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China is going to prevail [1]

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Date: 2025-04-19

Here is Nick Kristof this morning

The most heated trade war is with China, and it’s there that I fear Trump has particularly miscalculated. He seems to be waiting for President Xi Jinping to cry uncle and demand relief, but that’s unlikely; instead, it may be the United States that will be most desperate to end the trade conflict.

Kristof lays out some of the tools China has at its disposal. Briefly, these include

China buys ag products and planes from the US. It can get them elsewhere. USA buys several things from China that it cannot get elsewhere. These rare earth elements.

He cites a poll in South East Asia, where more people now support China than the USA. China can look elsewhere for its exports.

It can turn a blind eye to the narcotics trade.

It could dump US Treasuries for a few days.

I don't have any issues with this list; it largely echoes the list you will find from Paul Krugman (as an example). And the list is largely accurate.

But this is missing the forest for the trees.

China is going to prevail because it is designed by history to prevail in a trade war. And the USA, is likewise designed by history to lose in this type of trade war.

To understand this, you have to understand 3 things. And I mean…. really understand them. As being foundational.

(1) The single greatest source of Chinese shame is due to their humiliation during a previous trade war; i.e. during the Opium Wars. The current trade war offers Xi an opportunity to rally his people into a fascist frenzy of redeemed greatness in a way that the MAGA crowd can only dream of. As an aside, go back to Nick Kristof’s list, and look at the relative low position of “it can turn a blind eye to the narcotics trade”. I will bet you $1 that Chinese memories of the Opium wars will likely push that item close to the top of the retaliatory actions it undertakes.

(2) The single greatest source of strength of the Chinese economy (over other economies) is their collective willingness to produce more than what they consume. Some in the US call this cheating. It is a lot of things, but it is not cheating. They were set on this course by Mao, and have largely adhered to it. So, one of the strongest tools at their disposal is an ability to start consuming more to replace the external markets they may lose. This will require a shift, and monetary policies to enable that shift, but it does not entail a sacrifice. By contrast, the US economy has been built around collectively consuming more than we produce. We got away with this because of our pre-eminence (and factor 3 below), but that goes away in a trade war. So there will be a sacrifice in the USA… Trump will be asking us to work harder just so we can consume less.



(3) The single greatest source of strength of the US economy (over other economies) is the immigrant population. This includes the students who study at US universities, and then go on to create startups in Silicon Valley. It also includes those cross the Rio Grande after having trekked all the way up from the Darien pass, just so they can pick our strawberries. In laying this out, I do not mean to downgrade all the mom&pop shops run by white Americans outside Indianapolis that produce various plumbing parts. Or the Japanese-American owned nurseries outside Los Angeles. It is just that those things exist in every country. But what is unique about the US (and thus a source of strength over other economies) is the desire of other people to come here and work hard.

So, if you consider these 3 factors, it is not hard to see what will happen. Trump wants to shut down immigration...both legal and “illegal”. He is effectively shutting down the single greatest source of strength of the US economy over other countries (including China). Foreign students don't go to Chinese Universities, and don't create startups in the Chinese ecosystem. Now they don't do that in the US either.

And he is simultaneously asking the Chinese consumers to consume more while asking the US consumers to consume less. All this with the backdrop of the Opium wars that has juiced Chinese willingness to sacrifice.

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