Playing Chicken
Two large economies are going at each other. This duel was avoidable, but now that it has been set up, there can be only one winner. No prizes for guessing who.
The name "chicken" has its origins in a game in which two drivers drive toward each other on a collision course: one must swerve, or both may die in the crash, but if one driver swerves and the other does not, the one who swerved will be called a "chicken", meaning a coward.
Source: Wikipedia
On the 2nd April 2025, Trump declared “Liberation Day” for America and set a tariff of 154% on China. Think of anything you buy and then multiply its price by 1.5. Would you still buy it?
None of the businesses in the US think that the people of America would, either. This is tantamount to an embargo.
America buys $1 trillion worth of goods from China. The people of the United States would have to pay $1.5 trillion to the American government to buy those same goods, now.
So what has happened?
After Trump announced expansive tariffs in early April, ocean container bookings from China to the United States dropped 60% — and stayed there, said Ryan Petersen, founder and CEO of Flexport, a San Francisco company that helps companies ship cargo around the world. With orders down, ocean carriers have reduced their capacity by cancelling 25% of their sailings, Flexport said.
Source: PBS
US businesses have stopped buying Chinese goods. Shipments from China have declined.
Why has this not shown up at stores? The one-word answer is Inventory.
Every company maintains some inventory of stock for their business. They are using up that inventory to cater to the demand at the moment. Most businesses maintain 1-3 months of inventory. As the stock depletes, you will begin to see a lack of availability of certain products that were exclusively supplied by China. In other cases, shortages will be felt. Whatever supply materialises will get bought pretty quickly.
The summer of 2025 will be interesting in the US, to say the least.
Moving Production
The Trump administration assumed that… Well, I really do not know what they assumed. Here are the cases that could have played out.
- Trump puts up a tariff, and China comes begging to the US and cuts a deal
- Trump puts up a tariff and China says, pppffff.
There is no world where production capacity jumps continents in a matter of weeks. Not to mention, with the Trump administration chasing away all of the illegal immigrants (and some legal ones too), who is going to work at these factories?
Source: PIB
India sought to bring production to the country; It rolled out the Production Linked Incentive (PLI) scheme in 2020. In 5 years, that initiative has resulted in $150 billion in production. Apple alone produced $14 billion worth of goods in India between 2023-24.
Easily between a third and a half of that PLI achievement is thanks to one company.
It is hard to get companies to move production, and the sorts of incentives that must be offered are tremendous. Not to mention, the reason Apple shifted was because of the geopolitical tensions between China and the US. In its absence, I doubt any amount of incentivisation would have helped.
Trump is using the stick rather than the carrot. The outcomes are going to be catastrophic.
Trump likes to say every country in the world has been ripping off America. You make nothing, and you are still the richest country in the world. I would highly doubt that assertion.
Games nations play
Source: Voronoi
Barring some 20 countries, China is the largest trading partner to almost all of the world. If they have excess goods, they have plenty of markets to sell them into. The US, on the other hand, needs to fill a trillion-dollar gap in a quarter.
Who should be worried?
Chinese leader Xi Jinping has not spoken to US President Donald Trump on the phone recently, Beijing said Monday, reiterating that no talks are taking place between the two countries to resolve their tariff war.
The statement from a Chinese Ministry of Foreign Affairs spokesperson is an outright rejection of Trump’s claim in an interview with Time magazine last week that Xi had called him, as the world’s two largest economies remain locked in a dispute over sky-high trade levies.
Source: CNN
China has been talking tough. They have issues warning and told the world that they will not kneel down.
It is a message to Trump, telling him what he should be considering.
Since March, companies and individuals alike have been hoarding to beat the tariffs. Despite that…
The U.S. economy contracted 0.3% in the first quarter of 2025, the first negative reading since 2022, according to an initial measurement released Wednesday by the Commerce Department.
Source: CNBC
If there is a storm coming, you buy only what is necessary. You do not get your home redesigned. Which do you think costs more - necessities or a redesign?
Hence the contraction. Americans have started tightening their belts.
Trump has offered an excellent opportunity to embarrass the US. China will not pass up on it. They will make the most of it.
How the Game Ends
In all likelihood US will have to eat the bullet.
They may find a way around this whole tariff situation by importing goods from China via Canada or some such subterfuge. That will be a temporary fix. A fix that may have to last 4 years to soothe the ego of the greatest business mogul in the world.
The longer this lasts, the worse off the US will come out of this.