China’s EV dominance challenged by US, EU trade restrictions

Hey everybody, Peter Zion here coming to you from the top of Fraser peak in New Mexico. Back behind me, you can see Mount Edward, and just a little bit of Wheeler quick correction. That’s actually mount Walter, not mount Edwards, I knew it was some dead white guy. But today we’re going to talk about trade wars that are shaping up with the Chinese and why the Chinese don’t have too much leverage. The issue is that the United States and the European Union have both puts heavy heavy tariffs on Chinese electric vehicles 100%, the case United States about 50%, the case of Europe, this is just the first round expect these to at least double over the course of the next couple of years, the goal is nothing less than to keep everything that involves any part of a Chinese Eevee out of the system, starting with the finished vehicles, but it will move into parks and especially batteries in the not too distant future. This is the beginning of the process. And at the end, and regardless of what you think about electric vehicles, there is a belief in the governing systems on both sides that this is the future. And this is not a future that they want to allow another country or economic bloc to dominate. Obviously, there’s a lot of subtext in there. But that’s kind of the the core of the issue. And the Chinese are looking for things to retaliate against. The problem is, is when you’re a major manufacturing country that imports all of your raw materials and relies upon foreign markets for all of your sales, there’s not a lot you can do. Because if you impinge upon trade, you’re actually destroying the trade system that you rely upon for your economic model. The demographic situation in China has gone from bad to horrific. And we have discovered in the five years since the beginning of COVID, in China, that their demographics turned, not only did they overcome their population by well over 100 million people, people eight out of the block have under say 45, or the do most of the consumption, we only got our first decent look at Chinese demographics a little under a year ago. And the Chinese are now starting to understand why retail sales have not rebounded in the aftermath of COVID, they’re not going to rebound, they no longer have none of people to generate a rebound. So foreign sales are all they have. China is also not the technological leader. And that means it can’t withhold technology from its trading partners in order to get access to markets while it’s a really loud plant. So the question is, what do you reach for? Well, in the United States case, case, yes, suck it up. Because as they’ve discovered both under Trump and under Biden, if you do a retaliatory tariff on anything, it immediately gets a second round of tariffs on you, which hurts you far more even things where the Chinese would seem to have a little bit of an advantage things like say gallium and germanium, which are to not rare earth metals, but rare metals, that the Chinese dominant global production have they restricted access to Japan in the United States after rounds of previous rounds of sanctions. The problem is, there’s nothing that’s difficult about these two things to make. They’re just a byproduct of aluminum manufacturing. So the United States is getting back into aluminum smelting, and that will solve that problem. And the Chinese are left holding the bag and realizing that they have now triggered a second round of sanctions, and have lost all leverage in the conversation. In the case of Europe, this is the first time that the Europeans and the Chinese have really found themselves on either side of a trade dispute, expected to not be the last. It’s called Fortress Europe for a reason. And China is ripe to be cut out of the European market. Right now. However, the Chinese do not feel that there’s the same danger in doing retaliatory tariffs against the Europeans that there is against the Americans. The problem again, is finding a place where you’ve got that leverage. And what they’ve gone after is pork. You see back during COVID, or just before COVID The Chinese got hit by a massive outbreak of African swine fever that decimated the hurts probably called two thirds of the total. And into that gap Americans swine exporters stepped exporting just record amounts. And then you had the Trump administration which cheesed off the Chinese government and so the Chinese made the decision to never ever ever, ever buy any foodstuffs for any American producer ever again, unless there was no other option anywhere. And so they primarily for pork, switch to European supplies. And so it was the American pork industry that probably realized where we were going on with a broader trade relationship with the Chinese first and while they have adjusted their herd size down and back up a little bit, they’re not going whole hog on the Chinese market like they used to. That’s a problem for the beef guys actually. But you know, that’s another conversation anyway. So the Chinese basically cut as much American pork out of the market as they possibly could. And since this is the country that is a world largest pork consumer by a significant margin. They still needed pork and they went to Europe for it specifically Denmark and Spain and to a lesser degree, Italy. Well, you fast forward a few years and the Chinese swine herd has recovered. It’s a wildly wildly inefficient market, heavily subsidized massive overproduction. And that’s the key overproduction. Now that there is more than enough within China. They’re like, hey, let’s stick it to the Europeans on pork. It’s not nearly as good as doing that on, say, semiconductors. But you know, the Chinese don’t have a lot of leverage there. Another quick example is semiconductors. So no one makes high end semiconductors by themselves. Let’s get that clear. If you’re making chips that are better than about 28 nanometers, it’s going to take a village. And if you’re doing something that’s better than 10 nanometers, you’re talking to over 9000 firms spread around the world. So the idea that if you get a fab plant, you can just run with it. No, it takes huge numbers of players for specialty chemicals for design work for the lithographic. And on. Anyway, China can make chips of about 90 nanometers by itself. And that’s about as sophisticated as what you would put into a smart light bulb, anything more than that they need significant outside help. And about 28 nanometers is about as good as it gets, without like, generating some massive inefficiencies. And even that requires a huge amount of imported labor to do quality checks. If you remember back to it has been two years ago, already not sure. Huawei, the phone company came out with a seven nanometer chip. And everyone’s like, ooh, and they got around sanctions. But what they forgot that is that the staff at the facility that did this was almost entirely American and Dutch, the reason Dutch lithographic The reason American product designs, and they basically made an incredibly inefficient power hog of the chip, basically by modifying a bitcoin system. Anyway, bottom line is if the Chinese ever do find something to retaliate with, there are any number of ways that the European European Union and the United States can hit back in ways that hit to core Chinese interests very, very quickly. And that leaves the Chinese either screaming and anger, whining a little bit, or going after something like pork. Unless you’re raising pigs in Spain. This is just not that big of a deal. Yet, sooner or later Chinese demographics means this whole system is going to come falling down. Anyway, and then we’re going to find out just how much of the lower end manufacturing the rest of the world can get along with out this China is the workshop of the world for mid to low quality products and it is the king of assembly and that is not nothing. But that is not the tool that you use to fight a trade war.