Who Holds the Cards?

ZeroHedge asks Who Holds The Cards In The Trade War: U.S. Or China?

He who produces or he who consumes. Who holds the power? If China cut off the United States, shelves could go empty in weeks. If the U.S. closes its doors to China, the country’s income would collapse ushering in a severe depression.

So should American’s count their blessings as they are showered with inexpensive goods or is “the customer always right”?

ZH is holding a debate between Carnegie Endowment’s Michael Pettis and Z-Ben Advisors’ Peter Alexander.

The event will be moderated by Michael Green of Simplify Asset Management.

Each has studied China for decades and will provide the respective bear and bull case for the burgeoning superpower’s economic growth prospects. They will also weigh in on the ongoing U.S.-China trade war.

Unfortunately, the debate is subscriber only. But we have these opening positions.

Case Against China by Pettis

• China’s past economic success was driven by strong supply-side growth, especially during the 1980s to 2000s.
• The current major constraint is on the demand side, particularly domestic consumption, which is historically low.
• Weak consumption makes it difficult to grow the supply side without:
  • Increasing investment, which China is reluctant to do.
  • Expanding the trade surplus, which other countries are unwilling to accommodate.
• China is caught in an “Albert Hirschman trap”:
  • Successful growth models eventually become obsolete.
  • Countries often struggle to transition away from outdated models due to political and economic barriers.

China Case by Alexander

• Massive leaps in automation and AI: DeepSeek, fully autonomous Shanghai port, etc.
• Influx in private capital investment from abroad, which continues to persist.
  • Recent demand for fixed income products — bonds from the government and banking sector — has naturally suppressed interest rates as opposed to artificial suppression by western central banks.
• Pundits calling for Chinese collapse for decades. Never materialized and in fact the opposite has been true.
• Chinese consumers are beginning to purchase Chinese products, which will lead to a higher standard of living domestically while reducing the amount of available goods for international consumers (like the U.S.).

Tariff Carve-Outs Underscore Weak US Position

Politico comments Tariff Carve-Outs Underscore Weak US Position in China Trade War

The White House says it has the upper hand in its trade war with China. Its actions suggest otherwise.

Top administration officials spent the weekend trying to defend a carve-out of consumer electronics from the astronomical 145 percent tariffs it levied on China last week. The carve-out was neither an exemption nor a policy rollback, the White House argued, because those electronics are still subject to a separate 20 percent tariff on China and some electronic components could face sector-specific tariffs in the future.

But to some White House allies, the exceptions are indicative of the relatively weak position the administration is in as it wages a trade war with China, which has spent years making preparations for an escalation with the U.S. on trade. The carve-outs also reveal the conundrum facing the administration: The U.S. is imposing new tariffs on Chinese goods in an attempt to move manufacturing back to the U.S., but those tariffs are particularly painful for U.S. manufacturers because they are currently so dependent on Chinese parts.

So far, the U.S. has demonstrated that it is more willing to bend than China is in this burgeoning fight.

“Xi Jinping will not back down,” said one former Trump administration official, who like others in this story was granted anonymity to share their candid assessment of the U.S.-China relationship, adding that “the CCP will lose confidence in him” if he does, using the acronym for the ruling Chinese Communist Party.

But to some White House allies, the exceptions are indicative of the relatively weak position the administration is in as it wages a trade war with China, which has spent years making preparations for an escalation with the U.S. on trade. The carve-outs also reveal the conundrum facing the administration: The U.S. is imposing new tariffs on Chinese goods in an attempt to move manufacturing back to the U.S., but those tariffs are particularly painful for U.S. manufacturers because they are currently so dependent on Chinese parts.

So far, the U.S. has demonstrated that it is more willing to bend than China is in this burgeoning fight.

“Xi Jinping will not back down,” said one former Trump administration official, who like others in this story was granted anonymity to share their candid assessment of the U.S.-China relationship, adding that “the CCP will lose confidence in him” if he does, using the acronym for the ruling Chinese Communist Party.

“This is going to get really ugly,” the former official added.

The stalemate reflects China’s careful preparations for this showdown long before Trump announced his so-called “Liberation Day” tariffs earlier this month. Beijing’s prompt countermeasures underscore that readiness: a cross-domain mixture of tariffs, export restrictions on critical minerals essential to U.S. industry and targeting of American firms with official probes or sanctions that press multiple economic pain points.

The Trump administration’s decision to exclude key tech items has also quietly irked some members of the president’s inner circle, who expect any sector-specific tariffs on semiconductors and possibly other electronic products to be much lower than the 145 percent tariffs on China.

“You have to be firm and consistent with the policy,” said one person close to the White House. “And a 25 percent tariff is going to do absolutely nothing,” they said, referring to the figure Trump floated in February for future semiconductor tariffs.

“I spent most of March in China prior to the tariff announcement and it was clear the Chinese aren’t going to pay tribute to another emperor,” said Rick Waters, former inaugural coordinator of the State Department’s China House —the U.S. government’s focal point for China policy — and now director of Carnegie China, an arm of the centrist think tank the Carnegie Endowment for International Peace “It’s now a waiting game to see who blinks first — Xi would probably take Trump’s call but won’t pay up front or initiate. And lower level channels are unable to accomplish much without some area of consensus at the top.”

But the White House is equally unmovable in its position that Trump won’t be the one picking up the phone and initiating talks with Xi.

“We view [Trump] making a call to President Xi as an extension of an olive branch,” said a person in the Trump administration. “They’re a bad actor. We won’t be extending that branch.”

Trump continues to make conciliatory overtures to Xi, telling reporters on Monday that he doesn’t “blame China at all” for the U.S.’s economic dependence on the country and emphasizing his respect for the Chinese president. Over the weekend, he called Xi a “very good leader, very smart leader” of a “very big great country.”

But Beijing’s not budging.

“The U.S. uses tariffs as a weapon to exert maximum pressure and seek selfish gains, and puts its own interests over the public good of the international community,” Chinese Foreign Ministry spokesperson Lin Jian said Monday. Walking back China’s 125 percent tariff on U.S. imports will require the Trump administration to “resolve issues through dialogue on the basis of equality, respect and mutual benefit,” Lin added.

The administration has been focused on curbing what it says are large-scale illegal shipments, effectively laundering Chinese goods through third countries, including Vietnam and Cambodia. It also sees the countries as a potential alternative trading partners as it looks to wean itself from its dependence on China and shift manufacturing back to the U.S.

Xi is seeking to counter that move with state visits to Vietnam, Cambodia and Malaysia this week, where he’s pitching China as the more reliable trading partner amidst Trump’s widening trade war. Xi’s topline message to Vietnamese Prime Minister Pham Minh Chinh: the two countries “should ensure a smooth flow of trade,” Chinese state media reported Monday. Xi didn’t mention the U.S. or its president. But his hosts in Hanoi couldn’t miss Xi’s implicit jab at Trump by urging Vietnam to work with China in opposing “hegemonism, unilateralism and protectionism.”

Trump got the message. The Xi and Pham meeting is all about “trying to figure out, ‘How do we screw the United States of America?’” Trump told reporters Monday.

“Look, I’m a very flexible person,” Trump said in the Oval Office Monday. “I don’t change my mind — but I’m flexible.”

Actions Speak Louder than Words

For now, actions speak louder than words.

Trump portrays his weakness as “I don’t change my mind — but I’m flexible.”

Yeah right.

We have seen a dozen flip-flops and tariff changes in just two months.

Pettis 100% in Theory

In theory, I side with Pettis 100 percent.

The case by Alexander, as presented above, is very weak. It’s mostly China hasn’t blown up yet, so it won’t. And Influx of investment in China is waning.

Note that Alexander says “Chinese consumers are beginning to purchase Chinese products.” But that is something Pettis wants to happen and needs to happen.

So we have a bit of “violent agreement” as well.

The Mixed Bag of Practice

The reality is China (the world) needs to rebalance. But how? When?

None of the articles discussed either question. Nor did they discuss political ramifications.

As a practical matter, for now, and for totally different reasons than Alexander lists, I think Xi is in a position to wait out Trump.

Trump has to worry about midterm elections. Xi does not. Trump also has to worry about agricultural retaliations, rare earth elements, and inflation. Xi does not.

China controls 80% of the supply of rare earth minerals needed for military guidance systems, cell phones, wind turbines, car engines, and computer chips.

Moreover, Trump treated Canada and Mexico worse than China until the recent, and massive escalation.

Instead of seeking cooperation from allies to go after China, Trump went after the whole world! This was a seriously stupid mistake, even if one believes in tariffs.

Longer term, I side with Pettis. But the key questions are still unanswered, when and how? And Trump does not even understand the problem.

What’s the Real Problem?

Trump is fixated on bilateral trade in a multilateral world.

And the roots of trade imbalances have noting to do with trade.

The real problem is unsound currency.

Flashback November 1971

John Connally, President Nixon’s Treasury Secretary, bluntly told a group of European finance minsters “The dollar is our currency, but it’s your problem.”

Nixon Shock 

Connally’s statement is part of what’s now labeled as “Nixon Shock“.

The Nixon shock was a series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold.

Nixon did not want to hike interest rates for his guns and butter policies (War in Vietnam and social spending), and as a result the US was rapidly losing its supply of gold.

Nixon said the move to end gold convertibility was temporary. It wasn’t. 

Ever since Nixon killed convertibility of gold there has been no checks on fiscal deficits. Countries could spend at will and did, especially the US.

Prior to ending gold convertibility, countries that had huge fiscal deficits had to jack up interest rates to stop outflows of gold.

US debt held by the public is now $28.96 trillion. Total credit is almost unbelievable.

Real GDP, Government Debt, and Total Credit Market Debt Owed (TCMDO)

How Much Credit Expansion Does It Take to Grow Real GDP?

On April 2, 2025, I asked How Much Credit Expansion Does It Take to Grow Real GDP?

Detail Since 2019 Q4

• GDP: +2.55 Trillion
• US Government Debt Held by Public: +11.67 Trillion
• US Government Debt: +13.00 Trillion
• TCDMO: +27.33 Trillion

To grow GDP by $2.55 trillion since 2019 Q4, TCMDO went up by over $27 trillion.

This would not happen with sound currency. And it is nothing tariffs can possibly fix, even if Trump understood trade (which he doesn’t).

Dear Jerome Powell, Is Everything Under Control?

On January 31, 2025, I asked Gold Hits New Record High, Dear Jerome Powell, Is Everything Under Control?

Gold does not believe the Fed has things under control and neither do I.

Conclusion

Long term, Pettis is correct. Meanwhile, we struggle with an unsound currency that tariffs cannot fix.

Since tariffs will not and cannot fix the problem, Trump would not win, even if elections were not a factor.

That brings us to this important revelation.

Ultimately, the question of who has the cards is moot. A currency crisis is the likely resolution. Just don’t ask me when.

Related Posts

April 13, 2025: China Halts Rare Earth Exports Desperately Needed by the US

I have been warning about this for years. It’s now happening.

April 14, 2025: Trump’s Plan to Make Manufacturing Great Again in Pictures

The share of manufacturing employment keeps declining. What role did NAFTA play?

Please read the above post. It highlights the major problems with Trump’s promise to restore manufacturing greatness.

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