The Failure of Chinese Real Estate

Most of us think of real estate as a solid investment, and a good chunk of the Chinese population thought the same, but things aren’t always what they seem.

There’s a massive housing bubble in China, the kind that makes the ’08 housing crisis in the US look like child’s play. There’s not a whole lot of options for Chinese citizens to invest, so real estate saw a huge boom. All that money flooding in was great, but declining population growth and urbanization slowing has led to a collapse in demand. So, now there’s way too much inventory, no one to live there, and complex ownership arrangements make liquidation nearly impossible.

This got started in the 80s, as local governments began to rely on the national government for funding…naturally they started lying about their populations and economic status to ensure they secured more funding. On top of that, local governments started selling land to fund themselves, which fueled the real estate bubble. As these revenue streams dried up, it revealed the consequences of all this fraudulent activity in the form of ghost cities.

Now take all those local issues and add in the macro trends throughout China, like demographic collapse, global trade challenges, debt crisis, and more, and the Chinese have a very scary decade ahead.

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.

Transcript

Hey, everyone. Peter Zeihan here coming to you from the Kepler track in New Zealand. Today I’m going to tell you a story in three parts about one of the disasters that is waiting China in the months and years to come. Let’s start with, yeah. Let’s start with how private folks save their money. This isn’t like the United States, where you have a wide variety of stocks and bonds and go international. 

No, everything’s pretty tightly regulated, and the money can really only go easily into the big state banks. The reason for this is this is how the Chinese government maintains social cohesion. If the big state banks have access to the entire deposit base, they can then shove below market rate loans well below the level of inflation into whatever company they want, in order to make sure that there’s enough capital flowing through the system to employ everyone. 

It doesn’t matter if it’s productive, just matters that people have jobs so they don’t protest. By doing this, they maintain full employment. But it means that people get very, very, very low rates of return. So people are always looking for other ways to get their money into something more productive so they can make an investment for themselves. 

So from time to time, there’s a fad. From time to time, there’s a way to get money out of the country, whether it is foreign direct investment or Bitcoin or some sort of weird bond or gold, and you see money surging to these things until the government figures it out and then they clamp it down. But about ten years ago, Chinese people found something that the government didn’t mind, and that was real estate. 

You could buy yourself a condo, put your money into it. And because the country was rapidly industrializing and rapidly urbanizing, there was always going to be demand for more housing. You could see upward of price appreciation. So this continued on for a while and prices did great. 

And the people who were early investors did great. But eventually, people started buying second homes. Now most people in China can’t afford a second home. So what happens is they get together with their friends, their relatives, their neighbors and people they’ve never met, and they pool their capital to purchase a unit. And then sometimes they sell slivers of that unit to someone else. 

Now, anywhere else in the world, we call this asset backed securities. And this is one of the many things that triggered the 2007 financial crisis in the United States. But in China, it’s pretty par for the course. However, it’s done at the private level, for individual savers, as opposed to corporations or banks. So, you know, no fiduciary responsibility involved there. 

Well, you play this forward to today. And what’s happened is that the story’s changed. There are no longer people in the countryside who can come to the cities. There is no population growth. In fact, with the exception of a handful of top tier cities, every major urban area in the country has seen significant population decline since just 2020, much less 2010. 

The reason for that? The birth rate has now been so low for so long. There are no longer enough people in China under age 40 to have kids that we’re seeing a collapse in population, which means a collapse in housing demand. How bad is it? Don’t really know. There’s no good data. The Chinese government stopped collecting data on this topic years ago because they were afraid that chairman G wouldn’t like the results. 

So they’re kind of flying blind private analysts who are not subject to the CCP’s whims. The Chinese Communist Party’s whims estimate that there’s probably sufficient spare housing to house more people than Brazil has. About 180 million people, government folks who are estimating say that the real number could be more than ten times as high, perhaps enough to house 3 billion people. 

Bottom line is, you can’t break these things down. You can’t really sell the properties because they’re not owned by just one person and they’re not owned by the same consortium of people. So just finding the ownership network is kind of strange. You can’t just knock them down, even though there’s just such huge excess supply. And a lot of people think that, you know, maybe when the economy turns, demand will come back, but there are no longer people to generate the demand in the first place. 

So probably most real estate in China is worth maybe $0.10 on the dollar. And in terms of even the controlled limited pricing signals that we have in China indicate that officially, prices have already dropped by about one sixth in just the last five years, which in any market. But China would be a disaster. But here, the numbers don’t necessarily mean the same thing. 

So that is part one. Part two is a real doozy. 

Okay. Part two. Still on the Kepler. I’ve got, hanging value on my right and some cosmic death on my left. Okay. Where were we? Oh, yes. Part two. So another story. The Chinese government is, extraordinarily paranoid. And that’s not just the Communist Party that rules the place. Now that has been true since the time of the emperors of old. 

The problems geographic, China’s a huge swath of territory, and any policy that is set in the center is going to be. How should we say, loosely interpreted by the time you get to the frontier? And so China has always flipped back and forth between two extremes. 

Centralization, where the emperor or the chairman of the CCP, basically says everything has to go his way. And if it doesn’t, everybody dies. That’s, for example, the attitude that killed over 20 million people in the Cultural Revolution back in the 60s, 70s, recently. That was Mao or, the territories. The provinces grab too much autonomy and go their own direction and generate their own militaries, and warlord ism erupts. Which is the story through the vast majority of Chinese history. 

Chinese like to talk about how they’ve got a continuous history stretching back millennia. But in terms of actually being united in more or less its current borders, with the government that is actually functional. Actually, they have less than 300 years of experience, and half of that was under Mongol occupation. So, yes, the Han Chinese are an ancient, ethnicity. 

But, let’s just say they’ve never managed to hold themselves together into a meaningful government or be a meaningful power until, the Cold War, when the United States basically took all the foreign powers off the deck and allowed the Chinese to export themselves to wealth for the first time. Anyhow, back and forth, back and forth over unification, over regionalization. 

That’s the needle that the Chinese government is trying to thread. So after a series of reforms in the 1980s, the central government under Xi’s ding, I believe, basically realized that, Mao was and that was a fuck. And so they needed to unwind everything that he had done while still leaving his poster on the walls. 

Yes. This video will totally get banned in China. Anyway, so what they did is they centralized revenue generation. So all tax authority rests at the national level. But they regionalized spending on the day to day things like, you know, infrastructure, public works, income support, their equivalent of Social security, all that good stuff. And in doing so built a split system. 

The idea that Deng was after it was try to avoid the over centralization while also avoiding the over regionalization. Unfortunately, they did this without rooting out the fraud that is endemic in the Chinese political and economic system. And so the local governments just basically started lying about everything. Generating statistics that indicated faster economic growth than they were really having. 

Generally, statistics said they have more population than they were really having. And if you remember, the one child policy started not too much longer, actually, by about the same time that this split happened. And so we have had almost 50 years of a disconnect in reality between what China’s population really is and how the funds get appropriated. 

So that’s problem one, that we have a half century of bad data about how many people there really are in China. According to the official statistics, it’s somewhere between 1.3 and 1.4 billion. They have recently revised that down to between 1.1 and 1.2 billion. Most independent estimates put it 100 to 200 million below that. And there are a lot of private ones that say it’s 2 to 300 million below that, something in the realm of 700 and 800 million. 

I don’t really have a number that I swear by. But, you know, it’s obviously bad. All right. So if you’re a local government and you’ve been lying through your teeth for decades to get more money out of the central government, you’re trying to justify getting more money. And so you have to come up with new ways to get it in order to do everything from building railroads to having more mistresses. 

And so what you do, since you can’t tax, is you borrow, the two main revenues are you take loans from state banks, the same ones that are oversaturated with capital because the private citizens don’t have anywhere to turn or you sell land, and if you sell land, you get a nice little pop. Also, if you sell land to, say, a development company and the development company puts up houses, or more likely, high rise condos get a pump from that. 

So I think you’re starting to see the problem here. A level of government whose entire existence is based on a degree of fraud has now established a vested interest in encouraging real estate investment in order to generate more income for itself. You play that forward to the current day, and two things have happened. Number one, they’ve so encouraged this in places where no one ever had any intention of living. 

That you’ve got, ghost cities or ghost suburbs. It’s probably better to phrase it in every major Chinese city. With, as a rule, as you move down the tiers. So not so much Shanghai and Beijing or even, Chongqing, but, much smaller places. That only have a population of a few hundred thousand or a few million have entire swaths of their skyline that are occupied by entirely empty residential high rises. 

Second, the Chinese population bomb is now so advanced that no one will ever move into these places. And third, the development companies whose interests have kind of been in lockstep with the local governments for the last couple of decades, no longer have anyone to draw upon. There aren’t enough young people coming up to provide the seed capital to generate a new wave of investments. 

And, since most of this was built in a pyramid scheme style, we have a whole wave of recently started condos within the last three years that will never get finished, because there’s no longer enough people coming into the system to generate the capital to provide, what’s necessary for the base of the pyramid. So we’re stalled, and we’ve seen home sales in China dropped by somewhere between 70 and 80%, again, using Chinese data. 

So take it for what it is. Over the last 18 months. So that is that’s phase two. So book one here, we’ve got an economic system that is wildly built on, how should I put this as yet unrealized losses? As the population moves into collapse and people haven’t yet quite realized that the investment that they’ve put every cent they have into, is dead. 

And we’re talking here 70% of private savings is involved in residential real estate. So and then second, we’ve got a level of government at the local level that’s based on fraud. That has been encouraging that bubble that no longer can encourage it and has no way of generating income because, you know, you can only sell land once and you can only sell it if there’s somebody who wants to build anything and the land has all been sold in the cities, and nobody wants to build anything anymore. 

So next phase three. 

Okay. Phase three. I’m guessing some of you might be able to see where this is going, but anyway, so we’ve got a housing bubble that is in the process of popping and that popping is going to take out the 70% of private savings that is locked up in real estate. And we’ve got a local government system that provides all the services that everybody needs to survive that is utterly bankrupt. 

And we don’t even have a really good feel for just how bankrupt. Best data available, which is wildly incomplete, suggests that the total debt for local governments is about 90% of GDP. So roughly the same for just local governments in China as the entire American federal debt. In relative terms of that, about half is money that they have borrowed through something called a local financing vehicle or local government financing vehicle. 

If you want the full acronym, which is murky, to say the least. And most folks have even stopped collecting data on it because the central government and the local governments have been trying to obstruct it. So if you happen to be, lending money to the Chinese local governments in that you’re never getting any of that back, sorry. 

So what has happened now is we’re entering into a fundamentally new structure internationally for the last 25, 35 years. The Chinese have done well in mobilizing their workforce, which was the world’s largest to sell product, processed, low end manufactured goods for the most part, to the wider world. Basically, they bring in the inputs, process them, add a little value, send it back out. 

Well, that’s no longer an option. The steadily decreasing birthrate means that they no longer have a labor advantage. So labor costs in Mexico are now less than half what they are in China. And Mexican labor is over twice as qualified for whatever they’re doing. And the Chinese are, on average. That’s before you consider that courtesy of the Ukraine war, we’re likely to have some problems with shipping internationally in the not too distant future. 

And since the Chinese are completely dependent on freedom of the seas to get their raw materials in and the product out, that’s a problem. And then third, the entire world, and especially the United States has turned sharply protectionist versus the Chinese specifically to the point that under the Biden administration, we saw a massive ramp up in tariffs on top of what Trump did in his first term, with electric vehicles and green tech being, the more recent things added to that list. 

And with Donald Trump coming in, who says that the word tariff is the most beautiful word in the English language and is threatening a 60% tariff on day one? Some version of a tightening of restrictions on Chinese exports is sure to happen. And since there’s really no one left in China under age 40, there’s not a lot of consumption left in the system. 

So all of this is happening at once. But the real cherry on this cake. Is that the new news is that so many development companies are going bankrupt, that they’re trying to pay off their outstanding debts with finished and partially finished apartments that no one’s ever lived in. And a lot of these end up eventually in the hands of local governments who have started to accept them as a sort of secondary currency, and they’re starting to use them to pay off debts. 

So you’ve got you’ve got this completely bloated market where most of the products are probably only worth $0.10 of the dollar. They end up in the hands of a local government who can no longer raise capital by borrowing or, what’s nice can no longer race. I’ve got a nice little spring here. I can no longer raise capital by borrowing. 

That jig is up. It can no longer brings capital by selling land. There isn’t any left. And now that the demographic situation is so obvious, they are having a harder time lying to the central government about what their populations are. So we’re seeing a freezing, slowing, declining ability of the local governments to provide basic services, which only encourages more people to move out, which only puts downward pressure on the property markets, which only pushes down the cost of all this stuff in the first place. 

So we are at like step two of a really nasty, vicious cycle with every bit of bad reinforcing the next. And under normal circumstances, which probably never applied to China, you could look to national government, to come in with a bailout, take some of these apartments off the market level, some buildings. 

But because of the deliberately complex nature of ownership. Anything that you take out, especially in a building that has a few occupants, is going to completely destroy the life savings of a not small number of people. So there’s no really clean way out of this. The bottom line is that the local governments have gone from something that serves the needs of the Chinese nation and the Chinese state to something that’s just simply dead weight. 

And now we’re looking at private savings and local governments basically breaking more or less at the same time that we have a national economic catastrophe because of the degrading trade situation. So lots of fun will be had in the months and years to come. I’ve been saying that by roughly, 2034 that this is all going to be over, that there won’t be, China. 

But this situation has gotten so out of hand and so big that it’s entirely reasonable for me to bring that timeframe forward. I’m not going to do that because I don’t have good data to work with the situation at the federal level, and China is now not deliberately suppressing data that’s been collected, but suppressing the people who would have collected the data. 

So it’s never collected in the first place. So this is becoming ever more of a black box and little glimpses that we get like this with, the secondary market for, apartments as a mode of local governments paying off their debts. Just show how much rot is in the system and how deep it has gone. Okay. 

I’m done. 

Intel Keeps Playing Catch-Up with TSMC

Photo of an INtel microchip

We’ve discussed what TSMC is up to in a recent video, so let’s look at what another big name in the semiconductor space -Intel- is doing to keep up.

Intel was once the big dog of the industry but fell behind due to delays in adopting new technology (aka they got complacent and didn’t think anyone could surpass them). Then TSMC pulled the rug out from under them and Intel has been playing catch-up ever since.

The semiconductor production process is complex and there are lots of different steps along the way. One of Intel’s unique advantages is that it controls more stages of the production process than TSMC does. So, Intel has a bit more protection against single point failures, which in the geopolitical landscape we find ourselves in…could prove to be an essential layer of security in the long run.

So, TSMC remains the industry leader, but they could take a page out of Intel’s book and bring some steps in their supply chain a bit closer to home.

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.

Transcript

Hey everybody Peter Zeihan here today we’re going to talk about the semiconductor sector, specifically the American company Intel. Now Intel has had a rough few years. 20 years, ten years ago, 20 or 25 years ago, they used to be the industry leader, and they were so far ahead that they would release designs that were nowhere near the most sophisticated, because they knew it would take forever to the market to catch up. 

So they had years of work plan in front of them. Unfortunately, they rested on their laurels and they failed to invest in the technology called extreme ultraviolet that instead a Taiwanese from TSMC picked up on, which allowed for much faster fabrication and much more accuracy. Much less waste. And in a few years, TSMC overtook Intel become the world leader. 

Intel did get on the extreme ultraviolet bandwagon eventually, but it took them a while to master the technology, and they’ve been behind ever since. Now, that said, the semiconductor industry is really weird and that we really do only have that one world leader, TSMC, that makes almost all of the high end chips. Intel is trying to catch up from behind. 

And Samsung out of Korea has picked up some fabrication facilities, from a merger and is doing their best to play, but they’re a distant, distant, distant, distant, distant distant second. So I thought it would be worth understanding where this technology is going to evolve and where the corporations are going to evolve. American politicians like to focus on the fabrication facilities, the places where the semiconductors are actually, grown, attached, doped and, built. 

But that’s really not the hard part of the process. I mean, know, no offense to the fabricators. They do amazing work in difficult condition and technologically challenging fields, but the harder work is in design. A basic design for a high end chip can take upwards of 24 months to really get going, and that’s assuming you’re not really incorporating any fundamentally new technology into it. 

And most of this design work is done in the United States, with a lesser degree in Japan, but that makes it sound like it’s just some guy with a protractor basically scribbling on paper. And that’s not what it is. You’re bringing together literally tens of thousands of elements into a design to try to do something new, process faster, manage heat better, use electricity, use less electricity, use different materials, and so on. 

And all the new technologies have to be incorporated into this theoretical construct, which is then taken to Taiwan, where they work with TSMC in order to basically make an instruction booklet that the TSMC staff will follow. And then you have to worry about all of the inputs coming from around the world, because it’s not like you just take some silicon and you’re off to the races. 

No no no no no no. There’s copper, there’s palladium. There’s all kinds of different inputs, things like transistors that have to be very, very specially designed and produced. TSMC doesn’t do any of that. The logistics and the design companies in the United States do so even today, with TSMC producing 90% of the world’s high end chips. Most of the real work, most of the value added work, most of the high paying jobs are actually done in the United States, and operating a side facility while it’s still highly skilled work. 

It’s not nearly as highly skilled as what happens on the other side of the Pacific. The problem that brings me back to Intel is what happens on the other side of the equation, once you have all of your raw semiconductors, you then break them into their individual components and test them and package them. And then you have to put them into an intermediate product, like a motherboard or a memory drive or, a chip within a sensor system. 

And only then can you go into the proper manufacturing process where it is put into a car or a plane or a satellite or whatever else. So this one step fabrication, obviously unavoidable, obviously important, but it’s not really where the money is. Now, TSMC is a little obsessed with its security because it is a Taiwanese company. And you can understand why. 

And so the concern a lot of people have in the sector and more broadly is that if something happens to Taiwan, we lose all the iron semiconductors, and that is true. But if something happens to South Africa, we lose a lot of the rare materials that go into it. If something happens in North Carolina, we lose the ability to purify the silicon that goes into it. 

God forbid something happens to San Jose, we lose the ability to do a lot of the software work on the back end. There are thousands of single point failures throughout the system. What makes Intel unique, from my point of view, is that they have a number of these other steps under the umbrella. There are still literally thousands of single point failures throughout the Intel system, but probably about a third to have less than what TSMC has. 

So in a world that is on the verge of rapid globalization, the idea that we’re going to be able to make these high end chips at all is kind of a stretch to me, because there’s just too many places where a single break means the whole thing falls apart. But Intel has three advantages. Number one, more of the steps are under the umbrella. 

Number two, its fab facilities are in the United States. And number three, if we’re going to have to rebuild this environment anyway, easier to do it if you only have to replace 3000 steps instead of 4500. So one way or another, regardless of the corporate success or failure of Intel in the months and years ahead. The fact that more of this stuff is concentrated in Intel and in the United States suggests that some version of Intel is actually going to be a bigger part of the semiconductor future globally than TSMC over the long run. 

Of course, we’re all dead in the long run. So this is all about timing.

Trump 2.0 – China

Great Hall of the People, Rendahuitang West Road, 前门 Xicheng District, China

In this video, Peter mentioned a total fertility rate (TFR) of 0.5. While this may be the case for certain urban cores, China’s national TFR is closer to 1.0. Still abysmal, though slightly less catastrophic. —ZoG

Everyone knows where I stand on China, but how will Trump’s second term play into that?

Let’s run through China’s situation. The Chinese economic model is dependent upon continuous capital flows. Should that be interrupted, China’s industrial economy could collapse. The demographic picture is bleak too, as birth rates continue to decline and the population ages. And Xi Jinping’s master plan to fix all this is to push workers harder, tighten state controls and micromanage reproduction.

Trump is fixated on reducing trade deficits, but China has been able to sidestep previous deals due to lack of enforcement. Trump needs to work with our other Asian allies to counter China’s influence, and some more faith in defense institutions wouldn’t hurt either.

Overall, the Chinese view Trump as a disruptor and relatively easy to manipulate. While there is some historical truth to that, Trump has shifted US sentiment to be broadly anti-China, so tariffs and supply chain diversification get bipartisan support. The question remains, what will Trump actually accomplish? Tariffs are one thing but planning and developing an alliance network and alternative industrial capacity are a completely different beast.

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.

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from Blenheim, New Zealand, where I am walking through a vineyard, because that’s just what I like to do. Anyway, today we’re gonna do the second part of our open edit series on the issues that’s going to be facing President-Elect Trump on his first day of office, not the ones that he wants to face, the ones that are going to face him. 

And today we’re going to talk about China. First things first, let’s review what it is that the Chinese are dealing with. Before we talk about how Trump plugs into that, China has an economic model that is based on central state control, and that means the state controls the financial system and uses the financial system to shove money into whatever economic sector they feel that they need to. 

Now, they use this to achieve technological control of certain areas where they feel they can master the tech. They use it to subsidize development of technologies that they don’t master in the hopes that they will be able to. And they do it to build out the supply chains locally so they can drive competitors internationally out of business. But all of that pales to the primary goal, which is to make sure that everybody has a job so that nobody goes out in protest and gets together in a large group and goes on a long walk together, because that’s how the government got its job in the first place, and they don’t want that to happen to them. 

So you get this system that is over capitalized or capital is remarkably cheap. And as long as the capital keeps flowing, everything’s happy and for those of you who have ever been part of an economic sector that has busted, whether it’s, say, energy during a bust period or a boom bust period, or Enron or real estate back in the 2007, the 2009 crisis, you know this very well. 

As long as the capital keeps flowing, as long as the capital is cheap, then the system keeps running. But if for whatever reason, capital access dries up, then this artificially inflated sector basically withers away to nothing in a very short period of time. And the Chinese have been doing it. So long in so many subsectors that if that capital stopped flowing at any time, you’d basically see the end of China’s industrialized state at this point. 

That’s problem one. Problem two demographics. When you tell everyone that what you’re supposed to do as a Chinese is just work 12 hours a day, six days a week, well, there’s not a lot of room for anything else. When you pull people off of the farm and put them into the city so they can work 12 hours a day, there’s not a lot of time in their lives or physically in their apartment for kids. 

And so the birth rate drops and drops and drops and drops. And according to the most recent data, from December of 2024, the average woman in China is now having less than a half a child. So in most of China, we have a repopulation rate that is one quarter what is necessary just to sustain the population? We probably almost certainly have a lot more people in China over age 50 than under. 

And the place is looking at demographic collapse. And if you remember back to my earlier demographic work, most of the consumption that is done in the society is done by people who are under age 45, who are raising their kids and building homes. And that population is basically becoming an endangered species in China. And now that birth rate has been so low for so long, it’s been lower than the United States since the 1990s that we are looking at the dissolution of the heart of city around the end of the century. 

And there’s no way that the Chinese state will last very long. I’d say a decade or less at this point. So that’s their starting point. In order to make their system last as long as possible. Sherman Ji believes three things. Number one, everyone just has to work harder, which is only compounding the demographic situation because no one really sees a hope that this is going to change. 

Number two, he believes that the Chinese Communist Party, which let’s be specific here, it’s not the parties interested, it’s him, should face no challenge to its authority, and it should be able to micromanage every aspect of everyone’s lives. In fact, we now have the agency that used to enforce the one child policy making unannounced house calls to see if couples are having sex without contraception to make sure the birthrate goes back up, because that’s what the state wants now. 

You can imagine how well that goes over. And third, he has to keep export markets open because all of this production, all of this forced production, all of this over subsidized production can’t be consumed by the population because most of them are now over 45, which means it has to be exported. So they have to be able to shove the products they produce down everyone else’s throats just to keep their country alive. 

Enter Donald Trump. Donald Trump is singularly obsessed with the trade deficit, which is probably not the best way to look at the issue. But that’s how he sees it. So it doesn’t matter what I think. And as a result, he likes to think that he can make deals that will force things in the United States, his direction. 

For the most part, the Chinese, especially at the top, are not worried about this because they’ve dealt with him before. They see him as an eminently lateral person. And so they basically give way in negotiations, knowing that the day after the negotiations close, that there will be no enforcement and they never have to worry about him again. 

Why do they feel this way? They’ve already done it before. The phase one trade deal that was negotiated by the Trump team back in. Who was it seven, six years ago, committed the Chinese to buying X number of dollars of various products and by the end of the Trump term, he hadn’t met any of the criteria at all. 

In fact, they never intended to. All they did was make sure that whenever there was a product like what they needed available anywhere else in the country, they went to that first. So actually, we saw the trade deficit in a structural sense, go up because of trade talks with the Trump administration. The other reason that the Chinese are really not concerned about Trump is that they don’t take him seriously as a strategic thinker. 

The Chinese understand, as everyone in Asia understands, that if you want to him in China, you can’t do it alone. It can’t be just a trade. You can’t just be a strategic issue. It has to be holistic. You have to bring in all the other countries, from Indonesia to Malaysia to Singapore to the Philippines, to Taiwan, to Korea, to Japan. 

And if you don’t do that, the Chinese will easily find a weak link in the chain and be able to push out. And they see Donald Trump as being more danger to the alliance than they are now, whether or not that is accurate enough of that. That’s how they see things. And again, they’ve done this before with Trump the first time around. 

They don’t see anything different in round two except the Donald Trump is trying to wreck, law enforcement and the Defense Department and, the intelligence agencies with his appointees, which are the things that generally keep China in check as well as, if you’re going to have any sort of meaningful policy against China that deals with security and culture and technology and theft and trade, you need everyone working together. 

And they see Donald Trump as the best possible candidate for wrecking that capacity within the American system. So they’re actually broadly looking forward to Trump two, because they think they’re going to be able to get even more out of the United States than they did under Trump. One, much like the Russians are feeling and like the Russians, I think they’re miscalculating. 

This is not 2017. We are in a very different world now. And the single biggest difference on the Chinese front is that Donald Trump did succeed in changing the conversation in the United States, and there is now a competition among all factions in Congress about who can be the most anti-Chinese. Now, translating that sentiment and policy, that’s a lot easier said than done. 

But there’s no longer this core disagreement within the parties because the business community has been ejected from the Republican coalition. So the faction that used to be the most organized and calling the shots in the Republican Party on economic policy is no longer even part of the conversation, which leaves everybody else to fill the gap. And no one else is as concerned with economic stability as the business community was. 

So we’ve already seen in the last five years a significant outflow of investment from China, foreign firms and even of Chinese firms as everyone tries to get away from this country. That is facing economic implosion because of its demographic issues. And while Donald Trump certainly isn’t the guy to build a broad coalition within his own government, much less across multiple governments, to have any sort of coherent policy towards China, dude knows how to do tariffs. 

And that is certainly something that’s going to hit the Chinese on the headline. Now, as a rule, I would say tariffs are a really bad tool for shaping policy. So for example, the terror that Trump has threatened, not that I think are going to happen, against China and Mexico would be the fastest way to trigger an inflation induced recession in the United States, because most of the trade among the NAFTA partners goes back and forth across the border every time. 

And if you do a flat tariff, because doing anything about a flat tariff would require administration, Trump is not very good at that. You’re going to basically tax every product multiple times and drive each industry out of business and allow Chinese products to fill the gap. That’s not how things work in China. China, they have as much of the supply chain system in one country as possible. 

So if you do a big flat tariff on it, it actually does hurt the question is whether Trump can realize that if the goal is to actually break the trade relationship with China, you have to do more than tariff them. You have to actually take that income and build alternate industrial plant within North America. So there’s actually another option. 

Otherwise you get an inflation pulse, you get a consumer crisis, and you don’t actually change anything on the back end. You just make everything more expensive. Now, whether or not his ultimate appointees are people who can convince him of that. I don’t know. But what I do know for sure is that if we do get into a situation where Trump basically waltzes into East Asia with a sledgehammer, yes, the U.S. is going to take a lot of hits. 

Yes, it’s going to hurt. Yes, he will go down in history as triggering the highest inflation the United States has ever had. Yes, it will be ugly, but there won’t be a China on the other side of that. There are easy ways to do this. There are smart ways to do this. But that doesn’t mean that there are only 1 or 2 ways to do this. 

If the goal is simply to smash China and move on, I have no doubt that Trump can do that. If the goal is to smash China, move on, and have America in a much better place domestically. That requires a skill set that I have not seen Donald Trump wield just yet. All right, I’m done. See you tomorrow.

China Has No Chance

Chinese flag over a building

The Chinese are stockpiling resources – food, fuel, and materials – to help it endure a protracted conflict with the US. Is this something to be concerned about?

If China wants 120 days of stockpile, good for them, but it’s not going to help. China is completely import dependent; they rely on imports for energy, food, and raw materials and their economy is tied to the global supply chain. As soon as war breaks out, all that is going away.

Even if China has a 120-day stockpile, it’s not going to be very secure. Oil will be vulnerable to attacks. Food will be subjected to poor storage infrastructure and will likely spoil. So, that 120-day stockpile isn’t looking so strong anymore.

And if you start to factor in naval blockades, no access to US markets, and the power projection of the US, this stockpile quickly turns into the same smoke and mirrors that the Chinese are so great at.

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.

Transcript

Hey, everybody. Peter Zeihan here. Coming to you from a toilet in New Zealand. I just had to do a video here for The View, which I will share with you now. 

So you’re not going to have my ugly mug on this one. But just keep in mind the theme of where I am and what I’m doing. Anyway, the question from the Patreon page is pretty straightforward. China is stockpiling all kinds of things foods, fuels, materials, in order to survive a protracted conflict with the United States. 

Is that something that will work and the short version is no. China is the world’s largest importer of energy, food stuffs. The materials they need to grow food, as well as every mineral in the world. There really isn’t a lot of raw material that is produced within China. It’s brought in, it’s processed, it’s turned into value added goods, mostly manufacturing, and then export it. 

So China is vulnerable to cut offs at all stages of production chain of every industry in the world. Now they are. Yes, storing lots of stuff. But let’s assume for the moment they get to the goal of having 120 days of import cover for oil. Well, number one, so that would last them 120 days. Number two, they don’t have the salt domes at the United States has. 

So storing has to be largely done above ground, which means it’s something you can hit with a missile, which means that in a hot war, it’s all going to be gone within the first couple of days anyway. And keep in mind, the Chinese are vulnerable to the United States sea power, not just on the Chinese coast, but anywhere that can interdict anything, with the Strait of Malacca arguably being the most sensitive spot, because that’s where about 80% of their oil imports come from. 

Same basically goes for food. Storing food requires storage facilities. So a while ago, the Chinese built a massive corn storage facility, but all it was was giant piles of corn piled up along the side of the road. And they all rotted within a year, and it all went to nothing. Some version of that will happen for everything. 

And even if I’m wrong about energy and food and all the material inputs, they still have to export stuff. And their number one customer is the United States. So the Chinese battle plan literally is for the United States Navy to all sail within sight of the shore so that the Chinese can hit them with their air force. And then for the United States to continue to patrol the global ocean. 

So they can still import all the food and energy that they want, and that the United States will still keep its market open so that the Chinese can pay for everything. It’s a stupid, stupid, stupid plan. And so if there ever is a real fight between the Americans and the Chinese, not saying there will be, I honestly don’t think there will be. 

But if there ever is. Then the Chinese will be in the same situation. I am in the shitter. Although the view won’t be nearly as good.

Bring on the Chinese Investments in LATAM

Photo of the Chinese yen

A lot of you have been worried about all of China’s investments in Latin America. I get that it might sound a little scary, but you need to put these actions into the broader context of China’s circumstances.

China is in terminal decline. Its population is aging, and its resources are dwindling. So, they’re not going to be able to sustain these LATAM investments long-term. And don’t try to bring up the Monroe Doctrine, because recent administrations haven’t been enforcing it anyway.

Places like Peru, Brazil, Colombia, and Argentina are getting a sweet deal, since this is basically a form of subsidizing future industrialization of the region. And the US is only going to benefit from that as well, since we are partners to many of these countries.

So, if China wants to spend their limited resources (and time) laying the groundwork for a brighter future in a region that the US is so closely tied to, why should we stop ’em?

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.

Transcript

Hey everybody. Peter Zeihan here comes to you from Tongariro National Park in New Zealand. This is Taranaki Falls, just about done with the circuit. I thank God my back hurts. Anyway, taking an entry from, the Patreon page specifically. 

Tourists, specifically. It’s. Do I worry at all about China’s investments into Latin America? There’s a big port going into Peru. 

There’s a lot of mineral extraction stuff going into Brazil. There’s a general infrastructure going to Colombia. And then, of course, purchase agreements for everything under the sun to Argentina. What do I worry about? You know, I mean, don’t get me wrong, there’s a Monroe doctrine thing here going on, but, we haven’t had a president in the last 25 years who’s really acted on it. 

Certainly not, Obama or Trump or Biden. So, this is a very bipartisan kind of slouch strategically if if that’s the thing you’re concerned about. But I’m really not concerned about it. Remember that the Chinese are literally dying out. And if they want to throw some of their limited resources into the Western Hemisphere to build physical infrastructure that will help industrialize the Western Hemisphere to prepare for when China’s going to recover after China storm, I say let them, specifically the port in Peru probably isn’t going to get too much activity. 

There isn’t a really good transshipment port anywhere on the west coast of South America, so having one makes sense. And here, lo and behold, the Chinese are building it for everybody. In Argentina it’s more straight up sales issue. Those things can always go somewhere else when the Chinese are no longer the high price bidder. Colombia is a mountainous country where the population. 

Well, it’s unique, usually, like in Mexico, you live on the top of the plateaus to get above the tropics or anywhere else. You live at the bottom of the mountains where it’s cheaper to build. But in Colombia, because it’s right on the equator and the mountains are really steep and there’s jungle. They live on the side of the mountains. 

The top is tundra, the bottom is hard jungle and everyone lives in the middle. And so infrastructure is really hard. And if the Chinese want to pay for that grid because the U.S has a free trade agreement with Colombia, and any Colombian success is one for us as well. And then finally there’s Brazil. The Chinese are spending to build infrastructure from the coast up the skirt mint where Sao Paulo is, and then down into the interior again, expensive geography to develop and the Chinese are paying for it all. 

So if the Chinese want to pay for tomorrow’s world, I say let them. 

The Chinese Cut Off Drone Exports

Image of a drone firing missiles

The Chinese Government has moved toward implementing an export ban on drones and drone components, with an eye toward making supply issues a particular headache for the United States and the Ukrainians.

In regard to the latter group, Kyiv has had particular success in utilizing drones in their war against Russia. From reconnaissance to swarm attacks to providing targeting data for UAVs, the Ukrainian war effort has been building and burning through thousands of drones.

While the design and rebuild activity is happening primarily within Ukraine, several key components: motors, flight controls, and especially the batteries and made in China. China’s massive supply of affordable parts is what drove the Ukrainians to make up for shortages within their arsenals with drones in the first place, and you can bet Moscow has been pushing China heavily to stop the flow of these parts to Ukraine.

As for the Americans, the Chinese are looking to respond to the bevy of tech export restrictions pushed through by the Biden administration, and Beijing is bracing for an onslaught of new Trump tariffs. Things like drone components are one of the few levers Beijing has in this fight.

But what will the ultimate outcomes be? This is an excellent opportunity for the United States and others in the West to start building out their own manufacturing capacity for these components—a win for both strategic and economic reasons. Even if the Chinese were everyone’s best buddies, the current Chinese system is dying. Literally. The Chinese government cannot hold back the impacts of the collapse of the population growth rate, and the Chinese economy is undeniably slowing down. The global economy’s reliance on Chinese overproduction is coming to an end, regardless of whether anyone wants it to or not.

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.

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.

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.

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.

Things I (Don’t) Worry About – Chinese Investment in Mexico

A photo of mexico city at night

If you’re getting worried about Chinese investments into infrastructure in Mexico, it might be time to switch the TV off and take a walk…because that narrative is a complete fabrication.

This should help ease your mind: China doesn’t even crack the top ten list of foreign investors in Mexico, there are regulations for  the origins of goods outlined in NAFTA 2 that China can’t bypass (and the person who negotiated these rules will likely be in Trump’s cabinet), and any major investments by China would be outed by business leaders in Mexico (so we don’t need to stress about stuff happening beneath our noses).

And if that wasn’t enough, the Chinese system is in decline, and so is their global influence. If they do somehow manage to make investments in the region, it’s only going to help the North American industrial base prepare for the collapse of China. At least this is a good thought experiment to remind us that the US needs to focus on building out its own industrial capacity.

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.

Transcript

Hey everybody, Peter Zeihan here, coming to you from Massey Draw above the Denver metroplex. Today we’re gonna talk about something that has been on a lot of people’s minds during my work trips the last couple of weeks.

Two weeks ago, I was in Mexico, and one of the first questions that everybody asked me was what I thought about the Chinese effort to build industrial plants in Mexico to get around NAFTA regulations and ship stuff into the United States.

Last week, I was in Canada, and that same question popped up. I decided to turn on the television for 15 seconds for the first time in a year and wow, wow, wow. It doesn’t matter who you are—left, right, center, economics, socialist, whatever. Whatever you’re watching, this is a hot topic. It pleases me to say, as somebody who just looks at the data, it’s a complete fabrication.

China doesn’t even make the top ten list for foreign direct investment—that’s investment in physical plants—in Mexico. In fact, it doesn’t even show up in government statistics; it’s so low down the scale.

And, you know, honestly, folks, let’s be honest here. The soul-searching… this kind of stuff is really hard to hide. I mean, an industrial plant that’s going to be big enough to process—even if it’s just to stamp “Made in Mexico” onto a previously made Chinese product and ship it to the United States—

That’s not small. That’s not quiet. We don’t have stealth fields, and there isn’t a single facility doing this anywhere in the northern Mexican states. The infrastructure into central Mexican states is insufficient for the task anyway.

This is something that we have dreamed up ourselves in our post-truth environment that just happens to have taken on a life of its own.

It reminds me a little bit of when everyone was panicking a couple of years ago about the Chinese purchasing farmland. And again, the Chinese weren’t even in the top ten list. Now, that doesn’t mean there aren’t foreign entities looking to do something like this, but it’s not China—it’s Canada.

Canada is the number one owner of farmland in the United States outside of Americans. It’s also the number one investor into Mexico after the United States. And yes, yes, we should be concerned about Canada, though with the rule of law, their politeness, and their heavy coats… I mean, Canada, I’m watching you.

Anyway, should things change—should this become a real thing—three things to keep in mind.

Number one: NAFTA 2, which was renegotiated by Donald Trump in his first term, has very clear rules of origin laws that say a certain percentage of goods have to be made in the NAFTA states. This hypothetical scenario where the Chinese are trying to get around that is already covered by US law, and the US already has tools within the NAFTA system to deal with it economically, politically, and to block the products should it become a problem.

That authority already exists.

In addition, the most likely person to take over trade policy in a second Trump term is Robert Lighthizer, who is the guy who wrote these clauses and negotiated NAFTA 2 in the first Trump situation. So I have no doubt that if there’s any inkling this is going to go down, Lighthizer will take personal responsibility for this. And he is by far the most competent person who was on Trump’s first team.

And if he accepts Trump’s offer, he’ll be the most competent and capable person on Trump’s team. So put that to the side.

Second concern: If something like this does go up, it will not be quiet. When the Chinese build industrial plants in third countries, they bring in their own workers. They house them on-site, and it generally generates a lot of labor protests for the host country to deal with.

And Mexico now has a healthier press environment than the United States does. Mexican workers will not be shy. Mexican business leaders will not be shy about shining a light on something like this should it go down. Keep in mind that most of the business leaders in northern Mexico are relatively oligarchic—a little bit Elon Musk—and they really don’t like it when things don’t go their way. They’re not going to be quiet.

So we have a really good alarm system built in should this happen.

Third, and finally: The Chinese system is failing due to demographic collapse. Before you consider trade tensions, before you consider the possibility of a conflict in the world that would interrupt raw material supplies, energy supplies, or merchandise exports, we need to prepare for a post-Chinese world.

Which means here in North America, we need to roughly double the size of the industrial plant.

And if the Chinese do decide to come in to build industrial plants in North America, think about what that means. They are spending some of their limited capital resources, technology, and labor in order to help us get ready for a world without them.

So even in the worst-case scenario, where I’m completely wrong and this is about to happen at scale, the worst-case scenario is still pretty good.

TSMC Cuts China’s Access to Advanced Chips

Photo of the TSMC building

The recent discovery of TSMC chips in Huawei devices has revealed some gaps in the US sanctions on China. As a result, TSMC has decided to no longer even accept Chinese orders for advanced semiconductors.

This move aligns with the Biden administration’s strategy of halting progress in advanced sectors like AI; the US also got some other countries on board as well: Netherlands, Taiwan, Japan, and South Korea.

Now it’ll be up to incoming US President Donald Trump to figure out how to use tech restrictions or tariffs (or some combination of the two) to define US-Chinese relations.

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.

Transcript

Hey everybody. Peter Zeihan here. Coming to you from snowy and melty Colorado, where our first three feet of snow is rapidly going away.

Anyway, today we’re talking about something that happened last weekend, the ninth and 10th of November, and then followed up by an event on the 11th. On the ninth and 10th, the Taiwanese semiconductor company TSMC, which is the company that makes all the high-end semiconductors in the world, made a major announcement.

If basically it’s going to go into an EV, a high-end phone, a high-end computer, satellite communications, or artificial intelligence, it comes from TSMC’s foundries. Anyway, they said they are no longer going to even take orders for anything that is seven nanometers or smaller from any Chinese entity whatsoever. The instigating issue was a couple of weeks ago and a Huawei product.

Huawei is a Chinese telecommunications firm. They found some TSMC chips in one of the product lines, indicating that the sanctions, as they currently exist, are not working as well as some people thought they might. Some products are still making it to China and are incorporated into various goods. So, TSMC announced that they’re just not going to take orders from the Chinese for anything that is at seven nanometers or less.

Ten is generally considered to be the line where you get the really high-quality stuff, and all the really good stuff that goes into things like artificial intelligence tends to be four to three nanometers or even less. So, we’re not just talking about the top tier here but even the second tier.

Within 48 hours, the Biden administration announced they would lean heavily on TSMC to make sure no Chinese orders were ever even successfully placed. The Taiwanese announced compliance before the American order even came down, giving you an idea of how willing they are to cooperate on this issue. I’m sure that order was being drafted before TSMC made their decision, but TSMC beat them to the punch.

A couple of things come from this.

  1. Foreign Policy Implications
    We have our first foreign policy crisis for the incoming Trump administration. The Biden administration is setting Trump up for a pretty good success with relations with TSMC. However, we’ve had a difference in style when it comes to Trump versus Biden regarding China.

    • Trump’s approach has been tariffs, tariffs, tariffs, but with little meaningful enforcement. This has allowed China to find creative ways around the tariff structure—like mislabeling, exploiting NAFTA’s rules, or rerouting products through third countries like Vietnam.
    • The Biden administration, by contrast, has taken a surgical approach, identifying specific sectors and building tech walls to prevent tech transfer. This requires much more technocratic oversight to evaluate thousands of supply chain steps and ensure restricted products don’t end up where they shouldn’t.

Neither strategy is inherently “correct.” Each has strengths and weaknesses. Biden’s requires more ally cooperation and bureaucratic expertise, while Trump’s is more about making bold statements. A hybrid approach might be the best path forward. Regardless, Trump now has to decide on a course of action.

  1. Technological Thresholds
    The technological barrier TSMC is enforcing is in the seven-nanometer range. To understand why that matters, let’s break it down.

    • How Semiconductors Are Made:

      • The process starts by growing a crystal about the size of a Volkswagen. This is done by placing a seed crystal into melted silicon oxide and drawing it up slowly over days to form a massive ingot.
      • The ingot is then sliced into wafers, which are doped, baked, and etched under lithography machines repeatedly until the final chip is created.
    • Deep Ultraviolet (DUV) vs. Extreme Ultraviolet (EUV):

      • DUV, the older technology, uses UV radiation to etch chips. It can’t achieve atomic precision and involves manual adjustments, leading to inefficiencies and errors.
      • EUV, developed by the Dutch company ASML, uses a much tighter focus and automation to achieve sub-seven-nanometer precision. This results in fewer errors, more consistent chips, and better performance.

DUV can still produce chips between 10 and 90 nanometers, but getting below seven is a stretch. Huawei recently released a phone using a seven-nanometer chip made through brute-forcing DUV. The result was an expensive, inefficient chip with high energy consumption.

This prompted a coalition of nations—including the Dutch, Japanese, Koreans, Americans, and Taiwanese—to draw a hard line at EUV. If China can’t access EUV technology, they’ll be locked out of cutting-edge tech for years to come.

  1. Labor and Machinery
    China lacks the capability to produce or maintain DUV and EUV machines, much less develop them. EUV machines are exclusively made by ASML in the Netherlands. Without these machines or the skilled labor and software to operate them, China can’t produce high-end semiconductors.

The only way China can acquire these chips now is by hijacking shipments meant for someone else. However, doing so at the scale required to meet technological needs is improbable.

So, this situation lands squarely on Trump’s desk. How he chooses to pursue this technological blockade—and whether he combines it with tariffs or another approach—will set the tone for U.S.-China relations moving forward.

And I, for one, am curious to see how it all shakes out.

Photo from Wikimedia Commons

Can China Save Itself From the Mounting Debt Crisis?

Photo of woman holding Chinese Yuan

Beijing has announced a hefty plan to help local Chinese governments refinance their debt. But is this enough to ward off the mounting debt crisis?

Local Chinese governments don’t have many revenue sources, so they’re SOL when there’s no more land to sell. Many have issued local government financing vehicles (LGFVs), but they’re essentially hiding the debt…which is over $8 trillion now….about half of China’s GDP. So, the issuance by the national government will help (maybe for 2 years), but it’s not going to solve the problem long-term.

Once the rest of the world understands what China’s debt load actually looks like, I would expect foreign investors to run for the hills. And with all the other issues China is facing, this will be another notch along the journey towards economic decline.

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