Thoughts from the Past Two Weeks
The limits of U.S.-China decoupling, the principled case for an American industrial renaissance, and the scope for (desirability of?) capital flight from the U.S.
I had invested a fair amount of work at the beginning of last week researching and writing a note on the potential impact of the “reciprocal” tariffs across different societies and industries. By Tuesday evening, I was seriously thinking of pulling an all-nighter to get the note out as quickly as possible. Fortunately, I did not bother, because the policy was abandoned paused for 90 days by midday on Wednesday.
After waiting a bit, I decided to write about the potential for bilateral China-U.S. trade to adapt to punitively high tariffs by re-routing via third countries such as Mexico, Singapore, and Vietnam. But then the administration announced that it would be exempting large categories of goods from its tariffs on China, including the goods that my preliminary research had shown were among the most attractive to transship through Vietnam. (There have since been further announcements muddying the picture.)
While my experience was annoying and demotivating, it was not macroeconomically significant—by itself. But many other business owners and operators have also been affected by the violent capriciousness of the policy changes of the past few months, and together, the combined impact of our reactions probably is significant.
Leave aside the question of whether the tariffs are good or bad. How can any manufacturer, retailer, or user of foreign goods make plans under these conditions? Why should any other business believe that the capriciousness will be limited to tariffs? And if executives cannot feel confident making plans, what can we expect them to do besides hoard cash? As I warned in early March:
The U.S. business environment has materially worsened in the past six weeks. Perhaps most striking is not just the actual changes that have been announced, but the volatility and uncertainty around those changes…The costs of this constant policy volatility will cumulate over time, raising the cost of capital and discouraging hiring and investment. Even if the arbitrariness suddenly stops, which seems unlikely, the knowledge that it could restart at any moment will be a persistent drag on business activity.
Given this, I am going to “pause” work on the specifics of the tariff situation for a while. But there are some interesting fragments I have already worked on that I think you will appreciate. And since I spent a good chunk of this week either being sick or taking care of my sick kids, a grab-bag collection of half-thoughts is sadly all I am able to publish this week (below the fold).
Those looking for more on tariffs should check out the various podcasts I recorded last week. Last Monday, Jordan Schneider hosted me, Peter Harrell, and Kevin Xu for the ChinaTalk podcast. I also got to talk to The Atlantic’s Derek Thompson for the Plain English podcast. On Wednesday morning, I was quoted in the New York Times survey article on experts’ reactions to the “reciprocal” tariffs announced on April 2. I also talked with Jeff Schechtman of the WhoWhatWhy podcast. And on Thursday I spoke with Ken Early of the Second Captains podcast. Hope you enjoy them!
So here are some scattered thoughts on three distinct subjects:
The likely persistence of China-U.S. trade flows despite punitively high tariffs in both countries
Why an American industrial revival is a legitimate goal for policymakers—and why manufacturing employment is a terrible metric
Prospects for capital flight from the U.S.—and how to distinguish that from a benign/desirable rebalancing away from U.S. assets to claims on the rest of the world