This is Essay 1 in a new essay series "Stress Test, exploring how the same tariff shock will propagate differently in two economic systems - America and China
In the closing section, the author wrote: "...unless we understand our own system, we risk building policy on assumptions—and feeling the shock long before our rivals do.This isn’t about backing down. It’s about matching strategy to structure. And making sure the system that leads also knows how to carry the weight." A valid observation, I think.
My question: Is there anyone in the current administration capable of thinking along these lines?
The US and China need to grasp that hegemony has limits in world trade. American hegemony over the world's financial architecture gave it free money to buy anything it wished without fear of debt overhang. The Chinese pretended the US debt to be real money and the US market to be everlasting, creating a hegemonic manufacturing system that overwhelmed manufacturing in every other nation.
Both hegemonic systems served each other very well until the US piled debt, which it could never pay back, and China produced goods in far greater volume than it could consume.
However, for world trade to be sustainable, the world needs fairness, not hegemony.
The US currency must lose its prime reserve currency status and become a part of a basket of currencies. China needs to move a significant number of production operations to countries where consumption occurs.
Until then, this US/China trade war will continue.
The U.S. doesn’t have to pay back its debt and should not try. The WWII debt was never paid back. Through growth and inflation debt service gradually becomes negligible in real terms. Control the annual deficit and the fiscal impact of the debt will go down.
No, it’s refinanced. New treasuries are issued as old ones expire. Eventually, through growth and inflation, the debt service on old debt becomes bearable. The trick is not to add to the total debt too fast, which unfortunately is what we are doing now, even in peacetime.
Trump’s Independence Day will be remembered as the most poorly conceived plan in recorded history accompanied by the worst implementation possible - that’s how bad it is.
He kicked off by alienating the entire world, then shit his pants when the bond market (predictably) blew up and then rolled over, pivoted to pretend he was only aiming to alienate China all along. Good luck with creating a coalition to do that now.
The only things that haven’t sky rocketed in price over the last few years are tech goods and basically everything that comes from China to the USA. The USA hasn’t given themselves enough time to diversify away from China - so they’ll continue having to buy the stuff at crazy tariff driven prices. This is going to drive inflation wild in the short term. The Chinese are well able to knuckle down and play the long game, people in the good ol U.S. of A. will lose their shit on Day One. No factories could even be built for at least 5 years and with uncertainty now they won’t be started and even if they do come on line in 2030 the US economy will be a dumpster fire.
Any commentator trying to dress up this whole mess as anything but a complete shambles is a (willing or ignorant) sycophant in a Trump era version of the Emperor’s New Clothes.
Seems unlikely that the Trump administration could see positive results from this soon enough to help in the 2026 midterms. Losing the house will essentially (and possibly literally) handcuff him in the second half of his term and result in a GOP ouster in 2028. Why risk all of that? Makes me think this was some grand scheme to manufacture a crisis to bring down toppy US equity markets so they can be rebuilt into the remainder of his term. Time will tell. Thank for your excellent analysis.
Thanks. I do believe that things will settle down within 90 days. This is a calculated period of turmoil and reset. What is clear is that the 3 early strategies - cheaper refinancing, stronger dollar, more geopolitical leverage, have all gone in the other direction. So now everything depends on what other countries are ready to give and take as part of the negotiations. Then based on the reset lines in geopolitics and trade, the government can look into what incentives etc are possible to rapidly grow those sectors. People think that Trump in a fit of whimsy can create such big changes, but that is not true. Government as a system is quite unwieldy and even if you try to push extremes, it will come to an equilibrium in some time. I think the administration is sacrificing all that political capital because they want to ensure its a new equilibrium.
Another great analysis, honest, pragmatic but still optimistic. The US was in a slow economic downward trend with increasing debt, a threatened dollar and a true threat from a global elites. This tariff strategy is a a calculated risk that will truly make us stronger and more self sustaining. I suspect It will be be painful but God willing it will work! Thanks Tanvi I look forward to reading your new updates on how it is going.
The warning stands: without a deep understanding of how your own economy is wired, tariffs can hurt you more than your rivals. This holds true for all countries—regardless of any buffers in place to cushion the impact, which often offer only temporary relief.
Lovely discussion of the subject, but I would liike to inject some perspective and context.
The first and critical thing is this -- foreign investment in China is now less than zero. Capital is flowing out. Even Chinese capital is flowing out.
And, now the details:
1. US exports to China are 0.483% of US GDP.
2. US imports from China are 1.476% of US GDP.
Conversely,
3. China exports to US are 2.359% of China GDP. <<<<< Heel, one each, Achilles
4. China imports from US are 0.771% of China GDP.
Stand back and look at those numbers. They are bloody well insignificant in gross terms.
1. The US can easily deal with a less than 0.5% hit to GDP. I doubt we can even measure the impact with any accuracy.
2. China is looking down the barrel of a 5X impact at slightly less than 2.5%. This is more than half of their now dwindling GDP growth rate. China, which has other problems, will have negative growth.
More importantly for approximately 35% of Chinese goods, American consumers can do without. I am stocked up on crappy garden tools and head bands.
For another 35%, there are perfectly equal alternatives for purchase currently. Instead of buying a crappy powered handtool made in China, buy one made in Vietnam.
For the top end electronics, there will be some friction. For rare earth minerals, there will be massive global mining development (But in the meantime who are the Chinese going to actually sell those rare earths to?). The Chinese have excellent rare earths not because they have more of them, but because over the last decades they developed them. Guess what? The US and Africa will now do the same bloody thing.
The challenge for China is not to tinker with tariffs, but to actually engage in fair trade, to stop the IP theft, to give foreign companies access to the courts, and to remove the non-tariff barriers to trade.
Nope. China simply cannot and will not do that. This impacts both the US and other countries.
Meanwhile, the US is moving forward with other countries of substance who will reciprocate on tariffs and remove non-tariff barriers to trade.
Once these deals are done, China is fully screwed and tattooed. Boom.
The real challenge for China is how to feed its people and to suppress unrest. The Chinese Social Credit System will provide the data to suppress them, but what about the missing jobs?
Once a job is lost in China to tariffs, non-tariff barriers, alternative sources, and new deals with other countries, that bloody Chinaman's job is gone forever.
China faces a demand shock. PBOC free to stabilize not just because political structure. Also free to act because they enjoy: steady growth, fiscal surplus, copious reserves, and having come to this moment prepared. The preparation in the form of deflating their housing/asset bubble, and deliberately transitioning away from export-led growth to to domestic-consumption led growth. PRC home market as a % of GDP, is now higher % than large European economies. US policymakers slept through this change. Still less is dependence on exports to US specifically. Finally, Chinese scale-up of global financial services creates a powerful avenue for demand stimulus - vendor financing to global customers. If customers have burdensome USD debts? No problem, there is a continually growing pile of USD 4 Trillion with nowhere to go - buying out and neutralizing G7 debts of entire countries is a realistic option. Thanks to US policy, global customers can now pick up Chinese goods at a discount - and if nothing else, resell them to a US economy facing a supply shock.
As for the FED taking action - notwithstanding Trump's recent displeasure with Powell - I am convinced it's not a matter of "if" but "when". But the supply shock is fundamentally harder to treat.
Again, I'd return to the point from the beginning of this series of articles. For the trade-war gambit to work in favor of the US, it would be necessary to have other significant countries make stark sacrifices - and in most cases without the luxury of money printing.
Bottom line: US is still capable of awful disruption, but no longer has the weight to win this.
In the closing section, the author wrote: "...unless we understand our own system, we risk building policy on assumptions—and feeling the shock long before our rivals do.This isn’t about backing down. It’s about matching strategy to structure. And making sure the system that leads also knows how to carry the weight." A valid observation, I think.
My question: Is there anyone in the current administration capable of thinking along these lines?
The US and China need to grasp that hegemony has limits in world trade. American hegemony over the world's financial architecture gave it free money to buy anything it wished without fear of debt overhang. The Chinese pretended the US debt to be real money and the US market to be everlasting, creating a hegemonic manufacturing system that overwhelmed manufacturing in every other nation.
Both hegemonic systems served each other very well until the US piled debt, which it could never pay back, and China produced goods in far greater volume than it could consume.
However, for world trade to be sustainable, the world needs fairness, not hegemony.
The US currency must lose its prime reserve currency status and become a part of a basket of currencies. China needs to move a significant number of production operations to countries where consumption occurs.
Until then, this US/China trade war will continue.
The U.S. doesn’t have to pay back its debt and should not try. The WWII debt was never paid back. Through growth and inflation debt service gradually becomes negligible in real terms. Control the annual deficit and the fiscal impact of the debt will go down.
All debts have to be repaid. With a debt-to-GDP ratio of 122%, the likely predicament was that demand for US government bonds was waning.
No, it’s refinanced. New treasuries are issued as old ones expire. Eventually, through growth and inflation, the debt service on old debt becomes bearable. The trick is not to add to the total debt too fast, which unfortunately is what we are doing now, even in peacetime.
Trump’s Independence Day will be remembered as the most poorly conceived plan in recorded history accompanied by the worst implementation possible - that’s how bad it is.
He kicked off by alienating the entire world, then shit his pants when the bond market (predictably) blew up and then rolled over, pivoted to pretend he was only aiming to alienate China all along. Good luck with creating a coalition to do that now.
The only things that haven’t sky rocketed in price over the last few years are tech goods and basically everything that comes from China to the USA. The USA hasn’t given themselves enough time to diversify away from China - so they’ll continue having to buy the stuff at crazy tariff driven prices. This is going to drive inflation wild in the short term. The Chinese are well able to knuckle down and play the long game, people in the good ol U.S. of A. will lose their shit on Day One. No factories could even be built for at least 5 years and with uncertainty now they won’t be started and even if they do come on line in 2030 the US economy will be a dumpster fire.
Any commentator trying to dress up this whole mess as anything but a complete shambles is a (willing or ignorant) sycophant in a Trump era version of the Emperor’s New Clothes.
Seems unlikely that the Trump administration could see positive results from this soon enough to help in the 2026 midterms. Losing the house will essentially (and possibly literally) handcuff him in the second half of his term and result in a GOP ouster in 2028. Why risk all of that? Makes me think this was some grand scheme to manufacture a crisis to bring down toppy US equity markets so they can be rebuilt into the remainder of his term. Time will tell. Thank for your excellent analysis.
Thanks. I do believe that things will settle down within 90 days. This is a calculated period of turmoil and reset. What is clear is that the 3 early strategies - cheaper refinancing, stronger dollar, more geopolitical leverage, have all gone in the other direction. So now everything depends on what other countries are ready to give and take as part of the negotiations. Then based on the reset lines in geopolitics and trade, the government can look into what incentives etc are possible to rapidly grow those sectors. People think that Trump in a fit of whimsy can create such big changes, but that is not true. Government as a system is quite unwieldy and even if you try to push extremes, it will come to an equilibrium in some time. I think the administration is sacrificing all that political capital because they want to ensure its a new equilibrium.
Another great analysis, honest, pragmatic but still optimistic. The US was in a slow economic downward trend with increasing debt, a threatened dollar and a true threat from a global elites. This tariff strategy is a a calculated risk that will truly make us stronger and more self sustaining. I suspect It will be be painful but God willing it will work! Thanks Tanvi I look forward to reading your new updates on how it is going.
The warning stands: without a deep understanding of how your own economy is wired, tariffs can hurt you more than your rivals. This holds true for all countries—regardless of any buffers in place to cushion the impact, which often offer only temporary relief.
Very insightful, thanks you Tanvi. Glad I found your work and looking forward to following the tariff thread.
Lovely discussion of the subject, but I would liike to inject some perspective and context.
The first and critical thing is this -- foreign investment in China is now less than zero. Capital is flowing out. Even Chinese capital is flowing out.
And, now the details:
1. US exports to China are 0.483% of US GDP.
2. US imports from China are 1.476% of US GDP.
Conversely,
3. China exports to US are 2.359% of China GDP. <<<<< Heel, one each, Achilles
4. China imports from US are 0.771% of China GDP.
Stand back and look at those numbers. They are bloody well insignificant in gross terms.
1. The US can easily deal with a less than 0.5% hit to GDP. I doubt we can even measure the impact with any accuracy.
2. China is looking down the barrel of a 5X impact at slightly less than 2.5%. This is more than half of their now dwindling GDP growth rate. China, which has other problems, will have negative growth.
More importantly for approximately 35% of Chinese goods, American consumers can do without. I am stocked up on crappy garden tools and head bands.
For another 35%, there are perfectly equal alternatives for purchase currently. Instead of buying a crappy powered handtool made in China, buy one made in Vietnam.
For the top end electronics, there will be some friction. For rare earth minerals, there will be massive global mining development (But in the meantime who are the Chinese going to actually sell those rare earths to?). The Chinese have excellent rare earths not because they have more of them, but because over the last decades they developed them. Guess what? The US and Africa will now do the same bloody thing.
The challenge for China is not to tinker with tariffs, but to actually engage in fair trade, to stop the IP theft, to give foreign companies access to the courts, and to remove the non-tariff barriers to trade.
Nope. China simply cannot and will not do that. This impacts both the US and other countries.
Meanwhile, the US is moving forward with other countries of substance who will reciprocate on tariffs and remove non-tariff barriers to trade.
Once these deals are done, China is fully screwed and tattooed. Boom.
The real challenge for China is how to feed its people and to suppress unrest. The Chinese Social Credit System will provide the data to suppress them, but what about the missing jobs?
Once a job is lost in China to tariffs, non-tariff barriers, alternative sources, and new deals with other countries, that bloody Chinaman's job is gone forever.
JLM
www.themusingsofthebigredcar.com
China faces a demand shock. PBOC free to stabilize not just because political structure. Also free to act because they enjoy: steady growth, fiscal surplus, copious reserves, and having come to this moment prepared. The preparation in the form of deflating their housing/asset bubble, and deliberately transitioning away from export-led growth to to domestic-consumption led growth. PRC home market as a % of GDP, is now higher % than large European economies. US policymakers slept through this change. Still less is dependence on exports to US specifically. Finally, Chinese scale-up of global financial services creates a powerful avenue for demand stimulus - vendor financing to global customers. If customers have burdensome USD debts? No problem, there is a continually growing pile of USD 4 Trillion with nowhere to go - buying out and neutralizing G7 debts of entire countries is a realistic option. Thanks to US policy, global customers can now pick up Chinese goods at a discount - and if nothing else, resell them to a US economy facing a supply shock.
As for the FED taking action - notwithstanding Trump's recent displeasure with Powell - I am convinced it's not a matter of "if" but "when". But the supply shock is fundamentally harder to treat.
Again, I'd return to the point from the beginning of this series of articles. For the trade-war gambit to work in favor of the US, it would be necessary to have other significant countries make stark sacrifices - and in most cases without the luxury of money printing.
Bottom line: US is still capable of awful disruption, but no longer has the weight to win this.