Trump Tariffs Part 1 – China

An AI generated image of connex boxes with American and Chinese flags on them

The Trump administration is planning to impose some hefty tariffs on China. This isn’t just to reform trade practices and show China “who’s the boss”, but rather to shift industrial production away from China permanently.

Trump’s goal is to wean the US off that $500 billion worth of annual imports. This is going to be a challenging time for everyone involved; China is having their feet swept out from under them, and the US will have to find someone who can replace the Chinese (because we surely can’t do it on our own). And not to mention an unwanted bump in living costs for the Americans.

It’s not all bad news bears though. The US has enough cheap energy to help build all the processing and manufacturing it might need, but it will require significant investments, policy changes, and TIME. Trump has the right idea, but his approach is lacking a bit of the strategic depth that this will require.

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Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

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Transcript

Hey, everybody. Peter Zeihan here, coming to you from Colorado. Today’s the 26th of November, and today we’re going to talk about the incoming Trump administration’s initial plans for trade policy.

Last night, Donald Trump texted out that he plans to levy very sharp tariffs on Mexico, Canada, and China—our three largest trading partners. For this discussion, we’ll focus on the Chinese component.

We’re talking about China first because Mexico and Canada are different issues with different factors at play. First, with China: we don’t like China, and China doesn’t like us very much. The Trump tariffs, if implemented on the Chinese merchandise exports that come to the United States—roughly half a trillion dollars a year—would increase the average cost of living for the average American, every man, woman, and child, by about a thousand U.S. dollars a year.

The stuff that comes from China, like I said, is mostly manufactured goods, almost exclusively. The bulk of it falls into the electronics category, which includes computers, cell phones, cellular technology, white goods, consumer goods, and parts that can go into pretty much anything.

The Chinese have a very predatory trade system, so overall support from the U.S. citizenry is likely to be pretty high, despite the cost of this. This is a more traditional tariff goal here. The Trump administration has long wanted to reroute global trade flows, specifically where China is involved.

That means punishing the Chinese until alternatives can be generated. But therein lies the rub. No American trade policy going back to World War II has ever been very good at building that alternative system. We punish countries we think are engaging in unfair trade practices, but those punishments are usually designed to get them to dismantle those trade policies so we can return to something more fair or normal.

That is not the goal this time around. The goal here is to permanently relocate industrial plants. Simply throwing on a tariff and funneling the money to a general fund doesn’t achieve that. You also need to build a complementary industrial policy that takes some of the income and uses it to build a long-term alternative.

Here’s where the challenge and the opportunity lie. First, the challenge: the things China does, it doesn’t do by itself. It has relatively low-cost wages, especially for its mode of production. However, it’s not a very profitable industrial power. It has only managed to get to where it is now and maintain its position through a massive amount of subsidies.

If those subsidies were to go away, you would see mass de-industrialization of China, which would probably lead to the collapse of its political system. The Chinese aren’t even going to consider that, which is ultimately what a normal trade policy would aim for. To overpower that, you’d not only need a fairly steep tariff rate—much higher than the 10-25% that Trump’s team is suggesting—you’d also have to build an alternative.

When it comes to things like electronics assembly and components creation, the United States is not a very competitive player in that market. Our labor, to be perfectly blunt, is too highly skilled. The same goes for Canada and Mexico. You’d need to develop a different model, and doing that quickly is very difficult and expensive.

However, there is some low-hanging fruit. The Chinese dominate not just electronics manufacturing and assembly but also materials processing—turning bauxite into aluminum, cobalt into cobalt metal, and lithium into battery chassis, for example. This is something the U.S. and the rest of the world have largely stepped back from for two reasons:

  1. It takes up space and is environmentally damaging, leading to regulatory challenges.
  2. If the Chinese are willing to pollute their environment, exploit their workers, and subsidize the industry, why compete with them when they can do it cheaper and hand you the end product?

There are problems with that argument. The Chinese have discovered that this gives them leverage in trade talks. However, rebuilding this capacity elsewhere isn’t difficult or even particularly expensive. For example, the U.S., thanks to the shale revolution, produces a huge amount of excess natural gas and has the cheapest natural gas in the world. From that, we’ve developed the cheapest electricity in the world.

Over the last 15 years, the chemicals industry has shifted to run on natural gas rather than oil whenever possible. As of 2024, the United States is by far the largest, highest-quality, and lowest-cost producer of intermediate chemical inputs for modern manufacturing.

But it took the free market 15 years to make that happen. If we want to speed up the process for everything else, it means implementing an industrial policy that uses revenue from Chinese tariffs to help build the supporting infrastructure. This is low-hanging fruit that we need to address anyway. The Chinese won’t be around much longer, and even if they were, we wouldn’t want them to maintain the leverage they currently have.

Building up industrial plants isn’t necessarily expensive. For example, creating capacity for something like aluminum might only cost a few billion dollars. It’s not costly or time-consuming, but “cheap and quick” isn’t the same as “free and immediate.” It requires a policy to make it happen. Otherwise, the market will handle it over the next 15-20 years, but I’d argue we need to start the transition much sooner.

Once that foundation is established, we can begin tackling more difficult pieces like electronics. So far, the Trump administration has not demonstrated an awareness of this level of nuance in tariff policy. The general belief seems to be, “A tariff is good. Do it, and we win.” It’s going to take a lot more effort than that.

That’s the situation with China. The situations with Mexico and Canada are very different, and we’ll tackle those tomorrow.

No Shale for Europe

Photo of black oil barells

The US oil industry has seen a massive boost thanks to the shale revolution, but can the Europeans replicate the success the US has seen?

Unfortunately for Europe, there are a lot of things working against them. Problem one is that Europe just doesn’t have the right geology to make this work. They are also missing the decentralized network of small companies that helped build out the shale network in the US, they lack innovation, and they don’t have a rapid regulatory approval system. Aaand there is no financial incentives for landowners due to the legal barriers in place.

In the short term, this doesn’t look very plausible for the Europeans. They would need to buildout all the infrastructure, under perfect conditions, and even then it would take a decade to MAYBE get one million barrels per day. So, oil imports from the Middle East and US will continue.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Hey, everybody. Peter Zeihan here coming to you from a brisk Colorado. Today we’re going to take a entry from the Ask Peter forum. Specifically, what would it take for Europe to experience an American style shale revolution? The continent is a massive importer of oil and natural gas, and they don’t exactly have a lot of territory that is good for sun or wind either.  

So their choices really are nuclear, which let’s just call that problematic in some places, or imported. And if you’re importing, then you’re at the mercy of whoever you’re buying the stuff from, as they discovered with the Ukraine war, when that is Russia, that’s a problem. And as I discovered in the 70s and 80s, when that’s the Middle East, that’s a problem. 

And then, of course, most European countries don’t have a production base navy, so they can’t even patrol their own supply lines should someone in between decide to cut them off. So, you know, reasonable question. Well, there’s a couple things that they really can’t do much about. And then there’s a couple things that they can, but I doubt they will. 

So let’s start with what they can’t fix. Geology. Yes yes, yes, 90% of known oil and natural gas is in unconventional rock formations like shale. But that doesn’t mean that all shale deposits are created equally. So if you consider the United States, we’ve got the Permian, which in some places has 20 different stacked layers, each with their own petroleum layer, little jumbled together, but for the most part, pretty easy to get to. 

So you can drill down through one, do laterals go down to the next one, do laterals go down the next one? Do laterals and the whole thinking funnel up through a single point of extraction. It’s by far the best in the world of that geology, and it’s, as far as we know, the only one in the world, there are tiers. 

The Marcellus, in the Pennsylvania area is still pretty good, but it’s mostly gas, whereas the Permian is mostly oil. You’ve got the Bakken in North Dakota. That’s somewhere between, and the Europeans just don’t have the type of deep sedimentary geology that the United States or that North America specifically has. So it’s not that there isn’t oil and gas to be had. 

It’s just it’s probably not going to have the same bang for the buck, even if all else was equal. And of course, all else is not equal. The way the United States started its shale revolution was with hundreds, if not thousands of mom and pop companies. And so we developed the expertise as we went. But it started from kind of a baseline understanding, especially national lands in the United States. 

Small mom, the pops are the wildcatters that basically drill or have rights to small chunks of acreage and drill whatever’s best in that acreage. And they’re constantly trying new things. And in doing so, eventually they crack the code on shale. In the last few years, that has evolved quite a bit. And now the super majors have taken everybody’s best practices and are now doing some really aggressive iterations using things like artificial intelligence. 

And overall, since 2012, we’ve probably seen worker productivity in the area increased by 350 to 400%, which is by far the record for any subsector in any industry anywhere in the world. And that’s before you consider that, we’ve gotten much more efficient with the equipment. So we’re actually getting about two and a half times as much crude as we did ten years ago. 

But with one third the number of drilling operators, if you’re going to do this in Europe, you basically have to create it from scratch. With the notable exception of the United Kingdom, there is no constellation, no environment of small and medium sized players. Get your big national players that are de facto monopolies, and that’s about it. And with the possible exception of France’s too Tall and to a lesser degree, BP and EA and I, you know, none of these guys or what I would consider at the technological edge. 

So simply getting into shale in the first place would be a big leap. But at least that’s something you can do something about. The other issues are far more problematic, but luckily there is a little bit of hope here. The first one is proximity. One of the reasons why the U.S show revolution has been so successful is when the technologies were first pioneered, they were pioneered on the edges of projects that had already been in production places like the Marcellus in Pennsylvania or the Permian in Texas. 

And so there was already significant takeaway capacity was just waiting to be used. All the legacy pipes from previous oil booms, we weren’t exactly dormant, but they were certainly had a lot of spare, space in the pipelines. And shale was able to flow right in there. And most of the expansion we’ve seen in the last eight years has been about expanding that takeaway capacity, because it’s all the old stuff been maxed out in Europe. 

Their mature fields have been abandoned for decades. And so on the off chance that there is any infrastructure left, it’s probably going to have to be completely rehabilitated. In addition, a lot of the best geology we are aware of in Europe is directly under where people live. So, for example, we know there’s a good shale geology under the some of the lowest sections, lowest in elevation in the Netherlands. 

But you know, if you get any land subsidence, you all of a sudden have lost part of your country. So the chances of drilling there are not very high. And the richest shale deposit we’re aware of is under Paris, specifically under the roof. So the idea that the jewel in the crown of French historical preservation is suddenly going to be an operating oil extraction site. 

I don’t think so. This isn’t the United States where there’s still oil production on Wilshire Boulevard. They have a very different attitude towards things in Europe. 

The final issue, which is arguably the single largest, obstacle is legal rights in the United States, unless something has been negotiated otherwise, under the land you live on or own our mineral rights that you also control. 

So if somebody decides they want to come into your neighborhood and drill and they get your permission, you get a cut. Whereas there is no country in Europe where that is the case. So if somebody were to come in, they’d get permission of the National government, and then the national government would get not just the oil and gas, but all the money that would come from it. 

And you get nothing. So you’ve set up a situation where you can guarantee very strong opposition from regional governments, local governments, landowners, renters, everybody, because they don’t see any of the immediate benefit, unlike how we have it here. Now, technically, that is a legal change that is up to the individual countries to shift, but doing so would be would be a bit of a heavy lift. 

So even if in a perfect scenario, the Europeans could just wave a wand and change the legal structure without public opposition and all local landowners and adjacent interests were immediately on board. And if they started building out the infrastructure for takeaway capacity today, and if they retooled their entire educational system to generate the scads of workers, that they would need to do this at scale the soonest, that you would probably see a million barrels a day fresh output, from Europe as a whole, would probably be 8 to 10 years from now. 

And to be perfectly blunt, I don’t have that kind of time. The only way that the Europeans are kind of holding things together right now is with imported oil from the Middle East, an imported natural gas from the United States, and liquefied form that is more stable than their previous import menu, which was Russia heavy. But to think that that has ten years to run, in an environment where so much geopolitically is so unstable and changing so quickly, they’re gonna have to figure out another way. 

One more thing. Regulation. This is something that Europeans obviously can do something about. And I’m not talking about here about a relatively anti-business, pro-environment regulation. Obviously, if you’re going to have a robust energy sector. You have to make some compromises there. That’s not what I’m talking about. I’m talking about turnaround time. So the Texas Railroad Commission, which regulates the shale space in Texas, is famous for fast turnaround times.  

They accept applications for drilling permits 24 hours a day, 365 days a year. And in Texas, people drill and Christmas and Thanksgiving and Easter and all the rest. And most of the operations at most of the wells are operating at least 16 hours a day. They just rotate crews. The two examples I can give you of countries in Europe that have attempted, to try shale are the United Kingdom, Poland, the United Kingdom basically drowned everybody in paperwork. 

Very British. And as a result, getting things approved wasn’t measured in days or weeks, but months. Because there was always one more form. It was like working for the U.S. Defense Department. And when they discovered that the geology in the United Kingdom, is, the oil bearing stuff is less dense, it’s in smaller deposits and it’s more spread out, and it’s a lot deeper. 

Everyone pretty much walked away. The other country that tried Poland, had a little bit better geology, but you still had a problem with just permitting. You could file for your permit between 9 and 5 Monday through Thursday. And, God forbid, it was a holiday because, you know, the Europeans have a bunch of those. And this is an a country that actually has a strong national security interest in independent energy production. 

But foreign companies just couldn’t get it to work. And Exxon, you know, that dainty, demure company that never gets its way ultimately just threw up its hands and walked home? So unless you have that change in government culture, it’s really difficult to imagine this moving 

While U.S. shale operations now are getting more and more oil out of each individual, well, now measured in the tens of thousands of barrels a day, often, if you’re going to start new, with a new sector, with little expertise and especially without, say, the Permian geology, you’re probably only going to be getting a few hundred barrels per day. So the barriers between you and your operation that the government puts up needs to be very low for it to be worth that effort. And right now, the incentives in the United States versus Europe are just completely flipped. Okay. Now I’m done. 

When the Missile Is the Message

A missile being fired against a blue sky

Following the United States’ approval for Ukraine to use its weapons systems inside of Russia, Putin decided to launch an intermediate-range missile called the Oreshnik into Ukraine.

This was initially mistaken for a nuclear capable ICBM, but that was cleared up rather quickly. Turns out it is a missile the Russians developed illegally while pretending to abide by an arms control agreement. The important detail in all of this is that the Russians completely misread the room. They thought by flexing their missile capabilities that NATO unity might be fractured, and they could assert some dominance, but that backfired.

Many EU nations are increasingly arming Ukraine and taking a firmer stance against Russia, and some other factors are also increasing European solidarity. With regional security in question, European countries are locking arms and uniting against the Russians.

Prefer to read the transcript? Click here

Here at Zeihan on Geopolitics, our chosen charity partner is MedShare. They provide emergency medical services to communities in need, with a very heavy emphasis on locations facing acute crises. Medshare operates right in the thick of it, so we can be sure that every cent of our donation is not simply going directly to where help is needed most, but our donations serve as a force multiplier for a system already in existence.

For those who would like to donate directly to MedShare or to learn more about their efforts, you can click this link.

Learn about medshare here

Transcript

Greetings from Colorado. I just got off a plane, got back home for the weekend. It’s 22nd November, and the news regards a missile attack that the Russians launched against Ukraine earlier this week.

As you probably remember from a video a couple of days ago, the United States government has given the Ukrainians authority to use their weapons systems on Russian territory. Specifically, in the Kursk province, the Ukrainians have already started to use them to target command and control nodes and a few depots. They’re certainly going to be going after things like rail logistics in the not-too-distant future.

This is something where a lot of Russian politicos have been saying that this is a red line that will trigger nuclear war.

And that was obviously crap because that’s the wrong message coming from the wrong people. The Russians have yet to engage in the sort of meaningful conversation about the war that would allow the return of some sort of deterrence doctrine.

Anyway, in order to try to press their case that there would be consequences, the Russians launched a weapon from down near the Caspian Sea—well, further away than it needed to be to hit someplace in Ukraine.

At first, everybody thought it was an ICBM. That’s an intercontinental ballistic missile. And the only reason those exist is to have nuclear warheads on them. The idea was that it was supposed to be a threat to the United States.

Turns out it was not an ICBM, not an intercontinental ballistic missile. It was a new type of weapon called an “Organic,” which is an intermediate-range weapon.

Now, intermediate-range weapons in Europe—well, between the United States, the Soviet Union, and the Europeans—they were banned under a 1988 treaty called the Intermediate Range Forces Treaty, the INF.

The idea, and this was at the end of the Cold War when Reagan was in charge, was if we remove the shorter-range missiles that could be used in the European theater, then we move off of hair-trigger alert. We could start negotiating some sort of post-Cold War pact, which would eventually culminate in things like strategic arms limitations that would take all of the city-flatteners out of the equation.

Well, about 15 years ago, the Russians started violating the terms of that treaty and started developing weapons systems like the Organic, which now have hit the battlefield.

It’s not so much that this is a warning to the United States because the United States isn’t a target of intermediate-range forces—it’s too far away. This is about the Europeans.

And the question in Russian foreign policy and strategic policy has always been divide and conquer. They don’t like NATO because it allows everyone to band together, and it brings the United States and the Canadians into the party. They want a system where it’s every man for themselves. From a military point of view in the European space, that makes the Russians the most powerful player.

So the whole point of developing an intermediate-range missile and now launching it at Ukraine is a demonstration to the Europeans that we are back to the Cold War in terms of the Russians’ capacity to nuke before anyone can do anything.

Or at least that was the intent. It is definitely not working.

The British and the French have already allowed their weapons systems—most notably the Storm Shadow and the Scalp missile systems—to be used by the Ukrainians to target the Russians directly.

In addition, in Germany, we have a chancellor who’s on his way out, Olaf Scholz, who has been very hesitant to allow German weapons to be used. He is most likely going to lead his party, the Social Democrats, into a trouncing in elections that will happen within 2 or 3 months.

At that point, the new incoming chancellor of the opposition party, the Christian Democrats, has already said the first thing he’s going to do is call Putin, threaten him, and then free the German equivalent system—which is called a Taurus—for use by the Ukrainians.

Third, we have Finland and Sweden commenting about the sabotage by Russian and Chinese interests of internet cables and telecommunication cables in the Baltic Sea. They’re already talking about activating Article Five, which is the mutual defense clause of the NATO treaty.

So the Russians are misreading the situation. They’re misreading how the Europeans are standing. They’re misreading what the European nerve is.

The question is whether or not the Europeans can stick to it.

We’re now in this weird situation where the Europeans are doing a lot more for Ukrainian defense than the Americans because they know, at the end of the day—now, with or without the Trump administration—that they’re the ones who are going to have to live with whatever the security situation evolves into.

So we’re seeing a lot more interest in all of them to step up.

My personal favorite is an eight-party commission that involves all of the Scandinavian countries, all of the Baltic countries, Poland, and Germany, to start investing in defense industry manufacturing in Ukraine proper, so that the Ukrainians have a better chance of standing on their own.

Will it be enough? We’ll see. But what we know for sure is that the Russian effort has had absolutely the opposite effect.