I woke up, and the first headline I saw about what had happened in the US during my sleep was “We just increased tariffs on China to 104%” from President Trump. Once again, many people were caught by surprise, even though the US President had previously warned he would take this move if China decided to antagonize rather than accommodate his requests.
This is what I said yesterday in “TARIFF WARS: A NEW HOPE“:
“Unlike Japan and the EU, China can instead negotiate from a position of strength. Why? While Chinese exports to the US only account for 3% of China’s GDP, US direct imports from China account for 13.4% of total US imports. Furthermore, there is an indirect dependence on countries like Mexico and Vietnam, which themselves source on average ~30% of their inputs to manufacture finished goods then exported to the US from those countries. Additionally, the US’s biggest company by market capitalization, Apple, has most of its supply chain physically in China, and China also accounts for almost 20% of Apple’s total revenues”
As I have mentioned many times, the Chinese government plans well in advance for various scenarios to make the best decisions in every situation, aiming to ultimately achieve their long-term economic goals that are set/renewed roughly every five years. Do you think China doesn’t realize that, as I tried to warn everyone yesterday, the current situation will bring greater damage to the US economy rather than the Chinese one? Consequently, why would they sit at a negotiating table with the US right now when simply waiting will shift more and more negotiating power to China’s side? Unlike Japan and the EU, who clearly learned nothing from Trump’s first term, China has effectively positioned itself to use its opponent’s greater strength against them, turning the odds in their favor by applying kung fu principles to global economics. Furthermore, China knows a global banking crisis is on the horizon and has started preparing its banking system and financial markets well in advance to withstand it, as I wrote long ago in: “A BIG BANK IS ON LIFE SUPPORT, CHINA KNOWS IT AND IS PREPARING TO WITHSTAND THE SHOCK – IS THIS BULLISH?“
Considering the US administration’s target is to significantly reduce trade deficits with other countries, cut the government deficit, and re-industrialize the country, a more effective approach would be directly targeting specific companies that have greatly exploited the US economic system, like Apple. The company run by Tim Cook has spent more than half a trillion USD on stock buybacks in recent years, a huge amount it could afford thanks to its perfect system of extracting the highest possible amount mainly from US consumers while paying the lowest possible amount of profit taxes back to its country. Only a fraction of those hundreds of billions of USD was needed to build factories to manufacture iPhones meant for the US domestic market directly in the US. However, companies like Apple have been allowed to expand their profit margins to the extreme for the benefit of a few at the expense of everyone else.
Semiconductors, cars, widgets, and anything you can think of can be manufactured by companies in the US without any problem, as long as those companies accept that they will make significantly lower profits in the future due to higher costs. Given a market that is so focused on short-term stock performance and ever-rising share prices, a huge shift in mindset is needed for the benefit of the economy as a whole. This is something China understood very well, which is why the profit margins of Chinese companies are significantly lower than those of companies in other countries. In China, the government simply prevented companies from exploiting consumers and extracting value from many for the benefit of few. It also stopped companies from inflating their share prices and financial assets as a whole because it clearly took away capital that could be invested more sustainably and productively in the real economy. Why can’t the US do the same thing? Sure, it can, but the price to pay will be stock prices and valuation multiples crashing back to earth, something that has happened in Chinese markets since 2022, and stocks are now pricing at more long-term sustainable levels better aligned with the fundamentals of the real economy.
As I am writing this article right now, Chinese stocks are roughly flat despite the new action of the US government, hopefully it is now clear why.
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