Saying Apple "invests $55B in China every year" is financially illiterate nonsense.

We know exactly how much Apple has invested in China, as it discloses annually in its annual 10-K.

Apple has cumulative investment in "Greater China" (includes HK/TWN) of $4.8B as of 9/2024. Included in this $4.8B balance sheet figure are leasehold improvements on Apple Stores, "inventoy prepayments" and owned "capital assets at its suppliers' faciliities" like molds and specialized equipment sitting in Foxconn's factories.

The whole China-US supply-demand debate is polluted by shoddy economic reasoning and false narrative premises that have led to piss-poor strategy and policy implementation:

▪️ U.S. demand isn't fixed but driven by income (both wage- and capital-related), which is driven by productivity. Lower productivity — whether from trade war-related economic adjustments or retaliatory actions — will negatively impact income, which leads to lower sustainable demand.

▪️ The U.S.-China bilateral goods balance overstates the surplus as it does not account for offsetting deficits that China runs with other countries, the large FDI income and services deficits and other factors. Thus focusing on this metric has led policymakers to seriously overestimate the economic leverage American "demand" has over China.

▪️ Focus on China's "low consumption" has long been a red herring. It is demand — which like the U.S. and or any economy, is driven by income and productivity — that matters in the long run.

▪️ China's "low consumption" is mainly a function of its gross capital formation (GCF) levels being high. GCF is mostly domestic. And people forget GCF is merely a form of deferred consumption: all economic activity (GDP) becomes consumption at some point; "consumption" and "gross capital formation" are merely differentiated by the question of whether it is consumed now or consumed later. This concept might be less confusing if we properly referred to "consumption" in a GDP concept by its more accurate technical name, "household expenditures".

▪️ China's persistent "low consumption" or "low household expenditures" is not a function of debt or institutional "constraints" but policy choice that is largely underpinned by demographics: China's current labor force complements capital-intensive development. And Chinese housing and infrastructure buildout is not close to being complete.

▪️ That said, the former (labor force priority) is changing rapidly, driven by actual demographic change, automation and the trade war, all of which force costly economic adjustments on the economy.

▪️ The trade war-related adjustments lead to productivity boosts in the long run. Offshoring labor-intensive export processing work that dominates Chinese exports to the U.S. is what China needs to do in the long run to become an advanced, high-income fully developed economy.

▪️ Both the U.S. and China need to undertake costly economic adjustments in the short- to medium-term. The "winner" out of the trade war is the one that can (i) more rapidly undertake these adjustments and (ii) make the right adjustments that lead to productivity growth in the long run. "U.S. demand isn't fixed"

There are many analysts out there — e.g. those who like to use the phrase "supplier of demand" — who seem to rather ignorantly assume that American demand is some constant, magical force without considering the fundamental sources of real demand, which is productivity and global trade ... and how the trade war might impact both of these.

The American economy is highly productive! A key part of productivity growth, particularly over the last three decades, has been the continuous rise of the American MNC, especially in sectors like technology/Internet and pharma.

American MNCs have gone out into the world and absolutely crushed it. Their rise drives the incomes of well-paid employees (mainly located in the U.S.) and capital income in the form of dividends, share buybacks and rising market capitalizations (which support persistent capital inflows).

Rising incomes support rising demand. American MNCs directly and indirectly enable American households to increase their purchases of physical goods from places like China.

Simplest way to think of Huawei is that it has first pick (de facto monopsony) on elite STEM talent from the largest pool of STEM talent in the world and a culture and organizational & incentive structure that can efficiently re-allocate its R&D workforce to new product development adjacencies.

The NBA lottery is coming up so I will use that as an analogy. From this perspective, it is analogous to a company like Samsung Electronics and TSMC — which hold similar “draft rights” on elite Korean and Taiwanese STEM talent** — but scaled up 20x and 50x, respectively.

** the Korean and Taiwanese equivalents of Cooper Flagg, Ace Bailey, VJ Edgecombe and Dylan Harper …

China exports ~100M iPhones p.a. to the U.S. currently. This is valued by customs at ~$45B, or ~one-tenth of exports.

China’s economy only makes ~$60 in net GDP per average iPhone 👇 (this one says $72 but this is a high-end iPhone).

So China needs to replace ~$6B of lost GDP, or 0.033% of its annual output. At ~$8/hour, this is ~300k (mostly blue-collar) workers.

Every day, on average China creates ~33k urban jobs (~12M annualized). So losing the iPhone trade amounts to ~9 days of job absorption.

Remember this is ~one-tenth of China’s bilateral exports to the U.S.

So you need to explain to me why China won’t be able to absorb the loss of these relatively low value-add export processing jobs? If anything, it will merely just accelerate its move up the value chain.

Instead of assembling iPhones, China will grab higher market share of higher-value components like chips, memories and OLED screens. Now think about what happens when Apple loses market share, either as a result of retaliatory actions on its China sales or by tariffs rising prices and lowering demand.

Apple sells ~45 million iPhones in China today at ~$900 per unit. It generates ~43% operating margins, or ~$390 per iPhone.

Say Apple loses half its market share in China. ~22M iPhones x $390 operating profit per iPhone = ~$8.5B in lost economic value to Apple / U.S.

Who is hurt more in this exchange?

A decade it was virtually inconceivable that the relationship between the U.S. and EU would splinter so much that it gave China the opportunity to fill the void.

This would be the trade/economic equivalent of the U.S. splitting China off from the Soviet Union in the 70s.

https://twitter.com/TheStalwart/status/1915381900711014901

When Xi Jinping makes statements like "the world is in a turbulent time that is unprecedented in the past century" in 2021 he was likely referring to the possibility that situations like this to arise where China is essentially being handed the opportunity to re-shape global affairs much earlier than anticipated.

I don’t think people in replies making statements like “Korea will refuse to comply” quite realize that “ask” is a polite prelude to “also ban all RE shipments to Korea due to non-compliance”.

We are in a trade war. Gloves are coming off.

https://twitter.com/megatron_ron/status/1914695388860240057

Just as China was forced to adapt to chip export controls by stockpiling restricted equipment, exploiting loopholes, smuggling in the short/medium-term + developing domestic capabilities (upstream SME, building out domestic chip capacity) in the long-term …

I find it quite ironic how Pettis tries to distance himself from the Trump administration's tariff debacle given the clear influence his thinking and narratives have had in shaping the current obsession with tariffs; in particular, the disproportionate focus on the goods trade. We can clearly see this focus on the goods trade in the article's headline suggestion/recommendation of implenenting a "customs union like the one proposed by the economist John Maynard Keynes at the Bretton Woods conference" that attempts to enforce balance in (goods) trade.

Unclear how the U.S. can effectively enforce transshipment:

(i) Comparative advantage drives offshoring of labor-intensive work to developing countries.

(ii) For all practical purposes, offshoring these supply chains out of China will require cooperation from Chinese firms.

https://twitter.com/ChinaBeigeBook/status/1914274360048656769

U.S. wage levels are too high, which means this type of labor-intensive mfg work is simply not feasible to re-shore to America.

The U.S. lacks "producer power" here: it does not have the supply chain or indigenous human capital / know-how necessary to move these labor-intensive industries to its preferred countries via FDI.

For China, net exports does a particularly poor job of measuring foreign demand.

It overstates the “reliance on foreign demand” to GDP from two statistical effects.

While somewhat technical in explanation, these are very relevant in the context of trying to figure out which side has leverage in the ongoing trade war. The first is the structural deficit that China runs on FDI income. Foreign MNCs make for more money in China than Chinese MNCs earning income abroad.

The paradigm example is Apple selling iPhones to Chinese HHs. Apple sells over 40 million iPhones a year to Chinese HHs and has earned over $200 billion in segment GAAP operating income in China over the past decade.

Factoring in redistribution and wealth effects — which most people, including Armand seem to ignore — China and U.S are at roughly *equal levels of socioeconomic inequality but key difference is that China’s trajectory is improving while the U.S.’ is not.

https://twitter.com/armanddoma/status/1912690641055936541

Probably time to re-up this deep dive I did last fall examining China’s socioeconomic inequality that goes beyond wages and takes into account redistribution and wealth effects.

https://twitter.com/glennluk/status/1837929181923234025

Beijing has a bifurcated view on capital and this is something that has continuously perplexed Americans.

There is “strategic” non-market-oriented capital and then there is normal market-oriented capital that we are very familiar with. The entire SOE sector represents “strategic” non-market-oriented capital.

And many privately-invested firms are also subject to “strategic” goals through regulation and the active hand.

U.S. imported $439B of goods from China in 2024. Under the new tariff regime, it is heading towards nil over time.

What does the economic adjustment look like?

To answer this we need to go beyond dollars and dive into sector case studies:

In this 🧵 I'll focus on the iPhone. China exported ~100M iPhones to the U.S. in 2024 at customs invoice value of ~$430 each, for total recorded trade of $43 billion, or ~10% of total US-China bilateral goods trade.

This represented ~90% of trade captured by HS851713 (smartphones).

So I guess China’s response to the April 9th deadline was this white paper, published just a few minutes ago.

Link in ALT. Unlike the People’s Daily editorial, this one was published in English, which indicates who the intended audience is.

Here is my “live tweet storm” of reading that PD editorial.

https://twitter.com/glennluk/status/1908936890658832533

My baseline scenario now is US-China bilateral trade reducing significantly in the coming years.

Whether it goes to nil or stabilizes at the lower level will be a function of the 2028 election.

What are some second-order effects of this?

https://twitter.com/glennluk/status/1909284728387051542

One second-order effect of this will likely be that China reduces its USD reserves.

This is not a direct retaliatory action: less direct trade simply means less need for USD-denominated reserves.

But what will be the replacement?

Let's game theory this from Vietnam's perspective.

▪️ Vietnam's biggest overall trade partner is China
▪️ China/HK comprise ~54% of imports
▪️ U.S. comprise 28% of exports (#1) with leading share in footwear/apparel
▪️ China/HK is 24% (#2) and largest category is electronics

https://twitter.com/ZhugeEX/status/1909286463176323227

Vietnam reducing U.S. import tariffs to zero will not significantly increase imports from the U.S. 👇

The reason is that the U.S. simply doesn't have the things Vietnam's economy actually needs right now.

So this is actually a fairly easy "give".

https://x.com/GlennLuk/status/1908657871933292755

This is an important point. There is an upper limit/cap on how much you can disrupt the Chinese economy.

↗️ 34% already covers a large chunk of the 2.5%. There are decreasing marginal “returns” of further increases where “return” is sadistically defined as “hurting China”.

https://twitter.com/hongshenzhu/status/1909309957939642503

Let’s put that 2.5% in perspective of China’s fiscal impulse.

Net budgeted fiscal impulse increase was ~2%.

There was another 1% increase in the fiscal budget, so a total of 3%.

https://twitter.com/glennluk/status/1897314586615009280

Brad has this really strange definition of “overcapacity” that is based on production of something above “domestic market”.

IOW any country that exports is at “overcapacity” in that product category.

Then he says U.S. tech/Internet is “fundamentally different”.

https://twitter.com/brad_setser/status/1909091672597971121

But the U.S. is clearly a net exporter of Internet/advertising/tech. So it has “overcapacity” of this stuff under this strange definition.

Just as he argues Chinese mfg firms “flood” the global market and pressure foreign companies you can use this same framing on U.S. tech companies …

Balance of Trade (BoT) only measures physical cross-border flow.

Physical cross-border trade is only a subset of today’s modern global trade due to contract manufacturing and offshore tax havens.

https://twitter.com/nntaleb/status/1909093517088956830

The above distinction succinctly captures the crux of the BoP debate I’d had with Brad Setser 👇

Like the Trump administration’s reciprocal tariffs formula, Brad focuses on BoT not BoP in trying to determine fairness.

https://twitter.com/glennluk/status/1852082126318895135

This rapid response editorial from People’s Daily published a few hours ago provides major signal on China’s response strategy to the Trump “reciprocal tariffs”.

This is very much in line with what I have been tweeting over the past few days on the topic. It’s signal-dense, and worth parsing through key translated excerpts in a 🧵.

Source: opinion.people.com.cn/n1/2025/0406/c… Rapid response time.

Note the publication date: on a weekend Sunday evening less than four days after the April 2nd tariff announcements.

The depth of this response and the rapidity of the initial retaliatory response (within 24 hours) validates that Beijing was fully anticipating the possibility of this scenario for months.

Although a niche product category, perhaps passenger CNG (and not consumer electronics or chips) should be lauded as an example of strong execution involving state capacity.

India is now the world market share leader in passenger CNG vehicles.

https://twitter.com/tonamiplayman/status/1908775320494498110

The negative in this is whether such focus on CNG actually had negative ramifications on the development of India’s domestic electric vehicle industry and ramp.

CNG seems like a transitory fuel technology to an eventual fully electric world. And it’s not like India awash in abundant natural gas reserves.

If so, this could be regarded as an example of strong execution against a suboptimal strategy.

Let’s think about footwear and tariff impact.

~22B pairs of shoes are produced annually.

China produces ~half and is the largest exporter.

This has been gradually declining as rising wage rates make it less competitive over time (footwear mfg is relatively labor-intensive). Vietnam is the second-largest exporter, exporting ~1B pairs per year from ~2,200 factories located mainly around HCMC.

Indonesia is also a large exporter.