“Made in China” Becomes “Made in Vietnam”

A made in China tag crossed out. Photo by Envato Elements and licensed

Vietnam has been clawing its way up the American import leaderboard. With Trump’s July 9 tariff decision-day quickly approaching, let’s look at why Vietnam is next in line to China.

Vietnam is geographically close to China. It has a highly skilled and large workforce. And it has the industrial ambition that matches US needs. But if we already have Mexico, why do we need Vietnam? They scratch different itches. Think of Vietnam as V2 of China – made up of integrated industrial clusters like Ho Chi Minh City. Mexico has geographically isolated centers that focus on whole products, rather than sharing production across cities. Each valuable, but perhaps Mexico is better suited for a deglobalized world.

Vietnam will still have to navigate the tariff situation, which might be a cluster-f*** given the lack of personnel and systems in place. However, that doesn’t make Vietnam any less crucial, it just means there will be some hurdles to jump.

China’s Central Military Commission (CMC) has the combined power of that of the US Joint Chiefs, Secretary of Defense, and President. The Chinese military is run by party loyalists, rather than experienced strategists; this, along with the constant purging of leadership, shows just how deep the instability runs.

I’m not saying that the US should just ignore the Chinese, but maybe we should take their military capabilities with a grain of salt.

Prefer to read the transcript? Click here

Transcript

Hey, all Peter Zeihan here. Coming from Colorado today, we’re gonna talk about Vietnam. We are approaching July 9th, which is the self-imposed deadline for the Trump administration’s for setting tariff levels for the whole world. So if you remember back to April 2nd, tariff day, that kind of kicked all this off and set the world into trade chaos. 

He has paused that process, but it restarts on July 9th, so we’re going to have a show. But Vietnam is a country that has been discussed a lot in the last few days, and I think it’s worth underlining why and why this is one of the countries that really matters. Arguably more so than almost any other country that’s outside of NAFTA. 

So background, back before Covid, everything was trying to try to try to try to try to try to try to trying to China. And with Covid, when the Chinese obviously prioritize their own system for supply chains, everyone started to adopt something that was called a China plus one strategy, where we admit that we still have a lot of exposure and a lot of commitment to our investments in the Chinese system, and that we’re dependent upon the Chinese for everything. 

But we really do need at least a partial backup since then that is involved into what they call an anything but China ABC. And for whether it’s the China Plus one or the anything but China. Vietnam has always been at the top of the list for everyone. And so in the time from 2019 until 2025, the American trade relationship with Vietnam has exploded, in percentage terms, far more than anyone else. 

And the reason is pretty straightforward. Number one, it’s proximate to China. So whether the Chinese are investing in Vietnam or the Americans are investing in Vietnam, Vietnam is a logical place to move things either from China or through Vietnam, from China, or to simply replace the production capacity, from China. It’s just right there. Number two, the Vietnamese have been working very hard at making themselves very attractive. 

Roughly 40% of college graduates, from Vietnam are Stem graduates. So if you want to build something, especially if it’s talking about technical work, Vietnam is a logical choice. In addition, this is a country with a very large workforce, roughly on par to what we have in Mexico. So it’s been a good match for a lot of industries. 

And then third, the Vietnamese are very ambitious. They’ve invested a huge amount into their educational system, as opposed to the Chinese system where they’re trying to go more white color and design, the Vietnamese are going into more technical work, and they’re basically trying to leapfrog China from a technological point of view. And they’re doing a really good job of it. 

They’re not teaching rote memorization and intellectual property theft, of the Chinese style. They’re actually getting their people just in to do more of high value out of manufacturing. So it’s been a solid choice. It’s worth spending a minute talking about the difference between Vietnam and Mexico. However, because these are two very different economies that approach manufacturing in a very different way. 

And while to a degree they are competitors, really, it’s a more complementary system. So in China you’ve got your major population centers. And for the most part they are surrounded by a line of secondary manufacturing centers. It’s a very similar system to how we were set up in the United States before NAFTA. 

So for example, you have Detroit, which is obviously a hub for automotive, but Detroit draws upon other communities in the area going out to say, say, Milwaukee. In order to add value, add it reaches across the border to, to Ontario as well. And so you have your central node and a lot of secondary manufacturing that contributes to that primary node. 

That is similar to the system that we have in China that is similar to the system that we have in Vietnam. So you really can, with the right amount of capital, pick up the industrial plant in China and then go and drop it in Vietnam. And we have seen that happen at a significant scale. That’s not how things work in Mexico. 

All of the Mexican cities that are integrated with the United States through NAFTA are desert cities. So when you get to the edge of town, there’s nothing, with the possible exception of Monterrey, where you have a little bit more rainfall. And so there are secondary centers, you basically have places like Chihuahua City or to what do you want to that are unique to themselves and there’s nothing near them. 

So these places, instead of having a multi-step manufacturing system where product, intermediate product goes back and forth among the various cities on the cluster, you simply have a city with a bunch of industrial parks, and most of the steps have to be carried out locally. That generates a different sort of industrial profile, because when you’re around Ho Chi Minh City or Hanoi or Shanghai or Detroit or Houston, you have all these other places that specialize in specific things. 

And so you basically have a cluster of specialization that comes together to make a product. In Mexico, it’s different in Mexico, they focus on one product per urban center. And then that product start to finish is done. There and that product is shipped out. So an example, if you’re in Detroit and you’re making a car, you’re probably going to be drawing spark plugs from across the border. 

You’ll probably make the transmissions yourself. You’re probably bringing the engine blocks from somewhere else. But if you’re in Mexico, you do the whole seat assembly for an airline share. For example, whether it’s the seat belts, the fabric, the molding, the metal framing, whatever it happens to be, it’s all done in Chihuahua City. And then that semi-finished product is shipped somewhere else for inclusion. 

Same thing for engines, same things for engine blocks. It’s not that one is better than the other, it’s that they function differently because of the economic geography they have to deal with. So when you look at Vietnam and you look at Mexico, it’s not that they’re competitors in the traditional sense. They build things differently. And as we’re moving into a world with fewer connections where we have to do more locally, the Mexican strategy by default almost works better because they’re not as dependent upon inputs of various types from somewhere else. 

They’re not as integrated into a broader supply chain system as we are normally used to. Thinking of. That doesn’t mean that the system isn’t going to work. As China degrades with or without a trade war, we are going to need more places like China in order to keep product flowing. And Vietnam is a very solid contender for that role. 

But it doesn’t take anything away from American integration with Mexico. We’re moving from a situation where we have something like 2 to 3 billion workers linked up through free trade to something significantly smaller. We need different approaches, and these are two that work pretty well. 

One more thing about Vietnam that is different. There are charges, legitimate ones, that the Vietnamese are not simply engaging in normal manufacturing in a way that the United States can process, that they are also serving as a translocation point. So Chinese product is finished, it’s shipped to Vietnam, it’s stamped Made in Vietnam, or maybe had some very light value, had done. 

And the ship to the United States, that is happening. And that’s part of the reason why the trade, between the United States and Vietnam has expanded so much over the last several years. Most of it is legitimate. Some of it is this, pass through trade. So one of the things that the Trump administration seems to be doing, which I think is a good idea, is finding a way to tariff those things differently. 

Now, I am of the belief that tariffs to Vietnam overall aren’t the greatest plan, because it’s just the wrong tool for the job. But if your goal is to break down, Chinese trans shipment trade in order to break the link between the United States and China, which I think is a good idea, using tariffs and a two tiered system makes a certain degree of sense. 

So the numbers that are being thrown around today are 20% from Vietnam, which I think is ridiculous, and 40% for the trans trade, which I think is reasonable. The danger here, as always, with tariffs, is going to be administration because someone will have to look at every product that comes in from Vietnam and assign a category. 

So it then has a tariff level. Considering that the Trump administration still hasn’t staffed out over 80% of the positions at cleared out in its first month, it is unclear who is going to do this, because it would require a significant expansion of customs officials in order to handle what is basically tens of billions of dollars of trade. 

Now, if, if, if a way can be found to handle that, then we’re in a different game. But at the moment the administration has not developed the technology, the personnel, the procedures that is necessary to do that at the scale required. So A for effort, D for approach.

Xi Purges Chinese Military of Corruption…Kinda

Photo of Chinese military marching

Xi Jinping’s ongoing anti-corruption campaign has just found and purged its eighth CMC member, General Miao. And while the Chinese military is quite corrupt, this effort is more about consolidating political control than anything else.

China’s Central Military Commission (CMC) has the combined power of that of the US Joint Chiefs, Secretary of Defense, and President. The Chinese military is run by party loyalists, rather than experienced strategists; this, along with the constant purging of leadership, shows just how deep the instability runs.

I’m not saying that the US should just ignore the Chinese, but maybe we should take their military capabilities with a grain of salt.

Prefer to read the transcript? Click here

Transcript

Hey all, Peter Zeihan here. Coming from Colorado. Today we’re gonna talk about something that went down in China on the 27th. That was last Friday. We have had a arrest of General Miao. Am IA0, I think that’s pronounced Miao. Anyway, you know, he was one of the leaders on China, US Central Military Commission, which is kind of a combination of the Joint Chiefs of Staff, but also throw in the defense secretary and the American president. 

If you were put them all in one body, that’s the CMC. It’s a six person body. Yao is the eighth person that has been, arrested and fired, for nominally corrupt. And now the Chinese leader, XI Jinping, has been operating what he calls an anti-corruption purge now ever since he became premier back in 2012. Most of it isn’t actually about corruption. 

Most of it is about political control. Basically going through the system, getting anyone, who might theoretically stand against him. He started with political rivals and then just went into anyone who might eventually show the potential. And now that the CMC has basically been gutted over and over and over and over again, I think it’s worth pointing out two things. 

Number one, in the Chinese military, the anti-corruption angle might actually be a little bit more legitimate than it is with all of his other political purges. China’s military is one of the most corrupt parts of the society, and he actually waited until just 2 or 3 years ago to really start going after it. That doesn’t mean there isn’t a political angle. 

Of course, there’s a political angle. The CMC is not an independent state body. It is part of the Communist Party. The party runs the military, which brings us to the second point. It’s like you can imagine how effective I think the Chinese military is. I mean, number one, when all of the decisions are made by party ideologues as opposed to people with military experience. 

You know, there’s your first hint, second, when the ruling body of six people, which includes the chairman, has had eight people purged from it, it tells you what you need to know about the quality of the leadership. So I’m never going to tell the U.S. military to not take the Chinese threat seriously. 

All I want to do is kind of underline that when the leadership is this bad and rotates this much and is purged of this thoroughly, this often the idea that the Chinese order of battle actually matches what the Chinese state is capable of is kind of a stretch.

Finally, Some Clarity on US-China Relations

Donald Trump and Xi Jinping at the G20 Summit

It’s a bird, it’s a plane, it’s…some long-awaited clarity on US-China relations. Here are the two major developments that we’re tracking and what they mean moving forward.

Defense Secretary Pete Hegseth just made the strongest official statement on US support for Taiwan in case of a Chinese invasion. Of course, he made this declaration without consulting any military leadership, but hey, at least something happened.

The other development is that Trump and Xi finally set up a phone call. There are clearly some big personalities (and egos) at play here, so it’s a big win to even get this on the calendar. With all the issues going on between China and the US, as well as a slew of internal problems for each country, a chat is long overdue. Especially when that little chat could impact one of the world’s largest trade relationships…

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Foggy morning here in Colorado. Peter Zeihan here. Today we are going to talk about American Chinese relations because we’re finally about to get hopefully, hopefully, maybe, a little bit of clarity. Two big things are going on this week. Number one, and Defense Secretary Pete Hegseth has said that China is the threat if Taiwan is invaded, of course the United States will respond in kind. 

Military options are not just on the table. They would be our go to, It is the clearest repudiation of this concept of strategic ambiguity that we have been existing in East Asia for decades. That is the idea that Taiwan is not technically recognized. So the United States will not say, one way or another, whether or not we’re going to send them. 

The Biden administration, let me rephrase that. Joe Biden personally repeatedly repudiated that. But this is the clearest, most detailed, repudiation we’ve ever had from any American authority, ever. The question, of course, is whether or not that this is what the Defense Department is ready for. Hegseth apparently did not even discuss this issue with his own office, much less with the Joint Chiefs or the military chain of command at all. 

So I will never tell you that the military is not preparing for every eventuality. That’s why it exists. But it seems to be a disconnect between the political message that Hegseth is trying to send and what the U.S. military has actually been doing since January 20th. So that’s kind of piece. One piece to Donald Trump and Chairman G of China are having their first phone call this week. 

This is something that has been pushed off again and again and again and again. It’s been a very weird power play carried out by four year olds. She wanted Trump to make the call. Trump wanted to make the call, thinking that whoever came to the mountain would be the weaker party. I you know, if it makes sense to them, it makes sense to me. 

Whatever. This will be the first time that the two leaders have really had a conversation since the last time was Trump. President. And there are, of course, a number of big issues on the table. The most important one is the trade war. Trump put tariffs on China, which were 145% hundred and 85%, 510%. It’s hard to keep track. 

And then after a few weeks of basically seeing trade between the two countries go to zero, something that we’re going to start feeling soon because there are some holes in the inventory now that are starting to leak out. Trump abrogated his own tariff level, dropped it back down to low levels and said, you know, we have a deal. 

And all the deal was that this was that they agreed to talk. Well, now we’re talking. The problem we have on both sides of the Pacific is to be perfectly blunt. The leadership, Chairman Ji, spent the last 13 years purging the Chinese government of anyone who will tell him anything. Not just bad news, just anything. And that is in turn, gutted the bureaucracy of the Chinese system. 

So that is now the world’s least informed leader of the world in general of his own country. He has no idea what’s going on aside from the ideology. Trump is trying to catch up to him. Trump has executed his own purge of the government, is having his cabinet secretaries destroy the capacity of the United States to collect data long term. 

He’s sending back intelligence reports that don’t support his ideological views, no matter how far from reality they might be. And of the top 1600 positions in the US federal bureaucracy, a lot of them are still unfilled. When Trump came in, he didn’t just clear out the people at the top. He went as far down as he could, legally could go. 

And then even a little bit further. But those positions have not been filled. And even when he has nominated people and sent them to the US Senate for confirmation, a lot of those haven’t happened because he’s trying to achieve basically 17 bills worth of stuff in one with this giant super mega happy bill. And, you know, it’s taking every little piece of attention that Congress has. 

And so the Senate hasn’t been able to pick up the confirmation roster. So he is arguably today the second least informed world leader. The two of them manage what used to be the world’s largest economic trading relationship. Now it’s the third largest we are Mexico and Canada are now more important to us than China, but it’s obviously a massive strategic relationship that has to be handled carefully. 

So we’ve got two old guys driven by ideology who don’t think the rules apply to them, who have blinded themselves to information, and now they’re going to have a talk about what’s going to happen for the rest of us. It’s going to be consequential one way or another.

America’s Processing Crisis: Racing China’s Decline

Photo of workers in a manufacturing shop

One of the biggest challenges to US reindustrialization isn’t the raw materials, it’s the lack of processing infrastructure to convert those raw materials into intermediate products. Let’s break it down.

The US needs to (roughly) 20x its processing capacity to support the industrial buildout; however, the tariffs from the Trump administration have complicated things a bit. Importing already processed materials has become harder and the buildout of domestic processing capacity still needs years to ramp up.

Sure, we’ve been content getting all this stuff from China for decades since it was cheap and easy, but all that is changing as the Chinese system collapses. If the US doesn’t have the processing infrastructure ready, we’ll be in for a rude awakening.

Prefer to read the transcript? Click here

Transcript

Hey all. Peter Zeihan here, coming to you from Dead Horse Point State Park. Weird name. Looking over here at the Colorado Basin. That is a potash facility, which means it’s time to talk about processing. One of the biggest problems the United States faces in its re industrialization effort isn’t necessarily mining the minerals. It’s turning them into something useful, putting them into an intermediate form that can then be used in manufacturing. 

One of the things that Donald Trump administration has done by acting tariffs on everybody is make it more difficult for us to get the intermediate and finish materials that we need in order to do the industrialization process. What should have been done first, and this is not simply a criticism of the Trump administration, but also the Biden administration and the Trump administration before that, the Obama administration before that, and on and on, is that, North America is very rich in any number of raw materials, but we need things like this in order to separate the ore, in order to get at the minerals that we are after. 

And then you turn them into an intermediate product like, say, semi-finished aluminum or copper, whatever it happens to be. We basically need to increase processing on the continent by roughly a factor of 20. It’s different based on whatever mineral you’re talking about. But the problem we have is that the Chinese have basically massively subsidized their processing industry. 

So China is not nearly as rich in the raw materials as we are here in North America or the Western Hemisphere writ large. But they’ve expanded their money supply. They’ve funneled everybody’s private capital into whatever projects generate employment. And so if there’s something that technically that they can achieve, even if they’re not the low cost producer, they subsidize the crap out of it in order to corner the market in whatever it happens to be. 

And then because no one can compete with these subsidized prices, they basically drive other processors around the world out of business. And that’s before you consider that the environmental regulations in China are significantly less intense than they are in any third world country, much less first world country. So cheap capital. Turning a blind eye towards environmental damage, they’ve tended to corner the market. 

Well, we only now have a few years to undo and rebuild, some of our mistakes in order to have these materials locally. And unfortunately, it’s very difficult to consider being a manufacturing power, much less an industrial power, without having these things in place first. So we are now set up to have kind of the worst of all worlds. 

The Chinese system is breaking. It’s going away. We’re losing access to everything that they’ve been subsidizing for us these last 30 years, and we have yet to build enough of that capacity at home to begin a serious re industrialization program, much less provide enough manufactured goods for our own population. So expect to see a lot more things like this in the future all over the continent, because without them we don’t have anything to work from.

The Fire Hose of Chaos: How Do You Lose 100 Million People?

Chinese men and women walking in the street

Over 100 million people are missing in China!? No, the Chinese aren’t playing the world’s largest game of hide and seek, instead there’s widespread fraud in their data collection system. Yay! Government officials are admitting that they’ve been fudging their population numbers for quite some time, overcounting by at least 100 million (with some private estimates up to 500 million).

This starts from day one. Births often go unregistered, then local officials inflate vaccination and school enrollment numbers to secure funding. And by the time these imaginary people would theoretically enter the workforce, start paying taxes, and provide their first reliable data point to the government…there’s already been two decades of faulty statistics baked into the system. Now, the Chinese have a cohort of 20-somethings that’s over 100 million smaller than initially believed.

The future of China’s demographic stability and workforce is now in question, and there’s no plausible fix. While the US has better systems in place, the recent cuts to data collection under the Trump administration risk sending the US down a similarly dysfunctional path.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here. Coming to you with a woodshed edition of our daily videos. Today we’re taking a question from the Patreon crowd about China. Specifically, over the last couple of years, the Chinese have steadily revised down their estimates of their total population, with Chinese statisticians, government statisticians regularly opining now that they’ve over counted the population by at least 100 million people. 

And a lot of private estimates say that the over count could be as many as a half a billion. And, well, this is not my, projection. I have no way of doing a snout count of the Han Chinese. The question is, you know, how how do you lose that many people? 

Really? If you want to sum it up in one word, it’s fraud. Which the Chinese are very good at, especially at the government level. There are certain points in your life where the government becomes aware of your existence. In the United States, that’s when you’re born. That’s when you die. That’s every year when you pay taxes is or when you get a Social Security number, when you get a driver’s license, things like that. 

China is not nearly as economically developed as the United States. And government services are not as robust. So there are fewer points where the government becomes aware of your existence. And birth is not one of them. A lot of people in China are still born in either rural hospitals or maybe not in hospitals at all. 

The first time the Chinese become aware of you is when a doctor gives you your initial set of vaccinations. That is a census point. The second time they become aware of you is when you show up for your first day of primary school, think kindergarten, and then the next time they become aware of you is not until you pay taxes for the first time, which if you’re going to be blue collar, it’s probably around 16 to 19 and it’s going to be white collar. 

That’s probably going to be around 21 to 24. So those three points, well, here’s the issue. The doctors have falsified their documents for the immunization, saying that they’ve given more immunizations than they have because they get paid per shot. And then when you get to primary school, the local governments have lied about how many people have showed up for school because their government subsidies are based on the number of people in their province, and this is the primary method that they have for collecting census data. 

So these two first points at, when you’re an infant and roughly age five, the data has been fabricated on a massive scale. And the thing is, the national government in China did not figure this out until their own data didn’t match up. And remember, if you dial back about 25, 30 years ago, that’s when China was in the midst of the early stages of its industrial boom. 

Everyone was working in manufacturing, and they had just started in a big way, building out their white collar workforce, starting with their educational system. So since roughly 1992, but really not picking up until roughly the year 2000, the Chinese went very big into white collar training and thinking that they were going to evolve into a services economy. Now, that didn’t work out for them, but that’s a different issue. 

Bottom line is they established a system of training, tertiary education, college and grad school where a huge number of people were drawn out of the workforce and stayed in education for two, three, 4 or 5, six more years. And so the Chinese didn’t get their first data point as to how many people they had. The federal government didn’t get their first data point until how many people they had, until these people turned 21 to 24. 

Well, if this process started in roughly 2000, they didn’t get their first real data until 2021 to 2024. And that is the window when the Chinese started looking at their data at the national level and realizing it didn’t match up with the data they had been getting for 20, 25 years from the local level, that the number of kids that they’re supposedly born of blacks 20 years actually worked. 

And the result is a difference of at least 100 million people. Which means if the Chinese want to fix this problem today, they won’t get more workers for another 25 years. Because first, you have to encourage people to have more kids, and they have to have more kids, and then they have to grow up and 

Fixing the statistical system is a little late. That should have been done, you know, 20 years ago, but bygones. Now, the result here is that the Chinese data 25 years out of date, basically grossly overestimated the number of people that they have that are 25 and under. Suggests that the Han ethnicity is, well, to be perfectly blunt. 

Do they have not had enough live births to even continue it? And now that they’ve discovered it, basically everyone in China who’s over or under age 40, so roughly 25 to 40, they’d have to basically have five kids if they were going to save the ethnicity this century. It’s that bad at this point. Can’t really fix that with policy. 

And for those of you is like, oh, those stupid Chinese. That could never happen here. Well, yes, we have more data points. Things like driver’s license. Yes, we collect better data at the local level because in the United States, local and state authorities have the authority to tax in a way that local governments in China cannot. 

So local governments basically just get a big subsidy from the federal government every year here, there’s different stages of income at different stages of government. So the data is much better. But one of the things that the Trump administration is doing with all of its cuts is basically going after statisticians because it’s perceived as something that is kind of a waste. 

Now, I personally find that horrific. So we’re not collecting data anymore on disease transfer. We’re not collecting data anymore on energy, inventories. We’re not collecting data anymore on fraud. And we’re not even enforcing white collar fraud laws that are on the books. So we are setting ourselves on a path towards Chinese level statistical dysfunction. There are a lot more safeguards. 

There are more points of contact with the population in government than there are in China. The sense of fraud has not become ingrained in society here like it has there, but we are absolutely going the wrong way. Does this mean we’re going to be missing 100 million people in 50 years? I doubt it, but the idea that a government can function if it blinds itself, that’s a bit of a stretch.

The Fire Hose of Chaos: Xi’s Power Chokehold

Photo of Xi Jiping

Xi Jinping continues to push China closer and closer to that scary edge they’ve been staring at for quite some time. So, what will the fall of China look like?

History shows that over-centralized authority leads to progressive breakdowns, fragmenting the regions, and eventually warlords pop-up all over the place. But things are different now. China has industrialized, allowing it to sustain its large population. Once this infrastructure begins to falter, mass starvation and depopulation could follow in short order.

Xi’s extreme centralization has kept him insulated from the truth and unable to make informed decisions, which will likely speed up the rate at which China falls.

Prefer to read the transcript? Click here

Transcript

Forthcoming….

The Fire Hose of Chaos: China’s First Domino

As the pressure within the Chinese system continues to mount, you can expect to see signs as the first few things begin to crack. Those first pieces to slip will be manufactured goods, processed materials, and services.

The manufactured goods we all think of first are the consumer goods – aka all the crap that you use daily. Sure, we will face shortages on these things, but they can be replaced with time. The more critical side of manufactured goods are industrial components, like machinery and transformers. These will be harder to replace and are key to the reindustrialization that needs to take place in the US. Exports of processed materials like aluminum and lithium are dominated by China, and the US will face massive headaches if that goes offline. China’s lesser-known global tech role will erode if there were disruptions to hardware imports or further tightening of trade restrictions.

In a normal system, we would be able to see this collapse coming. However, thanks to Xi’s cult of personality, the rest of the world has a bag over its head and is in for a rude awakening.

Prefer to read the transcript? Click here

Transcript

Hello. Peter Zeihan here coming to you from Arches National Park. Continuing on with the fire hose series, looking at China specifically, I thought it would be good to talk today about the things we need to look for as the Chinese system cracks apart under the strain. First up is manufactured goods. 

Basically anything that’s assembled, but you can break this from our point of view, into two big categories. The things that we’re most likely to notice because they’re consumer products and those that are not on the consumer products. We’re gonna feel that now, the last vessel that was carrying, pre tariff shipments has already docked in Tacoma. Another one similar has already docked in Los Angeles. And Houston. Savannah and New York will get their last ones over the next 2 or 3 weeks. 

So we’ll be seeing product shortages, start in the West Coast, moving to the Gulf Coast than the East Coast over the next three weeks, and they’ll basically cover the entire country within five weeks. So we’re going to have significant shortages of pretty much all of the day to day stuff that you’re used to getting. There is one exception there, and that is electronics because the, U.S. tech world was able to convince Trump to put an exception on things like, you know, iPhones and all that good stuff. 

New tariffs are coming on. Those things just hasn’t happened yet. That’s a issue for another day. And while I say that this is, most noticeable, it’s probably the less important of the things that come out of the Chinese system from a manufactured goods point of view, because there are substitutes, they may cost more. It will take upwards of three years, for them to saturate the market the way that the Chinese products have and will take probably longer for the United States to make their own. 

But most of these things aren’t mission critical. A much bigger issue is the more invisible products that are manufactured that do not go onto your shelves, but help the system run. This is really machinery is going to be the biggest category. If you’re going to build out your own industrial plant, you have to build the things that allow you to make the things. 

And while the United States is the world’s largest producer of machinery overall, if you’re going to double the size of the industrial plant in a short period of time, we would basically need to see Houston do three and four times the amount that it’s doing already. That just can’t happen on anything less than a 5 to 10 year time frame. 

Some product in there that you are really, really going to notice. Is anything in the electrical space, most notably transformers. The Chinese are the world’s largest exporter of transformers, typically at the low end. But you know, if you need the power grid to expand. None of this works without that. So the US is in this weird the situation where the Trump administration has basically forced us into a very, very, very, very, very quick industrialization. 

Plus, something that would normally take 10 to 20 years. We now have to do in 4 to 5. And that means expanding the grid by a minimum of 50% in three years, which I think is technically impossible. And now we have to do it without the stuff that was coming out of China. About the only bright spot on this particular subtopic is that with the tariffs at the moment in abeyance because of the short term deal that was recently struck in Geneva, those parts will start moving again. 

But again, there’s going to be a three month lag before we can get any of it in, which means a three month lag before we can do any serious re industrialization. 

Okay. Second topic. Processed materials, intermediate goods, aluminum, lithium, things like that. Chinese is the world’s largest producer of all of them. In many cases, controls the majority of the global market for exports. Now, I have no reason at the moment to think that any of this is in any meaningful danger. But it’s more of a warning. 

The Chinese system was terminal before this trade war began. The trajectory has definitely steepened, and we need to start thinking about what a world without the Chinese inputs looks like. And that is one where we really just don’t have them on a global basis. And specifically here in the United States, where we’ve basically been giving out of that business for a very long time. 

Similar situation in Europe, not quite as extensive, in the negative in Japan, but not far off, when that happens. And I don’t think that’s going to be this year. But when it does, we’re going to find ourselves in a lurch, because all the things that we need in order to build out, the industrial plant that we’re going to need post globalization, post Trump, whatever you want to call it, will be gone. 

And we’ll have to start from scratch with almost nothing to work from. So when that happens, that is when the product shortages get severe. That is when the inflation gets like crazy. And that’s when the U.S. industrial experience goes from one of growth to one of stagnation on a secular basis until it’s fixed. 

And finally services. Now this is another one of those that isn’t going to be very visible to Americans, but it is going to be visible on a global basis. China is not a services economy, but it still has a billion people. And that means it has a robust services to service its own needs. Really, all we see on the American side of things are, very, very visible exceptions like, say, TikTok. 

But on a global basis, the Chinese provide a lot of the backbone technical services that make the developing world run, especially in the poorer states, most notably Africa. So while the United States has Apple and Microsoft and Meta and all the rest, the Chinese have their own ecosystem. And that ecosystem dominates a lot of the international space. What the Chinese cannot do is keep it running in a trade war, because the Chinese are wholly dependent upon the hardware that is imported from the rest of the world, especially the high end stuff that allows them to make low and mid grade semiconductors with some degree of foreign involvement. 

Now, the Chinese have made exemptions to their tariff policies so they can keep importing that stuff, which is primarily coming from the United States. But it’s only a matter of time before someone as prickly and transactional as Donald Trump ends those exports completely. And at that point, you’ll see a not so slow degradation in the ability of the Chinese to service their own population as well as everyone else’s. 

Unfortunately, we’re not going to be able to anticipate any of these breaks until they actually happen. Part of the deal with Chairman G’s cult personality is he’s shot the messenger so many times at the bureaucracy when they come across some data that they don’t think their boss is going to like. It’s not that they collect it and just don’t share it with them. 

They just stop collecting it. So we don’t have good death data. We don’t have good employment laid out by province or by sector. We don’t have information on land sales, which is the primary method that local governments use to raise, funds. We don’t have good agricultural production data because, you know, if it goes bad one year, that looks bad. 

So they just start collecting it. And so the government no longer has the core awareness that is necessary to help shape decisions. And for those of us on the outside, even independent efforts to generate information have been broken down. Most consulting firms in China have been closed down, especially the foreign ones. And people are basically left trying to kind of come up with a proxy. 

So they look at to see what electricity generation looks like, to extrapolate what economic activity might be. And my personal favorite, they’re using gym memberships as a proxy for population numbers and for employment because unemployed people don’t go to the gym, apparently. Anyway, that sort of disconnect because of ideology and ego and cults as making it almost impossible for us to figure out what’s going on under the hood in China and everything that’s going on international affairs and everything with the Trump administration, everything with trade is simply pushing us closer and closer to the edge that we can’t even see anymore.

Aging Populations and Which Countries Look the Worst

Note: This video was recorded during Peter’s last hiking trip

Many countries are on the brink of crisis. No, I’m not talking about political issues or potential wars. Instead, I’m looking at the aging population crisis facing a number of countries around the globe. Let’s start with Japan.

Japan is the oldest country globally, with 10% of its population over 80, yet they’ve managed to mitigate the impact this has had. The Japanese have adopted policies that extend working lives, improve health care, and encourage younger generations to have children…and there are plenty of other countries who could take some lessons out of Japan’s playbook.

Italy and Germany are aging more rapidly and could put some strain on the European monetary union. China could very well face a civilization crashing event due to its inability to handle its older population with poor social security and weak health care system. Korea is also aging quickly, but I’m optimistic about their ability to innovate their way out of this pickle.

While there’s not a lot of positive in this one, those countries that are bit behind in the aging process will at least have some guinea pigs. And If anyone is looking for a career with solid job security, I suggest pursuing something in hospice or elderly care…

Prefer to read the transcript? Click here

Transcript

Hey, everybody. Hello from Lewis Creek. Today we’re going to talk about demographics, specifically old people. The stereotypical case is Japan, where today 10% of the population is over 80 and fully one quarter of the population is either retired or qualifies for retirement. They are by far the oldest country in the world. However, they saw this coming back in the 1980s after having a birth rate that had been really low for nearly a century. 

And so they started extending working lives, better health care to make people keep their minds rather than fall into dementia, better child care. So the people who do want to have kids can try, and above all, ways to keep older folks at least engage part time within the workforce. All of that has allowed them to extend the useful working life of your average citizen, while also increasing the birth rate to a degree that they are no longer the fastest aging society in the world. 

There are now, like 20 other countries that are aging faster, including Thailand, Korea, China, Italy, Germany, Spain, Poland. It’s not that these countries are past the point of no return, but it’s time for them to start thinking about what happens next. Because while they may have seen this coming decades ago. They haven’t done squat about it. A couple of countries to keep your eyes on. 

Number one Italy. Here is a large country with an ancient population that’s getting older by the second. The oldest in Europe, and they’re in a monetary union with the rest of the Europeans. At some point, the additional outlays that are required to maintain an elderly population are going to crack the European system apart. Germany is just a couple of years behind Italy. 

So we’re going to see the Germans go from a minute payer of Europe to a net pay. That changes everything about what makes Europe work. Another country to watch is China. Every time they update their data, it gets worse and they may well now have a demographic structure that’s not too far behind Italy. And this is a country that doesn’t have a social security or pension system worth knowing, or a decent health care system. 

So when this goes, you basically had the Chinese lose their entire workforce in a very short period of time. I would expect that to be a civilization crashing event. And then finally there’s Korea, which is also aging very, very quickly. Maybe even just a touch faster than Italy. The reason I would say Watch Korea is if any country can figure out how to adapt to this, it’s the Koreans. 

This is the country that when they decided to get into the supertanker business, didn’t bother building a supertanker drydock. First they built the supertanker in two halves, in two different drydock and then welded together. The Koreans have a habit of defying physics to make things happen. And if anyone can find a path out of this, it’s them.

The Fire Hose of Chaos: The “Deal” With the Chinese

Trade tensions are taking their toll on an already fragile Chinese system. The US is dealing with self-sufficiency problems, but for China, it is an existential question. Will this new deal change that?

The Chinese economy relies on cheap capital to keep people employed and distracted; the idea is that social stability will keep people busy enough to avoid unrest. Surprise, surprise, that system is unsustainable. Throw in all the other issues plaguing China and you get a sticky situation. Now, enter Trump.

Round after round of extreme tariffs might be hurting American consumers, but that’s nothing compared to the death blow it is dealing to China. The entire Chinese model depends on exports, especially to the US, and the rest of the world can’t make up for that. But this new deal that’s emerged has walked back tariffs a bit (even if it’s largely symbolic).

This temporary relief from the tariffs will buy China a little time, but the fundamental issues haven’t changed. Oh, and the US is still going to get hit with a recession. Sorry to burst your bubbles.

Prefer to read the transcript? Click here

Transcript

Hey, all. Peter Zeihan here coming to you from the car. The snow is gone. So that means it’s hiking season. 

The first stop is, Utah. Anyway, we’ll be doing some more pieces as the trip continues. But right now, we need to get back to China. So we have seen a number of policy shifts out of the Trump administration in its first few months in office. 

And by far the most significant one is, of course, in trade. And we’ve spent the last couple of weeks going through the impacts of that on the US economy, and now we’re going to shift to the second largest economy in the world, which is the People’s Republic. The situation here is not minor. I mean, in the United States, we have been on the edge about industrial production and import self-sufficiency and all those good things that are worth having conversations about. 

But for China, the situation is far more existential. You see, the Chinese economic system is based on political stability. The, bribing the population. Basically, anyone who has cash, whether it’s a central bank or a mom and pop operation, that cash is forced into certain investment vehicles so that there can be cheep, cheep, cheep, cheep, subsidized cheap capital available for any entity that is capable of employing anyone. 

The theory is pretty straightforward. China has a history of being part of the region’s coming, their way of rebellions, and since the system has never had a way to transfer power from one generation to another, that has really worked. The best way to make sure that everything holds is to make sure that everyone is gainfully employed and it doesn’t have to be a real job. 

It just has to be something that keeps people doing something for most of the week so that they don’t get together in large groups and go on long walks together. Something the Chinese government is very familiar with because that’s exactly how they got their jobs anyway. So the capital structure is deliberately tilted towards this sort of robust, artificially cheap capital system. 

It means that the rate of returns on capital are very low, which means the entire system is kind of creaking along everyone’s style. But it means everybody’s got a job. The thing is, is if you invest a bottomless supply of someone else’s money into an industrial plant, it’s not going to be particularly efficient. And B is going to produce a lot of stuff that is not geared towards the local economy. 

And C, the local economy doesn’t have the capital that it would be needed to purchase it anyway. And that’s before you consider China’s demographic problems. Now, that they have more people over age 53 than under 53. Simply having consumption at all is kind of hilarious and so no shock. 

We’ve actually seen consumption go down in the last six years. One of the fun things about Covid is it kind of put everything on hiatus for a few years in China, because of the lockdowns, and none of the statistics really matched up with what we had before. And it’s only in the last 18 months that that’s far enough in the rearview mirror that we have some idea of what the numbers actually look like in China, and they’re all really bad. 

So along comes Trump and puts up a series of tariffs that basically function as an embargo, 185% was the peak in that sort of environment. Trade between the United States and China basically arrests. And while that is a problem in the United States, from a consumer point of view, it will absolutely trigger a recession in China. It’s the kiss of death, because the United States is China’s number one consumer of Chinese exports. 

Exports that they can’t consume themselves, which means that China has to be export lead no matter what else, because it can’t consume the stuff itself. Now they will they have they will continue to try to dump that product on other markets to get the income. But the rest of the world combined simply doesn’t have enough spare consumption to absorb what once went to the United States. 

And that’s before you consider that a lot of these countries are becoming more protectionist anyway as the world globalized. So you dump the product, they start putting up their own tariffs. We saw that last year with the electric vehicle craze, where the United States was one of the first countries to put up barriers, but then the Europeans followed the Canadian style. 

Basically, anyone who has an auto industry at all, including the Brazilians and the Indonesians and the Russians, and we basically just saw China cut out of all of the markets, and they started chopping up the cars to get the battery packs to put into other things. We’re gonna look at something like that on a much larger scale this year, and we’re already hearing reports of companies closing, factories shutting down, warehouses already being full across the length and the breadth of the Chinese system. 

Not so much in electronics, because the Trump administration issued a waiver for that specific subcategory. But that’s only about a fifth to a quarter of the products that the Chinese used to produce. So there is no version of the deal that the Trump administration would accept that addresses the issue as Trump defines it. And that’s a trade deficit issue that would also allow the Chinese to solve their problems in the way that they define it, which is a mass employment and export problem. 

So we really do have the irresistible force meeting a unmovable object here, and there’s no clean way forward. And yet and yet and yet a couple of days ago, we got a deal. Well, let me explain what that deal was. The deal is to dial back most of the tariffs to roughly where they were the day before Trump announced Liberation Day. 

And that’s the entire. Oh, and this is exactly what we should expect from the American side, because the Trump administration still wants it hasn’t staffed up. And your typical real trade deal with a country that does not have an agricultural sector or anything particularly sensitive, which to say that China takes about 18 months and we’re only getting started on this process. 

What the Chinese are hoping for is they can do some version of a repeat of the phase one trade deal that was done by the Trump administration the first time around, and in that deal, there were product quotas. There were changes to intellectual property laws. There’s a long list of things that the Americans considered irritants in the relationship that the Chinese agreed to. 

And so they signed a deal and then ignored it completely because the Trump administration had no bandwidth to actually enforce the deal. And things just went on their way this time around, the Trump administration doesn’t have 5% of the senior staff that it had last time. One of the reasons it’s taking us so long, just to get to the point where they’ve agreed to talk, is that there’s no one on the US side to even answer the phone, and so real talks maybe will now begin. 

And if the real talks follow the pattern last time, it’ll be a year before we get the phase one trade deal that the Chinese will then proceed to ignore. The Chinese are betting that the Trump administration is bad with so slow out of the political environment at home is so toxic that the Trump administration will simply be tangled up in other things, and they can go back to some version of what they would consider normal, which is where they were on April 1st. 

Now, does this save the Chinese system? God, no. Everything about the Chinese system is terminal. The demographics alone suggest that this is a country with, at best, eight years to run. And we’ve already had a number of trade policies out of the Trump administration targeting China. We are now in our 128. Oh my God, a trade policy. All for all for this administration. 

So the rules are changing. Investment is stalled in the United States because nobody knows what to do. But as far as the Chinese are concerned, this does give them a little bit more bandwidth, allows them to stall and perhaps a little bit more. If the 145% tariffs would have stuck, we would’ve been looking at for maybe five years. 

Tops of the Chinese system could exist before the employment system simply imploded on them. They needed something, and the Trump administration has given them something. The question is, how long will it last until we have our next hiccup at the white House? 

Oh, and one more thing. This doesn’t deflect the, forecast that I have of a recession in the United States at all. Assuming that Trump means what he said with the return to some version of normal tariffs that we had a few weeks ago, and assuming that everyone in China gets right back to work immediately, and assuming that all of the ships that haven’t crossed the Pacific are still there waiting. 

And remember, we’ve had three times as many ship cancellations on the Trans-Pacific route so far as we did during all of Covid times. Three assuming everything goes back to normal. The first product that leaves China now isn’t going to actually hit shelves throughout the United States until the first week of October. So we have at least been where we have a problem with inflation, where we have a problem with lack of growth. 

And that’s before you consider all the other factors that are going on, because it’s just this is just one thing, that has changed a little bit and everything else is going full bore.

The Fire Hose of Chaos: Chinese Edition Intro

Chinese flag over a building

Today, we’re launching into the next phase of our “Fire Hose of Chaos” series, shifting our focus from the US and onto China. Trust me, there will be no shortage of chaos in this series either.

The Chinese have built themselves up to be one of the most powerful countries in the world, but there are cracks in the foundation. The demographic issue is the largest crack, thanks to rapid industrialization, urbanization, and the one-child policy. And then the other issues start to pile on.

An aging and shrinking workforce has left Chinese manufacturing uncompetitive. Decades of financial mismanagement has created a fragile and unsustainable economy. Chinese agriculture is massively inefficient. And don’t get me started on the Yuan and the capital situation.

Get ready for a whole lot of dysfunction and chaos, because China was heading towards this scary collapse long before Trump came into the picture.

Prefer to read the transcript? Click here

Transcript

Hey all. Peter Zeihan here come to you from Colorado. For the last couple of weeks, we’ve been doing a series. I’ve been calling the Fire Hose of Chaos about how the Donald Trump administration’s policies are changing the American economic outlook sector by sector. And, short version is, now, a lot of you on Patreon have written in and said, hey, hey, hey, we don’t want to talk about the United States anymore. 

Think about the rest of world. I’m just like, you know, patience, grasshopper. We start at the top with the future of the most powerful country and the most powerful economy. And then we’ll move on to number two. And that’s what we’re gonna do this week. We’re going to start talking about China. Now, for those of you who need the refresher before we go into all of the details of the day, China is in a really bad spot. 

There are many, many, many problems, but the dominant one is demographics. Birth rates have been so low for so long for a mix of reasons fast industrialization, fast urbanization, and the one child policy that China’s birth rates have now been below that of the United States since 1991. Their population probably slipped below India, sometimes between 10 and 15 years ago. 

China’s own statisticians think now that they’ve over counted by at least 100 million people, maybe as many as 300 million. And best guess is, at the moment there are more people over age 53 than under, and all kinds of things come from that. But for the purpose of the firehose series, I think the single biggest one is that the Chinese are longer economically competitive in any manufacturing subsector. 

Once you factor out the fact that they’ve actually built the industrial plant, which is $37 trillion, that’s not nothing. But their labor force has gotten older and smaller without getting enough better. And so now we have labor costs per unit of production in China that are two and three times what they are in Mexico. And the Mexican labor is more highly skilled. 

So anything that leaves China doesn’t come back and the tariffs are absolutely going to accelerate that process. And this carries on into everything else. And there are many other problems. Consider finance for example, the Chinese have increased the amount of credit in their system by a factor of 40,000, since 2000, which is like far more than Enron ever did. 

And that leads to a collapse sooner or later, probably sooner, now that we’ve got the trade tensions and that shapes everything else. So, for example, if you just continue to expand your money supply, like China has, to the point that it’s triple in absolute terms what the U.S. money supply is, and they’re not even a traded currency. 

You start turning capital into a political asset rather than an economic one. And when you spend an economic assets like it’s a political force, you don’t do it on anything that is really worthwhile. So the Chinese use it to ensure mass deployment so that their people are quiescent. That only work so long is that there’s something for them to do. 

It also creates the housing sector, which is a legion of ghost cities, and it makes every economic sector they have remarkably in efficient, with the worst one being agriculture on a capital rated basis. The Chinese agricultural sector is the least efficient agricultural sector in human history. And it’s completely dependent on foreign inputs. You put all this together, and there was no way that the People’s Republic of China was going to survive as a unified government. 

And there’s no way that China, as a state would survive as a unified country just like 8 to 10 years from now. And that is before Donald Trump arrived. Now they have a lot less time. We’ll go through some of the specifics starting tomorrow.