Trade Collapse
And The Bifurcating World Economy
As the tariff war is ongoing, a few developments of note happened, leading me to think that a very interesting, and maybe a first in history, is happening.
It is rather rare in this publication that I claiming “this time is different”, it is actually a first, I think.
So let’s first study the facts and then study the consequences.
No One Is Backing Down
The first part to understand is that, contrary to Trump’s early claims, almost no one is giving him what he wants in the trade negotiations. And this is mostly due to stunning incompetence from his own administration.
The first sign of trouble were when the Japanese delegation admitted its dewilderment that, as far as they could tell, the US administration could not tell them what they wanted from them.
Which led to not-so-constructive results…
Meanwhile, the entire ASEAN (700 million people), by far the most economically dynamic region in the world, rolled a red carpet for Xi visit, including countries previously leaning the way of the US like Vietnam.
The Malaysian Prime Minister :
"At a time when [...] some parties are abandoning the principle of collective responsibility, the global initiative promoted by China is opening up new spaces for reform and cooperation...
President Xi's principles and stance are clearly different from the attitudes of a few countries that have begun to abandon the principle of responsibility sharing, shifting their priorities to sharpening hostilities and weaponizing the economy.
Even the EU seems to be growing a spine, although this is likely more out of a dislike for Trump than a true anti-American stance or intent of true independence.
Meanwhile, Trump has to dig in too, as he whipped in a frenzy his political base that is apparently now convinced, together with Trump, that the entire world has conspired to give their resources and labor to the US for dollars freshly printed at zero costs, and that it is somehow their fault, nefarious, and not what the USA requested from its vassals for decades.
However, the Art of the Deal is quickly turning into the Art of Dizzying Confusion. What is the position of the US at this point?
It can get even a little comical at times, even if in a tragecomedic way:
How you tariff a movie or what is considered a foreign movie is another interesting question I never considered I would ever ask.
Chinese elites are finding the current US messaging a little "disorientating" due to "confusing" communication with the Trump 2.0 team, said Qian Jing, co-founder and managing director of the Centre for China Analysis at the Asia Society Policy Institute.
"For example, there have been about five different [private] channels in the past 10 days engaging with Chinese officials, and all seem to be somehow carrying different messages," Qian said during a panel discussion held by the Asia Society in Hong Kong on Tuesday.
In the background, the war with Iran in preparation also sort of implies that anyone trading with China will be sanctioned into oblivion by the USA. (China buys 90% of Iran’s oil)
US-China Trade
While Trump decided, likely unwisely, to take on the rest of the world at the same time, the core issue is the US-China rivalry.
If the problem is the trade deficit, what is China supposed to buy from the USA? After all, the very same administration considering trade deficit as a quasi casus belli is also very busy sanctioning high-value imports to China.
Or is the point of the trade war to get fairer and lower tariffs? Apparently not either.
More fundamental is the idea that China's rise is only a favor the USA granted, and it is now taking it away.
Even if that was true (it is not), this is likely waaay too late for that type of strategy.
In any case, physical trade data indicate that Trump is getting what he wants, with an above-COVID level of collapse in trade.
Philly Fed Survey: "New orders fell sharply, from 8.7 in March to -34.2, its lowest reading since April 2020"
The change is now going toward the -60% as far as I understand this quickly changing situation.
However, companies make it clear to their customers why their orders are costing 3x the previous prices is going to be a target of the White House:
"This a hostile and political act by Amazon. It is not a surprise as Amazon is partnered with a Chinese Propaganda firm. This is a reason why Americans should buy American"
Amazon quickly backed down from making the tariffs visible and understandable for the public…
No Chinese Imports Consequences
When everything is made in China, what happens when nothing comes from China?
Logically, empty shelves will result if nothing is done. After a few weeks of hesitation, Walmart apparently caved in and gave up on trying to get its supplier to pay for the tariffs.
Somehow, this is something the United States Secretary of the Treasury ASSUMED would not be a problem, because US businesses are famously running with high inventory, and not prone to failure, just-in-time, Wall Street-driven management methods…
Speaking of governmental competence and preparation… Never believe it until they deny it is still a solid analysis framework about government.
For many small and mid-size businesses, this is almost a death sentence.
As it takes ~30 days for containers to go from China to LA. 45 to Houston by sea, 45 to Chicago by train. 55 to New York by sea, we are not seeing the effect YET, but very soon.
Overall, it is unlikely that the optics of Soviet-style empty shelves can be accepted, nor will US retailers take the chance.
They will have to pass on the new prices and scramble for alternative suppliers (themselves more expensive and submitted to their own 10-50% tariffs).
Not Just Trinkets
I think an absolutely fundamental error is that many, especially in the more sheltered halls of power, think that China is only producing.
But for example, the 8th largest category of exports by China is electrical transformers, a grid essential element with an order book saturated globally until 2030. And that’s before crashes like the Iberian Peninsula grid collapse of last week push further investments into the European and US grid.
In ~3-6 months we are going to start having shortages of transformers, pumps, air conditioners, and other complex goods which are made (or their critical components) in China. These products, which cannot be efficiently sourced elsewhere in this timeframe, are necessary for electricity, clean water, and a pleasant life.
Why do I say that the rich and powerful don’t get it? Well, here is how Trump sees the supply risk straight from the horse’s mouth:
Of course, this will not be the great thinker pushing for trade wars that will go to work in the factory and have 10x less goods for their children…
"The new model is where you work in a factory for the rest of your life, and your kids work there and your grandkids work there" -
Howard Lutnick, net worth 3.1 Billion
Killing Manufacturing?
A much more serious risk is to destroy US manufacturing instead of saving it. This is because after 5 decades of globalization, virtually all Western factories have a lot of inputs coming from oversea for their “made in USA” products.
More critically, almost every machine tool requires parts from China, especially the one crucial for maintenance and wearing off.
And let’s not talk about rare earths vital for magnets, batteries, electronics, radars, laser, screens, and any advanced tech, that are now embargoed from being re-exported to the USA.
I insist, it is not just sales to the US that is forbidden, but re-export of the rare earth OR THE PRODUCT MADE WITH THEM, under risk of losing the Chinese supply. This means that Korean or Japanese components will also be hard to get for the Pentagon, and impossible for SMEs.
This puts the US in Russia’s situation of having to smuggle chips and other key components, but likely in insufficient quantity to avoid a major supply chain shock.
Losing Competitivity
Meanwhile, every factory in the US trying to export their goods will face a problem: Every factory on Earth, except those located in the United States, can get the inputs they need from China, without paying an additional 145 percent markup. As China is often by far the most efficient supplier, in price but also quality and flexibility, this is a definitive competitive advantage against everyone else.
In addition, who can assume that buying equipment from the US will not be a bad idea if future tariffs and retaliations made impossible to gets parts?
A sign of things to come is that EU airlines are looking to buy Chinese planes instead of Boeing. At this rhythm, COMAC production lines will be unable to ramp up quickly enough…
Overall, the picture is bleak:
46% of Toy Companies in the US say they expect to go out of business within "weeks"
Shoes are expected to go up 87% in price
Apparel is expected to go up 65%
US Exports expected to drop 18%
Tourism to the US is down 20%
The weirdest gap right now is between the markets and anyone who works in the logistics industry
Hard for the markets to reconcile Visa saying “we have seen no change in consumer behavior” and logistics companies not having any idea what the world looks like in a month.
Please note this is NOT a comment about the necessity of tariffs or declining dependency on China.
It is, however, a stern criticism of the borish and amateurish implementation of these ideas. Too high tariffs, too fast, too unprepared, and too aggressive toward allies and friends are causing a lot of unnecessary self-inflicted damage.
Besides, this is ignoring a very basic principle of economics 101: no one is starting US factories to replace China’s capacity amidst this uncertainty of tariffs changing every other day and consumer spending potentially collapsing next month.
As a result, we already see a sharp decline in US corporate capital expenditure plans
The Bifurcation
Altogether, these datapoints indicate to me that it is increasingly likely, as each day passes, that the macroenvironment will radically differ between the USA and the Rest of the World, with one looking at an inflationary crash, and the other dealing with deflation.
It took me a while to think it out, hence the relatively long time before writing this piece.
Somehow, I see everyone getting it wrong on who will suffer what…
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