Liberation Day notes (cont.)
Might as well call it the China Tariff, and more poorly conceived thoughts perfect for Libation Day
imports most tariffed (with one very obvious substitute of choice)
Bull in the China Shop
ASEAN countries hit hardest, but Lesotho too. What does it mean?
If China wants to be the One True Walmart to the entire world, should we just take our cheap stuff and be happy (or not)?
a patent-paper trail of “whatever you’re having, we’ll
havemake that too”Buffett’s tariff proposal
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Liberation Day notes (cont.)
It’s a Friday fun-day, but I’ve still got tariffs on my mind.
Libation Day
OK, but this is fun:
Of all the consumer imports, Spirits are the most unscathed.
You know what to do, fam . . . libation day?
Discretionary spending has to go somewhere, just saying.
Bull in the China Shop
OK, back to the ongoing riff of underbaked tariff thoughts.
Random Walk doesn’t know what Trump is thinking, but if there’s one issue that might be worth starting a trade war over, it’s China.
Or rather, the degree to which China is the Walmart to the world, is pretty extraordinary. And for all the concerns and criticism about tariffs (many-to-most of which are perfectly valid), either you think that (a) this is not a problem; or (b) there is some other “free trade” solution.
Might as well call it the China tariff
Random Walk alluded to this yesterday, but make no mistake about it, China (and its proxies) are most definitely bearing the brunt of this thing.
Nearly all Asian exporters to the US took it on the chin (except Singapore):
Tariffs hit “Factory Asia” first and foremost, although no one quite as severely as Vietnam.
Vietnam generates ~30% of its GDP via exports to the US, which are on tap for ~46% tariffs. Ouch.
But that’s Vietnam, Random, not China.
I mean, yes, but also Vietnam is just where China manufactures stuff, so that the stuff comes from Vietnam, and not China, because “tariff China” is not a new thing.
Vietnam and south-east Asia have also become a conduit for Chinese goods to the US. Nearly one in three new investments in Vietnam is from Chinese companies.
“China’s prior strategy of routing exports through Asean may now be less effective, with reciprocal tariffs on countries like Vietnam and Thailand even higher than those on China,” OCBC analysts said
1 in 3 new investments in Vietnam is from China. Could be a coincidence, I suppose.
No, of course not. As I said, commerce is like water, it routes around and through, and in this case, around and through means neighboring ASEAN countries.
Ok but why is Lesotho catching strays then? It’s just a tiny, land-locked impoverished African country with 50% tariffs?!
Yes, because tiny Lesotho, the belly button of South Africa, is actually one of the leading textile manufacturers in the world, and it totally does this on its own accord, and not because it imports ~$170M of Chinese goods that it then assembles under a watchful Chinese eye in Chinese-made factories to sell to the USA.1
What if China makes . . . everything? Is that bad?
Look, Random Walk is no China expert, but my drawn-in-crayon understanding of China’s state of play is that it’s:
(a) an aging, indebted country;
(b) trying to grow its economy, by
(c) making and selling as much stuff as it possibly can to as many people as it possibly can, which because of (a), includes many non-Chinese people, like, all of them.
More simply, if we use deficits to finance consumption to grow our economy, then China uses deficits to fund production to grow its economy.
Whether that makes China bad or good is besides the point.2
The point is that China is executing on its plan (such that I’ve understood it), and if we let the free market run its course, then we will all—like, the entire world—be captive shoppers in China’s international emporium of all the things modern civilization needs to maintain its standard of living, infrastructure, and medical treatments.3
That seems bad, right?4
It’s no great refutation of Ricardian economics to wonder whether we might learn to make some of these things ourselves, or at the very least, create some supply-chain redundancy . . . right?
I mean, look at this:
Japan is the only country left where the majority of Amazon sellers are local.
Otherwise, it’s just China, selling everything, everywhere to everyone. And let’s be clear, no one is being forced to buy Chinese stuff, but we do, because it’s cheap, fast, and certainly good enough.5
That doesn’t just happen, though. That’s a plan, or a strategy, at the very least.
Whatever you’re having, we’ll have make it
The St. Louis Fed actually just published a research paper that purports to show what started as “make all the cheap tchotchkes” very quickly transformed into “dominate advanced manufacturing of basically everything.”
It’s a little hard to summarize, but the gist of it is that by using patent-application similarity scores, you can sort of watch China target advanced economies as end-markets, and declare “whatever fancy stuff they’re building, we’re going to built it too.”
The Partner Similarity Index measures the sector-overlap of China’s foreign patent applications with the foreign patent applications of that country generally. It’s a measure of “strategic alignment” between China’s patent choices and the target market’s broader IP ecosystem.
In this case, China sought patent protection with ~90% similarity to the universe of “imported” patents to the U.S.
China has increasingly sought patent protection abroad in sectors in which advanced economies receive numerous foreign patent applications. Among these, the U.S. maintains the highest and most stable alignment with China’s strategic patenting choices, consistently around 90%
Even more striking than the US, was the substantial turn to Europe, though:
Germany, however, stands out for its notable increase, showing a clear upward trend from 2013 through 2021.
This pattern indicates that Germany has become increasingly central to China’s international patent strategy, which might indicate China’s intent to penetrate sectors highly valued and actively protected in European markets.
Having unlocked the U.S. manufacturing market, China appears to have turned to Europe and said, “ok, now we’re going to make whatever happens to be the stuff that you make, too.”
And what drove that shift?
The increase in similarity was driven primarily by an uptick in “Machinery and Equipment” patents.
Except in the UK, in which case China was apparently less interested.
So, yeah, while it doesn’t settle the matter (far from it), it sure looks like China decides what to build by looking at what other advanced economies are building, and then says “yup, OK, that’s ‘highly valued and actively protected’ for you? We’ll build that.”
Again, the point is not that China is bad or mean—I mean, it might be, but this is not that—the point is that “build all the stuff that everyone wants, so that we can sell it to them” sure seems like the plan.
And if we don’t like that plan, then what exactly are we supposed to do (if not something like we’ve just threatened to do)?6
Idk. These are underbaked thoughts. Feel free to tell me what I’m missing.
Other links
De minimis exemption officially ended. I thought it was already over, but the Temu/Shein loophole is now closed.
Warren Buffett’s Tariff Proposal (and concern with the trade deficit). Buffett points out that if we’re consuming more than we’re producing (the trade deficit), and it’s not the product of a domestic surplus (the national deficit), then we’re basically selling our future for the present, and that cannot go on forever. His proposal is tariffs of a clever sort—he calls them Import Certificates, which basically function like Carbon Credits. Every time a foreign firm buys US imports, they get an equivalent dollar amount IC. Exporters to the US would be required to tender ICs with their exports—so, an exporter selling $100M in cars to the US would have to buy $100M in ICs from importers (or from an exchange). Trade would therefore be balanced, but the market would decide how. Buffett concedes it would still be a tariff (with all the attendant tradeoffs, as Buffett makes clear), but worth it.
Tariffs to hit HVAC and building materials. Increased costs to highly levered businesses is definitely something to watch out for.
Workday trains AI on customer data (with their permission). Score one for the incumbents over the AI native upstarts. Also, legal AI has no moats.
Previously, on Random Walk
Volatility begets volatility, and other sundries
Vol begets vol (and the analysts get it wrong, a lot)
Healthcare makes all the jobs . . . but maybe manufacturing too? Other labor market desiderata
healthcare jobs replaced all the manufacturing jobs (much to the benefit of women and aides)
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And that’s without any offense to Lesothians, for whom this arrangement is almost certainly life-changing for the better!
As if 1.4B people could be singularly reduced to “China = []”
Unless, of course, China bankrupts itself first. One has to assume that China cannot infinity-finance its manufacturing anymore than we can infinity-finance our consumption (and China was just downgraded by Fitch). China’s got problems of its own, and the thing about growing your economy by being the Walmart of the world is that you need customers.
Or maybe that’s not what is happening, and I’ve misunderstood this all terribly, which wouldn’t be the first time.
Well, some people are probably being forced to buy Chinese stuff. Like Lesotho, for instance…not sure the relationship is optional at this point.
Perhaps we wait for China to bankrupt itself, and in the meantime we enjoy their cheap stuff (as per fn. 3)? Idk.
Definitely read Matt Klein and Michael Pettis on why the current policy doesn’t make sense. They were the leading proponents of the need to rebalance but are opposed to the current trade policy. Just one example is that we put massive tariffs on Vietnam and Cambodia but not on Singapore. But because many us goods that go to Cambodia and Vietnam are shipped through Singapore and count at Singaporean imports. So they get no tariffs and vietnam gets 45%. The actual balance of trade between our countries isn’t reflected in the data.
Great read, especially your comments about how it might not be strategically sound to allow global manufacturing to concentrate under one sphere of influence. And that some manufacturing overcapacity isn't the worst thing in the world. Cardinal sins in the field of economics.