[joefranklinsrs]

This actually looks like the start of the disentanglement between the US economy and the Chinese economy. What will likely happens next (my best guess) is

1.) 40-60 percent of a company’s supply chain moves out of China

2.) China restricting the movement of capital/equipments out of China (similar to what happened with Korean companies last year)

3.) China growing homebrew competitors to the foreign companies leaving, part of the ‘made in 2025 in China’ strategy, via state enterprises or state spendings in startups. China will also make US companies’ operation in China very hard, either with license restrictions, or increased local ownership.

4.) China will disincentivize Chinese consumers from purchasing US (or foreign) products, via propaganda, taxes, or control (similar to what happened with Japanese and Korean products last few years). This would be hard, as Chinese consumers prefer higher quality, higher brand value, and higher perceived value foreign products.

5.) China will have to target US farmers with tariffs, as there isn’t much US imports to tax otherwise. Plus, there is also face saving.

6.) US will increase the tariff coverage to all Chinese imports, either triggered by tariffs on US farmers, or threats to US companies.

7.) China local governments will try to seize US owned corporate assets, or prevent factories from shutting down by its owners. This will escalate the urgency for US companies to move out of China.

8.) 70-100% of company’s supply line will be out of China

9.) Eventually, most direct trades between both countries shrink down to less than $50B. Down to a significant level where it starts to effect GDP for both countries (China way more than US)

10.) China will have no choice but to embrace its lost decade, ala Japan. It will tighten controls on its citizens. It will try to contain high inflation and high unemployment rate. It will try to unwind its debt for the next 10-20 years. Its gdp growth will go towards 0 or negative. Its GDP will shrink 20-30%.

(posted this in another thread but didn't get any discussion)

[chmod775]

Even though the US are China's biggest trading partner, US trade "only" accounts for about ~18% of China's total trade.

China is still trading with other countries. While it may take a hit from US companies pulling some manufacturing out of China, some of those will be replaced by other - both Chinese and foreign - companies. Especially other foreign companies operating in China will profit from reduced competition for Chinese labor / manufacturing, encouraging them to move more manufacturing there. This will blunt the impact of manufacturing for the US market disappearing.

Also US companies will only withdraw in part from from China, since they can still manufacture goods intended for anywhere else in the world there - just not for the US.

In the end China will take a hit, but nothing close to requiring those measures you're picturing.

The US will have to bootstrap a lot of manufacturing to replace Chinese labor. This will sound good on paper and look good on some economic metrics, because it requires domestic investment. But since the American lifestyle won't be "subsidized" by cheap and exploitative Chinese labor anymore, the average American may actually find himself to have less than before.

And the rest of the world will profit from having two major players intentionally cripple each other.

[joefranklinsrs]

"The US will have to bootstrap a lot of manufacturing to replace Chinese labor."

They just have to move to cheaper countries to replace Chinese labor. One time upfront asset cost, but lower expense over time.

"US trade "only" accounts for about ~18% China's total trade"

Once China is not part of the trade flow between US and X country (Taiwan, South Korea, Japan, etc), the total trade for China will fall even more than 18%.

"they can still manufacture goods intended for anywhere else in the world there - just not for the US"

US is the largest consumer market in the world. Japan is second at 1/3 of the size of US. EU consumer market is mostly fragmented. There is just not that much singular consumer demand outside of US. Plus other countries are enacting tariffs on China as well - India for example.

"Especially other foreign companies operating in China will profit from reduced competition for Chinese labor / manufacturing, encouraging them to move more manufacturing there."

There are lots of countries that have way cheaper labor costs than China, there's no reason for the foreign companies to go there in the face of increasing tariffs. Nike is 30% in Vietnam. Samsung is producing more of its phones in Vietnam. Uniqlo increased its presence in Vietnam by 40%.

"US companies will only withdraw in part from from China, since they can still manufacture goods intended for anywhere else in the world there "

Again, tariffs and cheaper labor costs elsewhere will entice companies to move out of China entirely. Not to mention the threat of Chinese government takeover of assets, or capital outflow restriction.

[chmod775]

> Once China is not part of the trade flow between US and X country (Taiwan, South Korea, Japan, etc), the total trade for China will fall even more than 18%.

If those are actually further up the value chain leading to exports to the US (as you seem to suggest), those would largely be imported goods.

Edit: Moot point really. Those would just be a consequence of manufacturing happening in China. It's better to have a direct look at the amount of manufacturing happening in China, instead of guessing at parameters directly which are actually a dependent on it. That would be like trying to guess whether a taxi company will buy less fuel if you're no longer a customer (maybe they'll have other customers instead), and on top of that wondering whether that's a bad thing. It's just the wrong aspect to focus on.

> US is the largest consumer market in the world. Japan is second at 1/3 of the size of US. EU consumer market is mostly fragmented. There is just not that much singular consumer demand outside of US.

Which apparently doesn't seem to mean much - as proven by the fact that plenty of brands have no trouble selling basically everywhere despite "fragmented" markets. Also what do you mean when you say the EU consumer market is fragmented? The main selling point of the EU is that it is literally a single market.

> Plus other countries are enacting tariffs on China as well - India for example.

India already appears to be backpedaling on their earlier posturing.

> There are lots of countries that have way cheaper labor costs than China, there's no reason for the foreign companies to go there in the face of increasing tariffs.

The most noteworthy tariffs are China <-> US right now. There's little reason for non-US companies to go elsewhere, especially now that Chinese labor and manufacturing is going to become cheaper again - emphasis on manufacturing, not labor, since the infrastructure and know-how already exist in China.

[joefranklinsrs]

"If those are actually further up the value chain leading to exports to the US (as you seem to suggest), those would largely be imported goods."

The Chinese factories that produce goods destined for US, also produce goods for other countries, leading to trade between China and those countries. When factories move to Malaysia or Vietnam, those trades disappear.

"as proven by the fact that plenty of brands have no trouble selling basically everywhere despite "fragmented" markets" . I was addressing your point "they can still manufacture goods intended for anywhere else in the world there - just not for the US" . You're basically losing 30%-40% of your sales. That's not something that can just be brushed off.

"India already appears to be backpedaling on their earlier posturing." Citation? a cursory search shows otherwise https://www.power-technology.com/comment/india-levies-safegu... https://economictimes.indiatimes.com/industry/indl-goods/svs...

"especially now that Chinese labor and manufacturing is going to become cheaper again"

Why? Wage and rent inflation is skyrocketing in China. Yuan will drop dramatically, which means energy/resource imports will skyrocket.

[rgbrenner]

"30-40%" is literally all exports from China. You're saying that if the US doesn't trade with them, there won't be a single buyer of Chinese goods anywhere in the world? That's pretty far fetched.

[learc83]

>The main selling point of the EU is that it is literally a single market.

The EU is legally a single market, but culturaly and linguistically it's not.

[cuboidGoat]

The same is also true of the USA.

[learc83]

92% of the US speaks English proficiently and 80% primarily. Cultural differences across the US are miniscule compared to the differences between EU countries.

Turn on a TV in NYC and in North Dakota, the vast majority of the content is exactly the same. The only differences are local news and advertising for local businesses.

Turn on a TV in France and Poland for comparison.

[imron]

> They just have to move to cheaper countries to replace Chinese labor.

You also have to factor in though that one of Trump's stated goals is to bring manufacturing back to the US.

Any company removing itself from China to a place with cheaper labour risks Trump implementing similar measures against that country at some point in the future also.

And does the company uproot its manufacturing again and again or does it just move operations back to the US, taking advantage of tax incentives to do so.

[age_of_stone]

you forgot that China would be the biggest consumer market in the world. comparing to cheaper labor, western companies may prefer more market shares.

[steve19]

But China protects local emcumbents and new entrants, forces joint ventures and IP transfer. If the Chinese market worth it? For some companies yes if course, but I don't think the Chinese market is always a good idea... Which is exactly what China wants.

[sonnyblarney]

1) 20% is a lot, moreover, others will join, and the US will strong arm others into playing.

2) China has little with which to retaliate. They can do whatever they want to 'American farmers' it won't matter because it's just a commodity: China will buy it's soy beans from Brazil, and Brazil's other customers will buy from the US. It'll have a null effect.

China is right now creating the biggest debt bubble the world has ever seen and it's scary - we don't know where they are going to go next.

See, in 2004 they had so much upside in front of them - but now ... it's not so clear.

I think we're going to see China grow at a more regular rate of 4% and that in the end, nothing existential will come of this trade war. It will hurt China a little worse than the US but it's not like we're going to see a fundamental shift in anything.

[teknologist]

> The US will have to bootstrap a lot of manufacturing to replace Chinese labor.

Just abandon the H1B program and make it easier for foreign labour to come in to do the work. Problem solved.

[notabot]

Last time I checked Trump wasn't exactly a fan of immigrants either.

[snaky]

That's especially acute considering China is more and more opening to foreign labour - despite the fact there is no path to Chinese citizenship for foreigners, well, except Nobel prize and Olympic gold winners.

[robjan]

I know a number of people who were non-Chinese "foreigners", but who attained Chinese citizenship. As long as you legally remain in the country for sufficient time it's not impossible.

[teknologist]

It would have a completely different effect in China though and serve to raise the average salary rather than reduce it. The fact of the matter is that foreigners are generally paid more in China (speaking from my own experience and that of friends and acquaintances who have also worked in China).

[mr_toad]

> And the rest of the world will profit from having two major players intentionally cripple each other.

We won’t profit from having our two best customers/ suppliers cripple each other.

And, copycat politicians are already watching closely to see how many votes this buys.

[rgbrenner]

I think you went way overboard toward the end. Only 37% (and declining) of China's GDP is from trade.. and only <20% is from the US. So 20% of 37% = ~7% of GDP.

Meaning, if all trade between US and China was cut off tomorrow, they would only lose 7% of GDP. So how do you get from that to 5X?

Seems like you have a model of the Chinese economy from a decade ago. Fact is, China is much larger now, and much less dependent on trade today.

Also keep in mind, a good portion of our imports from China consist of items that were imported into china for assembly. Look at all the items from other countries inside an iphone... yet when an iphone is assembled in China, the value gets assigned to China. If you adjust for this, it significantly reduces (but nowhere near eliminates) the trade imbalance. So the numbers above, actually overstate the impact on China's economy from cutting off trade.

Edit: corrected a few of my numbers from worldbank data

[joefranklinsrs]

I didn’t go into the 20-30% loss in GDP in detail, but it factors in loss of millions of manufacturing and management jobs, fake/wasteful GDP boosting stopped, loss of FDI, capital outflow, debt deleveraging, 20-30% further drop in Yuan, etc etc

[rgbrenner]

But where is that coming from? It seems to me you're just throwing out a disaster scenario that isn't backed up by the numbers.

China is much larger and more diversified than you seem to be giving them credit.

[outside1234]

A 7% drop in GDP in China would be a disaster - rememberer than in our “Great Recession” that the gdp only dropped -2.8%

[rgbrenner]

That's just China -> US exports. It doesn't account for imports for export, and Chinese imports from the US. They would still be growing if all trade with the US was stopped, after subtracting these.

Net trade globally, they're running an imbalance of 1.5-2% GDP.

They're growing at almost 7%/year. So there's quite a ways to go to get to -2.8.

[mg96226]

If anything, GP is conservative.

If gdp growth stagnates, there's a very real risk that the Chinese housing bubble will collapse and bring down the entire economy with it.

[rgbrenner]

What's the most alarmist position you could take here? Probably cutting off all US trade immediately.

But that doesn't result in a recession in China. They're growing at 7%, about the same as exports to the US. From that 7% subtract imports from the US (which would also be cuttoff and replaced by Chinese companies), and imports for export (which don't produce value for China)... and the result is that an end to US-China trade does not produce a recession for China.. they would still be growing by a few percent (note, the US economy only grows at 2-3%).

So they'll still have a growing economy... and they're still moving people from the rural areas into cities. So it's not clear to me that this collapses the housing bubble there. Possible though? Sure, maybe.

[tonyedgecombe]

I think you need to be skeptical about their 7% growth figure, the reality is probably quite a bit lower.

[gumby]

> This actually looks like the start of the disentanglement between the US economy and the Chinese economy. What will likely happens next (my best guess)...

I agree with your conclusion but not your map; I see China investing and stepping up ag purchases from Brazil sub-saharan Africa; increasing the militarization of oil-producing countries, and exporting cheap products to Europe, Africa, South America and their southern mining province, Australia. The US will be forced to pay more for everything and so imports will shift to trans-shipment points; US exports will be more expensive as their imports will be more expensive. This seems like a generous gift of price support from the Trump administration to the rest of the world.

The US is a manufacturing powerhouse, but its production is bipolar: super cheap stuff too expensive to ship (paper, chopsticks, etc) and ultra-high-added-value stuff (extremely high precision bearings and the like). Not cars in huge volume but planes: sure! Tariffs don't address this structural issue; if anything they exacerbate it.

[joefranklinsrs]

"The US will be forced to pay more for everything"

I'm assuming your assumption is because China is taking over all of the resources/production capabilities around the world? I don't think that can even remotely happen. Again, lots of multinationals are already 30% in Vietnam, Malaysia, or India. Companies can source ag or oil from plenty of non-Chinese sources. The consumers have barely felt the supply chain shifts.

"The US is a manufacturing powerhouse, but its production is bipolar"

You would be surprised at how much reshoring and US factories automation have occurred in the last few years in US. It will increase in scope after this current round of tariffs.

[gumby]

>> "The US will be forced to pay more for everything"

> I'm assuming your assumption is because China is taking over all of the resources/production capabilities around the world?

No, it's because the US government is forcing US consumers (and producers) to pay more for the goods than buyers in other countries will -- that's what a tariff is.

> You would be surprised at how much reshoring and US factories automation have occurred in the last few years in US.

Indeed I would be surprised and until recently I bought a lot of manufactured goods. OK, I may have overdone it on the beryllium bearing example: I did see a piece of fancy firefighting equipment being built in the Central Valley for shipment to a customer in NZ. But it was exotic enough that it wasn't worth figuring out how to make in NZ, while the volume was so low (they made 3-4 of them a year, at $100K/pop) that it couldn't keep the lights on. Most of what they made was farm gear and solar mounts for sale in the valley.

Another example: I bought some pressure vessels (about $60K each FOB Redwood City) made in LA: about half a dozen guys, a massive steel roller press and some excellent union welders. I could get them for much less from India, with about 50 guys feeding 2" sheet steel manually into a tiny roller press, excellent welding, also x-rayed and to the same safety standard. After shipping? About $65K. But that same factory in Amedebad is shipping tons of stuff to the oilfields of Central Asia and the Middle East -- they didn't really care if they got our businesses. While the factory in Los Angeles couldn't keep busy. So that's the low end: "not worth shipping". While $150K of high pressure steam boiler had parts falling off it in shipment from Chicago. It would have been cheaper for us to buy from Germany and have it shipped over just in terms of TCO.

So yes I'm pretty familiar, as a customer, of US heavy industry.

[rgbrenner]

You would be surprised at how much reshoring and US factories automation have occurred in the last few years in US. It will increase in scope after this current round of tariffs.

Here's real manufacturing output: https://fred.stlouisfed.org/series/OUTMS

Here's durable and non-durable goods manufacturing employment: https://fred.stlouisfed.org/series/PRS31006013 https://fred.stlouisfed.org/series/PRS32006013

Notice they are lower than before the 2008 recession. The recession that is now a decade old.

In comparison, here's imports of goods and services: https://fred.stlouisfed.org/series/IEAMGSN And here's imports of goods from China: https://fred.stlouisfed.org/series/IMPCH

Reshoring? I'm not so sure about that overall. It's great that US manufacturing is recovering though.

[erikb]

> 1.) 40-60 percent of a [US] company’s supply chain moves out of China

especially highlighting the part that I added: US company.

Does anybody think this is a bad thing for China? I'd argue that this is one of China's core interest. China is now becoming a major sales power itself. It's not recognized for that yet, but especially in the mobile market it's far ahead of he western competitors, maybe also in IoT.

Actually one of the core Problems China is facing is that it can't BUY the stuff it wants to buy for its own production, like chips.

And what it needs to worry about is that through all the complex entanglement at one or two points its public image of the new super power might slip. And this image is very much needed for it's plans in Belt&Road as well as in Africa. So most of its concerns are not related to the US market.

[07d046]

I have no idea how likely that is, but that looks like an ideal scenario for the White House, and a possible existential threat for the Chinese Communist Party. People have a habit of putting up with a lot when the economy is growing dramatically and their lives are noticeably improving, but they might not be so happy with an increasingly oppressive government and a struggling economy that isn't giving any sign of future greatness.

[seanmcdirmid]

Ya, the CCP has also taken a paternal-like responsibility for much of the economy, making guarantees about future positive economic performance and creating a lot of moral hazard in the process. This is why they are trying to avoid even a recession at all costs, or a property market bust.

[int_19h]

Thing is, an oppressive government can deal with more discontent from the citizenry than a democracy like US. So it's not just a question of relative GDP and balances etc - purely economic issues - it's also a question of who is more resilient politically. I'm not so sure US is, if only because politicians have to chase votes, and even relatively minor economic pains among important constituencies can blow up very quickly.

[07d046]

I think it goes both ways. As a democracy, America has a pressure valve if things are going poorly, and a peaceful transition of power to the other side of politics is always an election away. (It could fall as a democracy, but it's hard to see a trade war with China being a cause for that.) Maybe America might discover a lack of political will, but there's also a chance it could be wrapped up in nationalism and sold to voters, and action against China is one of the rare things that a number of strongly anti-Trump people do support.

As the rulers of a one-party totalitarian state, the CCP is setting itself up to take the credit and blame for everything in China. Following the "century of humiliation", China is attempting a century of rejuvenation. It started poorly with the Cultural Revolution and tens of millions dying in famine and violence, but it has made remarkable progress since Mao. It appears that the government is well-liked today (although nobody knows anything about China [1]) and economic development is continuing. The government can easily deal with a bit of discontent if required (by, say, putting a million people in concentration camps), but if there was a genuine crisis and people realised that the government had terribly mismanaged things or economically stagnates long before it becomes truly wealthy, the CCP might find that the mandate of heaven has shifted.

1. https://foreignpolicy.com/2018/03/21/nobody-knows-anything-a...

[dmoy]

> 2.) China restricting the movement of capital/equipments out of China (similar to what happened with Korean companies last year)

Are companies not subject to the existing money restriction? We can't move more than like 50k per year out or something. Maybe less now.

I have no idea how it works for companies, just individuals.

[mc32]

China will try to avoid this extreme scenario lest they end up like Russia --at least Russia has natural resources to export, if nothing else.

They will have learned that scaring off foreign investment is not good for their economy long-term. They don't want to squander their potential, I don't think.

Still, they have serious problems to address. Issues the US and the EU and other Asian economies have with them vis a vis their unfair trade practices.

If the EU and other Asian economies join up with the US and form one front on this, they will very likely come correct, if reluctantly.

[dis-sys]

When google chose to quit from the Chinese market, many people told me that China basically cut itself off from the modern world. 8 years on, we all know full well what actually happened. Comparing China to Russia is laughable at best - China's domestic market is 10x the size of Russia, it is comparable to the entire EU but with only one language, one system plus one culture making it much easier to do marketing for whatever products you can think of. In your single sided mind, you consider foreign investment something that makes China progress, yet you failed completely to recognise the fact that many many foreign companies rely on the Chinese market to continue to justify their existence.

The whole concept of US/EU/SEA countries should all team up against China is also laughable. Just look at EU, for Internet companies, mobile and AI, EU lost almost everything to the US dominance, EURUSD dropped 35% from its peak 10 years ago. You seriously believe EU has the interest to further strengthen the US?

[mc32]

Well see, maybe you’re right and I’m wrong. Still think the issues among East Asia, Europe and the US have enough in common in terms of unfair trade practices it behooves them to act in concert to get China to normalize their trade position.

[schuke]

The Party won't let anything that will lead to (10) happen. Growth=staying in power, this is the fundamental belief from which all their actions are derived. Facing a bad deal and losing face, they'll certainly choose a bad deal--they have a powerful propaganda machine to paint it as a good deal anyway, at least domestically.

[nbhuik]

As far as I know most of those are already happening today.

[MR4D]

Interesting analysis. Oddly, it reminds me of Venezuela’s path.

[NathanCH]

It's interesting because you can replace "China" with "The United States" and most of those bullet points are still true.

[pathseeker]

The US doesn't implement capital controls so this replacement fails at step 2.

[gricardo99]

Possibly even at step 1. How many companies have 40-60% of their supply chain in the US? I would guess very few.

[NathanCH]

I mean, it doesn't have to be order numnuts

[dang]

If you keep posting uncivil or unsubstantive comments we're going to ban you, so would you please stop?

The idea here is: if you have a substantive point to make, make it thoughtfully; if you don't, please don't comment until you do.

https://news.ycombinator.com/newsguidelines.html

[gricardo99]

Ok, so ignore #1, and #2. What else? I actually don't see much at all on the list that is applicable in reverse.

I guess you could reverse the last two, and ignore the rest, but then it seems the whole point of parent comment is lost.