Platformonomics TGIF #86: April 4, 2025

“It’s Just a Negotiating Tactic”

One theory, advanced by both aspiring 5D chess fans and “it is all about the grift” theorists, is that the massive increase in tariffs mark the opening of the biggest round of negotiations the world has ever seen. Every product, every company, every country now needs to beat a path to the Oval Office.

I disagree this is just deal-making (yet still hope to be wrong). I think Trump completely fails to understand why trade is win-win, believes there are only winners and losers, and sees tariffs as an end, not a means. Tariffs as a solution for the US being “ripped off” by trade is Trump’s longest and most consistently held policy position. Trump is a true believer, as is his closest trade advisor, Petey “Rasputin” Navarro.

The White House really can’t afford to negotiate at this point (and not just because so much ego is on the line). If the goal is to make the US an autarkic manufacturing paradise, negotiating away the tariffs puts an end to that dream. Plus there would be none of that much-promised tariff revenue to pay for tax cuts and other spending.

And, at a level that seems beyond White House thinking, trade balances globally and special exceptions just magnify diversions (which is what happened with Trump’s first round of tariffs on China). Doing a deal whereby say Vietnam cuts its tariffs, and gets some accommodation on US tariffs, does nothing to stop the flood of Chinese goods going through Vietnam.

And the White House has backed itself into a corner by making its ridiculous formula for setting “reciprocal tariffs” the central element of the policy. That formula is based on a country’s relative trade surplus with the US, not their tariff levels. So even if a country agrees to reduce their tariffs, it doesn’t affect the formula any time soon, if ever (And countries with no tariffs on US goods still got hit with higher US tariffs. But countries that run a trade deficit with the US also got hit with higher tariffs ¯\_(ツ)_/¯ ). That formula demands each and every country have balanced bilateral trade with the US, and restructure their domestic economies around that number. Good luck with that!

Despite the US telling countries not to retaliate, they will retaliate. The retaliations have already started. And Trump will have a tizzy and announce further huuuuuuge tariff retaliations to retaliations, in an effort to deter other retaliations. Some of the retaliation will be (actually reciprocal) tariff increases. But more will target specific choke points (hello Mag7! welcome your new taxes and antitrust scrutiny).

It seems hard to avoid a full ratchet, beggar-thy-neighbor doom loop in global trade. (And a movie we’ve seen before. I guess the White House response would be after the US instituted the Smoot-Hawley tariffs in 1930, we forgot to tell others not to retaliate).

The Real Trade Solution: Make Chinese Consumers Prosperous

This is antithetical to every populist America First impulse, but the best way to reduce American trade deficits is to increase Chinese household income and consumption.

The fundamental imbalance in the world is that Chinese investment is unprecedentedly high in both relative and absolute terms. It comes at the expense of Chinese households, whose incomes (and imports) are repressed in order to drive massive subsidies into manufacturing, making Chinese products super competitive. China produces far more than it consumes and the excess is exported. And that excess is accelerating, while the domestic economy is mired in malaise.

This is mercantilism at a level never before seen. The trade problem doesn’t get solved until Chinese households share in the phenomenal growth of the Chinese economy in recent decades. Investment spending needs to shift to households so they can consume, both domestic production and imports.

But this is much easier said than done. China’s mercantilism is a core strategy for the Leninist party rulers. They seek to increase the world’s dependency on Chinese goods, while reducing their own imports. This is totally at odds with the basic idea that the more you export, the more you can import, and comparative advantage works its magic. As the saying goes, free trade is great, but you can’t practice it unilaterally.

China is not the only mercantilist country. Germany, South Korea and Japan, amongst others, all play the same game and impoverish their people to help make their industry more competitive. But the absolute size of these countries’ mercantilism is much smaller and we don’t worry about them trying to undermine the global system in the name of a Leninist ideology.

The question is how to make the Chinese people more prosperous? Revamp the World Trade Organization? Create a new Free World Trade Organization? Tariff capital flows instead of/in addition to goods? (the other side of trade transactions). Dust off Keynes’s bancor plan? (none of this is new). Regime change in Beijing? It requires more nuance and thought than just jacking up across-the-board tariffs.

We should at least be gathering our friends and allies close if we really want to address the trade imbalances. The US absorbs half the world’s surplus (and the US, Canada and UK together absorb two thirds, so that Canadian trade war is inexplicable), so we have leverage. But torching our relationships and credibility with the entire world over the past two months makes it hard to get cooperation to systematically address the trade issue.

We do at least get to laugh at the superfluous PR efforts by surplus nations getting together to talk about forming new trading blocs (e.g. the EU pretending they’re going to become trade buddies with China). Hopefully the communiques will announce who has agreed to cut their own exports and absorb their new partners’ surplus. China offering to build tighter trade relationships in the aftermath of Trump’s tariffs with a straight face is hysterical. But hard to expect anyone else to be serious if we’re not serious.

Read Michael Pettis: he explains that we’ve seen all this before. He’s great on Twitter and his book Trade Wars are Class Wars is excellent (even if the title is a little misleading). The fact politicized economists on the left and the right hate him (without mounting much in the way of rebuttals) is a strong endorsement.

119th Congress Update 2

The 119th Congress remains on recess, but there are glimmers some members are considering returning to Capitol Hill.

Wag the Dog: Iran Edition?

The Trump playbook is to move onto the next outrage before people can digest, much less respond to, the last outrage. Note Iran is already on the clock, and has to be very high on the enemies list.

Ironically, this clip may be Iran’s best deterrent.

Stargate: “Science fiction, just like the movie it is named after”

Even CAPEX has become politicized…

I got the kicker quote re: Stargate:

Industry experts aren’t convinced. The “headline $500 billion number is science fiction, just like the movie it is named after,” said Charles Fitzgerald, the angel investor and data center investment watcher who has authored Platformonomics for more than a decade. “The only thing harder than raising $500 billion is actually spending that sum in four years.”

They printed my chart, but omitted the all important subtitle about Oracle being the perennial x-axis of cloud infrastructure.

CAPEX Clues: Microsoft Moves

The cancellation drumbeat continues, but all we can really do is watch whether Satya is good for his $80 billion. There is always churn in a portfolio that big. They are shifting assets around after disembarking from the Open AI CAPEX Train to Infinity (and Beyond). And maybe they’re even cutting back, but Sam Altman openly begging for GPUs doesn’t make me think Microsoft has idle GPUs sitting around.

And I’ve become Bloomberg’s go to for CAPEX data: