April 7: The Trade War Is About China

U.S. begins negotiations with Japan; Alan Tonelson on tariffs; The end of Factory Asia?

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The Big Story

Early Monday, markets appeared to be continuing their rout in response to Donald Trump’s sweeping Liberation Day tariffs. By midmorning, the S&P 500 had posted its worst three-day performance since the “Black Monday” crash of 1987, and both it and the tech-heavy NASDAQ fell into bear-market territory following double-digit declines last week. The carnage was even worse in Asia, where several markets suspended trading Monday morning as massive sell-offs triggered circuit breakers. Hong Kong’s Hang Seng Index dropped by more than 13% and Taiwan’s Taiex by more than 9%, and Japan and mainland China’s benchmark indices both fell by more than 7%.

Then came relative calm. The S&P 500 recovered, briefly climbing into positive territory before settling in at around -0.2% near the close of the trading day. As of our final checks on today’s edition, around 4:15 PM, the NASDAQ was in the green. Meltdown averted—at least for now.

Still, the days of market chaos—exacerbated by confused messaging from the White House—raised certain questions, even among those otherwise inclined to defend the president. Is all this tariff stuff as stupid and crazy as it looks? Are we really tariffing penguins? Have these people never heard of comparative advantage?

It’s certainly possible that the White House’s tariff scheme could turn out poorly—bets tend to come with risk, after all. But there does seem to be a method to the madness. As Henry Gao, a law professor at Singapore Management University, wrote in a Monday X thread (emphasis ours):

Three things you need to know about Liberation Day tariffs:

1. It’s not about the methodology.

The formula has been widely mocked, but that misses the point. The numbers aren’t meant to hold up in a PhD defense—they’re meant to shock, to create leverage. The more extreme the figure, the stronger the incentive for other countries to come to the negotiating table with the U.S.

2. It’s not even about the tariffs.

The real issue isn’t Vietnam’s tariff rates—it’s China’s trans-shipment tactics and its central role in global supply chains.

The aim is to isolate China and rewrite the rules of global trade. If a country like Vietnam is willing to align with that goal, it doesn’t matter much whether it sets its tariffs for American products at 0%, 5%, or even 9.4% (current rate).

3. It’s not personal with any country—except one. The tariffs are universal, affecting even places like Heard Island and McDonald Islands, sparking confusion and anger worldwide. But as Commerce Secretary Howard Lutnick explained, this blanket approach is designed to block every possible loophole China could exploit. In effect, all countries have become collateral damage in the U.S.-China economic standoff.

Until the two strike a grand bargain—or the U.S. builds a broad coalition to ring-fence China—the fallout will continue to ripple across the globe.

In other words, it’s about China, stupid.

The global trading regime of the past 50 years, which has admittedly made a lot of money for a lot of people, has also enriched China and deindustrialized the United States. As Michael Lind explained in Tablet last month, the United States now relies on China for critical industries such as shipbuilding, pharmaceuticals, steel, drones, and defense. As we have seen in Ukraine, America struggles to keep pace with the artillery shell manufacturing capacity of Russia, which has an economy less than 1/14th the size of ours. The United States and its allies are also heavily reliant on advanced Taiwanese semiconductors, which could be seized or blockaded by China in a conflict. Reshoring these industries is a play to bring “good jobs” back to the United States, sure, but it is also a critical national security imperative. Addressing it requires rebalancing American trade, not only with China but also with the rest of the world.

Trump and his team understand that the United States, as the global consumer of last resort, has a tremendous amount of leverage over the rest of the industrialized world, which depends on selling into U.S. markets. Disrupting the global trading system may cause pain here, but it will hurt the United States’ major trading partners more than it will hurt the United States. The tariffs on allies send a message: We are happy to defend you, and to trade with you on fair terms, but you must choose between China and us. We cannot rely on our defense umbrella while protecting your markets from our goods and helping to enrich China. If you don’t like our offer, you can try to cut a deal with the Chinese, but they couldn’t defend you even if they wanted to, and they will moreover flood your markets with cheap goods and annihilate your domestic industries. So maybe you should consider buying a few more Fords. As the White House Rapid Response X account put it, after Trump threatened an additional 50% China tariff on Monday: “The message is simple, for those who are ready to take a seat at the table and recognize that they will no longer be able to mistreat America, please come and join us.”

Lurking in the background of all of this, of course, is the possibility that the United States fears, or has reason to expect, a Chinese move on Taiwan in the near future. Here was China analyst Christopher Balding on X on Monday:

The Scroll heard a similar assessment from Brian Costello, a technology investor and entrepreneur. When we initially spoke to Costello on Friday, he told us that he thought the tariffs were a mistake. By Saturday, however, he had changed his mind. “I personally think they have some intelligence that something is going to happen with Taiwan by 2027. In that case, there’s a bunch of benefits right now to resetting the economy, refinancing our debt, trying to rebalance trade, and doing it on our timeline versus an emergency timeline.”

“If Trump looks brilliant in hindsight,” Costello added, “it will be because he made a proactive move.”

—Park MacDougald

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The Rest

→Treasury Secretary Scott Bessent announced on X on Monday that Trump had tasked him and U.S. Trade Representative Jamieson Greer with opening trade negotiations with Japan, following a “very constructive phone conversation” with the Japanese government. In a thread following up on the announcement, Bessent said that “Japan remains among America’s closest allies, and I look forward to our upcoming productive engagement regarding tariffs, non-tariff trade barriers, currency issues, and government subsidies.” He ended with a warning to China:

→The Scroll spoke with Alan Tonelson, the author of the RealityChek blog and the book The Race to the Bottom, for his perspective on the tariffs. Here’s a partial transcript of that interview:

The Scroll: What do you see as the administration’s goals with these tariffs?

Alan Tonelson: As I see it, there are two main goals that the administration is trying to achieve, and they’re pretty closely intertwined. One, they clearly want to revive the U.S. manufacturing base—they want to make it more independent and less vulnerable to global shocks, ranging from a war to a new pandemic to the kinds of geopolitical tensions that will always arise in world politics. That aim includes decoupling from China, and we’ve actually achieved some pretty impressive decoupling so far, but, but it’s certain that there’s more to come.

The second really goes hand in hand with what Scott Bessent, the Treasury secretary, has called the “detoxing” of the U.S. economy. Here, he hasn’t been as clear as he could have been and kind of vacillates back and forth between criticizing what he calls government-led growth and criticizing the nation’s addiction to to cheap credit and the habit that it’s developed over so many decades of living beyond its means because it’s been so much fun to buy cheap goods from overseas.

Achieving both aims is absolutely essential. Because for all the talk of an economy dominated by services and high tech, it’s vital to be able to make things. It’s vital if you want to be able to defend yourself adequately, but also manufacturing—and, and this is frequently lost on folks who call themselves students of the economy. Manufacturing accounts for about, about 70% of the private sector research and development that’s done in this country. So if you want a so-called high-tech economy, you really do need a strong manufacturing complex.

When Bessent talks about detoxing the economy, or encouraging Americans to live within their means, that sounds to a lot of people like he’s saying we’re about to get poorer—a message that we’d normally think of as political suicide.

It very well could be political suicide for the Republicans, and for Trump in particular, if they don’t pass their tax cut agenda, because the full tax cut agenda would dramatically lower business costs. In fact, if you combine the tax cut agenda with the regulatory cutting agenda, you just about offset the maximum increases in business costs that could be created by the tariff.

→Chart of the Day:

That’s from a story in the Financial Times, “In charts: winners and losers from Trump’s new tariffs.” In case you’re having trouble reading the text, the y-axis shows the share of a country’s exports subject to the tariffs, while the x-axis shows the tariff rate. The countries are color-coded by continent, with Europe in dark blue and Asia in red. The closer a country is to the top right corner, the harder it has been hit by the tariffs. And while nearly everyone is getting hit, it’s Asian countries—many of them manufacturing powerhouses that are also deeply intertwined with China—that are really getting hammered.

→Which brings us to our Quote of the Day, from a Financial Times story on the potential end of “Factory Asia”:

Vietnam and south-east Asia have … become a conduit for Chinese goods to the United States. Nearly one in three new investments in Vietnam is from Chinese companies.

“China’s prior strategy of routing exports through Asean may now be less effective, with reciprocal tariffs on countries like Vietnam and Thailand even higher than those on China,” OCBC analysts said in a research note.

“As a result, the trade dynamic may shift again, potentially driving China to pivot more of its exports directly to North America, despite the broader tariff environment.”

→That last point is why it’s important to look at who was exempted from the new tariffs: Canada and Mexico. Goods compliant with the United States-Mexico-Canada free trade agreement are subject to 0% tariffs. According to comments from Bessent, one of the United States’ major demands in USMCA renegotiations is for Canada and Mexico to harmonize their China tariffs with those of the United States—thus effectively consolidating North America as a U.S.-led free trading bloc designed to keep China out. As an article last week in The Wall Street Journal noted, since USMCA was negotiated during Trump’s first term, China invested billions of dollars in moving production to Mexico to get around U.S. tariffs—a move that now looks to be doomed.

→As we alluded to in the Big Story, China responded to Trump’s initial tariffs by leveling a 34% retaliatory tariff—prompting Trump, on Monday, to threaten to impose a further 50% tariff on China. Chinese President Xi Jinping has called to “fully unleash” China’s domestic consumption potential to counter the potential loss of U.S. markets for Chinese exports, while Chinese policymakers met this weekend to discuss whether to accelerate plans for a new stimulus package, according to separate reports in Bloomberg. The problem? Last year, China’s trade surplus with the world was just shy of $1 trillion, and its entire economic and ideological model is premised on manufacturing overproduction and overinvestment, twinned with suppression of domestic consumption. As Brad Setser of the Council on Foreign Relations told The Wall Street Journal, “China exports. It doesn’t import.”

→Here’s another X thread from Gao (lightly edited for readability) analyzing the Chinese Communist Party’s thinking:

Amid Trump tariff chaos, People’s Daily published an editorial today [Sunday] urging everyone to “Focus on Doing Your Own Things”—a phrase that sums up China’s core strategy. It begins by acknowledging that U.S. tariffs do hurt, but “the sky can’t collapse.” That phrase—“the sky can’t collapse”—is notable. Mao used the exact same words in 1962 during a meeting of 7,000 top CCP officials, after a disastrous 13 years marked by the Great Famine and split with a world Superpower—the USSR. Fittingly, this is also the 13th year of Xi’s reign—featuring the Great Lockdown and [a] split with a world Superpower—the United States.

The editorial offers 5 reasons why “the sky can’t collapse”... But many of these claims are questionable. It’s true China is reshaping global trade… It now exports more to Southeast Asia than to the U.S., and its [Belt and Road] trade exceeds that with the U.S., EU, and Japan combined. But a lot of this is just transshipment and nearshoring—the ultimate destination for much of it is still the United States

The editorial also claims: “China’s economy is stable and sound…domestic demand, investment, and consumption exceeded expectations…exports held up…and PMI [Purchasing Managers Index, a measure of manufacturing activity] rebounded.”Really? On consumption and investment: the numbers tell a different story. On [foreign direct investment]: it has collapsed, with FDI dropping 99% in three years and [now] at its lowest level in 30 years.

The editorial adds that China has been fighting this trade war for 8 years and has the tools to handle the pressure. Unfortunately, while people have been waiting for the stimulus for a long time, any forthcoming stimulus package would likely continue to focus on bolstering industrial production rather than boosting consumption… Even now, when the editorial says it will “boost domestic consumption with extraordinary efforts,” don’t get your hopes high and start expecting big cash handouts. Why? Because Xi, despite repeatedly paying lip service to "Common Prosperity," remains wary of the trap of “welfare states” and “raising lazy people.”

Instead, expect policies aimed mostly at absorbing excess industrial capacity—not boosting household income. And even if China eventually does introduce real consumption stimulus, it might turn out to be too little and too late as the people have been left out to dry for far too long.

The only saving grace is that, despite the harsh rhetoric, China reaffirmed that it doesn’t want a full decoupling. The editorial emphasizes that China “is not closing the door to negotiation” and urges the U.S. to engage. As I said last week, China still wants dialogue—even while retaliating.

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