Lessons From the First Trump - China Trade War

Is the US in a Trade War With China?

Christine Benz: Maybe you can delve into tariffs and this trade war that we’re in the midst of between the US and China. Maybe you can talk about how you think it will play out.

Louis-Vincent Gave: Yeah. So I’m not sure we’re yet in the trade war, to be honest. I think we had a trade war in 2017-2018. In 2018, President Trump changed the trade war from a trade war to a tech war, when he said, “You know what, forget all this talk about the trade surplus. From now on, we’re just going to prevent China from growing technologically by forbidding anyone to sell high-end semiconductors to China.” So not only are US companies, the Nvidias or Intels of this world, no longer allowed to sell high-end chips to China, but ASML, the Dutch equipment maker, can’t sell high-end equipment to China. TSMC can’t sell the latest, and Taiwan can’t sell the latest chip and so on and so forth. So we started with a trade war, moved to a tech war. The tech war was amplified by Biden, who piled on even more sanctions. And then Trump comes in and says, “You know what, I’m putting 10% tariffs on China not to accomplish anything on trade, but because China isn’t doing enough to control the exporting of fentanyl to the United States.” So far, I think what we’ve seen, and same with the tariffs on Mexico and the tariffs on Canada, what we’ve seen so far is more a drug war than a trade war. It’s been, “I’m putting sanctions on you guys, for you guys to basically regain control of your borders and for the flow of drugs to stop in the United States.”

The fact that we haven’t had the trade war yet doesn’t mean we can’t look forward to it. And on this front, when President Trump was elected, he appointed three commissions, one at the US Trade Representative Office, one at the Commerce Department, one at the Treasury Department. All of the three commissions mandated to come out with recommendations for potential tariffs against China and against other countries by April 1. So my timeline on this, I tend to believe that April 1, these three different commissions will come out with their findings, and it seems pretty likely that April will be Bash China Month. President Trump will take these reports, and he’ll say “I’m going to put all these tariffs on China,” and he’ll try to essentially soften up China before meeting with Xi Jinping in May. The idea, again, it’s the “art of the deal.” You beat up the opponent before you sit down with them so that by the time you sit down with them, the opponent is very ready and willing to compromise on anything.

So that’s the “art of the deal” as reviewed in the book. And I think, again, it will be April 1, the month of April will be Bash China Month, and the month of May will be let’s sit down with China and see if we can get to some kind of agreement. And if we do get to some kind of agreement, I think this will be very, very bullish, of course, for China. It’ll be very bullish for a lot of assets around the world. It’ll be very bullish for commodities. It’ll be very bullish for a lot of assets.

How the US Trade War With China Shifted Chinese Markets Away From Real Estate

Dan Lefkovitz: And I’ve seen some of your research on the 2018 trade war. It sounds like you think it had some pretty serious implications in terms of Chinese industrial production.

Gave: Oh, absolutely. Look, I have some charts that illustrate how starting in 2018, bank loans to real estate absolutely collapsed. And bank loans to industry in China went parabolic. Essentially, what happened when the Western world told China, “You’re no longer allowed to buy our semiconductors,” China essentially panicked. The leaders in China thought, “Well, if it’s semiconductors today, tomorrow it could be auto parts, it could be chemical products, it could be industrial robots, it could be turbines, it could be, you name it, it could be anything that we need from the rest of the world leaves us vulnerable to potential sanctions going forward. We thus have no choice but to build our own industrial vertical in pretty much every single industry. We have to be self-sufficient in everything.”

So in 2018, the order is passed on to the banks: From now on, no more loans to real estate, and everything has to go to industry. And I think that most of the Western media and most of Western investors over that period of time focused disproportionately on the real estate bust. They focused disproportionately on the real estate bust because from roughly 2000 to 2018, most of the growth in China had been through real estate. Real estate was the big driver of growth. It was the big driver of employment. It was the big driver of commodity demand. And so everybody had become used to just focusing on this. Meanwhile, what everybody missed was that China was starting to grow by leaps and bounds in industry. And today we wake up to a new reality where China is the biggest auto producer in the world, the biggest industrial robot producer in the world, the biggest producer of tractors, of trains, of boats, of solar panels, of batteries, you name it.

And this matters tremendously because industry, having an industrial system, it’s an ecosystem where workers, you need to have highly specialized workers, trained workers, who train other workers, and who go off and create their own widget companies. And China now has that. And in most of the rest of the world, we’ve actually dismantled it. So I know that all across the Western world, there’s now a big political push to reindustrialize, but it’s going to be very hard. It’s going to be very hard because not only is China producing at a much, much cheaper cost than we are, not because China has cheap labor anymore, labor isn’t even that cheap anymore, but because it benefits from the economies of scale of this massive ecosystem. So not only does China have that, but it is actually now producing very often at a quality level that is now superior to the Western world. And where you see this very clearly, to be honest, is in the cars. The production of Chinese cars is now extremely impressive. The idea that you and I might want to own a Chinese car would have been laughable three or four years ago. And today, they just make better cars.

Chinese Companies to Watch

Lefkovitz: You hear a lot about BYD. Are there others that we should know about?

Gave: Oh, for sure. For your listeners who have a bit of time, there’s a lot of cool videos on Chinese cars on YouTube, a lot of cool videos. But you can check out XPENG. XPENG is another big car company—they’re actually making flying cars. I mean, no joke. They’re commercializing flying cars.

I always say this, but there’s two kinds of people in the world. There’s the people who visit China and come back and say, “The future is being built over there.” And then there’s the people who listen to the people who just come back from China saying the future is being built over there and who disparage those people as being CCP shills, Communist Party shills.

But the reality, another great car company that you might have heard of because of their phone is Xiaomi. Xiaomi produces—there’s a video online on YouTube of Xiaomi’s factory and how quickly the cars are produced there. It’s pretty mind-blowing stuff.

And then there’s lots of other brands, which is, incidentally, perhaps another explanation to the first question you asked me as to, if growth was so strong, why haven’t return on equities been better? The car industry is a perfect example of how hard it is to consistently make money in China. Today in China, you have 130 carmakers, 130 carmakers, all of which are, well, almost all of which are pretty well funded by local banks. And so what you end up having is a situation of really, “Hunger Games capitalism” is what I like to call it, where all these companies go at each other until you get to the point where there’s only three or four of them who survive. And while you go through the Hunger Games, of course, it’s pretty brutal, pretty painful. But for the end consumer, it’s good news. The end consumer ends up with cheaper cars and better-quality cars. And so the end consumer ends up being the winner, but the process typically also entails a fair amount of capital destruction.

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