The Economic Fallout from Trump's China Tariffs | Shehzad Qazi

In Episode 411 https://hiddenforces.io/podcasts/the-economic-fallout-from-trumps-china-tariffs-shehzad-qazi/ of Hidden Forces, Demetri Kofinas speaks with Shehzad Qazi of China Beige Book about the impact Trump's China tariffs are having on the U. S. and Chinese economies and prospects for a grand bargain. Demetri and Shehzad discuss: The material impact that the trade war has had thus far on both economies The companies and sectors most likely to be impacted, as well as those best positioned to weather the storm The respective performance of each country's currency and stock market Explanations for the punctuated sell-off in U. S. Treasuries China's action plan to revitalize domestic consumption Demetri also asks Shehzad about Trump's stated desire to "do a deal with China," what such a deal would look like, how big it could be, and what concessions either side is prepared to make in order to get it done. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Joining our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 04/16/2025

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Chief Operating Officer at research firm, China Beige Book, Shehzad Kazim. Shehzad was last on the podcast more than two years ago to discuss the post-COVID reopening of the Chinese economy. I asked him back on the podcast today to discuss the preliminary impact Trump's tariffs have had on US and Chinese businesses and on their respective economies, stock markets, and currencies.

• 0:44Demetri Kofinas?

  We also discuss whether the action plan to revitalize consumption that was recently announced by the Chinese State Council and CPC Central Committee represents a more determined effort by Beijing to ignite a flywheel of endogenous demand for Chinese output should the country's export sector become priced out of critical markets in the US and Europe. I also asked Shehzad about Trump's stated desire to do a deal with China, what such a deal would look like, how big it could be, and what concessions either side is prepared to make in order to get it done. If you want access to all of our premium content, or you want to learn more about the Hidden Forces Genius Community and how to attend one of our many virtual Q and As,

• 1:26Demetri Kofinas?

  in-person events, and dinners, you can do that at hiddenforces.io/subscribe. And if you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. And with that, please enjoy this timely and informative conversation with my guest, Shehzad Kazim.

• 1:53Demetri Kofinas?

  Shehzad Kazie, welcome back to Hidden Forces.

• 1:57Speaker 01

  Hey, thanks for having me back on, Dmitry.

• 1:59Demetri Kofinas?

  It's great having you. How long ago were you on the podcast? It was like three years ago?

• 2:03Speaker 01

  Something like that, I think about three years ago.

• 2:05Demetri Kofinas?

  Right, and you were at one of our New York dinners a couple of years ago, too.

• 2:08Speaker 01

  Yeah, exactly.

• 2:10Demetri Kofinas?

  We actually just did one recently in Washington DC. And the focus there was on the Trump administration's China policy. To the extent that there is one, it's not entirely clear. Rush Doshi was there, John Pelson, who you remember from the dinner that you were at, was there, too. That was a very interesting conversation. I feel like, I feel like, and tell me if this is right, and then we'll get into a series of questions about the economy. It doesn't seem like we have heard as much of a coherent policy articulated for the public on China from this administration as I would have expected us to, based on how important China was and how big it factored into the Trump administration's first term. Do you generally agree with that?

• 2:54Demetri Kofinas?

  And if that's the case, why do you think that is? Is it just, in your estimation, because they haven't communicated that publicly, but there is a larger strategy internally? Like, what do we know there? How would you answer that question?

• 3:04Speaker 01

  Yeah, there isn't necessarily a full-blown strategy that has at least been unveiled publicly. And I don't believe that there really exists one behind closed doors either. Instead, what the administration has come out with this time around is something different. They've got a global goal. They've got a goal of structurally changing America's trading relationships with the world at large. That by and large includes changing America's trading relationships with China. And so, a series of goals are being pursued. And, you know, we've heard about things like there may be more investment restrictions. We've heard about things like there might be more export controls.

• 3:46Speaker 01

  But what we haven't seen is sort of a comprehensive plan that says, look, these are our top three or top five things we're going to accomplish vis a vis China. And this is how it's being done as part of this global effort of rewiring US trade.

• 4:00Demetri Kofinas?

  Yeah, so let me ask you this question, which is, what do we know about what the material impact has been so far on the ground in China from the tariffs? And also, I think, more importantly, from the rhetoric that's coming out of the Trump administration?

• 4:16Speaker 01

  Yeah, so I think, you know, as soon as the election took place in the US, it was pretty clear on the Chinese side that there's going to be a round two of a US-China trade war. And funny enough, I think it was Wall Street that certainly did not expect, despite over the several weeks and months, once the administration took control, that there absolutely was going to be a global trade war of sorts, certainly global tariffs. But I think in China, they certainly understood that. At the same time, they believe thus far, and they continue to believe, that there eventually will also be some kind of US-China deal. That said, on the economic front, the first impact was actually positive in the sense that there was a lot of front-loading, companies buying a lot of materials in advance of tariffs coming, and a lot of inventory buildup taking place out here in the US.

• 5:01Speaker 01

  So the economic impact was positive because manufacturing looked good, exports looked strong. But where we are today on the ground, as China's Beijing Books real-time data showed us, a lot of that front-loading effect and the boost to exports was certainly present in the first couple of months of the year, certainly there at the end of 2024, but has now expired, right? So into March, we saw our export orders indices slide. We saw manufacturing beginning to slow down, factory production beginning to slow down. So the economic impact that pulling forward of growth that took place, that trend has faded. And now we're, I think, on track to look at what is most likely going to be a sequential slowdown in the Chinese manufacturing sector.

• 5:41Demetri Kofinas?

  All right, so I'm gonna have more questions to ask about that, about the impact on China's economy. I still would love to get some clarity, because I feel like I'm in the majority of the cohort of people who don't really exactly know what is being tariffed, how much it's being tariffed, which tariffs are for negotiations, which aren't, what's on today that was off yesterday, or that's what's off today that was on yesterday. Like, where are we today? We're recording this on Wednesday, April 16. What exactly do we know about what has been tariffed? And from those things, what do you think is going to remain on at these levels or close to these levels?

• 6:21Speaker 01

  Yeah, I mean, this is a pretty fluid situation for sure. And there has been such a rapid ratcheting up or escalation of tariffs that it's become almost dizzying for markets. And we saw markets, you know, what happens when you get really dizzy, sometimes you puke. And that's what happened last week in the bond market and certainly has been happening with equities lately. So the simple way to put it right now, I think, vis a vis China at least, is that you have the top line tariffs at 145% on China right now. Now you have any products that contain chips or semiconductors that have been moved out of that top 145% rate. And instead, the 20% initial fentanyl tariffs that have gone into effect in February,

• 7:06Speaker 01

  those still apply to the consumer electronics and those products like your iPhones, computers and such. And that basket of goods is going to be most likely hit under the upcoming sectoral tariffs, which are going to be announced once the US trade representative finishes his investigation. Where you know, where they're looking, it's called a section 232. Basically, it's saying that, look, there are national security concerns around a foreign country's trade practices or violation of trade laws and trade agreements. And so as a result thereof, we have to punish them by putting tariffs on. We don't know what that tariff amount is going to look like. We also currently don't necessarily have clarity on how quickly that investigation can be done. Typically, those investigations take about 270 days.

• 7:51Speaker 01

  I do not anticipate that the US trade representative will be taking that long of a time. But at the same time, we don't know how soon and what that number is going to look like. So over the weekend, you heard a lot of things being referred to as exemptions. They're not technically exemptions as much as they are just moving them from one tariff basket to another with the expectation of more higher tariffs on those goods coming. Let me make one other point, as I said, that everything else is under the 145%. So how do you think about that in terms of, are you whether they're going to stay? Or not stay. Look, at the end of the day, we don't know. We're dealing with a administration where President Trump is certainly the decision maker here. I think everybody finally understands that. And so that means things can change and change very, very quickly without much forewarning.

• 8:35Speaker 01

  Pulling back, one could expect that, look, tariff levels on most products will most likely not stay at these high levels. But we're certainly not going back. I think one thing we can all probably bet our money on today safely is that status quo ante, as in where was the US-China trading relationships vis a vis tariff numbers? On, you know, February 1st or January 31st, or even the day the president got inaugurated. Are we going back to that? I can say fairly confidently, no.

• 9:02Demetri Kofinas?

  So a few more pointed questions on tariffs. Let's just talk about auto tariffs here for a second, because this is also a low margin business. And there's a lot of uncertainty as well here. I know a lot of folks are looking to maybe try to order a car or get a car early and ahead of the tariffs being put back on, because I think there was some kind of pause on these tariffs as well. Maybe I'm mistaken. So can you just walk me through exactly what's going on here? Because a lot of these brands that are also foreign brands, they have some, some of them have domestic manufacturing like BMW, but they don't manufacture all their cars domestically. So there's so much confusion here. What do we know about auto tariffs?

• 9:41Speaker 01

  Yeah. So if my understanding of this is correct, essentially the auto tariffs rule, you know, has been amended or the way this was written out in the proclamation and then subsequently in other documents has been amended to say that if a certain amount of US content is included in an automobile, you would deduct that when determining the tariff on the rest of the auto part. So this is where tariffs start to get incredibly confusing, incredibly technical. And so they are not necessarily being hit with one singular number, because again, the idea is that we don't want to punish. As a matter of fact, we want to encourage more production being done within the United States. So you make sure that you're not then penalizing, you know, car companies when they do have a certain amount of US, you know, United States product in there.

• 10:26Speaker 01

  So the rule of origin, laws as they exist, everything is Now being talked about, the conversations are getting more technical. And I think, you know, markets and, and, you know, the professional investors are certainly having a hard time. And I can imagine why a lot of people who are trying to keep on top of this would be having a tough time. This is, this is complicated stuff that normally trade lawyers in stiff suits in DC talk about. And then we don't typically talk about these things on social media and in the press.

• 10:52Demetri Kofinas?

  Yeah, I feel like I probably need to bring on a trade expert to walk me through some of this stuff. Because it clearly isn't just based on where the product is assembled or manufactured in the final stage. It's about the entire supply chain. And it sounds like it, at least, it sounds like every part that is manufactured outside the United States gets tariffed. And if that's indeed the case, one has to ask him or herself, what's the goal here? Is the goal here to bring the entire manufacturing chain back to the United States? Or are we eventually going to get a more targeted set of tariffs that looks to onshore certain parts of certain supply chains? I mean, that's, that to me is the, the important clarity that I'm looking for at least. So let's shift now to talk a little bit about the Chinese consumer.

• 11:34Demetri Kofinas?

  So I've seen reports that China's consumers have increased their consumption of domestic brands over foreign ones amidst the recent trade war. I've also seen a lot of these TikTok videos of different people running sort of wholesalers out of China that are producing, let's say, Fendi bags at a fraction of the cost that it's being sold to American consumers or European consumers. I'm not entirely clear what's happening there. If this is being promoted to distributors in the US, directly to consumers, to domestic consumers in China. I'm curious to understand about that, too. And I'm also curious to understand how much of this reported move by Chinese consumers to domestic consumption of Chinese brands.

• 12:16Demetri Kofinas?

  I've seen some talk about an accelerated shift away from US consumption. How much of that move was already in the making? And how meaningful is it on the margin, at the very least? To possibly kind of offset some of the demand crush for Chinese production from lost overseas markets. So there's two questions. So sorry about that. Why don't you just take the last one first and then we can re-ask you the first one?

• 12:40Speaker 01

  Sure. So let me maybe sketch out something from first starting from the macro point for our audiences. The first thing to understand is that Chinese consumer spending has been incredibly lackluster in the aftermath of COVID and more specifically COVID lockdowns. The two years that you had a zero COVID policy in China were absolutely were incredibly destructive, as you can imagine, because you're looking at firms shutting down, you're looking at incredibly sluggish economic growth, you are looking at people losing their livelihoods, you're looking at young graduates not being able to find jobs, you're looking at most fundamentally, a lot of economic uncertainty. In the midst of all that, you also got a very severe and very serious property market

• 13:23Speaker 01

  crisis, which was of course by and large engineered by the Chinese authorities, by the CCP, by President Xi as a way to sort of begin and as a way to maybe more proactively address the property bubble, to prick the bubble, to let the air out and to deal with that situation or problem before it turned into a actual very serious crisis. But the result of that was a lot of wealth destruction took place in China as well, which of course subsequently also resulted in consumers becoming incredibly cautious. So this is the background for the last five years really that matters. Nothing before that makes too much of a difference anymore. Now, where we are in real time numbers, if you will, is that Chinese consumer spending has slowly but surely gotten better if you look at year-over-year comparisons, right?

• 14:08Speaker 01

  So if you looked at consumer spending around the Lunar New Year holiday this year in our data, you would see that it certainly looked better than year ago levels and it was on par with pre-COVID levels as a matter of fact. Other indicators would show that it was like airline bookings perhaps were even better than 2019. So consumers are out there, they are spending some money now that previously they were not, but at the same time, they're still very defensive. They're not going to continue to spend outside of instances, holidays and very specific periods where more consumption Typically takes place anyway. What that means, by the way, is that they are also looking for being competitive on a pricing level is very important. But they're also not going to be supporting, I think, a lot of these expensive foreign brands when they have

• 14:53Speaker 01

  very good local alternatives. So for foreign companies, this is a challenge anyway because they were looking at, as it is, they were looking at a slowing consumer market in China. Then they were looking at a potential crisis in the consumer part of the economy, in the consumption side of the economy. And then they have a range of local companies that they need to increasingly compete with. So that story, that that pain point has been around for, you know, a few years now for foreign companies. That leads me to your second question and the second point, which is this new idea I've seen around, being floated around and argued that, well, if China loses the US market, it'll be able to make up for it by not only selling to other countries, but also through domestic consumption.

• 15:38Speaker 01

  And now this could not be farther from the truth that, you know, both couldn't be farther from the truth, but the domestic consumption side is even more fantastical. Because the reality is, as I just described, consumer spending has been, by and large, just not at a level where they could support everything that China produces. And more importantly, the government has not done anything meaningful on the consumer side, on the household side, vis a vis providing stimulus that would actually help spur consumer spending and do so in a way that was sustainable. They have done trade in programs and goods trade in programs and such, and provided subsidies for a very short time that has provided a short term, very limited boost to the economy, to things like retail sales.

• 16:22Speaker 01

  But this is not the stuff that is going to change the consumer spending patterns in any kind of meaningful way. So, no, if the US market is lost, that is going to create, that is a very big, very serious headwind for the Chinese economy. That carries very serious repercussions for the Chinese economy.

• 16:37Demetri Kofinas?

  So last month, China State Council and the CPC Central Committee issued an action plan to revitalize consumption to boost domestic demand. The action plan focuses on increasing incomes, improvising consumption capacity, upgrading service quality and optimizing the consumption environment. How important is this plan? Like, this got a lot of attention in my sort of world because the argument has been made for years now that the Chinese government would ultimately have to restructure the incentives and the regulations in its economy, boost safety nets, et cetera, in order to find a way to boost domestic consumption, in order to get this flywheel happening and so that the producers weren't so dependent on external markets for economic growth.

• 17:22Demetri Kofinas?

  What do you know about this plan? How important is it? And how does it factor in here?

• 17:26Speaker 01

  Yeah, look, for the last, probably at least 10 years, we've heard some version of a plan to boost domestic consumption, some version of a plan to, quote unquote, "rebalance the economy," some version of a plan to create dual circulation. What unfortunately we get is a lot of catchy sounding titles and promises coming out of the CCP and off Beijing, but we see little to no progress, right? 10 years is a very, very long time to be making the same promise and then, at the same time, making little to no progress on that stated policy goal. So I know that every time, you know, one of these new things comes out of a central

• 18:10Speaker 01

  party committee meeting or an annual meeting of party officials or the Chinese government, you know, there's a lot of attention paid to such promises. But at the end of the day, you know, we collect large-scale private data in China and we have been wishing and wanting for a long time to see evidence within the numbers and it's just not there. The support for SMEs, the credit support for SMEs is just not there. The types of changes, structural changes that need to be made in order to create a state that provides better elderly care, better support for childcare, a lot of the rules have to change around, you know, their local IDs and such, residency requirements. More importantly, none of that is taking place.

• 18:53Speaker 01

  So I wouldn't pay too much attention, and I certainly have not paid too much attention to the latest batch of pledges that have come out of Beijing. But we'll see if they're finally ready to make the changes. It'll show up in the data first or the more, you know, and that's the place to look.

• 19:07Demetri Kofinas?

  So we know what's happened to US equities as a result of, and to the US dollar as a result of the last few months. What has been the impact on Chinese equities and the Chinese renminbi?

• 19:20Speaker 01

  So the Chinese yuan is most certainly beginning to weaken. It has led to, once again, a call on, you know, there's a Chinese devaluation coming. And as we recently wrote in a client note, that, you know, foreign observers have called eight of the last zero Chinese devaluations. So we certainly don't believe today that a Chinese one-off deval is in the offing, that there's a higher likelihood of that happening. The reasons for that have are kind of well understood. They do not want to create a financial panic. They don't need a currency manipulator label to be added on to them. They don't want to upset their trading relationships with other countries because that wouldn't just hit the US, that would hit other countries.

• 20:05Speaker 01

  So the Chinese yuan has certainly weakened. They seem to be comfortable with it weakening a little bit compared to where it was. Seven point two was the latest line in the sand and it's weakened since then. So maybe some depreciation is happening and is in order and that would certainly sort of ease the blow from the tariffs, but certainly no one-off devaluation in the cards today. Chinese equities have had a pretty good time starting fall of 2024 because there was a big call on Wall Street that, hey, look, there's big bazooka is about to be fired in China, big stimulus is coming. The stimulus never came, but whatever policy announcements did come through and a lot of the risk mitigation that was announced in terms of, you know, loans being switched from one balance sheet to the other and allowances to issue more debt at the local government

• 20:50Speaker 01

  level, at the federal government or the center, you know, they were sort of seen as examples of stimulus. And so the Chinese equities started to do well. And then, of course, you got deep sea. And when deep sea happened, that was treated on the street as a total and absolute game changer, that China was now leading the AI race perhaps, and this was going to create more opportunities. So Chinese equities hit, you know, obviously multi-year highs. But in the aftermath, the tariffs and trade war starting, especially after what happened, you know, post quote-unquote liberation day, you know, we've seen Chinese equities also struggle, also beginning to decline again. So that trade did not last a long time. And I have to make this point, you know, I went repeatedly On various television networks arguing pretty aggressively that look markets had to

• 21:33Speaker 01

  take geopolitical risk very, very seriously. Markets had to take trade war risk very seriously. And it's just nobody was interested because people again, you know, the market continues to see President Trump more so as a dealmaker than as tariff man. And that has proven to be immensely costly in the last several weeks.

• 21:51Demetri Kofinas?

  I've not heard anyone juxtapose those two tariff man and dealmaker. That's interesting. I mean, you're right, the way we think of Trump, and I still think the way we think of Trump is as dealmaker. And that's actually going to be a question that I'm going to ask you, Shehzad. So let's hold off for that one. But what has been the policy response thus far since Liberation Day? The Chinese responded with reciprocal tariffs. However, I don't know how meaningful that is because again, like, it's not like US companies are hyper competitive within China's economy to begin with. So what has been the policy response? And how do we interpret those responses? How much of that is just signaling to try to get a deal, maybe, or to try to say,

• 22:34Demetri Kofinas?

  hey, we're going to kind of respond to save face, but we want to meet you at the table? And how much of that response has actually been to try and put pressure on the US? I know there have been some reports, I don't know how true they are or aren't, that the Chinese have been selling US Treasuries on the margin. Some people might argue, even if they agree that that is happening, they might argue about why it's happening. Is it happening because the Chinese are voluntarily selling Treasuries in order to send a signal? Are they selling Treasuries because they need dollars? Like, I can't make sense of any of this. So you tell me, what have they done thus far? And how do we pull signal from the noise here?

• 23:08Speaker 01

  Yeah, the Chinese response as far as their retaliatory tariffs of 125% on US goods, excluding US semiconductor imports, because they of course want any and all semiconductors they can get from us, are not particularly meaningful. You know, you cannot be the world's sort of biggest exporter and have incredibly weak consumption and then expect your retaliatory tariffs to carry much meaning. That said, there are of course, companies that sell into China that would prefer not to have those tariffs. So my Common applies to the larger sort of trade balance and where things stand at a macro level. But certainly, again, it doesn't apply to every and all companies selling inside of China.

• 23:48Speaker 01

  But that said, the other thing they've done, of course, is try to institute export controls or further export controls on rare earth or so-called rare earth minerals. Again, there, we are yet to see in practice in the coming months and so forth. How far can they go in actually enforcing and ensuring that the US isn't just pulling a China? And by that, I mean just buying those rare earth minerals and critical minerals from third parties. Right? So I'm not sure what capacity and what authority and what ability Beijing actually has to stop the US from just buying it from elsewhere. Because unless China wants to cut off the whole world, which doesn't seem like a good idea

• 24:33Speaker 01

  when China is trying to rally lots of countries on its side to actually push back against the US. You know, that that becomes very difficult. They have, of course, announced a suspension of buying planes from Boeing. So that's kind of stood out. It's not clear how meaningful that is for Boeing because it seems like that was a very small percentage of Boeing sales this year to begin with. So I think all we're saying, so we're giving lots of examples here. What are we really saying? What we're really saying here is that, you know, when it comes to a trade war, the world's largest consumer holds far more cards than the world's largest exporter. That's the bottom line here. And so China cannot do any kind of one-to-one retaliation. And China's retaliatory measures are, at the end of the day, going to be pretty limited in their impact.

• 25:16Speaker 01

  China's toolkit to retaliate is also very limited. Now, what happens next? What happens next is they could really escalate this. They could really escalate by actually selling treasuries, which there is no evidence that they're doing right now. They could escalate this by saying, we're going to start interfering in critical supplies like pharmaceuticals, like medical equipment. So as it is now, the 145% tariff means that a lot of US-China bilateral trade is basically coming to a standstill anyway, which means that China itself will now be relying on rerouting its products to the US. But do they actually say, you know what? Forget about it, things they really need, let's not do that. Or let's suffer the pain and let's create the shortage economy in the US. When consumers start things running out of basic goods and basic supplies that they rely on us for,

• 26:01Speaker 01

  like what happened during COVID, that is going to put so much pressure on the administration that it'll have no option but to change tack. So they could go through a series of very serious escalations here, but that would put us in a different water. I think that would probably bring us closer to a hot war. Right now, this is really a trade war. This is not really even full-fledged economic warfare. That would start taking us much closer to something much more dangerous.

• 26:24Demetri Kofinas?

  So I'm so glad you brought up the whole like who holds the cards here because that was going to be my next question. Because the administration, including the Treasury Secretary, have really made this point over and over again in interviews, which is that we quote, "hold the cards," not China as a surplus trading partner. Is it fair to say that that a conclusion derives from viewing this trade war in very conventional terms? Which is to say, you've got two trading partners and they each are motivated by gaining as much access to the other party's market as possible. And so escalation really comes along the lines of raising tariffs and making it harder to access the other person's domestic marketplace.

• 27:08Demetri Kofinas?

  Whereas if you were to focus on China's ability to withhold critical inputs for the pharmaceutical supply chain, for example, then you could say that China actually holds the cards. Again, depending on the pain point you're looking at. First of all, do you agree with that? It depends on how we're defining the scope of the possible war here?

• 27:31Speaker 01

  The way I like to think about it and frame it is that just because we hold the cards doesn't mean that China cannot hurt us, that China cannot make this incredibly difficult for us, incredibly painful for us and incredibly dangerous for our own stability and economic well-being at home.

• 27:52Demetri Kofinas?

  Okay, so here's my last question, Shehzad. What is the deal that comes out of this? Like, where do we finally end up? Because I feel like that's what investors are most focused on. And I'm sure many business people in China and the US, to the extent that they're up to speed on this issue and how it's impacting their businesses, are concerned about as well. Is there a "deal" to be made here? What is the scope of that deal? Who are the people that are having it? What do you know? And what do we know about this?

• 28:17Speaker 01

  Yeah, so, you know, I think a lot of people talk about the US-China deal. And the person who talks about it most, of course, is the president, is Donald Trump. I think, you know, this will boil down to what everybody thinks is a deal, as you just said, right? What do we mean by it? I am incredibly skeptical today of the idea that there can be a big deal for the centuries, deal for the ages between the US and China. And what I mean by that is a deal where we get rid of all tariffs and take them back to levels, say, even take them back to levels where they were at at the end of the Biden administration. Forget about the first Trump administration. And, of course, China gets rid of their 125%.

• 29:01Speaker 01

  China, again, has unfettered access to our market. On the other hand, they are saying full cooperation on fentanyl, absolutely going to make structural changes to our economy so we actually support consumption over production. We actually, therefore, open up the market, create more opportunities for American companies. Then we open up the market in real ways where we stop providing subsidies and support to our own companies. So we create more fair access for your countries. We, companies, we get rid of any problems you have with IP theft, and so on and so forth. I said this magical scenario, this utopia, that was once conceived of in terms of what China would eventually look like from the US standpoint. And the converse being China having unfettered and total open access.

• 29:45Speaker 01

  Come here, buy the farmlands, doesn't matter where you want to put them. We'll buy all your technology and put them in our military bases again. That stuff's not going to happen. Not even close to it. And I deliberately sketched this out so that I can explain to people what a true deal between the two sides could actually look like. We are nowhere there. And we will never be there. What is possible between the two sides, however, is a series of mini deals or maybe a skinny deal, as I could call it, which is that we have deals around very specific things, a deal around TikTok, a deal around more fentanyl cooperation, realizing that China will probably never fully comply and may not even ultimately have the ability to help us as much as we'd like it to. And a deal that focuses on bringing, eventually bringing down tariffs to some level

• 30:30Speaker 01

  that is below 145%, but certainly remains above, where it was even above the 20% fentanyl tariff. So I think we are headed towards a lot of volatility in this relationship because we are structurally changing it. And change is painful and change creates a lot of chaos. So really, the thing to do is to brace for that and to understand that big China recoupling is out. Total decoupling is an unlikely scenario right now, and a recoupling is certainly an unlikely scenario right now. It's a messy middle that we have to prepare for. And so it's complicated, tough, chaotic times ahead.

• 31:06Demetri Kofinas?

  So superficially, this looks like a very unilateral approach by the United States, which you can see even evidenced by the blanket tariff bans and the tariffing of our close allies and partners in Europe and Asia. Is there any talk about this administration looking to pivot? Maybe, again, maybe this is all part of some strategy, to pivot into creating some kind of new trading block or ecosystem that relies more on countries with which the US is aligned or has friendly relations? And how are China's trading partners? I mean, we saw talk about the, again, these are superficial readings of headlines coming from my end, but the South Koreans, the Japanese looking to kind of do some

• 31:48Demetri Kofinas?

  kind of joint thing with China, try to put pressure on the US to reduce tariffs. So like, how is this shaking out from an international perspective?

• 31:57Speaker 01

  There has been a lot of chatter lately, certainly on this idea of creating a new customs union or new trading blocks where countries with similar values and then similar laws and adherence to trade laws and trade agreements trade with each other. That's of course not something we can expect in the short run or probably even in the medium run. Now, that said, as we try to move supply chains out of China, as we try to substitute Chinese products or other products for Chinese products, more inputs from Mexico, more inputs from Vietnam and South Korea and so forth, and maybe other countries in Latin America, as we try to enforce things like nearshoring, friendshoring, and of course reshoring, the

• 32:37Speaker 01

  reality is that the changes in supply chains will over time most likely create this new quote unquote "trading block." The question that we don't have much clarity on today is where ultimately do we see China in all of this? Because obviously Chinese inputs are in so many things that we would still be buying from these other countries. So where do we want to have them completely restricted and brought them down to zero? Where are we okay with 10% Chinese inputs? Where are we okay with 50% Chinese inputs if those things exist at some point at the end of the day? That thinking, that strategizing, I just don't think has been done yet. But I think we are certainly moving towards supply chains shifting more reliably out of China and not just shifting, and as you say, you know, you use the word superficial

• 33:19Speaker 01

  in another context here, but the superficial changing of supply chains, which has been the transshipment problem, that you know, factories just load up a ship, send it to Vietnam, hang out in the port for however long you need to so that the goods now become Vietnamese goods and then you get the new piece of paper and you move on towards the US. Or you send, you know, a pair of shoes, as I like to say, and you change the tag on it, you know, or you maybe put a pair of laces in there and say, now this is a Vietnamese pair of sneakers and not Chinese. So that's not a real shifting of supply chains, you know, we need much more than that. Chinese-owned factories maybe even producing things in Cambodia and shipping them to the US may not be good enough either. So this is all very complicated, we'll see where it ends up. But the long-term trend has to be shifting supply chains out of China and doing it at a faster pace and more reliably than it's been done so far.

• 34:03Demetri Kofinas?

  Again, is there any talk or do you think that eventually this administration? Will focus in on specific supply chains that they want to prioritize reshoring or friend shoring. And let's say, when it comes to things like Nike sneakers or apparel made in China, that they're going to be less concerned about that and they're happy to sort of yield that industry to the Chinese?

• 34:26Speaker 01

  You know, I would hope that the upcoming reviews and investigations on the so-called sectoral tariffs, which are supposed to focus on pharmaceuticals, semiconductors and metals, copper, steel, and one more, I believe. I think some of those should, that's an opportunity for the administration to not just tell us what the tariffs are going to be and what type of trade issues we're trying to correct for, but to also come out with a plan that says, look, this is, you know, 10% off X, Y, and Z thing needs to move out by the end of 2026, or 50% by the end of 2027 needs to be placed in another country, right? I'm throwing numbers out, obviously, I'm pulling these from the air, but a realistic plan, a reshoring plan, a nearshoring plan would be good to see. You know, the administration's

• 35:09Speaker 01

  been in power for just under a quarter, an economic quarter yet. So I know they're trying to get a lot done in a short time period, but soon enough, it would be good to start hearing these ideas as well.

• 35:17Demetri Kofinas?

  I mean, I feel like that's what most Americans, and this is what I'm interested in, in which is where can we find consensus in this country? Because that's where we can develop the most durable, sustainable, cross-party policies that can endure across administrations and across-party administrations. And I think one of those areas would be, most people can agree that we don't want to be in a situation where if something happens in the rest of the world, we can't produce insulin in the United States. I'm not saying that's the case with insulin. I don't know enough about these supply chains to know which drugs are most affected. But there are clearly critical supply chains where I think most Americans would be willing to endure whatever is necessary, so long as they feel

• 36:01Demetri Kofinas?

  like it's being done in a competent way, to actually, you know, get those supply chains friend shored or, or nearshored or onshored. And to that degree, maybe this is my last question. I said my, my last question a couple of questions ago, but my, maybe my last question has to do with Latin America. So this seems like, again, based on how Trump seems to talk about regional spheres of influence, it seems that there's a real opportunity here for Latin America to play an outsized role in whatever the vision is from this administration, whatever the Trump doctrine is on trade. Do you agree with that? And what kind of talk do we hear around some of these companies moving manufacturing to Latin America and what that would mean for tariffs?

• 36:45Demetri Kofinas?

  It would mean for the cost of goods, et cetera.

• 36:47Speaker 01

  Yeah, I wish I knew more about Latin American economies and where they are today. But of course, you know, that seems like a obvious part of the plan. So, you know, not only do we want things very, very close by, and which really, quite honestly, puts Mexico in a very good position, but you know, there may be other Latin American countries, especially Latin American countries, you know, where increasingly you're also getting a big Chinese presence, where we want to take a closer look at what's going on and where American companies need to be or should be or could be also placed. Same thing again, what's going on in Central America? Are there opportunities there? So these are conversations that I think should be very live, should be happening. I am, of course, not read into this. And again, I don't know the region well enough to be able to talk intelligently.

• 37:32Speaker 01

  But the reality is, you know, to your earlier point, that the concept here needs to be economic security. The concept here needs to be supply chain security, especially for things that are necessary. Too much of the online commentary, it has focused on correctly, as you said, on things like our Nike t-shirts and our Nike shoes. But that's not what this is about. Ultimately, this is also, by the way, the administration would do itself a lot of favors if they sent out people to very competently talk about it. And I know they've got the people to do it. I mean, the Vice President himself is certainly a big fan of this idea. But talking about the manufacturing of the future, talking about how America will support the manufacturing of the future, what does that look like? What do factories look like in the 21st century?

• 38:16Speaker 01

  So that we can actually have a more sensible, a more advanced, a more current conversation about manufacturing. Because I think a lot of people snicker and jeer and sneer because they think we want people to go back to sweatshops. And that's certainly not, I don't think that's the idea, and I obviously would not be advisable. So there's a great opportunity here, Dmitry, to talk about the revitalization off the United States, to talk about the reindustrialization, and to talk about it in a technologically sophisticated and advanced way, so that we're talking about the future and not looking back at the past.

• 38:47Demetri Kofinas?

  So again, it wasn't my last question. One more, let's see where this goes. I don't believe the talk about fiscal austerity in the United States. I don't believe The administration, when they say they're looking to cut back fiscal spending and all this stuff, I don't think that's consistent with the larger goals of reindustrializing the United States. That's going to require a huge capex spend. What is your take on this? And what would be the implications of that, of your answer for the budget deficit, for yields? I mean, I'm just curious to know what your thinking is there.

• 39:18Speaker 01

  So I would leave that up to economists, and I would leave that up especially to people who really understand US economic policy and fiscal policy. But the larger point stands that the place we are today, if we, if we want to be, this is a big if, if we want to actually do industrial policy in a serious way, if we want to support industries and encourage them to come back home, we will not most likely be able to do that by just saying, here are some tax cuts, here's deregulation. Because at the end of the day, I'm not sure if our tax cuts and our deregulation will still make the economics of it all work for the companies who may alternatively say, you know, look at Apple, for example, okay, so China's getting a lot of tariffs, fine, temporarily we'll shift a significant amount of our production

• 40:01Speaker 01

  into India, because that makes more sense for them. It doesn't make as much sense as China. They'd rather just stay in China, but if they can't, then they'd go to India next. They're not bringing it to California, Arizona, or South Carolina. So if we want other aspects of our other industries, other factories, and other manufacturing parts of the economy to come back home, we're gonna have to think about this in a bigger way.

• 40:24Demetri Kofinas?

  Shehzad, this is great, man. It was great seeing you again. Of course, I see you all the time on CNBC. You've been crushing it over there. For people that want to read, subscribe to China Beige Book stuff, or follow you, or the team there at China Beige Book, how can they do that?

• 40:40Speaker 01

  You know, we've got a very active X or Twitter account. It's called China Beige Book, so follow us there. Visit our website as well, www.chinabeigebook.com, and follow our media and listen to our podcasts wherever you get your podcasts.

• 40:54Demetri Kofinas?

  Awesome, Shehzad. Again, man, thank you so much for coming on the show.

• 40:57Speaker 01

  Hey, thanks so much, Dimitri. Good to see you.

• 40:59Demetri Kofinas?

  For everyone listening, Hidden Forces is a listener-supported podcast. We don't accept advertisers or commercial sponsors. If you want to learn more about our premium-only content, including paywalled podcasts and intelligence reports, you can do that at hiddenforces.io/subscribe, where you can also schedule a call to learn more about our Genius Community and how to access special pricing to third-party research, live Q and As with domain experts in markets, geopolitics and technology, and how to attend our popular in-person events held in some of the most beautiful cities in the world.

• 41:36Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at @Kofinas, and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.