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Notes -
US and China slash tariffs as trade war cools
It looks like we will experience a de-escalation of the tariff battle between the US and China.
How does this line up with your personal predictions for how this was going to proceed?
My belief was that both sides would maintain 100+% tariffs but exempt essentially everything that matters. This development shows that I was wrong and I don't understand something about the events that have occurred. Does anybody have any ideas on what I missed?
To establish ground truth facts: All that is left of Liberation Day tariffs on China is minimal 10% “against humanity” tariff, reciprocated by 10% as well. 20% of “Fentanyl tariff” (lol) came in February, and China reciprocated it with asymmetric tariffs which are also in power. So it's somewhat more equal than 10% for 30%. Also, China has not repealed their global export controls on rare earth elements which is in fact terrible as there is no way to quickly ramp up production elsewhere, stockpiles will run out in months, and much of the imagined American revival (eg industrial automation, so robots) requires REEs. Though there's cope.
Chinese imports of ≈$500B add far more to American GDP, maybe on the order of $2T even naively accounted (eg not considering the costs of unmaintained infra if trade were terminated) – they're a large chunk of all consumed goods and inputs to almost all industry, they retail for much higher value, and create a lot of economic activity. Since the gap with the rest of the world is just 20%, China refuses to cover the tariffs on their side and there is, in fact, no ready substitute to most of their products at acceptable volume and shortages would have caused crisis and panic, most businesses opt to pass the price to consumer or just cut margins. So the main effect of this in the short term will be slight reduction in bilateral trade, slightly (because the markup of US distributors is insane) higher prices of everything for Americans, and redistribution of wealth from businesses and consumers towards their state.
I've been wrong with my usual doomerism, predicting that neither side will fold. I mainly overrated Trump's ego strength and isolation from feedback. China kept playing this with surgical game-theoretical precision, consistently demanding respectful and equal treatment and insisting that they will not be intimidated but in principle oppose trade wars as lose-lose scenarios. Trump toadies initially made some smug noises about “isolating the bad actor”; then, when Chinese retaliation succeeded in preventing quick submission of others, particularly emboldening other largest trade partners (EU and Japan), improved ties with ASEAN, and precluded any such isolation – course-corrected, through some opaque drama between courtiers it seems. They started begging for talks (in a bizarre Oriental manner of requesting that Xi calls first, to save Trump face, maintaining the optics of “they need us and our Great American Consumer more than we need their cheap trinkets”), and eventually signaled willingness for equal deescalation that the Chinese side has been expecting. We are here.
What has been learned? First, that indeed, the US just does not have the cards to push China around, much less rally “the world” against it. That trust and respect is easily lost. That even nations highly dependent on the US security umbrella and on trade with the US can refuse to bow, and barter for their own interests:
That the South-East Asia is probably not a viable platform for any “choking” or “Malacca blockade”, like, just look at this statement.
That the EU has sovereignty, that Canada has sovereignty, that… basically, that the US is not a big scary hegemonic superpower it imagines itself to be and sometimes laments the wages of being. It's just a very powerful country, with large but decidedly finite leverage, and that runs well short of getting everyone to play along with American King's unreasonable imagination. The US can not credibly maintain the pressure on a determined adversary the size of China. Now, some half-dead vassals like the UK will make unequal concessions. But that's about it. Others will drive a bargain.
It's been a moderate economic shock for everyone, and a significant loss of credibility for the US.
The miscalculation was not only that Trump actually believed in tariffs, unlike abortion, immigration, trans whatever, where he was always malleable. It was that Trump’s career record displayed regular, bone headed conviction to make and stand by dumb decisions (which is why the business declared bankruptcy multiple times during the largest multi-decade property boom in history) principally around the casinos in Atlantic City. It’s relevant because that whole project (directly responsible for 3 out of 4 of his bankruptcies) was the result not only of great ambition but also of steadfastness in the face of many advisors, bankers, fellow developers, partners etc no doubt telling him he was making the wrong decision(s).
On this basis I assumed that while Trump would fold eventually on the tariffs, he would persevere until the economic situation deteriorated considerably. When thinking about why he caved before then, I have a few ideas. The first is that Trump thinks of himself as a genius, especially in real estate, but he does allow for the existence of other geniuses, and I think he does accept that at least in domain terms other people are smarter than him (Elon Musk with ‘computer’, Jamie Dimon in finance etc), and they were both against tariffs. The second is that he’s easily persuaded by flattery, which is a classic Chinese art form, and while Xi was publicly posturing I do think there has been some suggestion that the diplomatic approach was softer. Lastly, I think people Trump likes personally like MBS and Meloni who both deal a lot with the Chinese and are in many ways economically reliant on them told him the tariffs were bad, and Trump has something of a sense of loyalty, at least in certain situations, provided someone (eg Cohen) doesn’t cross him publicly.
You know, there was an episode of the Apprentice where he explained exactly how this worked. The companies which held the real estate never declared bankruptcy.
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