China keeps returning to a well that has run dry, using exports as a means for growth. China is about to hit a brick wall, with global consequences. 
For decades, China had two ways to hit its GDP targets, a property bubble and exports.
But the property bubble has permanently collapsed as have the State Owned Enterprises SOEs that fueled the bubbles.
China desperately needs measures to support consumption, instead it goes back to the wll one more time with exports. It’s a move that cannot work.
Chinese Exports and Capacity Utilization
WSJ writer Nathaniel Taplin says China’s Overcapacity Is Already Backfiring
China’s first-quarter growth beat most estimates, rising 5.3% on the year—thanks mostly to strong industrial output and exports. But the economic data released Tuesday also showed that excess capacity is very real, and could be damaging to China itself.
In other words, firms’ pricing power both at home and abroad is weakening and margin pressure is probably mounting: The March industrial financial data, which will be released later this month, will be worth watching.
So will private investment in manufacturing. If external demand, in value terms, doesn’t find a stronger footing soon and China’s domestic economy remains weak, then eventually such investment will need to slow. Otherwise the government, or state-owned banks, will have to start absorbing the cost of too many loans to industry more directly, as they already have with real estate and infrastructure.Particularly interesting is the breakdown of that capacity utilization data itself. Falling run rates were especially obvious in Beijing’s favorite sectors like automobiles and electrical equipment—the so-called “new productive forces,” including electric vehicles, chips and solar panels, which policymakers have highlighted in recent speeches and have been stalking Western politicians’ nightmares. Automobile manufacturing utilization rates fell below 65% in the first quarter: well below their previous low (excluding the first quarter of 2020) of 69.1% in mid-2016.
What About Tariffs?
I agree with Taplin, but he failed to mention a key reason China will fail.
Trump has pledged to raise tariffs on China by a whopping 60 percent and the rest of the world by 10 percent.
According to Bloomberg Insight (paywalled) Trump’s 60% Tariffs May Push Powell’s PCE to 3.7%. That could pressure the Fed to choose between raising interest rates to curb inflation or cutting them to bolster economic growth.
Biden is hugely protectionist as well and will not allow Chinese autos into the country.
And this week Biden Called for Steep Hike to Tariff on Chinese Steel
The president wants to increase a key tariff rate on Chinese steel and aluminum products to 25% from 7.5%
Biden won’t say it but like Trump, he does not want imports from China. Both want to make the US a near-island, and Biden with union labor and free child care.
What is China going to do with all that EV and steel manufacturing capacity if the US won’t take Chinese cars or allow China to build its cars here?
Fighting China on Green Tech
Politico asks Does the EU Have What it Takes to Fight China on Green Tech?
The EU is getting increasingly trigger happy as it launches probe after probe into whether China is unfairly supporting its exporters and, in so doing, potentially killing off competitors based in the bloc’s single market — in sectors ranging from electric vehicles to wind turbines.
The EU is making increasing use of its newest competition bazooka, the Foreign Subsidies Regulation (FSR). It also has anti-subsidy and anti-dumping weapons in its trade armory.
This year, we have already seen the first three investigations under the FSR: One into a Bulgarian rail contract; a second into a Romanian solar farm; and a third, broader investigation into wind turbine operations in Spain, Greece, France, Romania and Bulgaria from this week.
In the Bulgarian case, the Chinese bidder withdrew from the competition after the Berlaymont went public. While that removes the threat of unfair competition, it also means that the regulation has yet to be put to the test.
The Commission can also investigate dumping, which is the practice of exporting products more cheaply than they would cost in your own market — often even below the cost of production — just to grab market share. The EU starts anti-dumping cases on a regular basis.
China has found sophisticated workarounds, for instance by investing in steel production in countries like Indonesia. The Commission, in an innovation, targeted that maneuver with an anti-subsidy investigation — which held up in court.
A Major Trade War Looms
No one wins these trade wars, and this one is likely to have major international repercussions.
China is hell bent on growing via exports while the rest of the world is hell bent on stopping that. Via announced policy US trade policy will stop Chinese imports and the EU is fast heading in that direction.
Tariffs are inflationary and excess capacity is deflationary.
Thus, the trade war will be very deflationary in China, but stagflationary in the US and EU.
China will try to get around the tariffs by exporting cars or assembling the parts in Mexico. But Trump and Biden will both attempt to stop that, dragging Mexico into the trade war.
I think this rates to be near the top of macroeconomic events in 2025. It is not on most people’s radar. And it will be a huge issue no matter who wins the presidential election in November.
Economic Predictions
The Wall Street Journal asked 69 economists what they thought about the economy. Let’s check out the results.
How Inflation Predictions Work
Economists want the Fed to get inflation under control, so that is what they predict.
The Fed operates exactly the same way, perpetually predicting what they want. Hubris applies.
For more discussion and 9 additional charts, please see Hoot of the Day: Economists Believe Biden Would Be Better for the Economy
US Treasury Issuance
Let’s investigate US treasury debt issuance by month and year.
The US is not in recession yet, but spending is soaring.
For details please see How Much Treasury Issuance Does the US Add Every Month to Finance Debt?
So, what happens if a major trade war plunges the US (global economy) in recession?
Heaven help us if my trade analysis is in the ballpark.
“Trump has pledged to raise tariffs on China by a whopping 60 percent and the rest of the world by 10 percent.”
Still waiting on this pledge:
https://twitter.com/realDonaldTrump/status/697182075045179392?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E697182075045179392%7Ctwgr%5E&ref_url=https%3A%2F%2Fabcnews.go.com%2FPolitics%2Ffact-checking-trumps-repeal-replace-obamacare-timeline%2Fstory%3Fid%3D46360908
The US will be the new Soviet Union, behind its own Iron Curtain that cuts it off from the much more dynamic parts of the world. As it found with the Russia sanctions the rest of the world will no longer play along.
China has no large dependency upon the US, but the US does upon China. The rest of the world will refuse to cut itself from China so what the US is going to mount massive trade restrictions against them as well.
After 50 years of neoliberalism-driven deindustrialization the US has no ability to rebuild all the industries that it has lost to China. The post is utterly delusional, as decades of “China crash” stories have been.
The massive tariffs will crash the debt-overloaded and hollowed-out US economy, China will be just fine. Just like Russia is.
Fed is waiting for something to break in US economy so that they can then have an excuse to lower rates.
That something will be in Labor force.
QT continues and Banks are curtailing lending. Since there is no energy policy coming from Biden administration to ameliorate inflationary pressures, USD is getting a Jet stream push upwards. Worldwide shortage of USD drives demand for it.
The two forces Structural Inflation vs monetary policy coupled with reduced lending are clashing.
The only outcome will be damage to Labor employment.
Keep buying USD on reversals even after Fed makes its’ move as there will be a lag between policy adjustment and effect on USD demand.
Mish – great post as always. I like that you include charts and reasoning for your opinion. I would appreciate if you would do a post about how cars (not exclusive to Evs)affect the US economy. I see car’s drastically affecting our economy. High interest rates are affecting the number of cars being sold which affects a lot of jobs – not just the auto makers but all the suppliers that make the parts for these cars. Layoffs in the auto industry have a lot more of an impact our economy.
That’s not how inflation predictions work Mitch, the bond market sets yields and rates by assessing the prospects for the economy. We know debt is too high, and banks won’t lend, so we know that there can’t be much inflation, and the price rises are specific to things housing, during a period of illegal mass immigration, and contraction of mortgage lending, so builders desperately trying to get funding to complete projects to hopefully sell, is not unlike the crisis in China, where the drop off in trade and trying to get an export-led RoI led to cash needing to go somewhere, and so it went into a property bubble. The real underlying crisis for China, is not simply that the young have given up on a future, but that there aren’t enough of them. China’s baked-in demographic crisis is both age and gender imbalance: their economy is the casualty.
The other problem with tariffs is the crazy strength of the US dollar as other currencies are crashing in relative terms. Stuff from all of asia is going to be cheap, not just China. Can they tariff pretty much everybody, including allies?
If they want to build an APAC alliance to contain China, they are going to need to adopt friendly policies to those countries.
The US Government doesn’t have to worry about people buying things from China because the public can only afford food, utilities/energy and insurance which is going up yearly. The best course for the US government is to get their financial house in order. If they want to tariff a bit, they can, and apply that to social security and Medicare. Unfortunately, we’re screwed. You can’t spend trillions in foreign aid and military and hope to succeed as a country when your competitors are focused on business growth and export.
I only see 2 issues … most of the competitors are as western (and thus Woke) as we are (other than China and Russia) … so our currency could stay too strong. As for taking tariff money and applying it to Social Security and Medicare … that can’t happen because any time we hit a budget crisis they scream about SS and Medicare. If they shore them up, they lose a major dramatic appeal to the public to make the other guys look bad.
In many developed countries, (unsustainable) health and social care budgets are the main growing problems, along with interest on the debt used to pay for them (unsustainably), these two areas of spending are on a collision course.
As Steve Keen has said: “The reason Neo-classical macro ignores money, debt and banks is because if they did they would have to acknowledge that they de-stabilize the economy.”
China is more pragmatic about debt than we are, but they apparently have just as big of a financial oligarchy that they and 99% of posters here are unwilling to look at changing the monetary and financial paradigm which would resolve the inevitable “Minsky Moment” in empires since day one.
Its an old problem of rigid orthodoxies vs innovation and problem resolution.
You are joking? China’s debt is huge, and a lot of the local debt is lied about. China’s debt is almost as large as the USA’s in total, and the amount irresponsible lending and bad debts in China, is another factor in why their economy is imploding.
You’re telling me the same problem I outlined in my post. What you’re not getting is the solution which is to change the monetary paradigm of Debt Only by integrating the new concept of Monetary Gifting so as to benefit every individual and commercial agent and even the private banks.
Speaking of subsidies, isn’t FJB’s inflation production act a massive subsidy? Oh I forgot just as in war crimes when the USA does it, it doesn’t count.My concern is that inflation will perpetuate as a result of protectionism and the FED will be forced to start raising rates again. This will utlimately lead to yield curve control making investing a minefield. The pubic is to dense to realize that tariffs are counterprodluctive. Hence we keep electing populist idiots.
That’s why idiot Grandma Yellen was in China recently, particularly about the “green tech”. i agree with Mish; and even if I didn’t, that horse left the barn 30 years ago. F the green grifters.
That old fool was telling them to slow down their exports and production. No wonder Xi didn’t meet her. We are a joke country and treated appropriately.
China is done. A colossal demographic crisis.
link to bbc.com
The new China is India and Apple is now looking at Indonesia too because the cheap China labor gig is up.
This is true, but there is also hope for some less populous countries in SEAsia and in Africa, and even maybe in Latin America, if there some sensible neo-colonialist development policies are put in place by the west.
“China is hell bent on growing via exports while the rest of the world is hell bent on stopping that.”
Not even close to “the rest of the world.”
Only the world’s has-beens. Who desperately try to cling to some, any, form or relevance. Despite no longer having any.
Most (in reality all, those in some parts are just sufficiently dumb and indoctrinated to not recognize it) of the world wants lower prices for manufactured goods and advanced technology. Lower prices are ALWAYS a benefit; to anyone not simply living off of the straight up theft which is always the only thing artificially supported prices is.
Furthermore: China’s current issue numero uno, is resource access. If idiot Americans waste their resources overpaying for simple stuff, simply in order to allow retards; like Mnuchin and all (literally all) of his colleagues; to pretend they are some useful lifeform; that means Americans will have less with which to bid for resources. Lowering input costs in China. Such that Chinese manufacturers can lower output prices. Which will increasingly enable people in places where manufactured goods have been too expensive, to purchase more Chinese made stuff. Many such places indeed being places with useful deposits of exactly the natural resources China’s manufacturing machine needs.
IOW, the rest of the world will simply route around America and Europe. Noone needs either anymore. Nor even derives any benefit from either has-been still being around.
The only real problem being the amount of weaponry still floating around in US government circles. Just like is the case with Russia. Having nothing else left they’re competitive; nor even just rudimentary competent; at: Both former superpowers are falling over themselves desperately trying to militarize every corner of the planet. For no other reason than bombing people being the only thing either is still somewhat capable of.
But aside from that: Having too much industrial capacity is no worse than being too wealthy or looking too good. Conversely: It is having too _little_ industrial capacity; or more accurately too little competitive industrial capacity; which is a problem. Hence why it is those suffering from that, who are the ones complaining. Not those who are wealthier and better looking.
The Russians will do fine, as they stomp out the embers of the latest brushfire. Brit Bob has been trying to indirectly colonize them for their oil, minerals and grain the last 150 years, too late now. All part of the Brits’ Great Game, including the middle east infernos to this day.
From Helen Rappaport, Lenin In London –
Most people know the now legendary tale of how Lenin, the architect of the Russian Revolution, returned to Russia after many years in exile on a sealed train across wartime Germany (they knew, too), arriving at Petrograd’s Finland Station on 16 April 1917. (U.S. entered WWI the same month). But few are aware the life he led in Europe between 1900 and his dramatic return. During those years he came to London on five separate occasions. London in fact had been notable for its political tolerance of foreign radicals for some time, so much so that the Italian anarchists who arrived toward the end of the 19th century called the capital “the most comfortable place in the world”.
That’s a bit deluded to be honest. You can’t magic up a complete and functioning industrial sector in the corrupt uneducated developing world. It’s like the idiots who go on about BRICS currency replacing the USD – like anyone wants CCP-controlled RMB.
Chinese were illiterate and starving to death under Mao. Two generations ago. Now they are leading the world.
Dreaming up much of an “industrial sector” was no doubt a bit unrealistic for Moses and those guys. Now it has already been done. Several times over. All that is required, is to get out of the way. All that is standing in the way of an “industrial sector” (emphasis _an_; not one as large and sophisticated as China’s), anywhere; are public and financial sectors. The less you have of those leeches-only “sectors”, the more you get of an industrial, productive one.
The Chinese reached close to 100% literacy, the life expectancy was massively increased, and starvation was left behind (excluding the natural famine of 1959). China actually outgrew India by a significant amount throughout Mao’s time. Deng’s policies were facilitated by what Mao built and also the end of the brutal Western sanctions on China.
when you cant compete you cry foul. we shud welcome low priced imports from China. Keeps inflation down and forces us to become more efficient.
Tariffs are a politically acceptable way to collect taxes.
As well as, obviously, to hand stolen wealth to useless, connected idiots.
I don’t see tariffs as really working because of the unstated assumption that the goods can be produced here. The workers just won’t exist as was recently proven by the failed attempt to produce Craftsman wrenches. They can patch things together with part time retirees, what few Gen Z types that are actually employable and illegal immigrants – unaffected apparently by laws forbidding their hire (Hello, Tyson Foods?)
Seems likely to me we are headed in an “Argentine” direction as to controls on the economy. And we need to talk about China’s internal consumption within the mix.
Your “hoot of the year” should be TARIFFS. And Copper shortages looming….the HOOT is that Tariffs are sold as GOOD FOR AMERICANS.
THAT IS A HOOT.
“This dumbshow of the old gaffer hiding at his beach house and avoiding direct engagement with reality is also drawing to a close. Instead of calling “a lid” on “JB’s” activities, some humid morning in the swamp his handlers will call in “a medical alert” instead, and that will be the last we see of that dreadful apparition.”
link to kunstler.com?
The US and Europe have caught onto China’s game and this time won’t let them come in and destroy our industries and they have said this as clearly and plainly as they can. China will have to look to the Bric markets to offload their surplus goods. Unfortunately for them the Bric markets are not as deep and rich as the developed country markets and can’t absorb enough to keep China growing. The Free-Market model is broken because although it looks good on paper, in practice it is a recipe to turn a developed country into an undeveloped one. Reality is a bitch.
China was given the opportunity to: Not steal IP, not support dictatorships, not support terror, etc, etc. They chose to do whatever the hell they wanted and Western companies got sucked in with low prices. When China felt powerful enough, they decided to let their business leaders have zero respect for their agreements and start producing everything and anything whether it was theirs to do so with or not.
Good on them, but now they get to live with the consequences. That is the free market. Trust, trade, technology. Trust comes first. You steal my tech, I don’t trust you and I don’t do business with you. End of story.
Broadening of Anti-Dumping to well. . . Anything from conpanies in China without 100% US operation would be legitimate at this point, but the impact would be devastating, so baby steps.
Going to lead to a huge decrease in standard of living in the Western World if cheap manufactured goods come to an end.
At the same time it’s going to prop up increased extortion of money from everyone from union based manufacturing.
An automobile alone might cost the average family 10-15K per car!
“No one wins these trade wars, and this one is likely to have major international repercussions….Tariffs are inflationary.”
Does anyone remember the Smoot-Hawley Tariff of 1930? It was Congress’ attempt to transfer the economic fallout from the Great Depression to foreign countries. The following year a major bank in Vienna failed sending unemployment way up in central Europe, especially Germany. Also in 1931, the British Empire set up preferential tariff rates for its members. In 1932, the Nazi Party in Germany received the largest number of votes in two national elections and the following January, Germany’s President invited Herr H. to become Chancellor of Germany.
Tariffs are a government tax on sales reducing people’s purchasing power, and so deflationary.. That is one reason why, in the 1930s, recession followed Smoot and the Great Depression, born of MAGA-style protectionism and nationalism, aka Nazism ?
Tariffs are a government tax on imports but not on domestically produced substitutes. So they are inflationary and result in a lower standard of living for average consumers. After Smoot-Hawley became law, many European exporters lost a big chunk of their American business and had to lay off employees.
The Saturday House Vote confirmed to China that the US is on the Uranium standard and that China will accept tarrifs whether they like it or not.
After all, the US is the world’s model of freedom fighters.
Imagie if all goods and sevices were produced in China. We’d not have to work, and could buy everything on the cheap.
Right up to the minute that Xi decides he wants something, then it’s “If you want your lights to stay on then you will acquiesce to our takeover of Taiwan.” Then later “Oh, you want AI chips from our colony in Taiwan? That will cost you …”
Yes, that would be bad. But if Americans weren’t making anything or offering services, they’d have no money and no future.
Xi has been using the racist dead president confetti to buy coal and build coal and nuclear power plants.
We did a good fraction of that for the past 40 years, and now our kids can’t afford houses. Wonder if there’s a correlation…
This end of the world stuff sure is exciting!!!
My oldest second cousin was gassed at age 15 in 1942 in a death camp in Nazi occupied Poland called Belzec. If it is your end of the world, it won’t be exciting.
My Uncle was part of the Contingent of US Soldiers that visited the Death Camps of the Nazi’s. The big memory for him was the “Courage” of the German soldiers who stood stoically by and never appeared to blink as the Bone pits were unearthed.
Zero sense of remorse there. The Germans obeyed orders!
Pro-Palestinians say it didn’t happen, I’m sorry they are trying to erase your family memory to gain power.
No… NAZIS say it never happened.
You know, people like this: link to wfaa.com
Artificial cost of capital to over produce and over export. Deflationary for western importers. Impoverishing for Chinese consumption. Same as it ever was. ZIRP was our answer. But we share the same Imperial problems and answers, authoritarian introversion, while casting bread and circus, blowing bubbles. Looking good Billy Ray.
NO WORRIES folks ….WW3 will sort out ALL current issues ! Wanna bet ?
It seems inevitable.
It’s going to be quick one way or the other.
The good news is people have been saying the sky is falling for all or recorded history and it’s still there.
According to Hal Turner, French troops arrrived in Odessa , Nato soldiers killed in Dnipropetrovsk…..WW3 ball is definitely rolling …
…and I do hope Russia manages to wipe the smug empire of evil (US of A) off the fckn map …..Slava Rossiya , it stands at the right side of history !
Go die in a fire you filthy russian creep.