The Peter Zeihan Podcast Series - Trump Tariffs Part 1 - China || Peter Zeihan

Episode Date: December 4, 2024

The Trump administration is planning to impose some hefty tariffs on China. This isn't just to reform trade practices and show China "who's the boss", but rather to shift industrial production away from China permanently.Join the Patreon here: https://www.patreon.com/PeterZeihanFull Newsletter: https://mailchi.mp/zeihan/trump-tariffs-part-1-china

Hey, everybody, Peter Zine here coming to you from Colorado. Today is the 26th of November. And today we're going to talk about the incoming Trump administration's initial plans for trade policy. Last night, Donald Trump texted out that he plans to levy very sharp tariffs on Mexico, Canada, and China are three largest trading partners. And just the Chinese component. We're talking about China first because you're Mexican and Canada, different issues, different issues in play. First with China. We don't like China.

China doesn't like us very much. And the Trump tariffs, if they're implemented on the Chinese merchandise exports that come to the United States, roughly a half a trillion dollars a year, it would increase the average cost of living for the average American, every man would have a child, by about a thousand U.S. dollars a year. Now, the stuff that comes from China, like I said, mostly manufactured goods, almost exclusively. The bulk of it falls into kind of the electronics category, which includes computers, cell phone, cellular technology, also white goods, consumer goods. and a degree of parts that can go into pretty much anything. The Chinese have a very predatory trade system, so overall support from the United States citizenry is likely to be pretty high despite the cost of this.

And this is a more traditional tariff goal here. The Trump administration has long wanted to reroute global trade flows, specifically where China is involved, and that means punishing the Chinese until alternatives can be generated. but there in lies the rub. No American trade policy going back to World War II has ever been very good at building that alternative system. So we'll punish people that we think are doing unfair trade purposes, but those punishments are designed to get them to dismantle those trade policies so that we can get back to something that's more fair and normal. And that is not the goal this time around.

The goal here is to permanently re-locate industrial plant. So simply throwing on a tariff and throwing the money to a general fund. doesn't do that. You're going to have to also build a complementary industrial policy that takes some of the income and uses it to build a long-term alternative. And this, there's a challenge and an opportunity. First, the challenge. The things that China does, it doesn't do by itself. It's got relatively low-cost wages, especially for its mode of production. It's actually not a very profitable industrial power. It only managed to get to where it is now and maintain its position through a massive amount of subsidies.

And if those subsidies were to go away, you would see a mass de-industrialization of China, which would probably lead to the end of the political system. So the Chinese aren't even going to consider that. And that is ultimately what a normal trade policy would do. So if you want to overpower that, you not only need a fairly steep tariff rate, much higher than the 10 to 25% that the Trump's team is suggesting right now,

you also have to build an alternative. And when it comes to things like electronics assembly, and components creation, the United States is not a very competitive player in that market because our labor, to be perfectly blunt, is too highly skilled. So is Canada's. So is Mexico's. And so you're going to have to develop a different model. And to do that quickly is very difficult and very expensive.

But there is some low-hanging fruit. The Chinese dominate not just the electronics manufacturer and assembly, but also materials processing, turning bauxite into aluminum, turning cobalt into cobalt metal. turning lithium into battery chassis, that sort of thing. Now, this is something that the U.S., the rest of the world, has largely stepped back from for two reasons. Number one, it takes up some space, and it's environmentally damaging, and so there's a regulatory angle. And number two, if the Chinese are willing to pollute their environment and enslave their workers

and subsidize the industry, why in the world would be you compete with them on that space when they're just going to do it so much cheaper and suck up all the pain and have to. hand you the end product anyway. Now, there's some problems with that argument. The Chinese have discovered that this gives them a degree of leverage in trade talks that they haven't had before, but there's nothing about rebuilding this capacity somewhere else that is difficult or even expensive. One of the things we've seen in the United States with the Shell Revolution is we produce a huge amount of excess natural gas. And we have the cheapest natural gas in the world. And from that, the cheapest electricity in the world. And so we have spent the last 15 years changing our chemicals industry

to run on that stuff whenever it's possible as opposed to oil. And now in 2024, the United States is by far the largest producer and highest quality producer and lowest cost producer of all the intermediate chemical inputs that go into modern manufacturing. But it took the free market 15 years to make that happen. We want to do it faster for everything else. And that means having an industrial policy that captures the Chinese tariffs and uses it to help build that supporting infrastructure that we're going to need.

It's low-hanging fruit. we need to do it anyway. The Chinese are not going to be around much longer. And even if they were, we wouldn't want them to have the leverage they have. But that means building up a huge amount of industrial plant. Now, in the case of something like, I don't know, aluminum, you're only only talking about a few billion dollars to build it out. It's not expensive. It doesn't take a long time, but cheap and quick is not the same as free in today. And that requires a policy if you want it to make it happen. Otherwise, the market will take care of this over 15 to 20 years. And I would argue that we need to start our transition well before that. And then, and only then, can you start talking about

an industrial policy for the more difficult pieces of this like electronics? So far, the Trump administration has not indicated that it has an awareness of this level of subtlety in tariff policy. Just the general belief is a tariff is good. Do it. Make it happen. And then we win. It's going to take a lot more work than that. Now, that's the situation with China. The situation with Mexico and Canada is is very different, and we will tackle that tomorrow.