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Notes -
https://x.com/TrumpDailyPosts/status/1909263788295041257
https://x.com/unusual_whales/status/1909411006423392583
So the two biggest economies are now locked in a full-scale trade war... I suspect this will be more severe than previous skirmishing. In the past China imposed restrictions on imports of Australian wine, lobster and coal due to us calling for an inquiry into COVID. The Australian government basically ignored this without retaliating and eventually (with a change of govt over here to the less anti-Chinese Labour party) the restrictions were dropped. And they didn't touch iron ore, our biggest and most important export.
But nobody really cares about Australia, there's no loss of face in restoring trade relations like there would be with being seen to submit to Trump. You can show magnanimity to a weaker country but you probably can't show weakness to a peer power. Plus the US-China tariffs seem to be much more comprehensive, there's no shielded goods listed. I highly doubt that Xi will back down here like Trump seems to be asking. Giving a one day ultimatum is quite rude.
It seems that Trump's strategy is to shake down the US's weaker trading partners (the 'other countries which have requested meetings') and try to smash the stronger powers like China and possibly the EU. The EU might even fall into the 'weaker' category if Trump can link security to the trade relationship, Vance and co wanted to send Europe the bill for bombing Yemen since it was mostly European trade flowing through the Red Sea. The US has opportunities for leverage in terms of energy flows now that Russia is persona non grata and with defence via NATO. On the other hand, the EU is run by Trump-haters and they're hardened experts in economically wrecking their own countries, so they may show some backbone.
Anyway, who has more leverage between the US and China?
China's exports to the US ($500 billion) are mostly manufactured goods, electronics and machinery. These are ironically the things you'd need to industrialize the US, though a lot is also consumer goods. China dominates certain industries like port equipment as seen here: https://old.reddit.com/r/Unexpected/comments/11jsyyf/well_thats_unfortunate/
https://tradingeconomics.com/china/exports/united-states
The US's exports to China ($144 billion) are a mix of agriculture/energy and electronics (semiconductors are included in this category), aircraft, machinery.
https://tradingeconomics.com/united-states/exports/china
Personally I favour a supply-focused view of trade conflicts. If you're losing out on $500 billion worth of goods due to high tariffs (an additional 50% on top of the 34% and the previous tariffs really add up!) then that's worse than 34% or 84% if Xi matches on a mere $144 billion. Many of those goods will be prerequisites for US production. A much smaller proportion of Chinese imports will be prerequisites and soybeans/gas can be bought from elsewhere. Plus the Chinese approach to industrial policy seems much more sophisticated, they target key sectors to build up economies of scale. They foster development in high-tech industries with huge state backing. They do plenty on the supply side, tariffs only affect prices and demand. I think China is not too concerned about losing US imports, they want to replace them with indigenous suppliers on the high-end anyway and have been working hard to do this for years and years, that's Made in China 2025. There is no equivalent comprehensive program to reshore production in the US.
And if China loses some of their exports, at least they retain production capacity. Those mobile phones and plastic toys could go to Chinese kids instead.
I've seen others online favouring a demand-focused view, so there is room for difference on this (elasticity matters a lot).
I think China will come out ahead here unless Trump manages some crazy 4D chess bullying other nations into tariffing China too. China is the central hub of the world economy in terms of trade flows, their economy is larger in real terms and their political system seems to be more stable, less erratic.
Edit: https://x.com/typesfast/status/1909362292367802840
This seems even crazier if true, it's like Trump is deliberately trying to crash the US economy with these hasty, no-warning orders and fines. See the thread for details. This is how you don't do industrial policy.
My impression after obsessively monitoring this situation for days (of course) is that neither side will fold, tariffs are here to stay, and everyone will be poor and mad for it. China of course won't fold, the idea that they're at risk is preposterous, they can well weather complete cessation of export to the US.
Broadly I have concluded that the main problem the US faces is racism towards the Chinese; the ill-earned sense of centrality and irreplaceability. I believe that Trump, Navarro and the rest of that gang are as misinformed as the average MAGA guy on Twitter, given how they speak and that amusing formula. Americans still think that their great consumption is the linchpin of Chinese economy, 10-30% of their GDP (it's more like 3%); that the Chinese produce apparel, “trinkets” and low-quality materials (they also produce things that Americans plausibly cannot start producing at the same quality in years); that American IP is vital for their industry (they're making their own software, OSes, CPUs…) and so on. The idea that American de-industrialization is a product of betrayal by Wall Street Elites who offshored jobs to China also feeds into the delusional notion of possible parity – but the truth is that there has never been a point in history where American industry had scale or diversity comparable to what's going on in China now. The issue with their bad financials is also overblown; as for losing markets, they have the capital at hand for consumption stimulus. This guy from Beijing writes:
Accordingly, with a higher real GDP, their effective debt to GDP ratio may be as low as 150%, not 200-300%. They have US assets to sell too.
So China can trivially absorb half of the overcapacity freed by reduced trade with the US, and might find buyers for the rest.
My thesis is that in picking this fight, Americans don't understand that they're actually not that big of a deal. Unfortunately, their delusions are globally shared and become reality in their own right. But perhaps not enough to offset the gross physical one.
The actual dangerous thing for China here is that Trump seems determined to immiserate the whole planet, completely irrespective of any geopolitical rivalry, because he's an illiterate anarcho-primitivist and thinks that all trade is theft unless it's barter, basically. America vs. The World, especially with a chain reaction of tariffs on Chinese (and likely also Vietnamese etc…) capacity spillover, results in massive reduction of productivity for everyone. For now, nations like Vietnam are unilaterally dropping tariffs on American crap, but that can't be a big effect because their tariffs were low to begin with, and Americans just don't and cannot produce enough at price points that people of those nations can afford. (We may see IMF loans for 3rd world countries importing overpriced American beef or Teslas or whatever to placate Don, but I doubt it'll be sustainable). I suppose in the long run the idea is that Optimus bots will be churning out products with superhuman efficiency, at least Lutnick argues as much. But that's still years away. Perhaps this extortion of zero balance trade (so in effect, the demand that trading partners buy non-competitive American products) is meant to finance the transition to posthuman automated economy. Bold strategy.
I am of course very amused and curious to see how it'll go. Will Fortress America intimidate the rest of us into submission, likely forever? Or will it be so stubborn, brutal and ham-fisted that humanity will finally rebel and ostracize the rogue state, letting it broil in its own supremacist fantasies? Can Bessent et al. turn 1D “trade le bad” checkers of the King of Understanding Things (懂王) into 4D chess? We shall see.
Yes I agree, much of US GDP is nonsense, it's like an inverted pyramid with the manufacturing base too small and services too large. There are of course real services like R&D but there are also more or less fake services, HR training sessions and legal compliance, managing tax... There's real education and fake education, those schools in America where nobody can perform to grade level, useless or negative-value degrees...
Just because money is changing hands, it doesn't follow that it's a good thing. Fentanyl raises the GDP after all. Metrics of production should be prioritized over financial flows.
I don't think it's really possible for this to be true on a grand scale. After all, if the American GDP is in some way fake how come the median American can buy so much Chinese production with his or her dollars? The ratio of durable goods consumption to GDP in the US is not vastly lower than it was in the 60s, and that small decrease we would expect given that the average person obviously has many more 'consumer' services to spend his money on these days in a way that is obviously real consumption than he did in the 60s.
Consumption is indeed high but production is too low. That's my point. It's an unstable position to be in. There are lots of people in the US who are very wealthy and prosperous but shouldn't be.
Physical production? I don't see why this is a problem if service production rises to compensate (except for e.g. national security reasons which has nothing to do with whether some service jobs are 'fake' or not). Yes the US runs a BoT deficit but the durables deficit is like an order of magnitude bigger than the overall deficit - that is to say service exports wouldn't have to rise that much to eliminate the deficit, which would certainly be easier than trying only to boost physical goods exports in which the US obviously has far less comparative advantage, especially in mass production.
How could this even be true in an inter-country sense? If production is too low, what sustains consumption? Foreign investments in American instruments? But surely these prove that investors are satisfied in the likelihood that future American production, on which they are trading, will be able to make good their investment? Service exports would be the other candidate, but then these, if they are competitive on the open world market, clearly 'deserve' their price.
I don't really understand tbh, and I don't mean that in a rhetorical sense. How do you perceive the supposed 'instability' of the US position unravelling?
A lot of Americans have completely made-up jobs, working in DEI or consulting or HR, compliance (with bizarre laws), educating people with ridiculous nonsense... it's not productive activity. Some of those jobs are useful but much are not.
They're basically sucking wealth away from productive enterprises since they consume wealth but do not produce wealth. The US runs huge trade deficits to support a high level of prosperity, relying on the social construct of 'the US is the greatest country in the world, with the strongest military and the safest currency' so that people maintain confidence in the US dollar.
See this doesn't necessarily any problem with trade as such, as this is an internal dynamic - if regulation produces non-productive workers who piggyback off productive workers in 'real' sectors, it's just shuffling around the fruits of production among Americans.
If this is the explanation for how the US sustains non-productive work, how come other Western economies have observed a similar turn toward services?
I meant to say sucking wealth away from productive enterprises around the world. Suppose Zhang in Chongqing makes an iphone that goes to a product manager who doesn't do any useful work, just sits around in meetings all day. This is an unstable dynamic in my book. It would be unstable even within a country if you have a class of elites who laze around all day and a class of workers who make goods for them. When Onlyfans whores delight in their paid-off houses it incites a lot of resentment amongst people with shit jobs. Elites are supposed to lead wisely, that's why they're supposed to get goods from the workers.
Other Western countries are poorer than the US. Not everyone is cut out for productive work, there are internal status games and politics... But the US is unusually rich and has a high trade deficit, the US is the biggest offender. The rest of the West (with some exceptions, though German industry seems to be declining fast) is relying on prestige, not production. Degree mill universities, immigration ponzi schemes, selling enterprises overseas. Selling assets to pay for consumption is bad, profits and capabilities head overseas.
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