The Great Divorce, fast track - Briefing #47

Between a producer and a consumer, who has more power?

The Great Divorce between the US and China may have hit the fast-forward button to completion this week. On April 9, 2025, Donald Trump announced a 125% tariff on China alone while capping the rest of the world at 10% for a 90-day delay. China predictably responded with 125% on Friday as well, only that this time China made it clear that they will not respond to further tariff hikes, because, and the specific language in China’s official announcement has made me chuckle:

"Even if the U.S. continues to impose higher tariffs, it will no longer have any economic meaning and will become a laughing stock in global economic history. At the current tariff levels, there is no possibility for the market to accept U.S. goods exported to China. If the U.S. continues with this tariff number game, China will not pay any attention."

即便美方继续加征再高关税，已经没有经济意义，而且还将沦为世界经济史上的笑话。在目前关税水平下，美国输华商品已无市场接受可能性。如果美方继续关税数字游戏，中方将不予理会。

China does have a point not to “pay any attention” any longer. Direct US-China trade is now nearing a complete halt (if you don’t count smuggling). The Great Divorce that I have discussed, the namesake of my other newsletter focused on US-China relations, is thus completed.

This is not difficult to foresee. A few days before Trump’s “125% + 10% announcement”, I wrote:

Future = Hard decoupling, zero trade between US and China. Some tariff settlement between US and rest of world. Then China trade indirectly to US through RoW.

Both China and US lost something along the way. But humanity benefits.

For this briefing, I will try to ask 5 questions to mark the end of this eventful and consequential week:

1. Did Trump plan for all of this?

2. Which side has blinked, Trump or Xi?

3. Why is China fighting back so swiftly and with seemingly so much resolve?

4. Between a producer and a consumer country, which one actually has more power?

5. What does the future look like from now on?

Did Trump plan for all of this?

Applying a 100%+ tariff to China while applying a 10% uniform tariff to the rest of the world sounds like a masterful play from the face of it. Now, China is singled out, while the rest of world will “beg” to negotiate with the US.

Sometimes, the dividing line between a genius and an idiot can be as thin as a sequence of events. Had Trump just played this game of divide-and-conquer in the very beginning, then he would have been the real genius.

But obviously, that’s not the sequence of events that actually happened. Instead, he did everything in his power to show that he is a boorish clown and a bully at the same time, breaking the trust of friends and foes alike. Over the last few days, the risk premium required for holding US assets (stocks, bonds, and currency) has become substantially higher. And it’s not going to change in the foreseeable future.

Will the world ever trust this clown (and by extension USA) in the same way as before again? The nature of this permanent damage can’t be understated. If this is indeed Trump’s plan all along, then it just proves he is an idiot.

Who has blinked?

To ask who has blinked, one only needs to look at which side has descended into a mindset of victimhood.

This week, I met an economist at a leading European bank in Shanghai. He said his biggest takeaway from his China trip was that he was very surprised that Chinese people are not boycotting American goods. Back at his home, Europeans are boycotting American products massively, but here in China, people still purchase the Apples, the Teslas, and the Coca-Colas without much bad feelings.

His observation got me thinking. In this second China-Trump trade war, China has responded with both resolve and composure. The stance of top leadership to stay open to the world is clearly a strong factor here. And unlike Europeans, who are basically betrayed by a supposed ally, Chinese people are more annoyed rather than angered. So, while MAGAs are dreaming of bombing the Three Gorges Dam, Chinese netizens are only creating pictures of Trump waiting for a phone call as if it’s from his lover.

The anti-US sentiment is real, but it’s the sentiment of an adult, not of a victimized child. So when China said, “If the U.S. continues with this tariff number game, China will not pay any attention,” it’s actually a very honest expression of how we think: We don’t want to be engaged in this boring game anymore. Please just get it over with, leave us alone, and we shall move on.

There are also crazies like Fox’s Watters who bought into his own propaganda and actually thought that this trade war would cause CCP to lose its grip on power.

To the contrary, the trade war has become a rare event that has successfully galvanized virtually every Chinese citizen, including many people who are usually pro-West liberalists, under the same banner. All observers on the ground that I know are also unanimous in this assessment.

Why is China fighting back?

Why is China fighting back? Specifically, why is China fighting back so swiftly and so determinedly, to the great surprise of the Trumpists? Is it, as some might say, only a contest between two macho leaders, and is China being irrational here?

First of all, we should recognize that it should be a given that anyone who is confronted by a bully should fight back, if only for the practical reason that showing weakness in front of a bully can only lead to being taken advantage of.

The only time you kowtow to a bully is when the power differential becomes so large that fighting back only has symbolic value. For example, it's perfectly natural for countries like Vietnam and Singapore to try to stay in Trump's good graces. It’s pointless and entirely irresponsible if their leadership sticks out its neck in the way Chinese leadership does.

So the right question one should ask is: with what kind of power differential vis-a-vis a bully should one stop kowtowing?

I think there are both strategic and tactical aspects to this question.

Strategically, as I said last time, China has been preparing for this day ever since the first trade war. For many years, many people (including, of course, my favorite journalist Ms. Wei LingLing) were complaining that China has placed so much on economic security at the expense of economic demand, that too much of a policy focus has been placed on technological advancement and self-sufficiency, at the expense of domestic demand.

In hindsight, isn’t it just part of China’s “war preparation” for today?

Moreover, looking at bilateral trade, Chinese exports to the US stood at $438.9 billion. This was a big number, of course, but it still only accounted for just 12.6% of total exports and only ~2.4% of China’s GDP. Is it painful to lose this? Of course. But it can only be painful up to a certain degree.

Finally, just on the eve of Trump 2.0, China's leadership has also signaled its clearest intention to shift its economy towards a more balanced one between consumption and production. This trade war only made it even more necessary for China to double down on this new strategy, which is the fundamental strategy that China must adopt to preserve a stronger and more balanced economy.

On the tactical side, China’s speed in a tough response also warrants attention.

In my last post, I wrote that I had underestimated the Chinese leadership’s resolve to retaliate so soon, not waiting for responses from other countries. In hindsight, though, I have realized this was only necessary.

Once China decides to retaliate, it is in China’s best interests to do it as quickly as possible. Not doing it fast enough will risk putting China in an uncomfortable position when more and more countries strike deals with Trump, while a swift counter-attack gives everyone else a stronger hand when dealing with Trump. In this sense, my favorite meme photo of the past week does contain a lot of truth:

Between a producer and a consumer, who has more power?

Until this point, I have not even touched on the topic of pain. In Briefing #45, I wrote:

If we talk about the pain, I think we should be more worried about American consumers and companies, with inflation bound to rise further and with vastly compressed profit margins. If it’s ultimately a contest between pain acceptance levels, my wager is always on the China side.

Behind the question of who is able to suffer more pain, the real question is: Between a producer country and a consumer country, who actually has more power?

In a normal, peaceful time, I’d say the consumer has more power.

This is just like how you do business. In the business world, the customer is always God. A business exists to satisfy the whims and wishes of the customers. Because a customer pays, and the producer wants to make money.

The problem is, what if the customer is a bully? What if customers wantonly and callously wield their demand as a weapon to punish its supplier? At this point, it’s no longer a normal business. Producers actually hold more power now. They can just shut down the manufacturing plants and stop producing, leaving consumers in the cold, unable to enjoy the benefits of products.

Finally, there is the question of which one is easier to make transitions. It’s very obvious that it’s much easier for a production-centered economy to consume more than for a consumption-centered economy to produce more.

This is just human nature. This is just the path of least resistance. For a diligent producer to consume more, just giving him/her more money is enough. For an indulgent consumer to produce more, oh boy, there is a whole laundry list of steps that you would require. The fact that many people don’t realize this key point constantly surprises me.

Not to mention, America’s seemingly infinite consumption power is built on a dream, a dream that the Dollar of the United States of America has god-like qualities. “In God We Trust”, they say. But what Trump did was precisely striking at the foundation of this dream. The whole world was jolted into the harsh reality of a chaotic new world: the US can no longer be trusted, and the only leverage that Americans would have, their very consumption power, is called into question.

What does the future look like from now on?

Now is the time to make some more predictions.

In my constant urge to quantify the situation, imagine if it’s a video game about boxing. At the beginning, Mr. China suffered a blow to his chin and suffered ~5% damages. Mr. China then dealt a blow to Mr. USA in the stomach, and Mr. USA also hit himself in his own face many times and suffered close to ~50% of the damages. It might already be life-threatening now.

Given this is the state of affairs right now, in the medium term, I will not bet on China responding to the US “request” for a call any time soon without a significant capitulation from Trump. After all, this is a contest of pains. Some time is needed for both sides to really appreciate the physical pains and see if each side can handle it, so China will comfortably wait for empty shelves to appear in the supermarkets in the US. Time is on China’s side, so why is there a rush?

In the long term, rising US Treasury yields and falling US dollars are setting in motion something of great historic proportions. With everyone looking out for themselves, now is the perfect time for China to make mutually beneficial deals with its key trading partners, such as the EU, ASEAN, Japan, and even India. It’s also a perfect time for China to invest more in these partners on a mutually beneficial basis.

A deeper, long-term integration between China and the world is underway.