Thread by @Geo_papic

Looking for some early January weekend reading? Highly recommend this @SteveMiran piece from two months ago on restructuring global trade architecture.

hudsonbaycapital.com/documents/FG/h…

It is very good! I have 10 thoughts on the report.

1) What does the US do about Chinese "enemy shoring" around the world? Is the US prepared to raise tariffs to 60% against even geopolitical allies that Chinese companies use as transit exporters?

2) Currency offsets on tariffs. Yes, USD rose in 2018/2019. (I disagree this was because of tariffs, but that is neither here nor there). The bigger question is how would that aid US manufacturing? Unless the US imposes very high tariffs on all trade partners.

2) (cont.) If the US imposes a tariff on China and its effects are offset by USD appreciation, that makes sense. But what if China then moves that same production to Vietnam? Or if Malaysian exporters take market share? They're neither tariffed and their FX is now cheaper!

2) (cont.) This is the fundamental problem with tariffs in a multipolar world. The US will have to play wack-a-mole with the entire world if it intends to use tariffs to bring manufacturing domestically. Not to mention that it is 2025. Not 1895. Supply chains adjust fast.

2) Since the trade war began in 2018, US trade deficit with China has shrunk thanks to Trump-imposed tariffs. But, thanks to the dynamic I explain in this thread, the trade deficit with the rest of the world has actually grown!

3) China has made large in-roads in the Global South since 2018/2019, investing both geo-strategically (which nat-sec hawks often cite as pernicious) and organically (ironically, forced by US tariffs). How would an increase in tariffs impact US econ relationship with that world?

3) I am not talking about BRICs. I am talking about the entire Global South, which often scoffs at US obsession with China. This is where future global GDP growth will come from due to demographics. US cannot just cede this massive geography to Beijing!

4) @SteveMiran proposes to use tariffs to change Beijing's behavior and to sequester the world into zones based on how anti-China trade partners are. The former shows willingness to engage. The latter to ossify current posture. Can't have both.

5) Intriguingly, there is little mention in the paper - until the end - of Pres. Trump's repeated demands that trade partners (and rivals!) invest in US manufacturing. That could be a middle-of-the-road solution that does not create the "wack-a-mole" scenario I describe above.

5) (cont.) Manufacturing FDI - even if made by geopolitical rivals - can serve to fulfill domestic national security goals, domestic socio-econ goals, and serves as fixed-asset investment medieval "hostage" in case of a conflict (i.e., it can be "seized" in case of a conflict).

5) (cont.) The only argument against Chinese FDI into the US is that a theoretical BYD plant in Ohio rises up off its foundation and transmutes into a "Transformer," stomping all over Cleveland in case of a war.

(Yes, I am being funny).

6) @SteveMiran posits that if Europe retaliates against US with tariffs and takes security into its own hands, that is not a bad outcome as it allows US to focus on China. YES BUT... presumably it would also allow Europe then to not join the coalition against China!

6) The whole "let Europe defend itself" is not necessarily a path that Washington will benefit from. With domestic defense spending comes something else: independent foreign policy.

7) I think that @SteveMiran overstates the benefit of the US security umbrella to the vast majority of US trade partners (as do most US policymakers, so this is not a knock). Sure, for Israel and Europe, the umbrella really matters. For India, Indonesia, and Brazil? MEH.

8) The last bit on multilateral and unilateral FX policy is 🔥. Both the Nixon and Reagan administrations either imposed or threatened to impose tariffs in order to get FX adjustment policies enacted.

8) China could play a massive role in this effort. I think @SteveMiran overstates how painful Beijing's participation would be for China. In my view, China is mired in a secular stagnation. It ought to pull the fiscal lever hard. Trump would be doing them a favor!

9) I disagree that China will drag its feet on making manufacturing FDI decisions in US. I think Chinese companies will trip over themselves to do so. Their only risk is that a non-Trump/MAGA politician comes to power in US and changes the terms of the deal.

9) What the US ought to do with Chinese manufacturing FDI is to impose technology transfer demands on Chinese corporates.

10) VERY little space in the report was provided to opening up China to the part of the US economy where the US has a comparative advantage: services.

10) In my own research, I have argued that the US is fighting a trade war using unipolar/bipolar constructs. This is a mistake. We are in a multipolar world. The US should learn from the British Empire, not obsess about tariffs.

The solution? Not one that many MAGA acolytes would want: finish what Bush Sr. and Clinton did not. Open China fully.

The cover of the report says it all @SteveMiran! 😉