Southeast Asia (Page 5)

Trump’s recent trade strategy will stifle China’s position as the world’s dominant nation, denigrate American technology and power, and alienate US allies and partners.

I also think it’s unlikely that this is willful, there’s an old notion that you should “never feature to hate that which is properly explained by stupidity”. The decision to roll out their tax plan in a careless, last-minute, on-again-off-again manner and the fact that Congress has not chosen to withdraw the government’s tax authority suggest that idiocy is at play here.

But in any situation, there are certainly some people within the Trump presidency and the MAGA movement who would like Trump to produce a business plan that helps to incorporate Chinese power.

According to CEA Chair Stephen Miran, who writes ,” China has chosen to triple down on its protectionist, export-led model to safe residual income, much to the consternation of the rest of the world.” And Treasury Secretary&nbsp, Scott Bessent went yet further, suggesting that confinement of China should be the primary purpose of US trade plan:

Scott Bessent emerged from this year’s market turmoil as a potentially unexpected cause trade negotiator, presenting a possible situation for the upcoming months: US agreements with long-standing partners that put pressure on China.

” They’ve been fine military allies, no great financial friends”, the original hedge fund manager said Wednesday of some of these US friends. In the end, the Trump administration should probably come to an agreement with them. ” Then we can approach China as a group”, he said.

Japan, South Korea, Vietnam, and India, which Bessent claimed are the nations that are close to China, are the nations he said he’s looking at. They are countries with which the US could work to isolate China, something that’s been called a “grand encirclement” strategy.

This is actually a very achievable goal. Every day that Trump’s tariff chaos makes the US look like a chaotic clown car makes it a less realistic goal, but as of right now, I still think that it would be possible for the US to radically pivot its trade and industrial policies in order to create a coalition of nations that could economically balance, compete with and even isolate China. And it’s not difficult to imagine how that approach would work.

But first, we should think about why we would &nbsp, want&nbsp, to economically pressure China and what we might hope to accomplish. In the end, in a perfect world, nations would simply trade with one another and become wealthy rather than engage in conflict. And China has plenty of good stuff to offer the world —&nbsp, cool cars, cheap solar panels and batteries, and lots more. Why should we trade with China in a hostile manner?

The reason is geopolitics. Even singing praises for the benefits of trade don’t address the fact that sometimes powerful leaders want to rule or even attack other countries for whatever reason. The world is an ungoverned place, and the balance of power is the only thing that keeps the peace.

China is currently the world’s top producer and exporter. Its current leaders also think of the US and many of its allies as either rivals or outright enemies. They appear determined to conquer Taiwan, sever parts of India, Japan, and the Philippines, and frequently rely on Chinese influence to rule smaller nations. It makes sense to want to weaken China’s ability to do all this, while strengthening the other nations ‘ capacities to resist it.

Therefore, the following should likely be among the objectives of China’s trade policy:

1. Preventing China from gaining an overwhelming&nbsp, military advantage&nbsp, over other nations
2. reducing China’s ability to impose economic pressure on other countries
3. Reducing&nbsp, supply chain vulnerability&nbsp, in nations threatened by China, so that any future conflict with China wouldn’t crash those countries ‘ economies.

That doesn’t mean that China’s trade policy should prioritize prosperity and cool cars; rather, it should instead prioritize adding these other geopolitical objectives.

In any case, when I talk about economically” containing” China, that’s what I’m talking about. So, here’s a list of things we would do if we wanted to accomplish that goal seriously. Obviously, this list is very, very far away from anything the Trump administration is doing or contemplating. However, this is what I believe it would require.

Zero trade barriers with any nations other than China

Manufacturers need scale  to lower costs and maintain their competitiveness. One reason China’s manufacturers are so formidable — and why American manufacturers were so formidable relative to their rivals 80 years ago — is that they have access to a huge&nbsp, domestic market.

Chinese automakers like BYD can increase sales and lower costs to levels that no foreign competitor can match because they can sell untold numbers of cars to their billion customers. BYD is currently building a single factory that ‘s&nbsp, bigger than the city of San Francisco.

Another important factor that Chinese manufacturers are so successful is domestic supply chains. Practically everything that goes into a Chinese EV, particularly the battery, the metal, and the chips, is produced in-country. Instead of having to struggle to import it from abroad, it is now very quick and simple for Chinese manufacturers to source everything they need.

It’s inherently very hard for American manufacturers can match those two advantages. Our consumption is higher in dollars, but we have much fewer people, so our companies can’t ship as many units domestically. The US is much smaller than China. Chinese people buy&nbsp, about double the number&nbsp, of cars every year that Americans do.

Of course, America’s allies, including Japan and Korea, are also at a greater risk of having this issue. Smaller countries compensate by finding highly specialized niches to be competitive in. Due to its size, China can more easily create a fully self-sufficient manufacturing ecosystem ( which it has, in fact, spent the last 20 years trying to do ) and this places their supply chains and defense-industrial bases at a disadvantage.

The only possible way for China’s rivals to match it in size is to gang up. And in this situation, “gang up” refers to creating a free trade zone where both parties can trade freely.

If the US had zero trade barriers with Europe, Japan, Korea, India and the countries of Southeast Asia, those countries wouldn’t become exactly like one huge “domestic” market. There would still be language barriers, geographic differences, exchange rate fluctuations, and national regulatory differences that might unintentionally stifle trade.

But it would go a long way toward allowing American manufacturers — and European, Japanese, Korean, Indian, and Southeast Asian manufacturers — to attain the sort of economies of scale and supply-chain networks that China enjoys within its borders.

In essence, you would have to start imagining” Non-China” as a single, vast economic force in order to balance China. If this sounds familiar, well, it should.

Two trade agreements, such as the TPP and TPP with Asia and TTIP and TTIP with Europe, would have greatly contributed to the development of this kind of common market among non-Chinese manufacturing countries. Both were killed by Trump. This is the first thing you would do, in any case, if you wanted to economically balance China and lessen your dependence on it.

Tariffs on Chinese intermediate goods, and data collection on supply chains

Next, supply chain vulnerabilities among non-Chinese countries would be something you’d need to address. The ideal would be to make sure that non-China has the ability to make everything it needs to make, so that A) non-China can be self-sufficient in case of a major war, and B) China can’t dominate the nations of non-China by exerting pressure on key supply chain vulnerabilities ( like&nbsp, it’s doing right now&nbsp, with rare earths ).

One thing you need here is targeted protectionism. The idea is to prevent China from being able to put non-China manufacturers out of business with a sudden flood of subsidized exports. Imagine, for instance, that China decided to savagely dominate the chip industries in the United States, Japan, Korea, and Taiwan by launching a sizable wave of subventioned computer chips. The only way to prevent this strategy from working is protectionism.

Therefore, you need the ability to impose specific trade restrictions very quickly in industries that China is attempting to conquer. Note that this is very different from Trump’s tariff policy — it ‘s&nbsp, far more targeted&nbsp, in terms of industries, it’s only on China, and it has nothing to do with trade deficits or other macro imbalances. It’s more similar to the tariffs that Biden imposed on some Chinese goods.

But there’s a problem here, which is that standard tariffs don’t hit&nbsp, intermediate goods. Our tariffs assume that this phone is “made in Vietnam” if China manufactures a phone, disassembles it, then ships the pieces to Vietnam where Vietnamese workers piece it back together and sell it to America.

If laptops made in Mexico and sold in America contain Chinese chips, those chips aren’t subject to the tariff rate on Chinese goods — they’re only subject to the tariff rate on&nbsp, Mexican&nbsp, goods. In <a href="https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf”>his 2024 note, Stephen Miran makes this clear. 1

The answer to this is to apply tariffs to the nations where the value was added, not the country where something was finally assembled. Doing this would allow us to put tariffs on Chinese intermediate goods like computer chips and batteries, in addition to final goods like phones and cars.

Of course, this method of applying tariffs would require much more sophisticated data collection. We’d need to figure out where the components in each imported good originated. A small army of bureaucrats would be necessary for this, among other things.

Industrial policy for strategic industries

We would need to do more than just plugging new holes in the ecosystem to give Non-China a self-sufficient, robust manufacturing one. We’d have to&nbsp, fix the existing holes&nbsp, as well. For instance, China already produces the majority of the world’s batteries and processes the majority of the world’s rare earths. Those are vulnerabilities that need to be dealt with.

We need to start making things that we currently don’t make ( or that we make very little of ) in order to accomplish that. The best way to do that is industrial policy. Maybe given the right long-term incentives, those industries would reappear in non-China on their own, but giving them a helping hand fixes the problem much more quickly.

And industrial policy occasionally can contribute to non-China’s stability. For example, if Taiwan gets invaded or bombed by China or struck by a massive earthquake, the world’s chip supply could be seriously damaged because most of the factories of TSMC — the world’s dominant chipmaker — are in Taiwan. Therefore, it makes sense to press or persuade TSMC to relocate some of its factories to safer locations, such as the US, Japan, and elsewhere.

This was the cornerstone of Biden’s approach to industrial policy, with the CHIPS Act for chips and the Inflation Reduction Act for batteries and renewable energy tech. But this was only the start of a study, with only two sectors left.

Other industrial policies should be added for other sectors — drones, electric motors, machine tools, robots, telecom, and of course rare earths and mineral processing. They should be included in the mix, but they don’t have to be as extravagant and expensive as the CHIPS Act and IRA.

Of course, it’s not known whether Biden’s approach to industrial policy — which is similar to China’s, though smaller in scale — is the best one. Balaji Srinivasan offers an alternative strategy based on government-organized industry consortiums like SEMATECH in the 1990s in an interesting post. This is similar to how Japan did many of its industrial policies during its boom years.

In any case, industrial policy should be reinstated if the US and the rest of the non-China world want to compete with China.

Smart pro-investment policies here at home

China has structured its government policies around building lots of factories, which is another important reason why it is such a manufacturing superpower. That pro-investment policy has introduced macroeconomic distortions, but it has also allowed Chinese manufacturers to iterate quickly, to expand the ecosystem of suppliers, to scale up, and generally to do all the other things that make manufacturing work.

I don’t want to see the US allowing widespread pollution of its rivers or forcing millions of people to emigrate from their land in order to build factories in a bid to compete with China. But over the past half century, the US, even more than other rich countries, has thrown up a vast thicket of procedural barriers that block the building of new factories. Many of these barriers would be easily eliminated, which would greatly improve the ability to once again compete in American manufacturing.

To its credit, the Trump administration has actually been making some moves in this direction. For instance, Trump has acted in executive orders, eliminating a number of regulations governing the implementation of NEPA, one of the biggest procedural obstacles to development in the US. Experts on the negative effects of NEPA are optimistic that this change will significantly lessen NIMBYs ‘ ability to block factories, housing, and other development projects.

And while the US shouldn’t be trying to invest as much of its GDP as China does, raising it from its current low level should also be top of the priority list. Two policies, suggested by JD Vance and&nbsp, widely believed&nbsp, to be&nbsp, effective, are 100 % bonus depreciation and full expensing of R&amp, D spending.

Under the Office of Strategic Capital, the Trump administration is also testing out government loans for manufacturers. That’s a good idea, though of course, it’ll be subject to some amount of waste and corruption.

Much more can be accomplished. Private banks could be encouraged to make loans to manufacturers looking to scale up. Export promotion and the promotion of greenfield FDI in manufacturing are also thought to be promising concepts.

In any case, this is all aspirational on my part. The Trump administration has a total focus on its damaging and unproductive tariff policy. What’s more, zero tariffs on non-China countries, expansions of state capacity, and expanding on the legacy of Biden’s industrial policies definitely don’t seem like the sort of things this administration would be interested in.

This is essentially how you would go about making the world economy a fortress against Chinese power, if you wanted to, or did.

Notes

1 Miran does make a pretty substantial mistake, though. He stated:

” Freeman, Baldwin and Theodorakoplous ( 2023 ) find that, while just over 60 % of manufacturing intermediates imported into the U. S. came directly from China, incorporating the value-added of manufacturing intermediates that originated in China but were imported from other trade partners brought that number above 90 %.

These figures are far off. You can see Freeman, Baldwin, and Theodorakoplous ‘ estimates in Figure 2.3 in&nbsp, their paper:

This is the “look-through” exposure, or “estimation of the total value-added of manufacturing intermediaries that are Chinese. China is ultimately responsible for 3.5 % of all U. S. intermediate goods, which is about 20 % of the value of imported inputs. not 99 %. Miran is just way, way off base with his numbers here.

This article was originally published on Noah Smith’s Noahpinion&nbsp, Substack, and is republished with kind permission. Become a Noahopinion&nbsp, subscriber&nbsp, here.

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