We’ve already explored Trump’s tariffs, but it’s worth a quick recap of his rationale before we tour today’s wild ripple effects:
- US trade with China hasn’t made Beijing more capitalist or democratic
- Instead, China has dominated key sectors while eroding US industry, and so
- Trump ran on a platform of using tariffs to tackle that imbalance.
And while he’s now slapped tariffs on everyone (otherwise he says China just reroutes via third countries), the big kahuna tariffs are now really on China. Building on earlier tariff rounds during Trump 1.0 and Biden…
- Trump’s 34% tariffs last week have now triggered a 34% response from Xi Jinping, in turn triggering another 50% addition from Trump.
The cumulative result is that as of today (Wednesday), the world’s largest economy is now slapping the world’s second-largest economy with 104% tariffs. And the second-largest economy is responding with its own historic 52% tariffs.
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But as spicy as this all sounds, it’s worth having a clear picture of what it all means for…
- The big end of town
For the US, one reason the S&P 500 just posted its biggest intraday reversal in history is that major US firms depend on China, whether as a source of inputs, consumers, or both. Many have dual dependence, like Apple still manufacturing 90% of its iPhones and generating 17% of its revenue in China, hence the firm’s 20%+ stock crash since last week.
There are similar stories for China, which is (just in numerical terms) about four times more reliant on exports to the US than vice versa: some firms (like Lenovo and ByteDance) have that same double-dependence above. Meanwhile…
- The smaller end of town
In the US, for example, Virginia’s Sarah Wells (who makes accessories for moms) has paused hiring now that Trump’s tariffs have wiped her margins — local suppliers can’t fill her orders, and she still needs Chinese raw materials anyway. There are countless other such tales, like California’s big machine toolmaker who’s just slashed production.
Of course, the argument is US suppliers can eventually step in, but ‘eventually’ might be years off, by which point some of these same US businesses may no longer be around to click ‘buy’, or not at the higher prices US suppliers will need. And sure, others like commercial shrimpers welcome Trump’s tariffs after years of battling cheap imports, but shrimp victories will be dwarfed by soy losses, as farmers brace to lose half their exports.
Over in China, meanwhile, up to 10 million manufacturing jobs are now at risk as US-dependent exporters crater. And social media is awash with anecdotes, whether it’s the Jiangsu textile worker losing shifts, or the Guangdong assembly line guy bracing for ruin.
Of course, the argument is that many of these jobs were created at US expense, though it’s unclear if there are still millions of Americans wanting that factory work, let alone wanting to pay quadruple for a tee (notwithstanding some local cost-effective options).
So, what’s next?
Trump is assuring everyone Xi will make a deal, though it’ll have to be fast while the pain spreads across the US economy.
And yet while China’s foreign ministry is vowing to “fight to the end”, Xi Jinping is in a bind, too: his legitimacy rests partly on a Communist Party promise to keep lifting local living standards, but millions of layoffs will worsen his economic woes, while running cap in hand to Trump could just risk new political woes among his Beijing elites.
So markets will keep shuddering while the world watches to see who’ll blink first.
INTRIGUE’S TAKE
Trump’s 2024 campaign united different US tribes, but they’re now back in conflict:
- Capitalists hoped Trump’s pro-business tilt would turbocharge growth, while
- Isolationists hoped Trump’s populist-nationalist instincts would help repair some of the disruption left behind by a generation of globalisation.
By implementing historic new tariffs, Trump has now sided with his isolationists like Navarro, nudging more capitalist voices like Musk to publicly call Navarro a moron. It’s also why we’ve already flagged the possibility that Trump might fire Navarro.
Anyway, there’s a quiet sense among many foreign policy types that Trump 1.0 was right to diagnose the US imbalance with China. The yelling has been more about his methods: Biden used a scalpel (targeted tariffs, industrial policy), while Trump has now dropped a sledgehammer (the highest US tariffs in a century).
And will this work? The markets are still flashing a big red ‘no’. In addition to record falls in stocks, remember the claims this might all drive yields down to help refinance US debt? We’ve just seen the opposite, with US yields spiking higher, signalling either:
- a) This might just be another big unwinding of the basis trade (a common hedge fund bet on the price gap between Treasuries and futures)
- b) The US might now be losing its safe-haven appeal, and/or
- c) The markets might fear stagflation ahead (slow growth and high inflation).
If it’s more a combination of b) or c), that’ll prompt fears that Trump might’ve just pulled a Liz Truss.
Also worth noting:
- Total trade in goods between the US and China amounted to $585B in 2024.
