Trinh Profile picture
Nov 21, 2024 18 tweets 9 min read Read on X
Guys,

Are you ready for a Trump tariff thread and what this means? This is going to be a bit of a technical one but I'll make it easy & fun & we'll go through literature & analysis.

Let's go.
We start with the basics. How does tariff work? First, as you know, the US is a big free trader. Still is despite tons of tariffs on China. So goods in the US generally are tariff free to import & hence proliferation of foreign goods in the US.

But that being said, it does impose tariffs & duties. Sometimes overtly targeting a specific product to protect domestic sector due to lobbying. Anti-dumping duties is an example. A country that is not a market economy is an easy target (China, Vietnam) as u can say those countries have subsidized excessive production & hence duties.

But comes Trump. He has been consistent since the 1980s about the US trade deficit which he has railed against in public interviews and what does he do.

He started a US-China trade-war on washing machine duties.

Before we talk about what has Trump 1.0 (=first term 2017 to 2020) & Biden (2020 to 2024) done in terms of tariffs, I want to talk about the practicality of WHO PAYS FOR TARIFFS.
The IMPORTERS pay for tariffs. By that, American importers pay for tariffs. So when an item say costs 100 goes to 125 because of a 25% tariffs, there are a few things that COMPANIES that import can do.

They can PASS ON that cost to CUSTOMERS (buyers of goods). They can ABSORB that cost. They can FIND A NEW SOURCE to import. Or the SELLER can make the item cost 80 or a 20% reduction of previous price to then when the seller pay 25% that is just 100 BUCKS of import costs so the SELLER ABSORBS this margin compression.

That 25% goes to the IRS as government revenue. Who pays for it? Well, it depends on who ABSORBS THAT COSTS of 25% but surely 25% tariffs happen.
You may say why do you bother to talk about this but I think this point of PASS-THROUGH of tariffs matters because it impacts whether the quantity demand of the tariffed item from a country that is targeted is going to actually GO DOWN.

So let's go back to this idea of IMPORTERS paying tariffs. If price goes from 100 to 125, and the importer can import a 110 price (still higher than 100 of country X being targeted but LOWER than final costs) elsewhere, they would totally choose a new SELLER.

Elasticity of demand is the idea that when price goes up, whether quantity will fall by the same magnitude or less or more.

If you DON'T HAVE ANY OTHER SELLER & must get the goods, your elasticity of demand = 0

You will import & absorb it. But as you know, rarely do you have such an item where there is such a big moat that no one else is selling it.
Anyway, I want to cover this point with you & I will cite this Fed paper that says ELASTICITY RISES OVER TIME.

That makes sense right. First, you are like, dude, Christmas is coming & I need that rubber wheel for my bicycle assembling & so must buy NOW irrespective of tariffs.

But over time, if TARIFFS keep going up and up and up, you are like, gosh, I must figure a way to REDUCE MY COSTS.

So the Fed has a paper that estimates that ELASTICITY OF DEMAND RISES over time. Specifically to 4 for China.Image
So why do we care that Trump is Mister Tariff man? The US is the LARGEST importer of goods globally.

3.83trn dollars. You can find the Global South to sell your goods but a close to 4trn importing market is not one you can disregard lightly.

Btw, of that USD3.83trn imports, the US imports 501bn from China. China exports 502bn from the EU.

Let's be clear here. If the EU and the US both imports MASSIVE TARIFFS on China, this is a 1 trillion market that is hard to find elsewhere and China is trying to to protect very very hard.

So let's talk about Trump & Biden tariffs. I'll go from LATEST tariffs, which President Biden imposed on Chinese goods.

Btw chart below is US imports from China by product. You can see that it has dropped as a share of total US imports. Anyway, let's see why.Image
This is the latest that Pres Biden has imposed on China.

On EV, we have 100% tariff.
On semiconductor, we have 50% tariff.
On medical manufactured stuff like needles + rubber gloves, we have 50 to 100% tariffs.

Btw, there is something going on too, they are looking at closing de minimis loop hole or under 800 goods to not face tariffs.

Anyway, so the US already have a lot of tariffs on Chinese goods. Pres Biden didn't just keep Trump tariffs, he RAISED a lot of tariffs under section 301 that were reduced when Trump negotiated with China at the end of his term (remember Phase 1 and Phase 2 deals?)
nytimes.com/2024/09/13/us/…Image
Anyway, most of the tariffs on Chinese goods are generally capital goods & some are now veering into consumer goods (apparel has 7.5% tariffs) & even medical gloves are now 100%.

So the tariff levels basically have basically been prohibitive (EV = 100% = prohibitive) and some zero to not so high. The trade-weighted tariff for Chinese goods is roughly 10.4% (according to our US economists).

What's the point here? Whether it's Biden or Trump, being a China hawk on trade is a bipartisan approach.

And many had hoped that Biden would put a floor on that deterioration but he had continued what Trump started, which is more curbs (tariffs + investment + sanctions) and also added extra layer of industrial policies (carrots to produce in the US & tariffs are sticks to buying from China).
Before I talk about the impact on the US/China/APAC trade, I want to talk about China responses since.

First, the CNY has depreciated about 15% since 2017 trade-war. Interest rates have only gone downward.

Second, China producer price index has been in decline in recent years.

Third, China has continued to subsidize supply-side growth, esp sectors targeted by the US, and not just high-end tech but expansion of energy sources.

Fourth, China has been trying to diversify out of the US (EU & rest of the world) to offset the inevitable decline in US market import through both diversifying investment & also market access.

Fifth, China has gotten closer with Russia, Iran etc.

Sixth, although already started, China started to also hedge its dependency on USD via alternative systems etc.
Despite all this, which is the depreciation of the yuan and declined PPI, which should help price competitiveness of Chinese goods (that is equivalent to say the SELLER lowering prices so that when the IMPORTER pay 25%, net net pass-through of tariff likely less than headline figure) offset tariffs, there is a noticeable DECLINE in US IMPORTS FROM CHINA.

And where items are tariffed, they are notably declined (capital goods).

So as the US continued to import more from the world, its imports from China declined for the tariff goods. For tariffed goods, that's an almost 40% decline according to the Fed.Image
China used to make up 23% of US imports and now it's 14%. The drop for tariffed goods are much higher. Irrespective, there is a drop.

So at a 10.4% trade weighted tariff (some items have 100% like EV), you already see a massive impact.

And that is notwithstanding China depreciating the yuan & PPI deflated, which has helped.Image
Remember that I mentioned that China continued to PRODUCE LOTS OF STUFF despite of US-China tariffs.

But with demand weak onshore and PPI deflated and CPI almost non-existent, all that stuff is going to the REST OF THE WORLD.

So it's selling to the rest of the world. For example, China cannot sell EV in the US but it has then flooded the EU markets w/ Chinese EV.

Now the EU is raising tariffs but they do it pretty gently unlike Trump & Biden at 100%.Image
Let's talk briefly about WINNERS of trade-war.

First, you may disagree & of course that is fine but I will name the following winners:

Vietnam (manufacturing)
Malaysia (manufacturing - high-tech)
India (manufacturing but mostly PORTFOLIO FLOWS)
Singapore (financial)

and to a lesser extent South Korea, Japan.

Thailand and the Philippines are kind of on the fence but I think Thailand more than PH.Image
Vietnam is one of the few countries that has managed to raise both exports to the US and also China.

In Asia, all countries have managed to raise their exports to the US except Indonesia.

Vietnam is interesting because it sticks out like a sore thumb of how exposed it is via exports to the US.

Many people accuse that MOST TRADE VIA VIETNAM IS JUST REROUTING.

How true is that?Image
First, you should know that it can't be all rerouting because investment landscape has changed. As time goes by, companies don't just ABSORB HIGHER TARIFFS, THEY FIND CHEAPER ALTERNATIVES.

And you can say China is cheaper NO MATTER WHAT. What if TARIFFS KEEP GOING UP?

It can't be that cheap. You know that because Chinese EV disappeared from the US with 100% tariffs. Anyway, FDI inflows into ASEAN surpassed China.

And not just from Western and North Asians like South Korea and Japan and Taiwan but also by China.Image
There is a paper by HBS on how much rerouting is really happening in Vietnam (link below).

The answer is that at the product-level, it's about 16.1% in 2021. And at the firm level, it's about 1.8%.

Either way, the point is to say that while rerouting has increased since tariffs on China, it's not as big as you think.

WHAT IS REROUTING? It is when there is ZERO-VALUE ADD. Like you don't even assemble in Vietnam.

If a company imports Chinese intermediates to then assemble in Vietnam then that is not rerouting.

Cool paper. Read it!

hbs.edu/ris/Publicatio…
Sorry, this thread is getting long.

Shall I show you my calculation of IMPACT OF TARIFFS ON CHINA/VIETNAM ETC? :-)
Thread continues tomorrow & next week I am in Paris and Milan. Talk soon tomorrow on what happens next!!!

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More from @Trinhnomics

Aug 26
Despite the 50% tariffs imposed by Trump, India's future is more trade & not less & why tariffs will need to go down.

Here we go, a thread.
From winning the Trump trade war, India is now the US President’s biggest target. The Trump administration imposed a 25% tariff on India. To add insult to injury, Trump announced another 25% tariff, effective tomorrow, on the grounds that India imports crude oil from Russia.

Indian goods bound for the US will now face tariff rates similar to China’s if we include the Trump 1.0 tariffs, making any China+1 strategy in India less competitive for US markets, and relative to Southeast countries, which for the most part face tariff rates of about 20 per cent.Image
Will the additional 25% tariff stick? While Russia’s war with Ukraine isn’t going to end by Wednesday, the secondary Trump tariff is likely temporary. Therefore, the question is not whether India will be able to bring the 50% back down to at least 25%, but when. Image
Read 12 tweets
Aug 22
Eight months after Trump has been inaugurated and we of course have now the EU US deal. What do we know about Trumponomics?

I would say my read is the Miran paper is a blueprint for Trump actions so far on trade. Let's see what I mean by that. And this has consequences of how Trump sees India, which I think is not just escalation to gain leverage.
First, let's talk about an important ally, the EU. The details are out and I would say this is actually rather good for the EU in the context of out of control Trump tariffs.

Why? EU tariffs are NOT stacked. They are ceilings. As in, they get 15% max, including sectoral tariffs like auto (including car parts), pharma, semiconductor, lumber etc but not steel & alum, which they are still trying to negotiate. There are some additional exemptions for EU products such as aircraft, parts, generic pharmas & ingredients etc.Image
Meaning, to trade for this 15%, the EU is falling closer into the US orbit via investment and trade as well as defense, which it is working on being more self sufficient with increased spending but not just yet.

Anyway, what can you say about other allies? It means South Korea and Japan can and hopefully have similar terms.

Remember that reciprocal tariffs under IEEPA aren't the only ones. Section 232s are pretty scary and more stuff being added all the time without warnings.

An example is steel where a few days ago 400 more products were added to include steel derivatives.

So if you want to have access, this is basically what the costs are and so what does that tell you about others? Here I go back to the Miran paper.
Read 14 tweets
Aug 21
Russia import imports since 2022. If this calculation is correct, the arbitrage is USD2.5/barrel currently, then annual saving is USD1.5bn. Image
India trade balance with BRICS: It buys way more than it sells.

Some say more BRICS is the answer. But looking at trade as it is right now, what needs to happen? Image
India total exports to all the countries in BRICS is less than just to the US alone. Image
Read 7 tweets
Aug 1
Guys, let's do it. All things Trump tariffs. Here we go. First, let's talk about the basics. 10% is the floor as in everyone gets that. And these are the economies that get higher than that:
15% (EU, Japan, South Korea and 33 countries: Angola, Botswana, etc.)
18% (Nicaragua)
19% (Cambodia, Indonesia, Malaysia, Pakistan, Philippines, Thailand)
20% (Bangladesh, Sri Lanka, Taiwan, Vietnam)
25% (Brunei, India, Kazakhstan, Moldova, Tunisia)
30% (Algeria, Bosnia and Herzegovina, Libya, South Africa)
35% (Iraq, Serbia)
39% (Switzerland)
40% (Laos, Myanmar)
41% (Syria)
In Asia, it looks like this. Excluding China and Myanmar, Laos, India got the highest - 25% and maybe more.

China is waiting for talks on extension. Right now, it's 10% reciprocal + 20% fentanyl during extension + 25% during Trump 1.0

Southeast Asia gets 20% to 19% except Laos & Myanmar at 40%, Brunei is 25% but energy is exempt so...Image
India original was 26% so 25% seems bad but frankly not too far from the Southeast Asians. That being said, India was aiming closer to 15% as Vietnam got dropped from 46% to 20%.

Anyway, let's talk about details of the White House info.

It goes into effect 7th August. But if you got stuff in ports/front-loading and not yet consumed till 1 October, there are varied rates for them.

Long story short, there is still time to negotiate this down before it goes into effect basically.Image
Read 13 tweets
Jul 30
Trump tariff strikes India at 25% plus Russian oil import punishment. Is it a surprise? Not exactly. I have been thinking for a week what a US India deal look like. And to be honest, I think I saw this coming. I think India can negotiate down from this threat btw. It's not final. But how much lower and what are the costs?
Why is it not a surprise that India is not getting the deal that it is working hard on?

First, let's look at the EU and Japan - they got smacked with 15% tariff & got reprieve for auto (and other sectors) but auto is key at 15%.

So 15% is the best India can get. And it won't get it. Why? Well, it has to offer a lot to Trump to get that and it won't.
Remember that this is just a threat (similar to what Trump did with Japan before they settled on a lower number) and the threat I suppose can be real or not. Irrespective, he cares about it enough to post about it.

Trump has a few agendas that he wants India or Modi's help with.

Ending that Ukraine War is one. And India is not interested in that. It's an emerging country that buys where it can cheapest.

Russian oil is cheapest & so it buys from Russia & Trump wants to starve Russia of oil revenue. India doesn't want to not buy the cheapest oil possible. Besides, Russia is neither a foe nor a friend.

Maybe the West's foe but not India. So on this point, very hard. What are the costs to India? Well, it will have to pay more for its oil if it doesn't buy the cheapest oil.

Trump is adding to that costs - tariff.
Read 6 tweets
Jul 28
India imported 15,000 cars a year. Why? It has 110% tariff on autos. Now, trade negotiations are not going well and it's approaching the WTO on Trump's 25% auto tariff.

But the reason is simple. India exports more than it imports autos. Why? It has pretty high tariff on auto.

What would an India trade deal look like then? Is there going to be one?Image
What's interesting is that the UK and India signed a trade deal that is supposedly a huge game changer.

Let's take a look at it.

Under the agreement, tariffs on imports of internal combustion engine (ICE) cars will be slashed to 30-50% in the first year of implementation, but with the benefit limited to a quota of 20,000 cars.

The tariffs will be reduced gradually, and after 15 years, they will become 10 per cent, with the quota set at 15,000 units. For out-of-quota imports of ICE cars, the duties are reduced to 60-95 per cent in the first year, and further to 45-50 per cent from the tenth year onwards.
So on the surface, it looks like a big deal but the quotas are so tiny that it makes one wonder.

Of course, relative to annual import, quotas are HUGE as it is MORE than annual import.

But why do people care so much about US 25% auto tariff but don't care so much about India's 110% auto tariff?

Well, because the US imports 8m cars EVERY YEAR.

Look at the big deal that is the UK and India trade deal liberalization. There is a limit in quota.

The quota that the US sets for the UK is 100,000. So in other words, the US remains a big deal and one that needs to be negotiated with.
Read 4 tweets

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