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Tariff Leverage

2d ago 15:44

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This week we talk about trade wars, TACO theory, and Chinese imports.

We also discuss negotiation, protectionism, and threat spirals.

Recommended Book: More Than Words by John Warner

Transcript

In January of 2018, then first-term US President Trump announced a slew of tariffs and trade barriers against several countries, including Canada, Mexico, and those in the European Union.

The most significant of these new barriers and tariffs were enacted against China, though, as Trump had long claimed that China, the US’s most important trade partner by many measures, was taking advantage of the US market; a claim that economists tepidly backed, as while some of the specifics, like those related to intellectual property theft on the part of China, were pretty overt, the Chinese government fairly brazenly gobbling up IP and technology from US companies that do business in the country before hobbling those US interests in China and handing that IP and technology off to their own, China-born copies, claims about a trade deficit were less clear-cut—most of those sorts of claims seemed to be the result of a misunderstanding about how international trade works.

That said, Trump had made a protectionist stance part of his platform, so he kicked off his administration by imposing a package of targeted tariffs against specific product categories from China, including things like solar panels and washing machines. Those were followed by more tariffs on steel and aluminum—from a lot of countries, not just China—and this implementation of trade barriers between the US and long-time trade partners, which had mostly enjoyed barrier-free trade up till that point, kicked off a trade war, with the Trump administration announcing, out of nowhere, new tariffs or limitations, and the country on the pointy end of that new declaration announcing their own counter, usually something the US sells to their country, while in the background, both countries tried to negotiate new trade terms on the down-low.

There was a lot of tit-for-tatting in those first couple years of the first Trump administration, and they led to a lot of negotiations between the US government and these foreign governments, which in turn led to the lifting of many such barriers, though the weaponization of barriers continued, with the administration, for instance, announcing a tariff on all imports from Mexico until the Mexican government was able to halt all illegal immigration coming into the US; negotiation ended that threat, too, but this early salvo upset a lot of the US’s long-time allies, while also making it clear that Trump intended to open negotiations with these sorts of threats, whenever possible—which had the knock-on effect of everyone taking the threats pretty seriously, as they were often incredibly dangerous to specific industries, while also taking them less seriously because it was obvious they were intended to be a negotiating tactic.

When Trump left office, a bunch of international relationships had been scarred by this approach to trade deals, and when Biden replaced him, he dropped most of the new tariffs against long-time allies, but kept most of the China tariffs in place, especially those related to green technologies like electric vehicles and semiconductors, the local-made versions of which were becoming a big focus for the Biden administration. The administration then went on to expand upon those tariffs, against China, in some cases.

What I’d like to talk about today is how this approach to trade protectionism and negotiation has ballooned under the second Trump administration, and what a new threat against China by Trump might mean for how the relationship between these two countries evolves, moving forward.

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Trump’s second administration opened with an executive order that declared a national emergency, claiming that the Chinese were trafficking drugs, especially synthetic opioids like fentanyl, into the US, and that this allowed criminals to profit from destroying the lives of US citizens.

This declaration allowed him to unleash a flurry of tariffs against China, first imposing 10% on all Chinese imports, then increasing that to 20% in March of 2025.

China retaliated, imposing tariffs of 15% on mostly US energy products, like coal and natural gas, and on some types of agricultural machines, while also engaging in some legal pressure against US companies, like Google. They followed this up with tariffs against meat and dairy products, and suspended US lumber import rights, and disallowed three US firms from selling soybeans to China.

The US reciprocated, and China reciprocated back. There was a period of spiraling broad tariffs and import bans in the mid-2025 between the US and China, which led to an aggregate baseline tariff on Chinese imports of 104%, which was followed with an aggregate Chinese baseline tariff against US goods of 84%. The US then upped theirs to 145%, and China raised theirs to 125%.

Again, vital to understanding this spiral is that the Trump administration made pretty clear that they were doing this mostly as a negotiating tactic. There were claims that they could solve the US deficit by raising tariffs so high that the funds from those tariffs would pay off the country’s debt, but that’s generally not considered to be realistic. Instead, the consensus view is that Trump likes to play negotiating hardball, likes to step into negotiations with the upper-hand, being able to say, give me what I want and I’ll reduce the pain you’re experiencing, basically, and this play against China was another attempt to make that kind of advantage stick.

China, for its part, seemed like it was done with the posturing at that point, though: it announced, after its retaliatory tariffs reached 125%, that it would simply ignore all further increases on the US government’s side, because the whole thing is just kind of a joke and it’s beneath them to keep playing this game.

Not long after that, Trump announced that the tariffs against China would come down substantially, but not to zero; Trump said this was decided after discussions with China, and Chinese officials said they hadn’t been in contact with the Trump administration about any of this—which is something that seems to happen quite a bit with the Trump administration.

During this period of spiraling trade barriers, China was able to establish better and more open trade agreements with other nations in Southeast Asia, including South Korea and Japan. China also reduced it US Treasury holdings, reducing its exposure to the US economy at a moment in which the US government was betting big on policy that many economists considered to be ham-handed at best, completely nonsensical, delusional, and harmful at worst.

During that spiral, before things cooled off, China also began applying protections on locally sourced and refined rare earths, which are a category of mineral that are vital for modern electronics and things like solar panels, batteries, semiconductors, and electric vehicles.

China makes and owns the rights to the vast majority of the current global supply of these materials, mining about 70% of them and controlling about 90% of global processing. And cutting them off, or even truncating their flow, is considered to be a huge strategic threat. The US has been slowly investing in alternative supplies for such things, but many of them are difficult or expensive to produce in the proper volume, and it’ll likely be a decade or more before those alternative sources can be properly exploited, replacing the volume currently imported from China.

Back in June, China granted permits to US businesses that would be allowed to import rare earths, but that supply remained tenuous—a bit of a counter to Trump’s ongoing tariff threats that could seemingly arise out of nowhere, messing up everyone’s plans. The Chinese seemed to want to leverage this supply in the same way, and keeping things limited while issuing a few permits meant the flow could kind of continue, but could also be slowed or cut off, again, at a moment’s notice.

In early October, the Chinese government announced new curbs on the export of rare earths and related technologies, just three weeks before a scheduled meeting between Trump and Chinese leader Xi Jinping. These new curbs further limited what could be imported to the US, even if there were intermediary nations involved, and also tightened their grip on anything related to mining, smelting, recycling, and producing products, like powerful magnets, from such materials.

It’s worth mentioning here, too, that these sorts of materials are increasingly vital for the production of high-tech military goods. If the US were to lose access to sufficient volumes of them, the US military would have a very hard time making missiles, replacing satellite components, building tanks and drones—it would give China a significant advantage, probably for years, in terms of upgrading and maintaining their military hardware.

Despite that, and despite the US government’s claims that it intended to replace Chinese sources of these materials, theoretically limiting Chinese leverage in these upcoming talks, progress in that department has been minimal, so far; about a billion dollars worth of investment in rare earths supply chains were announced over the past year or so, but further investment is considered to be unlikely in the near-future, and it’ll be a while before these investments will pay off, if they ever do.

Shortly after that announcement by the Chinese, President Trump threatened to enforce a new 100% tariff on Chinese imports, beginning on November 1, or potentially even sooner, raising tariff levels to just shy of what they were back in April of 2025, at the peak of the US-China trade protectionism threat-spiral.

He also said he didn’t see any reason to meet with Xi if they were going to limit rare earths in this way, but later clarified that the meeting hadn’t been cancelled, and said that he set the implementation date for that new threatened tariff rate to Nov 1 because that would give the Chinese the opportunity to back down on their new trade barriers before they chatted.

Global markets, which are sometimes a good barometer for how informed folks think these sorts of negotiations will play out, have been relatively calm about all this, though there have been some significant tumbles in the US market, including a recent drop of about 2.7% for the S&P 500, marking the worst day for the US market since April, back when the tariff threats last reached this kind of peak.

One stance that’s become popular in trading circles over the past year is the so-called TACO theory, which stands for Trump Always Chickens Out; the idea being that Trump is never really serious about any of these threats, he just likes to talk a big game and then hopes the other side will feel threatened enough to give him what he wants during negotiations—but if they don’t, he steps back from all his big talk and quietly gives in to the other side, especially if they have leverage.

Some analysts are assuming that’s what’s happening now, as evidenced by Trump’s own statements about giving China the chance to deescalate—giving them specific instructions for how to let things calm down, rather than making these threats and suggesting they’re permanent, or not giving the other side any rationale for why it’s happening.

There’s a chance, though, that there’s some truth to the opposing theory that this is part of a larger plan by the Trump administration to create a new trade war that’s meant to dominate headlines and concerns for a while, maybe as far into the future as next year’s elections, all of which is meant to conceal other efforts by the administration, like the military occupancy of American cities and the administration’s vehement objection to releasing the so-called Epstein files, which allegedly contain many references to Trump and other powerful people within his administration, which in turn would further connect him to a renowned pedophile.

The Republican-controlled congress has made a massive effort to keep those files from being released, and Trump has become well-known for saying and doing headline-grabbing things whenever something inconvenient for him starts bubbling up in the news.

So while there’s a chance this back-and-forth will end just before those upcoming trade talks, both sides taking their fingers off the trigger, as it were, in order to make a deal, there’s also a chance elements of this will be spun into a larger narrative, a war of sorts meant to dominate headlines and conceal other things that the administration would prefer to keep off the front page.

Show Notes

https://apnews.com/article/rare-earths-china-united-states-trade-supply-chain-de92222cda02dc85064c697911c6dea7

https://apnews.com/article/tariffs-timeline-trade-war-trump-canada-mexico-china-a9d714eea677488ef9397547d838dbd0

https://www.scmp.com/economy/china-economy/article/3318694/china-cuts-us-treasury-holdings-third-month-amid-trade-war-debt-ceiling-fears

https://apnews.com/article/china-us-trump-tariff-threat-trade-talks-cc4bd30c3b1bcf2eb2676bc0e66efba0

https://apnews.com/article/trump-inflation-federal-reserve-powell-88358f4955fd86ef3c86f5e8e089e775

https://apnews.com/article/trump-xi-tariffs-china-ai-642b042b1ebe1d1930eb93bf51943e3f

https://apnews.com/article/trump-xi-china-cc47e258cfc6336dfddcc20fa67a3642

https://apnews.com/article/china-earths-exports-trump-dad99d532f858f04d750d0b8c50e5ed6

https://time.com/7292207/us-china-trade-war-trump-tariffs-timeline/

https://en.wikipedia.org/wiki/China%E2%80%93United_States_trade_war

https://en.wikipedia.org/wiki/Tariffs_in_the_first_Trump_administration

https://www.piie.com/research/piie-charts/2019/us-china-trade-war-tariffs-date-chart

https://www.wsj.com/economy/trade/trumps-fresh-tariff-assault-threatens-chinas-fragile-economy-d0b3a00d

https://www.bbc.com/news/articles/cn828kg8rmzo

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Tariff Leverage

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published 2d ago