Why this trade war feels so lopsided

I have recently wrote about three majors threads on twitter regarding the trade war that have been well received, so I figured to summarize here on where we are. First, I wrote about China expanding its export market since 2018 to insulate impact from losing market access to US. Then I wrote about China’s move up value chain to this third economic period. Finally, I wrote about China’s “Bad Economic choices” in getting itself ready for this trade war.

Yesterday, I saw this interview of Andy Xie by CNBC. Back 15 years ago, Andy was basically the go to guy for Chinese economy. I guess he lost some sway recently, but I would still put his knowledge of Chinese economy ahead of basically everyone else. He said several month ago that a trade war is not a big deal for China. This was something that I and several other cranks said twitter, but very few economists that got interviewed on TV understood that. Basically, he looked at things from both the perspective of importance of being the largest unique supplier to a country and largest market for a country. He saw that while export to America did represent 2% of China’s economy, it’s not a huge deal in the overall scheme of things. More importantly, China can readily source US imports from other countries. As long as China’s tech progress continue, this does not affect your average Chinese person. The goal of China is to move up the value chain rather than remaining as the final assembly plant for iPhones, Walmart and Nike. Young people coming into work force do not want to do blue collar jobs. China is losing millions of blue collar works per year and its blue collar work force continue to age. Setting the stage for massive blue collar shortage in coming years. That’s why it is investing this much into automation. Youth employment is high because 70% of college graduates are looking for white collar jobs. There just aren’t that many such jobs being created. Does China really want to remain the place where low value added manufacturing is done?

This chart is great. It shows China’s trade surplus versus countries other than US jump from around $50B in 2018 to $700B in 2024. Over 6 years, it transformed its economy from one that was doing low valued added assembly for American companies to one that was outcompeting Western firms in global market

If we take a look at TD Cowen’s cost breakdown (which overestimates cost of almost every step), just about 10 to 15% of the xFactory value of a iPhone 16 goes to a Chinese employer. This also does not include Apple’s own IP value that gets included in import cost. If we extrapolate this to most of the designed in US and made in China products, it is likely that China Inc captures very little of the value from each product exported to America. If a name brand apparel is sold for $100 in America, it might only cost $8 to make in China and then shipped to America, packaged and distributed to big store retailer. The name brand may sell the product to retailer at $35 to make a nice healthy margin to pay its staff and all the operational expenditure. Then the retailer will charge 2 to 3 times when it sells the product. As I discussed in my last substack, this is the model that China is trying to move away from as it enters third phase of its development.

At this point, you may ask just what is China selling to the world? Well, one answer is the new three: EVs, solar panels and batteries

Another answer is cars in general, since most of the auto exports are not EVs

Another answer is trucks, tractors, buses and all form of heavy machineries and mechanical + electrical products. Powered by both diesel engine and batteries.

If you can actually read Chinese, you will see that the export of ICE trucks are mostly to global south countries. There is no western country other than Australia in any of their top export destinations for these products.

The same phenomenon has taken place in the solar market where global south exports have overtaken global north exports. Europe was complaining for a long time about Chinese exports destroying their local industries. Fine, you can import more expensive Russian LNG while China provides cheap solar power to countries that actually appreciate them. You can see the same trend in Wind power exports.

Today, I was looking up a list of CEEC projects that it bagged in Q1. There was a huge list of projects in oversea markets. Almost all of them were in Asian and African countries. It is fine that Western countries don’t trust China with their energy infrastructure. China will just build the energy infrastructure for rest of the world. All this has happened while China has built conventional forms of infrastructure in these countries as part of BRI.

See above for the transportation nodes that China built up as part of BRI so that recipient countries can trade more with China and then buy more Chinese products. They also get Chinese companies like CEEC to do more energy projects so that they can industrialize and grow more.

Africa has been a special partner for China. China has invested heavily in Africa so that China can trade more here and industrialize many countries. It has also built more ports, highway and rail projects so that they can grow faster. This has led to huge increase in trade between China and Africa.

We’ve seen this play out with the former Soviet Republic, Middle East, Latin America and ASEAN region. China is exporting more to everyone so that it does not depend on the US market anymore.

By having an intentional industrial and geopolitical policy, Chinese government reduced US market to just 14% of its export. And more importantly, those are low quality exports. Most of the exports are for US companies rather than Chinese companies. They also need to import large amount of chips and raw materials to complete those exports. Basically, America is still importing from $500B from China because it just absolutely cannot get a large chunk of that efficiently from anywhere else.

During this period of time, China also consolidated its dominance across precious metals, chemical sectors and different supply chain. You can see here with its processing dominance back in 2023. Keep in mind that even some of the non-Chinese share here are done by Chinese companies with Chinese tech to supply to Chinese market.

Ultimately, China is dominating these production because it is the largest consumer. For example, if we look at Titanium alloy. China is the world’s largest Ti miner.

Yet, it is still the largest importer of Titanium ore, because its consumption continues to grow at very high rate.

The tremendous demand for Ti material in China meant it also became the largest Ti sponge producer (63% of global production) and also the largest exporter by 2023.

See below for the huge growth of export, mostly to Russia.

all while its import shrunk to next to nothing

If we look at the production of final Titanium material for various applications, we see similar Chinese dominance in the past few years. We have seen similar growth and control of full supply chain against other advanced materials like carbon fiber, Tungsten, Manganese, Antimony and all the major chemical fibers.

It also went beyond the production of metals and chemicals. They used their dominance there to further up the supply chain. Especially since most of the final product and the demand is also in China. Chinese OEMs are working with domestic producers to de-risk from Western supply chain during this time.

You can see this in production of marine engines, semiconductor manufacturing equipments, industrial robots and CNC machines as well as the supply chain in the production of these machines.

For example, China had been a huge importer of CNC machines, but could not get access to the latest most high end ones due to export controls. It developed its own CNC industry with major players like Kede, Haitian and Beijing Jigdiao group. See chart above, domestic market share grew from < 50% in 2023 (left) to around 60% in 2024. They estimate that Chinese firms will fully catch up and surpass global competitors over the next 5 to 10 years. That has enough impact in high end manufacturing like the aerospace sectors.

I’ve spoken about semiconductor supply chain and industrial robotics extensively in the past. China is well on its way to achieve for full technological sovereignty across all the major manufacturing fields. It has done this while also achieving supply chain dominance. All of this means a modern economy simply cannot avoid Chinese imports and supply chain. I think we are about to find out how painful that is in America in a few weeks. Basically, China has done this intentionally over the past 7 years while America was overly focused on AI and geopolitical stuff.

While the DC blob was overly joyous in celebrating an economy buoyed by a stock market bubble fueled by AI bubble, China took its time deflating its stock market and real estate bubble and attack the big tech monopoly of domestic economy (like with Alibaba). It made technological sovereignty and advancement the core of economic objective rather than just GDP growth. Would you rather go into a trade war with an asset bubble or without one? Would you rather have tech sector dominated by a few large players or many competitive startup players? Given how quickly China’s AI sector has caught up to OpenAI, I think it would be hard to say Chinese leadership did the wrong thing here. Could DeepSeek have happened if Chinese tech sector was just dominated by Baidu, Alibaba and Tencent?

If we take a look at the breakdown of China’s import from America in 2024, > 43% of import from America was food, energy and chemical products. These are all things that can easily be replaced by other countries. In fact, we’ve seen China intentionally build up ports, infrastructure and farming yield in Brazil to facilitate growth of Brazilian agriculture products so that it can fully replace America.

Most recently, China has opened up a huge port in Chancay, Peru. It now has plan to build a road between Brasil agriculture region with Chancay so that soybean, wheat and other farming goods can be more cheaply sent to China.

While it is true that China still depends on American MNCs for a lot of chip imports, it has also made decision to have same tariff on all US made chips. Now, a lot of US MNC sales are fabb’d in Taiwan, so those will not be affected. But the effect on TI, analog devices and Intel could be quite large. China clearly believes that it has enough chips stocked up and can switch over to domestic or European or other Asian options with enough time. Since it has already been cut off access from cutting edge American SMEs, it will be rapidly expanding domestic share of SMEs across more nodes.

We have seen a huge growth in capacity in mature chip, memory chips and power chips in the past few years. All of which point to less reliance on US and foreign import of chips. The point is that China has taken recent years to reduce US reliance on key technology, so that it can grow even in the event of a trade embargo like the one we have right now.

So as we stand, most of China’s coastal elites simply do not feel the effects of the trade war. There are no major Chinese companies (outside of may be Lenovo) that have large revenue affected by this, while US MNCs took $495B revenue and $95B profit from China market

See above on just how much more money US MNC made in China vs vice versa. China can live without iPhone, Tesla, Starbuck and Sands Casino. Cutting off market and labor access to China would be really bad for many US MNCs. So, China still does have a lot of cards to play if things escalate. For now, just the trade embargo is already putting huge strain on US stock and bond market as well as imports of much needed goods. It is likely that China will not resort to limiting market access to US MNCs, but this also shows how much further China can escalate here.

Can US really handle a couple of more months of not having vital inputs to its economy? You can try to production out of China, but factories, roads, workers and ports in Vietnam and Indonesia cannot possibly multiply over night.

As this type of drops continue, we are going to run out of stuff here in America with empty shelves. Many small business that relies on import with simply go out of business. Some apparently have already sold their branding and design to the Chinese factories that have the cash. As such, these Chinese factories lose direct access to US market, but now move up to higher margin design business and can simply move their low margin production to ASEAN country. This will speed up China’s progression toward the high end design and service industry.

In Xi’s recent visit across ASEAN countries, he really stressed how China can help them move up value chain. That type of messaging is much welcomed in those countries.

UnionPay, ICBC, NAPAS & Vietcombank signed 4-Party Cooperation Agreement on China-Vietnam QR Code Retail Payment Interconnectivity after that trip. It will allow local currency settlement services for cross-border payments. Almost all merchant POS terminal in Vietnam can accept UnionPay card. Digital + financial integration of China & Vietnam economy. The next phase of integration between China and its Asian neighbors is in services. All of this creates white collar jobs that current horde of college grads in China demand.

So, it appears to Andy Xie and me that China is fully ready to move on from US while Trump administration has clearly signaled recently that America actually can’t decouple just yet. They did not realize China has changed since 2018. That is a huge mistake. History will not look kindly on the beltway establishment that failed to see China’s success in de-risking from America and foolishly entered a trade war that it cannot win.