Chartboook 372 "Oh ... it's only China". Or how to make the sudden decoupling of the world’s two largest economies seem like a relief.
How do you make the sudden decoupling of the world’s two largest economies seem like a relief?
In a day of shocking policy news, this post by Trump’s cheerleading Commerce Secretary Howard Lutnick brought me up sharply on Wednesday afternoon.
The double action of simultaneously lowering tariffs for most of the world (we think) and arbitrarily raising to them an eye-watering 125 percent for China, added a new twist to the rollercoaster of Trump’s trade policy.
A generalized protectionist offensive turned out to be the overture for a policy that at this stage amounts to Blitzkrieg on US-China trade.
With his generalized reciprocal tariff threat, Trump may have meant what he said. He was using threats to extort concessions. Then, as the markets reacted, the administration decided to meet the demand for suspension that was coming from some of America’s most influential business people.
As a well-source Bloomberg story described it, the administration was getting calls from all sides:
… Trump himself, meeting with several race-car drivers on the South Lawn of the White House on Wednesday afternoon, conceded that the decision was driven in no small part by the chaos roiling financial markets.
“Well, I thought that people were jumping a little bit out of line,” Trump said. “They were getting yippy — you know, they were getting a little bit yippy, a little bit afraid.”
But there was more to it than that.
Though the execution was wild and the whole thing is an exercise in arbitrariness, a general policy shift is clear: Yesterday, the administration shifted from a generalized trade offensive to radical decoupling from China.
Now I know I’ve been vociferous in my criticism of sanewashing the Trump regime, but hear me out. Is it possible that whilst many of us spent the last week chortling about the absurdity of the tariff formula, they did, in fact, have a “cunning plan”.
In fact, they more or less told us that they did.
Look at the top of Trump’s board!
As the justly derided Scott Bessent pointed out:
“As I told everyone a week ago in this very spot, ‘Do not retaliate, and you will be rewarded’,”
It was an absurd proposition. How on earth could they expect that the rest of the world would put up with the antics of the American President without reaction? The rest of the world does not share the ludicrously one-sided interpretation of trade with the US.
But imagine we are in Trump world.
Imagine they have been plotting this over some time. Imagine the rationale goes something like this:
“Ok. We are going to shake things up. Hit everyone with some nasty tariffs. Some nice big numbers. Beautiful numbers. That will flush them out. Lets see how they react.”
“Reward those who kiss the ring?”
“Well keep 10 percent. Keep talking. But yeah …. reward those who don’t react.”
“Ok. So if we are splitting the world into “team defy” and “team comply” (Baldwin), who do we know is least likely to kiss the ring? Who is going to retaliate?”
“China and maybe the EU. But China for certain.”
“So then we are in a real trade war? … with China? And maybe Europe?”
“You say that like it is a bad thing! No more, “small yard. high fence”. Decoupling for real.”
“Or, they surrender?”
“Or we get some kind of really big deal"?”
What did Trump write last Friday, as markets plunged on the news of Sino-US escalation:
“CHINA PLAYED IT WRONG, THEY PANICKED – THE ONE THING THEY CANNOT AFFORD TO DO!”
That language from Trump suggests that China could have played it differently. And the possibility of the grand bargain has always been one of Trump’s fantasies.
Looking for a deal with China is not the position of an ultra hawk like Navarro. Nor, apparently is it the position of Bessent.
In the fevered atmosphere of the West Wing trade policy and anti-China policy have converged.
We have been asking for some time what is Trump’s China policy. Here we have our answer.
The extraordinary denouement of Wednesday was no doubt driven in its timing by market reactions and what Trump referred to as “people getting yippy”.
But it did, in fact. have a certain logic: shake the world, flush out and isolate China.
At the next stage, in the negotiations with those who are willing, there is nothing to prevent the White House from demanding conditionality on trade with America’s other partners, to further target China. Remember the Penguins and closing the door to indirect imports from China.
A radical move to decoupling was always going to be a shock. It was always going to hurt the markets. This way, 125 percent tariffs on China almost come as a relief.
As the excellent team at Bloomberg, pointed out this is a truly shocking escalation compared to this time last year, when Janet Yellen was still able to say: “Our two economies are deeply integrated, and a wholesale separation would be disastrous for both."
And in economic terms, especially from the point of view of the US consumer, “Oh, it is only China they are going after”, makes no sense. China is so huge that with 125 percent tariffs on that one country, the overall tariff level is actually higher than before Trump announced his “concessions”.
We calculated that post Trump “put” today, the tariff mix is actually worse —China exports more consumer goods to US than other countries, so boosting that (to 125%) relative to others will boost the hit to consumption goods.
The pain will be felt across a wide range of consumer goods:
But this goes beyond consumer economics. The upshot from Wednesday is not peace, or deescalation but:
a “full-blown trade war …. grand bargain delusions can be shelved,” according to Arthur Kroeber, a New York-based partner at Gavekal Dragonomics who was previously based in Beijing. “In essence this means that Trump is committed to ending US trade with China.” That leaves the two economies with a combined GDP of $46 trillion locked in a game of chicken. At stake is almost $700 billion in two-way annual goods trade, China’s estimated $1.4 trillion of portfolio investments in the US, and less obvious but no less significant variables such as people-to-people links forged over decades at businesses and universities and public opinion that’s souring on both sides. A poll last year by the Pew Research Center found eight in 10 Americans had a negative view of China, but a Pew survey released on Tuesday also found 52% believed US tariffs on China would hurt both them personally and the US. Bloomberg Economics estimates that 100% US tariffs on Chinese goods would virtually wipe out all US imports from the Asian manufacturing powerhouse over the medium term.
How will this play out? It is far too early to tell. But the silliest thing to imagine is that Beijing has no way of responding to US pressure. And this will not primarily take the form of the 84 percent tariffs they have announced:
… Evan Medeiros, who advised former President Barack Obama and Treasury Secretary Hank Paulson on China policy while they were in office, says that’s a misreading of all the surgical economic tools from export controls to anti-trust and cybersecurity reviews that Chinese officials have at their disposal. In a new study published Tuesday, Medeiros and co-author Andrew Polk document a whole suite of “precision-guided economic munitions” that China has that are “designed to inflict targeted and often substantial pain for political and geopolitical purposes.” Those, Medeiros argues, give China an asymmetric advantage in any economic conflict with the US. “The issue with a tariff war is that both sides suffer. And the big question in the US-China relationship today is who suffers more and who can withstand more pain?” says Medeiros, who is now at Georgetown University. “The Chinese, recognizing this, developed an entirely new toolkit to engage in competition with the United States, that gives the Chinese the ability to inflict very specific pain on very specific actors in the United States with no corresponding cost or pain for themselves. And if you're getting into a long-term economic competition with the US, which they are, this is incredibly useful.” Trump’s attempt to increase pressure to force a negotiation is “a dangerous strategy,” Medeiros says. “The Chinese don’t want to negotiate with a gun pointed at their head.”
And how is this going to ripple out across the world?
“The US shock is going to lead to a more severe China shock, which may very well lead other major players in the world to put tariffs up against China. That’s a scenario which I think is pretty certain,” says economist Richard Baldwin, who along with other trade experts was attending an improbably timed International Monetary Fund conference on “The State of Globalization” in Tokyo that closed Saturday. “Everyone was just shaking their heads,” he said of the mood at the venue. Baldwin argues that the saving grace for the global economy may be that the US only accounts for about 15% of global trade and that countries representing the remaining 85% including China are eager to maintain the system as it is. The rest of the world led by China and the European Union could make their own moves to liberalize trade, Baldwin says, even as the immediate response to Trump’s tariff blitz splits the world into “Team Comply” and “Team Defy.”
Source: Bloomberg
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It seems like a relief if you have significant wealth in the stock market.
If you're a US business downstream of intermediate goods from China, you're getting hit hard. You'll have no choice but to bump prices. Direct-import consumer goods like shoes or phones aren't even the most concentrated pain points. In addition the situation gives US side of the sup chain license to price-gouge. Impact to main street will be rapid.
If you're a business exporting US tech globally, which typ means high % sales in China, you just got a 9 iron to the nuts. Serious chance you will be forced out of China as soon as they can manage it, which is 2-4 year timeframe, and will then face both higher costs and accelerated competition in the rest-of-the-world, impacting in 3-6 years.
In Washingon, they'll realize what's happening sooner, in 6-12 months, but by then it'll be too late.
Why do commenters now ignore the 2 main reasons Trump says he is using tariffs in the first place: re-industrialize the U.S.(maybe, but probably not) and bring in revenue so he can cut taxes (definitely)? This whole switch to “he trying to get better tariff deals” completely undermines those primary drivers for the tariffs. There is plenty of credible reporting that other countries offered to eliminate all tariffs before his tariffs took effect but those were rejected by the admin — discounting the “free trade” argument. A more logical explanation for what happened yesterday is he got spooked by the bond markets. I think Trump is more likely to respond to fear than anything else.