Why America Will Lose Its Trade War With China
U.S. market at a scale and efficiency that is hard to replicate elsewhere.
Now, when we talk about tariffs and the potential for a trade war, we must consider the implications of these high tariffs on the American consumer. If tariffs are imposed on products we heavily rely on, such as electronic devices and appliances, the costs will ultimately trickle down to consumers in the form of higher prices. This could lead to a decrease in consumer spending, which is a significant driver of the U.S. economy.
Moreover, as companies weigh the options of relocating their supply chains, they are faced with numerous challenges, such as finding suitable alternatives to Chinese manufacturing. It’s not just about cost but also involves quality, reliability, and the existing infrastructure necessary for production. For many companies, the prospect of moving operations to other countries like Vietnam or Mexico may not be as straightforward as it sounds, given the intricate web of existing supply chains.
In conclusion, the ongoing trade tensions and uncertainty surrounding tariffs place U.S. companies in a difficult position. The reliance on China for a multitude of goods complicates matters significantly. As we move forward, it will be crucial for businesses, policymakers, and consumers alike to navigate this landscape carefully to avoid the pitfalls of a protracted trade war that could have repercussions for the economy. entire world. They’re not just making toasters for the United States. And so the entire ecosystem to build those products is anchored in China. And you just can’t up and move that to another country easily. There’s nowhere else in the world that has even remotely the capacity to do it.
And per the comment about uncertainty, I wouldn’t want to open an electric toaster factory here in the United States if the only way this product could even remotely be cost competitive is with 100% plus tariffs on Chinese goods. If there’s a trade deal struck, I’m suddenly out millions of dollars. And I’m doubting too many banks would want to give me a loan to make that.
And even worse, if I did build my toaster factory, most of the components would have to come from China because that’s where the ecosystem is. I wouldn’t be able to buy those components from the United States. So I would pay tariffs on components anyway, and then my investment makes no sense.
I want to talk about both of these categories, which you outlined so well. Both categories of big ticket manufacturing, automakers, aerospace manufacturers, military contractors, electric vehicle makers. That’s one big category. But I’m so glad you mentioned the other category, which is stuff parents need. I mean, just going through the list that you sent me over the weekend, we rely on China for 99% of imported child safety seats with detachable hard shells. I got one of them. 93% of children’s coloring books. I got seven of those. 95% of cooking appliances. 96% of toys for pets. 88% of Christmas ornaments and Christmas trees. And 74% of toy parts for ages three and under.
Just looking at this, Jim, it seems like a trade war with China is going to give the American consumer, and in particular, the American parents, a very painful lesson in how dependent we are on China for a lot of stuff we don’t even think about in our everyday life. Practically speaking, what happens if the wall goes up and this stuff just stops coming?
Yeah, so this is going to be it, is the question of what do importers do? So, the first is there will be a dramatic reduction in product variety. So, in other words, importers are not going to bring in the range of products they would have without the tariffs. That, in and of itself, is a loss to the consumer because more variety is generally viewed as better. You get to pick the thing that you like the best for the goods that are still brought in and we still will need child seats, we will still need electric toasters, the price is going to go up and go up substantially.
At 145% tariff, I feel comfortable saying the price of these items is going to become 75% to 100% greater than it currently is because there’s not enough margin to essentially be spread out amongst the firms to fully absorb this. And we actually saw this in our import data through March and that while it does appear that suppliers of cell phones are actually lowering their prices a little bit to help the importers absorb some of the tariffs, no, not all of it, just a fraction of it, we didn’t see any type of drop for the price of imported household appliances, which would suggest that the U.S. importers are essentially absorbing the entirety of that tariff.
Because to, again, clarify, importers pay tariffs, exporters do not pay tariffs. And so the reality is the consumer is going to see less variety and for the goods that are brought in, they’re going to face a higher price. There is no way around that. That is why I largely believe the administration backtrack on smartphones and laptops and they managed to do that at like 10 p.m. on a Friday night to where I woke up Saturday morning seeing this announcement and sure enough, those are the products.
And the reality is, is there is no feasibility of producing the U.S.’s needed quantities of these goods in the United States in any type of short time period and certainly not at the cost that we see from overseas production from China. And let me just pin you down on that last point, because one thought that a person might have hearing me list all these products we rely on China for is, we’re America, damn it. We should be able to make that stuff here. We should be able to make our own child safety seats with detachable hard shelves and our own pet toys. What is your response to that take?
Like both on how long it would take to set up those manufacturing facilities and whether it’s worthwhile in the first place for the U.S. to have, say, a deliberate strategy of reshoring toy manufacturing. Yeah. So could we make it here? Of course we can. We can build F-35 stealth aircraft. We can build Boeing airplanes. We can build incredible motor vehicles. Of course we can make this stuff. The question is, is this what we want to devote our limited resources to making? And the answer to that is no.
And the reason is, is for any manufactured good, you can sort of think there’s kind of three big buckets of where you add value to that good. There’s the design and innovation piece. So think about Apple developing a new iPhone, developing the iPhone 17, all of the code, making sure the components integrate, developing their own chips for their computers now. There’s the physical transformation process then. This is bucket number two, which is what we think of as traditional manufacturing. This is putting all the components together to produce a finished motor vehicle at a Ford plant.
And then the last piece is marketing and distribution. There’s value added there. Think of Nike taking a sneaker that cost them not that much money and convincing all of us to pay a heck of a lot more for it, right? What you can think about with the United States is a lot of those things you mentioned, child safety seats, pet toys, human toys. Sometimes those are interchangeable, as I found with our dog, is essentially the value adding for a lot of these goods that we’ve offshored is in step one, which is the design and innovation.
So again, the iPhone. Or it’s in step three. It’s the marketing and distribution. Think of Nike. There’s not much value to be added by snapping together pieces of a doll or snapping together the pieces of the iPhone. And so that doesn’t make sense to perform in the United States. The United States, where we tend to manufacture extensively and lead the world, is topics like aerospace, topics like farm equipment. And those are the types of goods where there’s an inherent connection between that design piece and the production piece.
John Deere cannot, with 100% certainty, anticipate when they design a tractor, the exact how it’s going to be manufactured and how the components will interact with each other. The same applies to motor vehicles. That’s why the motor vehicle makers design their cars and build the cars. When Apple tried to do that and apply the same model that it uses for laptops and cell phones to cars, it didn’t work. Because this is a vehicle that is inherently far more complex, and you can’t anticipate these interactions.
And so the challenge we run into is, we right now have an unemployment rate that’s slightly above 4%. You don’t, one, have the labor supply in the United States to produce a lot of these goods at scale easily. Two, we don’t have, these aren’t jobs that would pay well. We would be looking at jobs that would be paying, you know, not that much because this is not skilled labor to, you know, put together a Barbie doll. I’m not trying to be mean to folks, but that is not highly skilled work. And in general.
And so this is where it is a huge challenge to understand what the logic here is for a lot of the proposed tariffs. Because it’s not a strategic focus of only finished motor vehicles made outside of North America. There may be, you could actually see some type of argument. I would still be very skeptical of it. But at least at that point, you’re trying to channel production to a type of good for where we are very competitive. And it is a tremendous amount of value added.
Jason, I have one more question about the first category that you talked about, lithium-ion batteries, electronics, smartphone parts. You mentioned that in a full-on trade war scenario, we might have a situation where American parents are paying double for, you know, toys for their kids, toys for their pets, new toasters. What happens to American automakers or military contractors or smartphone companies if the guts of their machines are suddenly tariffed 100% or 200% or even if China stops selling us those critical supplies entirely? How catastrophic could it be for automakers, aerospace manufacturers, military contractors?
Yeah. So one of the things we’re watching very closely at the moment is China recently essentially halted exports of what are called heavy rare earth elements. These are things we wouldn’t think about very much. But these elements are needed to produce very powerful magnets. As you mentioned, those are, you know, type of essentially what we call them rare earth magnets. They’re used as components for electric vehicles, drones, missiles. So aerospace gets affected. The auto sector gets affected.
And right now, the open question that we’re still trying to fully understand is what type of inventories of these heavy rare earth elements are there out there? And so, sort of the, you can think China’s a huge player in this space, Japan and Germany to a much lesser extent as well. And so the concern sort of right now at the moment is lack of access to these heavy rare earth elements would be extremely challenging for certain industries to deal with. You know, it’s too early for anybody to start, you know, to get worked into a panic thinking, oh my heavens, like the auto sector is going to shut down.
But it also shows, I think, sort of the somewhat asymmetric responses that China has went with in this regard. You know, at the same time, China is right now suffering because they’ve tariffed American propane so much that propane is now very expensive over there. The challenge with that is propane is a feedstock to plastic manufacturing. So Chinese plastic manufacturers that are making essentially those like raw basic plastics are seeing massive increases in their costs. And so this is, you know, right now we’re seeing sort of these complex effects play out. And that’s why, again, we’re all hoping for some type of de-escalation to take place and take place rather quickly.
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Let’s take a look at the other side of the ledger here. Not what we buy from China, but what we sell to China. After looking at your data and doing a bit of writing for The Atlantic, I calculated that as a share of global exports, China buys 89% of our grain sorghum, 52% of the soybeans we sell to the world, 30% of our cotton, 27% of our pistachios, 73% of our frozen pig organ exports, and 51% of our optical instruments for inspecting and making computer chips, which is particularly important because that can layer with tariffs on the smartphone components that we then buy back from China.
What should people know that’s most important about what we sell to China? You covered a lot of the key categories there, but what people really need to realize is that China is a big export destination for us. We exported about $125 billion of products to them. As an example, just today, China announced that they will no longer take deliveries of Boeing aircraft that are going to be finished. Aerospace is our number two export to China on a line item basis. We export over $10 billion back in 2024. The concern here is that these negative effects have on U.S. exporters, and therefore they’re then engaging in less economic activity in the U.S.
Another example that is almost incredibly ironic is companies like Intel that manufacture CPUs here in the United States for computers. They export those to China for assembly into finished products, which are then re-exported back to the United States. All of a sudden, you have China putting a 125% tariff on an Intel CPU. Even if you have a computer assembled in China, it’s going to be coming back to the U.S. not just with a 20% tariff, but the key part of its guts got doubled in cost by that first tariff. Unless there’s a drawback provision that is allowed for the Chinese exporter, a computer would be more expensive.
Part of the challenge with these tariffs is there’s a lack of clarity about the extent that what we call drawbacks exist. The concept of a drawback is, let’s say I import steel from Canada, I put that in a finished product that I then export to Germany. Under normal circumstances, even if I pay a tariff on that imported steel, because I export my product, I can go to the government and say, “Give me my money back that I paid on that tariff.” We’re not allowing that for the steel and aluminum tariffs. We’re allowing drawback on the reciprocal tariffs. There’s a lack of clarity, though, on whether China would allow for drawbacks in the scenario I just explained.
That’s where we’re really struggling because things are moving so fast to understand these little nuances that really play a big role in affecting the overall costs that consumers will ultimately bear with these tariffs. There are two points here that I think are so important, and I just want to slow down a little bit to make sure that our listeners get them. The first point that I hear you making is that the U.S. and China are at risk of severely tariffing one another’s intermediate products. If China tariffs our instruments for making computer chips and then we tariff their computer chips, those tariffs can stack in a way that makes the entire electronics industry significantly more expensive.
Every time these products cross state borders, there’s another 10% or 110% tariff that’s hitting that product. Is there any way that this has any effect besides significantly raising the cost of making complex machines and complex computers throughout the world? No, at least from a U.S. consumer side, it would be certainly detrimental for what we’re going to experience. Again, we may see some production and assembly shift out of China for these products. Apple is strategically relying on their capacity in India to service more of the U.S. market and potentially using more of their Chinese capacity to service Europe, as an example.
Because of the complexities of global supply chains, no one wins in trade wars. What’s important for everybody to understand is there are all these nuances and unanticipated complexities that exist that are very problematic to understand. For example, let’s say that there’s a global tariff ultimately put on laptops. What that does is it makes a laptop assembled in Vietnam more expensive to the U.S. consumer. Yet Intel is likely exporting the CPU for that laptop to Vietnam. All you end up doing is hurt the domestic production of CPUs because consumers buy fewer laptops. The irony is there’s more value added making that CPU in the United States than there is slapping the laptop together in Vietnam.
The second point that I heard from your answer is that there’s an asymmetry between what we rely on China for and what China imports from the U.S. For example, China imports a lot of cotton, pistachios, frozen meat, and processors. The Chinese can shift a lot of their import strategies and just buy frozen pig organ meat from some other country or maybe buy processors from Japan. But you mentioned that the U.S. relies on China, the number one global manufacturer, for many things that we can’t easily just re-aim our economy toward one other country and say, “We’re going to buy all of your toasters instead.”
Am I right in hearing that there’s a dangerous asymmetry between the way that China relies on American imports and the way that America relies on Chinese imports? Yes, there certainly is in some product categories. One of our top exports to China is semiconductor manufacturing equipment. Our exporters are very reliant on the Chinese market for business. Chinese importers do have the option of going to European or Japanese manufacturers. Now, it may not be a perfect substitute, but there is that possibility. For us, for something like toaster ovens, there really isn’t a plan B to China, the same way with soybeans, which is our top export to China.
China does have the option of going and buying from Brazil, which they have increasingly done. Now, for some items, China is dependent on us. For example, people want to buy a laptop with an Intel CPU. It may have to come from the United States. Now, Apple is a global manufacturer, so perhaps there’s an alternative strategy that they fulfill the need for Chinese demand from a facility in Ireland, let’s say. There is some potential for essentially Chinese importers to do the same thing that U.S. importers are doing. For some product categories, it does feel like China has potentially more ability to go elsewhere.
We’ve seen this on the propane side where propane is one of our top exports to China. They’re not sourcing from the U.S. Everybody else knows they can’t effectively buy from the U.S., so their prices are going up. We’re getting to sell our propane elsewhere, so we’re coming out ahead while they’re bearing the brunt of this. There’s a lot of complexity. It’s certainly not a one-to-one situation where we’re always at a disadvantage, or they’re always at a disadvantage. It’s going to be very specific items and the dynamics playing out over thousands of different types of goods.
I want to close by thinking about surprising winners and surprising losers of this trade war. You mentioned earlier that nobody wins a trade war. So maybe the answer is there are no surprising winners. You also said something else, which is that if tariffs are going to be prohibitive on China but low on Vietnam, then there will be a huge incentive for Chinese producers to sell their products through Vietnam. Like send the product into Vietnam, have it painted in 45 seconds, and then have it sent out to the U.S. as a Vietnamese export rather than a Chinese export, which might theoretically help create a new kind of shadow Vietnamese economy for repackaging de facto Chinese goods.
Are there other ways in which you could imagine certain countries might be able to narrowly benefit from the chaos in U.S.-Chinese trade relations? Yes, I think there are a couple of angles. Just so everyone listening knows, what you described doing, while it does happen, you can’t as an importer do that. It’s illegal. So don’t go out there and try to do that. Right now, if USMCA, the U.S.-Mexico-Canada Agreement, stays intact, the biggest winner likely is actually Mexico. Depending on what happens with tariffs from Vietnam, this will be important. Depending also on what happens with the auto side piece, right now, USMCA-compliant vehicles from Mexico are not being tariffed because Customs doesn’t know how to subtract the U.S. value in those imports from Mexico. No one knows when they’ll figure this out.
In the big grand scheme of things, I personally believe that probably the biggest winner of all of this is China. Prior to this event, the entire world was looking at them suspiciously with many of their trade practices, saying, “You’re overproducing, you’re dumping products.” The EU is putting tariffs in place; other countries are putting tariffs in place. The world was essentially starting to unite against China for many of their trade practices. We have come in and, in the last two months, completely gotten rid of that dynamic. We’ve now made ourselves essentially the outlier in how we’re behaving.
You can see this right now with President Xi of China going on a tour of South Asian nations. They’re talking about tariffs, with Japan, South Korea, and China discussing the potential for a trade agreement. That’s shocking in terms of how these developments are. Effectively, we’ve ceded momentum in the world that was looking more suspiciously at China and their trade practices. We’ve essentially set ourselves out as the odd behaving nation. We’ve thrown away 80 years of goodwill in a system that we helped create.
One of America’s advantages over every country on the planet is that disproportionately the world’s smartest people want to go to school here and want to stay here for work. If you look at what’s happening in American science policy and higher education, we’re making the U.S. a very risky bet for folks who want to practice science over the course of many decades. That is undercutting a historical advantage that we have spent about 80 years developing.
I want to end with a surprising loser here, or an ironic loser. I’ve spoken to several large and small manufacturers in the last few days, and one consensus that I’m hearing is that this yo-yoing of tariff rates is an enormous procedural headache. Big companies might have the personnel and the resources to push through and plan for the future, but small companies exposed to the global trade war are going to get crushed. Do you agree with the assessment that, ironically, a plan that is being sold as all about helping the little guy is creating an amount of confusion that will, ironically, hurt the little guy most?
Oh, absolutely. This tariff war will put tens of thousands of small retailers that specialize in sourcing goods from China and selling them in the U.S. out of business if this stays in place for six months. Again, this is the challenge we all have because we don’t make many toys anymore in the United States, and we don’t make much apparel in the United States. That’s what a lot of us are struggling with: understanding the logic for how this is good for the whole economy.
Jason Miller, thank you very much. Thanks for having me.