Trump’s Tariff Shock and the China Supply Chain

One month after my last piece in NationIts main things – on DOGE, tax reducing, Pentagon costs, drop in oil prices and, above all, tariffs, look pretty good. I thought Mexico and Canada would go pretty easily that China would return the hit. At first, it seemed that I guessed that in Vietnam and other Asian countries to avoid heavy hit. But then Trump retreated from his inappropriate “mutual tariff” scheme.

This retreat was caused by fluctuations on the bond market and dollars. In the past crises, even if US policy was guilty – how it was in the case during A mortgage -dimensions– As a safe asylum as a safe asylum, the US Treasury Bonds and Accounts. This time they moved. Japanese insurance companies Perhaps brought this stepIn the act of self -defense who struck the money where it hurts and showed the borders of Trump’s power. “intermission“So far, the economic picture and tariff policy may be completely different than today.

Trump has still claimed success, reporting that more than 75 countries came to a “kiss (his) ass”, including proposals to reduce their tariffs for US goods to zero. Because for many countries, these tariffs were already low and others cannot afford that America is still exports, it costs it and promises little profit to American firms. But together with, say, a few weapons or soy supplies can be enough to keep the tariff wolf from their door.

China does not bend. He does not bony and knees. This was the principle of Chinese policy after the revolution. No one is prone to Gorvel before any foreign authorities cannot become a leader in China, and any Chinese government that hesitated on the point will be popular with anger – even in China. China also has a life story, much greater than anything that Americans can remember. The Chinese can and take what comes. So we are in the trade war, and the only question is: how long is Trump (and America) blinking?

The first points of pressure on political pain – stock markets and bonds; The second is the upcoming election. A wide scenario has known since 2008 – providing prices that lead to a financial crisis, after which revenue, deep recession and eventually emergency measures to move back the economy again. However, it was then. Bush and Obama regimes had enough to keep the instinct to refer to Cyrenia, which was under stress-like Trump himself, faced with Covid in 2020. But in the new libertarian order, and with Trump (allegedly), they banned re-election, extreme musk and- and-Melon-ism can prevail this time -North if the Democrats will profit next year.

The third potential pressure point can hurt even more. Consider the supply chain in America: Amazon, Walmart, Target, Costco, etc. These firms have created the most rigid funnel for distribution of goods that, if -have seen. Many of these goods do not mean, but many from China. Many are manufactured in the US and other countries. But everyone merges into the same chain to which many millions of Americans are now small when there are alternatives.

Apply an argument from my new book, Economic Entropia. It was Henry Ford’s famous formula for the T Model Top, which has been repeated for more than a century in each sector and domain. This is an American system. The system of distribution of America – with all its aesthetic and moral defects – is only the last and one of the greatest application of the Ford principle.

But highly effective, high-fitting cost business structures are fragile. When their variable costs grow, their volume is shrinking and the profit can fall sharply, as they still have to cover their fixed costs. Profit quickly turns into losses. Firms with high fixed costs can worsen only until their reserves are exhausted – at that moment the break and bankruptcy. The adjustment does not occur in magic, according to the textbooks; This is a slow, painful process – when it happens at all.

Trump tariffs in China, leaving aside those in the rest of the world, increase variable costs. If tariffs destroy Chinese suppliers’ profits – it is very likely in many cases, as Asian revenue rates are low – they will be Stop sending to the US. The drop in volume will make a profits of the distribution network. As the profit falls, parts of this network can start to fall. If large shops and online pads begin to close, there will be no channel with sufficient capacity Non -Kitan goods, including manufactured in the USAOn a wide consumption market that is an American working and middle class. Without access to their own customers, American producers will also break through.

The last big crisis, Covid-19, broke the supply chain only temporarily. It could be repaired, redirected and restored. In addition, Covid Hit Services is most difficult. Services have relatively low fixed costs. They shrink, and then, after all, they (mostly) restore. A great financial crisis in 2008 got into the housing: it destroyed values, displaced millions through redemption and depressive construction. But housing owners who were not moved – the vast majority – mostly the loss of paper and life continued. Homemade construction is also a high -cost industry industry, and eventually the housing sector began to recover.

The distribution is different – and all Americans need to eat every day. They rely on a high -cost supply cost for daily purchases, including food and many other items made in the US and worldwide. When the distribution network begins to fall, Americans can be deprived of not only Chinese goods but also all goods. The pain sensor will rise up and up. The Soviet-style deficit economy may occur-and it can happen quite quickly, as the pandemic has shown.

With a serious deficit, the “stimulus” reflex is counterproductive: more money will bring longer lines and raising prices. You can start the distribution system with loss with the help of revenue and subsidies for “critical infrastructure” provided by operating firms. But it is difficult to imagine how it either happens on a scale, according to a stable dollar. If the dollar price continues to fall, the price of everything (imported and home) will increase even more. Then the federal reserve will face the choice of subsidies for infrastructure or raising interest rates to protect the dollar (and “combat inflation” as they will call). This dynamics, as soon as it started, works against recovery.

Perhaps also because the evangelists surrounding Trump hope that the problem will be solved by massive waves of new investments in business, revival of the domestic industry, translation of supply chains and decentralization of distribution, all quickly in the teeth of inflation, recession, unemployment, high interest rates and bankruptcy. When pigs fly.

Naturally, it is also possible that our leader again cancels the course, announced the victory and will try to restore the status -with the usual flattery aimed at XI jinping. On smartphones and computers, the two largest imports from China, he was already making exactly this, late on Friday night, obviously to keep Apple. As long as it costs to blink on the rest, our disposable Chinese partners may have overestimated the value for their relationship with us and moved on. Good luck return them.