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Trinh

@Trinhnomics

Dec 31, 2021 • 25 tweets • 10 min read • Read on X

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https://twitter.com/SenWarren/status/1476327168833581056

Ok, this is my last thread of 2021 & I'll talk about something that is MOST valuable in global exports - semiconductor - or chips, that powers the modern world. This is also very topical as we use it in our daily lives & at the center of politics & geopolitics given its shortages

https://twitter.com/SenWarren/status/1476327168833581056

In case you are wondering why we should know more about this most valuable global export item (worth about USD1trn & more valuable than oil), then we must not forget that in order for me to tweet this, we need chips. If we use the body analogy, chips = brain & oil is like blood.

Let's start with definition:
a) Semiconductor or in UN classification is known as cathode values & tubes & USD949bn was traded in global exports
b) It's a manufactured good & an INTERMEDIATE
c) U don't see it in the final product but products like CARS & laptops & mobiles need it

So the most valuable item in global trade is something you DON'T SEE as it is an intermediate product. You only see the final products such as cars/laptops/etc.

Chips are one of the US top exports (airplanes, oil, chips). China is a net importer of chips. Has a deficit of chips.

Meaning, money flows from China (USD350b) to chip exporters (North Asian countries like Taiwan (TSMC), South Korea (Samsung) & the US (Intel, Global Foundry). Let's talk about chips & its supply chain & why this is the US China trade-war & key to our national security (CHIPS ACT)

Chips were invented in the US & the US has 47% market share, Korea has 20% and Japan 10%, Europe 10%, & Taiwan 7%. China 5%.Now u may ask, well, why is the US fretting over chips if it DOMINATES. Because wants to retain the lead & this 47% includes design & manufacturing is less.

Before you say, "I'm so proud to be an American" and bask in your glory (well, I am rather proud), let's look at the value added by activity or supply chain of chips. And this is where the Biden administration (Trump before it) & Senator Warren are having issues: MANUFACTURING.

Let's put it a different way: American semiconductor firms are doing the R&D intensive part of the supply chain & they have OFFSHORED most of the manufacturing to Asia in various places in various segments of the supply chain, from Taiwan to Malaysia & Vietnam. India wants in too

Note that the US still remains MOST OF THE VALUE CHAIN but increasingly LESS. Consumes 25% of global semiconductor while China 24%, so the same. Europe about 20%.

So where's the beef? The issue is that we DON'T manufacture most of it in the US so have little control over supply.

I won't go into the R&D part of the US supply chain & go straight into the heart of the matter & why I quote Senator Warren's tweet, which I think is simplistic but sets the tone of the hour.

The USA lead in R&D but LAG in manufacturing. Who leads? Taiwan! Specially, TSMC.

To understand this chart, you need to understand a bit about chips but let me, a non engineer explain what this means: Foundries are where chips are manufactured. Manu of chips are capital intensive & very high tech. Basically u want smaller & faster chips & TW dominate < 10nm.

This chart shows u by region (basically we only have a few firms here so this is where Senator Warren goes off about too much concentration but the consolidation is necessary as it's EXPENSIVE to build a foundry).

TW & SK lead or TSMC & Samsung.
US has Intel + Global Foundry.

TSMC is ahead and DOMINATES <10nm & the US lags in this point. If u read the March 2021 US National Security Commission on AI paper, then it's all about the LACK OF MANUFACTURING in ADVANCED CHIPS that's a huge liability.

TMSC manus 54% of global chips.
nscai.gov/wp-content/upl…

Btw, the former CEO of Google is a key author of this report that calls for more support of US manufacturing of chips because it is the support from other governments that has allowed them to thrive.

Anyway, key pts are: we are good at R&D & bad at manu

nscai.gov/wp-content/upl…

Okay, let me wrap this up on why it matters to you, first, u use semiconductor as it is an input into electronics (the brain). U want a faster brain that is not too heavy right to help u with ur whatever tasks. Anyway, below is where the usage of chips is as a share of total. So?

Well, u know the SUPPLY of chips demand on INVESTMENT & it's capital intensive (at least 10bn for a decent foundry) & takes about 2 years. Plus we got Covid-19 related disruptions like Southeast Asia shutting down in Q3 2021.

Demand is HIGH & even acutely higher because Covid!

Note that I'm saying the following: we got supply that is relatively INELASTIC in the short-term for chips because of capacity constraints & time lag in investment & the fact we depend on TSMC for <10nm size. Second, operations were hit (remember my ASEAN note?) 3rd, demand high

@intel

Ok, so what happens now? First, the US will try to retain its lead. The Biden Administration has the CHIPS Act that has 52bn passed by the Senate waiting for the House to pass that gives incentives. Btw, @intel is basically the last American manu at the size that can compete. So?

Given that there is so much emphasis on getting US manu up to speed, one an reckon that more support will be lobbied by American firms, and specifically 2 left that manufacture & specially Intel to get it to the competitive level or the US won't have any (if can't compete, exit).

The US isn't the only country. EU has a similar strategy but the US has more to lose & what the supply shock crisis shows that we have too much concentration risk to East Asia & in some sector Southeast Asia for manufacturing in general & that means more diversification needed.

Arizona has emerged as a place where Intel is adding additional foundry (basically connecting to its existing). But TSMC is not silly. It is smart. It knows where the game is headed & building there too. So is Samsung.

In fact, TSMC also looking into the EU given policy shift.

Note that American firms such as Intel have a global footprint. Specifically, it has investment in Vietnam and just added USD7bn to Malaysia.

India just passed 10bn bill to attract semiconductor (it wants in too on the supply chain). Diversification will include ASEAN + India.

Hope I got u excited about semiconductor & know a bit more about the product that U DON'T SEE BUT SHAPE YOUR LIFE, CPI, INTEREST RATES, DOMESTIC POLITICS, GEOPOLITICS & geeky & cool at the same time.

And yes, I think the US SHOULD support the sector, both R&D & manufacturing.🙏

I have more too add but my threads always end up so long & let me end it by giving you the sources I used for this rant:

*Book: amazon.com/Fabless-Transf…
*The BBC video on semiconductor: bbc.com/reel/embed/p09…
*Policy paper: semiconductors.org/wp-content/upl…
*nscai.gov/wp-content/upl…

HNY!

@Trinhnomics

Have a happy new year! This was my way of saying thank u for being with me on Twitter Land. No matter how good/bad life is, key in my opinion is to focus on learning & processing what we learned to understand more about our world & each other!

See u in 2022!

💃@Trinhnomics

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Trinh

@Trinhnomics

May 8

Okay, I want to talk about tariffs a bit because there are a lot of tariffs. On everyone:

1) Steel + aluminium +25%
2) Autos is 25% (and some auto parts except USMCA qualified) - but note that Trump has realized that steel & alum are INTERMEDIATE GOODS and when you tax that then you got a big problem so he's BACKTRACKING on that for the auto sector, as in, they don't get steel & alum on top of auto
3) 10% on everyone ex China on top of above until early July in Asia.
4) China gets embargo level of tariffs or >100% and some >200%.
5) Exemptions for semiconductor, energy, pharma, ICT (phones, laptops etc), commodities.

How bad is this?

Tariffs are a tax on investment so Trump is PUTTING A TAX ON INVESTMENT ABROAD.

Specifically: steel & alum & auto ex USMCA and specifically China.

More to come of course but this is now.

He is starting to understand that when you tax a lot of stuff, especially sectoral, especially intermediates, you are SHORTENING SUPPLY CHAINS AS THIS COMPOUNDS.

A car is made of thousands of parts. Steel is part of it of course. So he has to make exemptions to make sure things don't kill the auto sector that he is trying to rescue/prop up. But supply chains are complicated.

The US used to be almost tariff free. Low single digit of trade-weighted tariff. That means a lot of PING PONG OF TRADE.

As in you can ship intermediates back and forth and have things assembled etc. SUPPLY CHAINS LENGTHENED.

Tariffs SHORTEN SUPPLY CHAINS.

So this complex supply chains that is stretching across US-Canada-Mexico and Asia (ping-ponged across Asia from Japan to Malaysia/Thailand/China) etc is all going to get shortened.

So that is what tariffs will do. Supply chains will be more REGIONALIZED.

No matter what the negotiations will be - US w/ China for example, or US with other Asians or Europeans, the fact is that Trump tariffs are starting at MAXIMALIST positions and will settle at a MORE REASONABLE POSITION BUT STILL VERY HIGH TARIFF REGIME VS BEFORE.

And they will be very TARGETED to shorten supply chains to favor US/Canada/Mexico & maybe key allies in Asia and key allies in Europe.

US trade will China will ultimately be to serve rest of the world or to feed into the above. It will ultimately be cutoff. Because China and the US are strategically decoupling. They are putting a floor on that speed but the speed is towards decoupling.

Read 11 tweets

Trinh

@Trinhnomics

May 6

I'm back in Hong Kong after being in Poland for two weeks. Poland is a country that is better every year (I have been going there every year since 2015) & a country that is very mindful of its geography and being next to two giants (Germany & Russia) that have historically invaded. Kaliningrad (Russia, which was a former Prussian or German town) borders the north & so the Pols are painfully aware the very thin line between peace and a potential invasion. The entrance to my husband's family farm marks several grave cites. One of them is the Tomb of Unknown soldiers from WW1 and we regularly find WWII remnants on the farm ground as well as rubbish from the communist collectivist era when it was part of the Soviet Union or Russian empire.

Poland is an interesting country for me to visit as it is am EM with world class infrastructure but at the same time you can see in the people the pain of the past. If you see older Pols, they look like they have had a hard life in their body and face. This is very similar to what you see in China or other parts of Asia where the impoverish past is very recent and generational differences in skin/look/aesthetic reflect not just time but also transformation of society.

What I find interesting about Warsaw is that brutalist of Soviet architecture - the Nazi invasion (Germany & German soldiers) leveled the city w/ extreme severity and so most of the city is newer than the "new world" as they were built post war or re-created post war. If you find an older building/neighborhood, it's actually pretty rare and very treasured, like the Polytechnic University neighborhood that looks like Paris while the rest look, well, brutal at best.

Read 4 tweets

Trinh

@Trinhnomics

Apr 24

It is a marathon & not a sprint. Produce below costs & run losses & still produce & gain market share as your goods are much cheaper (selling below costs & hence running losses) & competition goes out of business.

Once you reach a critical mass of market share (monopoly) then the sector consolidates and u can raise prices.

These companies can survive because they are backed by state policy that want certain sectors to develop & not worry about profit margins.

This is why Chinese equities underperform Indian equities or American equities over a long period but China dominates global manufacturing.

Foreign companies find it cheaper to import products that are produced in China & resell at a much higher price & then in the process have high profit margins.

The issue here is that it vacuums out domestic industries as they cannot compete & eventually we are left with the US where it is.

It does not have the capacity to have self-sufficiency in strategy sectors required for defense.

This is the biggest flaw of globalisation, beyond of course the vacuuming out of industries.

Read 4 tweets

Trinh

@Trinhnomics

Apr 24

The EU trade deficit with China is basically what the US trade deficit with China used to be. And as the US markets increasingly shut out China, imports from China will rise as goods are produced at a cheap costs. If u look at China industrial profits, they have been terrible but product has continued to rise. Why? All about gaining market share, the long game.

Profit margins for exporting are higher than domestic as competition is fierce so there is a strong desire to export vs selling onshore for diminishing return.

All this sets up for an unsustainable global trade picture & I suppose the question is whether Europe or others are happier with cheaper goods (the key thesis for global trade) or having to erect barriers to trade (protectionism like EV tariffs they imposed) beyond what they already have.

I was asked a question recently when I went on Fox on whether the global trade system is fair.

The thing is it is not about fairness. China is fighting with a state-led approach using the savings & will of 1.4bn industrious people to become self sufficient sector by sector.

It is not a listed firm in the US that cares about quarterly earnings. They operate at a loss for a long time and still churn out production because the state implicitly & explicitly supports by promoting that sector via capital, land, and subsidies.

So the question is not fairness but that this is not the WTO designed trade system. Countries that are smaller & weaker and also firms, no matter how big, cannot compete with state-level competition.

Read 5 tweets

Trinh

@Trinhnomics

Apr 22

I'm going on Fox News at 240pm EST for the Charles Payne show to discuss tariffs impact on the US and Asia. Today, the US slapped anti-dumping duties on Southeast Asian solar with varying rates but they are essentially embargos on the import from the region, especially from Cambodia, Laos and Vietnam, and slightly less so Malaysia.

This is a result of the Biden administration probe that started a year ago that was initiated by a South Korean Hanwha Qcells, Arizona-based First Solar Inc and several smaller producers. South Korea is one of the countries that deployed a lot of capital to the US after the US imposed tariffs on solar on China a decade ago and recently Biden introduced industrial policy the IRA.

As the US gave Southeast Asia exemptions, about 70% imports came from the region. But now with anti-dumping duties, that is essentially done for US markets. But note that most of these exports are by Chinese producers that committed capital to arbitrage tariffs. They already started to halt production last year as the anti-dumping duty probe started.

Note that this is an interesting study because it is a bipartisan issue of using antidumping duties/tariffs to protect a domestic industry or foreign companies that have invested capital in the US (Korea's solar). Meaning, it raises costs and ultimately is targeting Chinese solar. Much of Cambodian solar is Chinese. Is this a big loss for the region? Well, even for companies that are not Chinese, the tariffs are a reminder that the costs of allowing Chinese investment leads to also domestic solar companies in Vietnam being smacked with tariffs.

While it is just solar, it raises the question of two issues: Where is Chinese solar moving next to avoid tariffs to the US? If that's not possible, then that means it will need to sell to wherever it can (Europe!).

For the Southeast Asians, the impact is two folds.

First, of course, selling solar to the US is done. But more importantly one should ask what is the real impact? If they were just merely rerouting exports, then not so much as the value add is not really Southeast Asia but rather Chinese.

That being said, not being able to sell to the US means that this particular sector faces risks itself onshore as it faces both more fierce Chinese imports (they were likely Chinese imports anyway) and any hope of moving up the value chain is now very difficult. This is especially the case of Vietnam.

And finally, it raises the costs of allowing rerouting/Chinese investment to arbitrage tariffs, especially in strategic sectors the US care about for the domestic sector because it risks having all producers having essentially no trade w/ the US on solar in particular. A cautionary tale so to speak ahead of negotiations w/ the US on reciprocal tariffs.

Read 7 tweets

Trinh

@Trinhnomics

Apr 15

Let's talk about Trump tariffs. They are up, it's a question of whether how much, to whom, which sector rather than whether.

I want to clarify a simple fact that needs to be nailed home - trade and investment go together. Tariffs are a friction to trade & if you just take the idea that tariffs are going up (we'll discuss soon the details) then INVESTMENT IS GOING TO BE RESHUFFLED.

Half of global FDI is US driven. Global investment will be reshuffled. Okay, let's talk about first w/ who is LEAST TARGETED & we got to who is MOST.

Trump trade authorities come from 3 sources:
1) International Emergency Economics Power Act (IEEPA) to give the president the power to declare a national emergency & impose tariffs.

He did this w/ fentanyl for Mexico & Canada + Reciprocal tariffs.

2) Section 232 Tariffs that basically gives the Secretary of Commerce (Lutnick) the power to do a COMPREHENSIVE investitations to determine sectors that undermine US national security

3) Section 301 Tariffs - Basically to target a specific country, this one is a China tariff one and the power goes under USTR.

If power is given to the president and one can say whether he's abusing power or not or there's too much power concentrated in one (designed as such to address areas that Congress is too slow), can it be taken away?

Yes, but not by the Supreme Court because it would say that this is a political issue & to be solved politically.

So it would take Congress. But while there is something going on, this is very unlikely. Congress is too, well, I don't mean to say anything negative but you know what Mark Twain said about Congress, to deal with this.

So we are stuck w/ tariffs & unless tariffs call the house to fall down, tariffs are here.

Let's talk then big picture vs going down on Trump cards/flip flip because I think the chaos is by design & not an accident.

Okay, who hasn't been tariffed? Mexico and Canada but specifically only USMCA content.

Read 15 tweets

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