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.

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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: 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.

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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.

The Fire Hose of Chaos: American Brands

Image of the iconic Nike swoosh logo

Many of America’s most beloved brands rely on Chinese manufacturing, but what happens when that goes away?

The impacts and shortages faced will vary based on how dependent each company is on China. There are three groups these businesses fall into: tech firms, consumer brands, and mid-tier companies. Tech firms like Apple, Dell, and Microsoft have complex and integrated supply chains that would be difficult to pick up and move; these companies will need years to rebuild, and they’ll face shortages in the meantime. Consumer brands like Nike, Mattel, and Keurig can be easily replicated. Middle-tier companies like Whirlpool and GoPro will face lots of competition and will need heavy investments to recover.

This disruption was inevitable, but Trump moved it up on the calendar and left companies no time to adapt. So, get ready for shortages, bankruptcies, and inflation. There might be one upside here though, we may not have to see Crocs around anymore…

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Transcript

Peter Zeihan here. Coming to you from Colorado. Today we’re talking about some of the impacts of the Trump tariffs on the American corporate space. There are a lot of companies that sell consumer goods in the American market, American companies primarily, that have outsourced most of their manufacturing to China. And with the tariff policy, we’re basically getting two things. 

Number one, people can’t afford these products anymore. And so most shipments from the United States to China already stopped. And you’ll see that hitting the shelves at some point in the next 3 to 6 weeks, based on where you live in the country. From the point that the Trump administration were to cave on all of these tariffs and just say, you know, bygones, and the Chinese just say, okay, it will then be another six weeks before product starts to return. 

So, let’s say that, June 1st is when that happens, you’re talking about three months without product. For most of these companies, that’s enough to kill them. And even if it wasn’t, the Chinese basically have the technical capacity to take over a lot of the supply chains themselves, because all of the equipment is already in China. 

Most of the intermediate products are already in China. So these are companies that in some form are just going to die in the not too distant future and vanish from American shelves forever. Now, not all of them are the same. They fall into three general categories. The first are products that are more advanced, where the Chinese do a lot of the assembly, but a lot of the product in the intermediate product comes from outside of China. 

These companies have at least a chance to rebuild their supply chain in other countries. But you’re talking about hundreds of billions of dollars of sunk cost for some of them. And you don’t do that in a year or two years or three years. This is five years or more minimum. And that just means that these products are going to disappear until that happens, or they’re just vanished from your lives for probably five years, maybe a little bit more. 

And most of those fall into the category. Apple, Dell, Microsoft and Hewlett-Packard. So if you haven’t gotten your backup computer, do it now, because the inventory that is in the country right now is all that is left. Yes. Electronics have been at least partially exempted, but it’s already too late. And the Chinese are moving to take this stuff over. 

Second, these are products that are on the other end of the spectrum. Things that the Chinese can take over now. There’s nothing that’s particularly sensitive about them. From a technological point of view, it’s just a the brand is what’s special, and it’s the brand that’s going to disappear, or they’ll misspell it and they’ll just make it a Chinese brand. 

And this this is a very long list that includes a lot of consumer products and a lot of clothing. So Nike, Levi’s, Hasbro, Mattel, Ralph Lauren, Skechers, Under Armor, Estée Lauder, Columbia Sportswear, Patagonia, Yeti, KitchenAid, Black and Decker, Stanley Tools, shark, Ninja of At-Home Appliance Fame, Keurig iRobot Ray-Ban Pvt. That’s Hilfiger and Calvin Klein. Newell, which is Rubbermaid and Sharpie and Crocs. 

So I guess there’s at least some bright spot here. Crocs will finally fucking go away anyway. They’re gone. There is absolutely nothing they can do at this point to salvage the production that they have in China. I do not feel all that guilty for any of these companies. Everyone who has been paying attention has been seeing some version of this coming for a long time. 

And I’ve been warning companies like this that the Chinese were going to vanish from the space anyway because of demographic collapse, and they should get out while they can. Anyone who is left has basically lost. And then we’ve got companies that are somewhere in the middle. These are companies where, you know, they’re halfway between Apple and Crocs. There are some parts of the supply chain for some products that are more advanced that the Chinese can’t just walk in and take over. 

So we could see these companies come back after some significant reinvestment. Not as much as will say for somebody like Apple, but they’re going to be dealing with a massive amount of competition in the international space from the Chinese, who can make their lower end products exactly as they used to. That’s fossil, the watch company whirlpool, other white goods companies, GoPro and Fitbit. 

It’s a long list and this is only partial. Now again, some version of this was always going to happen, but Chinese were always going to go away. But the way that the Trump administration has done, the tariff policy basically front loading the penalties and not giving people a chance to adapt means that all of these companies and more are going to break in the American space. 

Most of them will end up filing for bankruptcy, and someone will probably come and buy up the pieces and then do limited restarts of the production lines and other places. That does mean that in the interim, and we’re talking here for the lower tech stuff, a period of 1 to 3 years for the higher tech stuff, probably four or more. 

We just don’t get the product. So one of the big challenges that we’re going to be having in the United States is inflation driven not just by tariffs directed not just by higher capital costs directly, not just by higher labor costs directly, but high tariffs caused by extensive product shortages in the consumer space, whether that is electronics, home goods, apparel, you name it. 

We can recover from this. We can recover from this faster if we have Mexico and Canada and our other trading partners involved. But it’s not going to be quick and it’s not going to be free.

Trump 2.0 – Reindustrialization

Another layer of the challenges facing the Trump administration is the fallout from a Chinese collapse and what it will mean for US reindustrialization.

China is the world’s manufacturer, but just about everything is going wrong for them. Between demographic and economic decline, trade blockades, and a collapsing workforce, China won’t be around for much longer. So, everyone else will have to find another way to get their stuff.

That means reindustrialization and the US is nowhere near being ready to take on that load. We’ll need to rebuild industrial capacity, expand the electrical grid, and address labor shortages. If Trump fails to do that before China goes off the deep end, we’re going to experience product shortages and record inflation, cementing Trump’s legacy as the man who made American something less than…great. Or maybe, just maaaaaybe, the old/new president can address these issues and shepherd the United States into a new golden age.  fingers crossed

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from the top of French Ridge in the Motoki Tuki Valley of New Zealand. This is the first place I ever went backpacking in the country. And I haven’t been back in 27 years. So just as hard as I remember it when I was 23. Okay. We are going to continue on with the Trump 2.0 series today, specifically the sort of domestic issues that are going to be waiting for the president. 

Really, this is a China, China, China situation. But from an economic point of view, rather than a geopolitical one. Let’s review, China’s dying, birthrate has dropped by over half in the last six years. They now have more people over age 50 than under. And their workforce is in the early stages of collapse. Their population has been in a state of collapse for over 20 years. 

But, when you run out of people aged 0 to 20, you really don’t feel it in your consumption or your investment or your tax base. You’re just paying for less education. Well, that has now been going on for 45 years, and they’re running out of new people to bring into the system. At the same time, they print currency like mad. 

Like, you know what the gold bugs say that the US Federal Reserve does, China actually does. But like times five, they expand their money supply by about 500% more than the United States has on a monthly basis. And so that drives up asset prices, which makes it for more difficult for the young people to do anything because, think about if everyone in the United States was over 40, was buying a vacation home, how hard it would be to start out if you were in your 20s. 

Now, I’ll apply that to China. So you’ve got all this massive real estate build and absolutely no chance that someone young can get in on it. So we are looking at a national collapse here and a population collapse and probably a civilizational collapse. The only question is time frame. If I was to, put a date on that and yes, yes, yes, putting dates on things like that is hard. 

And that is, the most difficult part of what I do. I would expect a complete economic breakdown within a decade and then probably a national breakdown. What’s the ten years after that, anyway? One way or the other, the Han ethnicity is not going to survive in this century under Donald Trump. Donald Trump absolutely is. Rare. 

And to pick a fight with the Chinese on trade issues, he’s been talking about massive tariffs to stack on top. He and Biden actually are pretty close together on these issues. 

Trump enacted a lot of Selective tariffs on specific items as well as blanket tariffs. Biden didn’t peel any of those back. 

Biden went in and did tech tariffs to prevent technology transfer. And now that Trump is back, I find it very unlikely that he’s going to peel back anything that, Biden did. If anything, he’s going to double down on it. So the way that China has traditionally dealt with its demographic collapse and making sure that the economy can go is again printing lots of currency, building lots of industrial plant and then exporting it. 

Well, under Trump, that worked. But it’s no longer working under Biden because Biden has basically marshaled the entire Western alliance to act against things like tech transfer and most notably, electric vehicles and automotives. And so the Chinese don’t have any place to dump it. It’s gotten so bad that even the Russians and the Brazilians and the Turks are basically blocking Chinese imports. 

So we have all this new productive capacity coming online in China, nowhere to send it. We’re getting an inflationary and a deflationary pulse in China at the same time, which is like the worst kind of bad. Anyway. Bottom line is that Trump is very clearly wanting to pick a trade fight, but it doesn’t appear that his incoming administration has given any thought to what happens should he win. 

China is the workshop of the world, and while there are certainly sectors that Americans would like to keep the Chinese out of, they are the single largest presence in almost every industrial sector and their sudden disappearance. And it probably will be sudden because it will be, involving a degree of government and economic collapse. Then what? 

Because we still need the stuff. And if the Chinese are incapable of building it, suddenly we are in a very, very new sort of economic cycle. So, you would fix this by massively expanding the industrial plant and the manufacturing base in the United States. But you don’t do that quickly. You don’t do it overnight, and you don’t do it cheaply. 

So the smart play, if you’re looking for recommendations here, is to take whatever income comes in from tariffs, regardless of how they’re sourced, and actually use them to underwrite the construction of an industrial plant, starting in industrial processing, things like turning, bauxite into aluminum, things like steel, and then moving into, more and more sophisticated manufacturing. 

That requires a degree of organizational build out that the United States doesn’t have. The United States hasn’t had an industrial policy like that since World War Two. Luckily, Joe Biden and Donald Trump are the only two Americans left alive who remember any of that day. Yes, yes, yes, they’re about the same age. So hopefully, somebody on Team Trump will know what to do with that. 

But we’re starting from almost scratch. Everything that the Biden administration did along those that path was dealing with environmental issues in some way EVs, solar panels, that sort of thing. And I’m not saying that that was bad, but that’s just a one very, very narrow niche for what is necessary to be done. We need a multitrillion dollar build out as quickly as possible. 

Second, powering it. It’s not that the United States needs oil or natural gas. We are awash in that. And energy policy under Trump suggests that he wants to build up that advantage even more. The problem is electricity. It takes a lot of power to stamp and mold and move things that you don’t need when you’re basically doing digital work. 

So we need to expand the grid on a nationwide basis by at least half, and places that are likely to see the biggest industrial build out, places like the Rocky Mountains, the classic South, and Texas, they probably need to double the grid within five years, which is just a massive task. But I haven’t seen anyone from Team Trump even breathe the word electricity when discussing the energy situation. 

It’s all about oil. It’s all about natural gas. It’s even about taking things like windmills out of the equation, which I think would be unwise since, you know, Texas gets 15% of their electricity from now. The easiest way. There’s nothing easy about it, but the easiest way to do that is to make it much, much easier for electrical cooperatives and electric companies to import and export power across jurisdictional boundaries, whether that is across the, the seams that separate the three big grids in the United States, whether it’s among states, whether it’s within states that cross from, say, a co-op to a city’s, power system, we need everyone who has a competitive advantage, whether it’s in capital, in labor, in sourcing because of green tech, in sourcing, because of natural gas, to be able to put up a power plant and send that power to where it is needed. Doing that, of course, requires significant reform of the electrical grid in its current form and a whole lot of build out. And Donald Trump is famous for many things, but managing what is functionally a new department, creating it from scratch is not something he seems to have considered at all. 

Third is labor. If we’re going to expand the industrial plant by half, that’s a whole lot of workers that the United States doesn’t have right now. In fact, the United States, since, Covid is facing a worker bust for two reasons. Number one, we have started this re industrialization. We are seeing expanding, labor in all of us. 

Sorry. We are seeing an expanding labor demand in all of these sectors. But too far more importantly, the baby boomers are leaving us two thirds of them have already retired. The oldest ones are starting to die. They’re leaving the labor force in numbers, like when they entered the labor force back in the 1960s. And we have to basically do almost all of this work with just a fading remnant of labor from the boomers. 

There is no indication from Team Trump that, workforce training for blue collar workers is something that’s particularly high on the list. And if anything, all this talk of mass deportations of, illegal workers from the United States is going to actually tighten the labor supply. So basically, we’ve got two scenarios here, and it’s going to be up to Donald Trump and his team to decide which one to go. 

Number one, you smash China while they’re down. You kick them in the face, you break them, but you fail to build up the industrial capacity. You fail to build up the electrical capacity, and you’ve got the labor force at the same time that will generate a shortage in every possible consumer and industrial good at the same time, while also generating the fastest inflation that the United States has ever experienced. 

And Donald Trump will go down in history as the president who broke it all, or you build up the electrical grid, you find a way to square the circle with illegal migrants, you expand workforce training, and you repurpose the capital that was coming in from tariffs to actually build up the industrial plant faster. And Donald Trump goes down in history as both the president who broke China and set the stage for a new fundamental age of American economics. 

I know which one I’d rather see. 

China Will Soon Lose the Title of “World’s Manufacturer”

Photo of workers in a manufacturing shop

Globalization led to the rise of China as a manufacturing powerhouse, since finding the lowest cost producer was the priority. However, deglobalization, coupled with China’s demographic decline and aging workforce, has both eroded that competitive advantage and changed everyone’s priorities about cost. So, what happens next?

With China fading from the spotlight, Western countries will become more protectionist, which means manufacturing will be coming back home to places like the US and Europe. But that’s going to bring a while slew of problems with it.

While this transition will create significant job growth and increase the political power of labor, it will also bring high inflation and inefficiencies. This will force highly skilled workers to take on tasks that were historically outsourced to cheaper labor markets. So, if you thought inflation was bad now, just wait…

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Transcript

Hey everyone. Peter Zeihan here coming to you from Yosemite. This is an unnamed lake behind me, so I’m going to claim it. This is Peter Lake and there’s Peter Island right in the middle of it. Great for laps. I built a summer home here. Any who? I wanted to talk a little bit today about the global structure of employment.

Looking forward and back, if you could sum up the concept of globalization into a single phrase, it would be lowest cost producer. The idea is, whoever can produce the product or the step in the supply chain at the lowest cost in a reliable manner pretty much gets the business. And when the Chinese built it up to the bar in the 1980s, they brought a billion industrial workers with them.

And that’s before you consider the fact that it’s a single legal structure, such as it is, or that they subsidize the bejesus out of everything to drive any competition out of business. Basically, they took all the assembly and the low-end stuff from the rest of the developing world, where no region was probably suffering more than Latin America.

Where the geography is much more difficult for infrastructure. And so the Chinese could outcompete them there as well. For the first world countries, and most notably, the United States, we got out of that sort of business because if you pay an American $50,000 a year to assemble a car, it’s going to be a really expensive car.

And so we doubled, tripled, quadrupled down on design work. And there are few industries where this shows up more than technology. The Chinese may make some low-end semiconductors and do a lot of assembly, but it’s the Americans who design most of the chips and make a lot of the high-end chemicals that are necessary for Chinese fabrication facilities to work.

So when someone tells you that the Taiwanese or the Chinese or the Koreans or the Japanese stole our industry in semiconductors, you know, no, we still do the high-value added stuff. The Chinese do the low-value added stuff. Anyway, this has been the state of affairs in increasing intensity for the last 30 to 40 years.

And now we’re entering a new world where the Chinese are aging out. And so they’re losing their economic competitiveness, even at the low end. And their workforce is collapsing because their population is in demographic decline, actually, demographic decline is too kind—demographic collapse. They now have more people aged 60 to 75 than 0 to 25, if I remember my math correctly. Anyway, it’s close.

Sorry, I can’t fact-check out here anyway. Lots of old people, very, very few young people, and even fewer people coming into the workforce in the future.

Okay, so what happens now? Well, the Chinese are no longer competitive. It’s only because of the sunk cost of the industrial plant that we still think of China as an industrial power.

And, you know, 30-odd trillion dollars in sunk cost in industrial plant. That’s not nothing, but it’s not enough without a workforce.

That’s before you consider the trade wars that are intensifying, regardless of who wins the American presidential election, regardless of who wins in various European elections. Both the American and the European blocs have turned very sharply protectionist, specifically versus China, and so we’re probably going to see significant crunches in the trade portfolio of products coming from China very, very soon.

What we’ve seen with the electric vehicles is really only the beginning. What that means is if the Europeans, and especially the Americans, still want stuff, they’re going to have to make it their damn selves. And there is the problem, because the United States has geared its educational system, its infrastructure, and its capital structure over the last 30 years to do more and more higher and higher value-added work, not a lot of assembly.

And so we’re going to have to take highly paid, highly skilled American workers and put them to work doing things that, under normal circumstances, they’d have people in another country do. Now, this will generate a lot of employment. This will generate a lot of political power for labor, organized or otherwise. But it comes at a cost, because if you’re going to pick one word to sum up globalization, it was efficiency.

And there is nothing about having people do jobs that they weren’t trained for, or that they’re overqualified for, that’s efficient. So yes, we will get huge growth, and yes, we will get huge inflation to go along with it. The 2, 3, 4, 5, 6, 7% that people have been bitching about these last 3 or 4 years, that’s just the start.

The Future of Manufacturing: Where and Why?

China has been the global manufacturing hub for decades, but what happens if that goes away? If and when China experiences a significant collapse, someone will have some big shoes to fill, but who can do it?

There’s a few requirements that help narrow down our list – proximity to a consumer base, a young workforce, and existing infrastructure. Argentina shows promise, but political instability limits the country from realizing its potential. North America – specifically the US and Mexico – have the opportunity to claim a piece of this pie. However, the region that is most likely to benefit most from a shift in global manufacturing is Southeast Asia.

Countries like Vietnam and Indonesia are particularly noteworthy, thanks to their large, youthful populations, expanding infrastructure, and ability to handle manufacturing along the entirety of the value-added scale.

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Transcript

Hey, everybody. Peter Zeihan here. Coming to you from the Gulf Shores. Today I’m taking an inquiry from the Ask Peter Forum. And it’s if my estimation for the mass collapse of China comes true, where is the manufacturing going to go? Well, first things first. If you remove a billion people from the global pool, you people are stopped. So yes, we’re still talking about tens of trillions of dollars of capital investment that needs to happen, but maybe not quite as much as we think. 

Now, once you’ve gotten past that, you’re basically looking at three factors that shape where the stuff is going to go. Number one, a place that is either has itself or is proximate to a significant consumer base to justify the infrastructure development in the first place. Number two solution number of people under 50, not just to consume, but actually to do the work that is necessary. 

And then third, you would prefer somewhere where they’re not starting from scratch. there’s $35 trillion of leased and industrial plant in China. And even if we only need to relocate half of that, which would be overly optimistic, I would argue, having to do that in a place that doesn’t have a road and rail system would be a much heavier carrier than a place that does. 

So this rules out any number of locations. Africa doesn’t look too good because it doesn’t have the infrastructure, and it’s too dependent on numerous oil imports to make it system function. Europe doesn’t look that good because it all has the infrastructure. It doesn’t have the consumption base. Japan kind of falls into the same category. So when I think of this, I think of three regions. 

So in ascending order at the bottom is Argentina. good infrastructure, great educational system, positive demographics, probably. They’re arguably the best one in the world for a country at its point of economic development. Of course, the downside is that it’s full of, Argentina foreign policy and. Yes, yes, yes, Malay, the new president is, doing reasonably well, but one president does not make a pattern. 

So we will see. But if if Argentina is successful at reinventing itself, it will easily become the manufacturing hub and player, not just for itself, but for the broader Southern Cone region. Brazil can’t compete in this. The infrastructure isn’t there, the education system is there and the country is aging rapidly. So you can see a world evolving where Argentina gets a lot of these pieces and then just treats Brazil as a captive market. 

Okay, that’s number one. number two is North America. the United States obviously has the consumption base, but so too does Mexico. It’s a pretty young country, demographically speaking, and, well, most of North America has already been absorbed into the NAFTA system. Central and southern Mexico really haven’t. So there’s a lot of low hanging fruit there, not just from a consumption point of view, but more worker point of view. 

And then, of course, the United States is the world’s largest consumer market with top rate infrastructure. so we’ll grab some chunks to, the third section. And the part that I think in relative terms is going to do the best is Southeast Asia. Here you’ve got a cluster of countries that have partially integrate. We partially globalized and partially industrialized, but almost all of them still have significant, reserves. 

They can grow up under labor. And as the place does better and better and better, the consumption situation is going to look better. the two countries that I’m arguably most, interested in, in relative terms are Vietnam and Indonesia. Both have large populations who are at a beach. Both have large populations in excess of 100 million people. 

High almost quarter billion in the case of Indonesia. Their infrastructure is okay, not great, but it’s rapidly expanding. And there’s some very clear population centers where this is all really serving as nodes for greater regional distribution. They’re also proximate to China. So this is a place where Chinese companies are already investing. These are countries who get along with the United States. 

They’re places where the Americans are invested. These are places, the people of Japan. So the Japanese are investing. And most importantly, they’re all at different stages of production. So it’s easy to imagine a supply chain system where the Vietnamese do the really high end stuff, then come down the Thais and Malaysians for the middle manufacturing and then lower end stuff in places like Indonesia. 

Vietnam is the one I’m most interested in because they’re trying to jump stages of production, and already 40% of the college grads are Stem graduates. So it’s easy to see them becoming the next Malaysia. But with a population that’s roughly four times as large. that becomes significant very, very quickly. So. So I get everything. Yeah, I think that’s everything. 

All right. I wanna have a good one. 

The Future of Ohio: Manufacturing Growth and Political Shifts

If you’ve ever spoken to an Ohio State fan, you know that they’ll tell you how amazing they are without you asking. Unfortunately for all of us, I’ll be adding to their boasting list today because there’s plenty of success and growth in store for Ohio.

After years of stunted economic growth caused by the Jones Act destroying its manufacturing base, Ohio is ready to turn the page like Bob Seger’s hometown. As Ohio’s reindustrialization process kicks off, we’ll see plenty more projects like Intel’s semiconductor facility pop up throughout the state.

Ohio’s political stance has long aligned with national sentiment, and we’re now seeing the state shift toward populism. Between a political shift and Ohio’s manufacturing resurgence, it’s a safe bet that this state (and all those Buckeye fans) will continue to play a critical role in the country’s future.

Prefer to read the transcript? Click here

Here at Zeihan On Geopolitics we select a single charity to sponsor. We have two criteria:

First, we look across the world and use our skill sets to identify where the needs are most acute. Second, we look for an institution with preexisting networks for both materials gathering and aid distribution. That way we know 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. Then we give what we can.

Today, our chosen charity is a group called Medshare, which provides 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. Until future notice, every cent we earn from every book we sell in every format through every retailer is going to Medshare’s Ukraine fund.

And then there’s you.

Our newsletters and videologues are not only free, they will always be free. We also will never share your contact information with anyone. All we ask is that if you find one of our releases in any way useful, that you make a donation to Medshare. Over one third of Ukraine’s pre-war population has either been forced from their homes, kidnapped and shipped to Russia, or is trying to survive in occupied lands. This is our way to help who we can. Please, join us.

Support medshare's ukraine fund
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Transcript

Hey everybody. Peter Zeihan here coming to you from not Idaho and not Iowa, but Ohio. Iowa’s got corn and pigs and soy and insurance and Idaho has potatoes and wheat and the Snake River, Ohio excels at things like manufacture. Or at least they did. Ohio is one of the states has been really hurt by something called the Jones Act, which is something that bars cargo ships from transporting cargo between American ports unless the vessel is 100% American owned.

Captains built in 75% crude. It’s something we did in 1920 as part of the Interstate Commerce Act that absolutely destroyed the ability to move things on the water. And since Ohio is bordered to the south by the Ohio River, which is one of the world’s great waterways, and then the north by the Great Lakes, which are one of the world’s great waterways, Ohio is arguably the State of the Union that has suffered the most.

It also took a big hit because of globalization. Ohio is also the state that has arguably suffered the most from globalization because it had the economic geography that was excellent in terms of lots of flat land that was easy to build infrastructure on and a lot of legacy infrastructure from its industrial period. But with globalization and the United States basically elevated places that didn’t have very good geography as part of our plan to defeat the Soviet Union.

And that meant that places with subpar geography thinking here, Brazil or India or China were able to get a huge leg up. And that gutted a lot of the manufacturing base here. Now, Ohio is still a significant manufacturing player, just not as rich as there used to be. And part of the decline in the use of the waterways and because of globalization is part of the reason why Margo and Donald Trump have done so well in this state and why the state’s politics has taken such a hard turn to the populist right that is in the process of shifting maybe not the political stuff, but all the economic trends.

Globalization means that we need to rebuild a lot of industrial plants in other parts of the world, and all of a sudden geography matters again, and Ohio’s looking pretty good. Ohio is one of the healthier demographers in the advanced world, suggesting that it has a pretty robust potential workforce. And the state and the local governments here in the Columbus area have been very aggressive at going out, including the investment with the single biggest achievement they have been the intel facility that is just down the road here.

Intel is an American semiconductor manufacturer who was the world leader until about six years ago when they made a bad bet. They bet that this new thing called extreme ultraviolet lithography was just not ready for prime time. And they designed their chips using an older type of technology that’s much more expensive to operate and a lot more finicky.

But turns out that EUV actually was ready and the company that bid on or BET on it was TSMC, which is the semiconductor manufacturer out of Taiwan. So today, all the world’s best chips are basically made in Taiwan. And while Intel has designed some of the chips that TSMC makes, they don’t really mean facts for very many of their own.

Certainly not here in the United States. This new facility that’s under construction in Ohio seeks to change that. Specifically, they’ve got these two models called the 20 A and the eight A if works by 2025, they’ll be produced in this facility and they are sub five, even sub three nanometer, which will almost overnight elevate them to producing some of the world’s most advanced chips.

So far, $20 billion have been sunk into this facility, 2 billion of which is local and federal subsidies. And if Intel has its way over the course of the next decade, that number, 20 billion, will increase to a hundred billion. And that’s just for fabrication. That doesn’t include any follow on businesses that are likely to pop up from network effects, whether that is assembly or testing or light manufacturing to take these chips and put them in things that we use every day.

So the potential here for the Ohio region to grow is explosive, and that even assumes that we don’t do anything with the Jones Act. And if we do that, all the old manufacturer, it is likely to come back as well because you just can’t beat the local geography here for internal transport. So will that have political connotations? Probably delay and that’ll get really colorful, but we’re going to cover that in a different video.

I’m just outside Columbus today and we’re going to talk politics a little bit. We’ll use a link in this mail to give you an idea of where I generally think U.S. politics are going. But the general issue here today is we’re at an inflection point. Ohioans are proud that they’ve been voting for the winning side in almost every presidential election for over a century, with all the events in 2020 breaking their pattern.

And the reason both for it happening and the pattern break is Donald Trump. So before 2020, Ohio was the middle of everything middle class, middle income, middle and manufacturing, middle and services. It was very representative of the United States as a whole. So it was very easy to track the political winds based on what the Ohioans were thinking, but they did suffer quite a bit from globalization and something like the Jones Act, as you saw in the previous video.

And so there’s a lot of resentment in the state. And since Donald Trump basically ran on resentment and people who felt they had been left behind, Ohio switched and now is considered a generally populist conservative, socially area. However, if you remember some of my other work, you know that the political factions that make up the country are moving around basically the the American political system is made up of two very large parties because the electoral system forces that into form.

Basically, you have to get one more vote than the other guy in order to win the seat. And so therefore, you don’t want to alienate any potential voters. And in that sort of environment, you two huge parties that are made up of independent factions that shift around based on changes in economics, sociology, politics, demographics and in the last 30 years, we’ve had a lot of things go down.

We’ve had the rise of the baby boomers and now the retirement. We’ve had hyper globalization and now it’s end. We’ve had the rise of social media and the implosion of information transfer. And through all of that, the two parties held together until very recently. And in the Trump era, that relationship is breaking down. Now, Trump did a lot of things for a lot of reasons to a lot of people, but the ones that matter for this discussion is he elevated a faction known as the populist to power, and they are now the single largest voting bloc in the United States.

They’re very powerful here in Ohio. But in doing so, he drove away a number of more traditional factions. He would call them RINOs that include the entirety of the business community. But he was able to court other groups that are more socially conservative, people like the Catholics and the Hispanics over to his side. And as part of that process, there’s now a tug of war between the Democrats and the Republicans over the future of organized labor, where an organized labor is only become more and more powerful over the next decade because we need to build out the industrial plant.

And most of those jobs are blue collar, and we’re an environment of labor shortage. So we’re going to see more and more strikes. What this means is the business community and the labor community, which have traditionally been the two most powerful voting blocs in Ohio, are suddenly Sweden voters. So everyone got used to Ohio being the man in the middle and ultimately representing what we were all thinking.

We’re still there. It’s just that the two factions that matter the most are at the moment not part of the political process. So what we’re going to be seeing over the next few years between this massive re industrialization and buildout and this political shift is Ohio is still going to be the man in the middle. And where they come down is going to determine the shape of our political parties moving forward.

And we’re seeing those arguments across the Ohio political landscape right now with everyone engaged in everybody angry and everyone hopeful, all at the same time. So stay tuned. Watch Columbus. And they’re going to give us our first good taste of what our post-Trump party structure is going to be.