China is on its last legs. Its demographic picture is far past terminal. Its financial system makes Enron look responsible. Simply feeding its people is far beyond Beijing’s capacity without legions of outside assistance. And with the wider world ever-more-firmly turning against Chinese manufactured goods, there is little reason to expect an industrial recovery. If you don’t care for China, now is the time to nudge the country into history’s ash heap.
And so Donald Trump is picking trade fights with Mexico and Canada, the two countries indispensable to the United States if the goal is to create a world independent of the Chinese. In doing so, Trump is granting China that most precious of all commodities: time.
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Hey, all. Peter Zeihan here coming to you from Colorado. We’re doing the latest in a series on what Trump is up to in the world. And today we’re going to talk about the Chinese. Now the Chinese are having a shit time. The demographic situation keeps getting worse. We’re at the point where we’re probably only a few years away from the general collapse of their labor market, and we have seen their labor costs go up by a factor of roughly 15 since the year 2000, which is, one of the 3 or 4 fastest increases in human history.
Financially, they’ve expanded their credit pool by a factor of 3500 at least since the year 2000. For point of comparison, the U.S has tripled. So we have an Enron style bubble. And basically every economic subsector they have, it’s probably a lot more than that 35 times, because they change the way they look to statistics when it comes to local government debt.
And they just cut it out of the system altogether. Stopped reporting. That probably adds another, times five. So, you know, 40 times anyway, so massively overexposed, massively leveraged. In terms of manufacturing, that means their labor costs have gone up. And so they’re not nearly as competitive as they once were. The Mexicans are now more competitive in almost every major manufacturing sector in terms of agriculture.
They’re the world’s largest importer in absolute terms, and they’re the least efficient producer in terms of the input per calorie that they get out. And almost all of those inputs are imported as well. From a security point of view, yes, they’ve got a lot of ships, but they need to be able to control global sea lanes if they’re going to protect their commerce.
And that is the job of the US Navy. So if you ever have a fight with the US, there goes their entire economic and development model. It’s just a series of bad upon bad upon bad. And at the very top, their government has become completely ossified, as chairman G has basically put the finishing touches on his cult of personality.
So it’s very difficult to get anything done in terms of policy. Not to mention that he’s pretty much blind to what’s going on because he’s shot the messenger so many times. Nobody brings him anything. You put all that together. Now is a great time to push against the Chinese and just knock them over the edge so they can fall into
The dustbin of history. So, what is going on with U.S. policy towards China is almost the opposite of what Donald Trump said he wanted to do during the election campaign. He took a very hard anti-China line, and one of the many impacts that Donald Trump had in his first term is he changed the conversation in the United States about China from potentially being a partner to definitely being a perceived threat or a foe.
But since he became president a second time, we haven’t seen really much on China. There’s been a blanket 10%, tariff on everything. And that’s about it. Instead, Donald Trump has reserved most of the fights that he’s picked for our allies and especially our close neighbors in Mexico and Canada. From the Chinese point of view, this has been not just a reprieve, but it’s allowed them to continue doing what they’re doing and shoving products into the American market.
Because ultimately, in a world without China, the United States is going to have to build out a massive amount of industrial plant in order to produce the things that we used to get from East Asia. And there is no way that that can happen unless it’s hand in glove with the Canadians and the Mexicans in the NAFTA system.
And so by picking tariff fights with the closest neighbors, what Trump has done is strongly disincentivize anyone from relo hating their operations from China to the United States. And that was in full swing calendar year 2024 and 2023 saw the greatest declines in foreign direct investment into the Chinese system that we have seen in ages. In fact, last year, total new investment in China was only $4.5 billion.
We haven’t seen a number like that since the early 90s. Companies were running to get out and getting to the North American market. But at a stroke, Trump’s tariff policy has frozen that in place, which is setting us up for a combination of factors. That is really problematic because if we haven’t built out enough industrial plant to replace the Chinese system when it crashes, we’re just not going to have stuff.
Now, the road from here to there was always going to be difficult. We’re talking about an environment that is not particularly conducive to industrial expansion, and the issue is a capital and labor. It’s largely a baby boomer story. When you retire, you liquidate your savings, you move out of stocks and bonds into cash and T-bills and the money that used to fuel economic development and credit in the broader system shrivels up.
Well, two thirds of the boomers have already retired. Two thirds of that money has already shifted over. So I’d argue that the rough tripling of capital costs we’ve seen in the last 5 or 6 years is largely demographic driven. That has very little to do with the economic cycle or policies of the Fed or Trump or Biden.
It’s just demographics. And on top of having now basically a capital shortage, that we need to somehow use what’s left to metabolize and build up this industrial plant. Trump has pledged to increase the annual budget deficit of the federal government by over $1 trillion a year. Now, you might say, well, he’s going to get some savings out of the federal government with all these mass firings.
But keep in mind that the vast majority of federal spending is Medicare, Social Security, defense, and, Medicaid. Those four together are the 7,080% of the total. If Trump does what he says he wants to do and fires a full one quarter of the federal workforce, that actually only reduces the government budget by about 2%.
So it’s a lot of sound and fury without a lot of movement. And on the backside, he’s going to add $1 trillion to deficit spending. That’s going to make everything else a lot more expensive and a lot more difficult. There’s also the labor situation. The United States, if it needs to double its industrial plant, needs a lot of blue collar workers to fill those jobs, and a lot of construction workers to build the plant in the first place.
Well, most construction workers are undocumented in some way. And so a mass deportation program not only stalls our ability to build in the first place, it shrinks the labor market overall. And at a time when we’re already at record low unemployment levels, all of this is making the Re industrialization more difficult. And now the tariff policy is forcing companies to take a pause and what they were already doing and give the United States kind of a side eye, because we now have something that we’re not used to hearing here.
Regulatory instability. And the Chinese at the moment look more stable than we do from that measure. And this is obviously a problem unless you’re a Chinese, of course, because what Donald Trump is doing right now is granting the Chinese that most valuable of geopolitical commodities time.
Photo of Donald Trump and Xi Jinping at the G20 Summit from Wikimedia Commons
