More on the China shock

David Autor and Co. popularised the phrase China Shock with their 2016 paper documenting the loss of over 2 million jobs in concentrated pockets of America due to factory closures arising from cheap Chinese imports. This recent article nicely captures the China Shock in the US. 

While I have not come across similar rigorous studies, it’s fair to argue that an even bigger shock is happening in many developing countries. And with the Trump tariffs and the displacement of Chinese merchandise from the US market, this shock is likely to get amplified.

The heavily subsidised and cheap Chinese exports threaten developing countries like India at two levels. One, they destroy domestic manufacturing bases and economies through factory closures and job losses. Two, Chinese firms outcompete their counterparts from export markets. 

I have blogged here and here documenting the world economy’s China problem, and especially how it impacts the developing countries. This post is in continuation of those earlier posts. 

A recent article in Bloomberg pointed to the ‘China Shock’ on emerging economies that compete with China. Sample this about Indonesia

Southeast Asia’s biggest economy lost roughly a quarter-million jobs in the textiles and apparel industry over the last two years, according to the Indonesia Fiber and Filament Yarn Producer Association, which has estimated another half-million are at risk in 2025—effectively wiping out one of four jobs in the sector in a matter of years. That pace is considerably faster than the “China Shock” that claimed as many as 2.4 million US jobs from 1999 to 2011.

This shock is being felt across developing countries. 

This trend appears to have been hastened by the Trump tariffs initiated in 2018.

China explains the import surge across developing countries since 2018. 

Or take the example of renewable energy equipment exports from China. 

In 2022, for instance, China sent roughly 65 percent of its wind turbine exports to high-income countries, according to BloombergNEF. By 2024, however, it was sending more than 60 percent to low- and middle-income countries. Beijing has laid out plans to build factories that assemble solar panels in Nigeria and electric vehicles in Indonesia.

At the aggregate level, this trend is inevitable given the large and widening difference between China’s shares of domestic manufacturing and domestic consumption in the world economy.

After the bursting of the 2020 property bubble, in its search for an economic growth engine, China doubled down on manufacturing and exports. Exports took off vertiginously, and its trade surplus nearly tripled to touch $1 trillion in 2024. Since the country has managed to retain its global export share and significantly increase its share of global manufacturing value addition (tripled in 2005-20) despite a significant drop in the share of exports to the US, the displaced exports have found their way to developing countries. 

Interestingly, even as China’s manufacturing share has rocketed, its share of global consumption has lagged far behind despite a spurt in the 2005-15 period. 

This wedge between consumption and production has widened and is a good measure of the excess capacity accumulated. 

The short story is that China suppresses domestic wages, and thereby demand, and maintains manufacturing excess capacity far above its domestic demand (and therefore explicitly aimed at export markets). Worsening matters, this excess capacity is also supported by economy-wide subsidies that distort not only world trade but also the global economy itself. This excess capacity is a massive negative shock to the world economy. In this context, it’s foolish for countries like India to eschew any kind of export-targeted subsidies in their Production-linked Incentive (PLI) or other schemes for fear of violating their WTO obligations. 

With the economy weakening, the achievement of President Xi’s ambitious 5% growth target for 2025 is impossible without increasing exports. This has now come to a head with the astronomical Trump tariffs, raising questions about even sustaining existing exports. For all the brave talk about “fight till the end”, it cannot be denied that at more than $500 bn of exports (it’s probably an underestimate given the re-routing via Hong Kong, etc.), the US is not only the largest export market but more than three times the second largest market, Japan. The Chinese economy will be seriously hurt without finding alternative outlets (either to re-route to the US or as destination markets) for a significant share of these exports. 

But with the US government closely scrutinising trends on imports and deficits with its trade partners, re-routing and increasing exports generally will be a challenge. Further, the only large markets that can absorb a part of this are Europe, East Asia, India, Brazil, and Mexico. In all these countries, their own tariff and non-tariff walls are coming up to keep out Chinese exports. The European Commission President von der Leyen has already warned that the EU would be watching any re-routing of displaced exports. These trends will only increase with time. 

Mexican President Claudia Sheinbaum this month said her country would review tariffs on Chinese shipments, linking growing violence in places such as central Guanajuato state to large-scale job losses in its shoe and textile industries… Sheinbaum said on March 6. Mexico has already raised tariffs on textile and apparel imports from China to as much as 35%... Sanan Angubolkul, the head of Thailand’s Chamber of Commerce, warned this month that the situation is “very critical, and there’s no time to waste” as the nation deals with a surge of electrical appliances, clothing and other Chinese goods. The country last year extended a 7% value-added tax on imported goods below $50 to mitigate the impact of Chinese e-tailer Temu, owned by PDD Holdings Inc. Malaysia added a 10% sales tax on online purchases of low-value goods last year, while Indian authorities have taken a range of measures, including anti-dumping probes on items as diverse as Chinese solar cells, aluminum foil and mobile phone components. Vietnam’s government, meanwhile, ordered Temu and Shein Group Ltd. to suspend operations in the country last year, citing incomplete business and tax registration paperwork.

This pushback from its trade partners is also reflected in record numbers of trade disputes against China at the WTO. There were 198 trade investigation cases against China in 2024, double its tally in 2023 and nearly half of all disputes lodged last year at WTO. This comes on top of 21 investigations launched by the European Commission on Chinese products, compared to nine in 2023. 

More than half of the trade cases against China last year were initiated by developing countries, indicating that western countries’ objections to Chinese overproduction were widely shared. The data showed 117 cases were initiated by emerging economies, including 37 from India, 19 by Brazil and nine from Turkey. The flood of low-cost output from China has even unnerved some of Beijing’s closest partners. Russia recently imposed “recycling fees” to impede booming Chinese car imports, which have taken up almost two-thirds of the local market in the wake of western sanctions on Moscow. Pakistan, to which China is the largest sovereign donor, opened five trade cases in 2024 focused on rising imports of printing paper, self-adhesive tape and chemical products.

To summarise, we have a few clear pointers on the China shock and its consequences. The US shaped the existing global trade order, built around the WTO. This trade order has had one mega beneficiary, China, and a few smaller beneficiaries, especially in the developing world. This has allowed China to pursue a beggar-thy-neighbour trade policy at a staggering scale, whose costs in terms of factory closures and job losses are now becoming evident across the world. The backlash has culminated in the Trump tariffs that have brought an end to this era of globalisation. Similar walls of protectionism are springing up across the world. 

Even in the best-case scenario, the age of ultra-low tariffs and the use of exports to drive sustained high growth is over. It’s hard to look beyond a world of curtailed globalisation and increased reliance on domestic markets to drive high growth rates. It's also fair to argue that those countries who are more dependent on trade to drive growth will be more adversely impacted by these trends. In any case, the entrenched consumption-production imbalance will be unsettled one way or another. 

More thoughts on corporate India

Over the years, I have blogged numerous times, highlighting corporate India’s singular failure to create world-class companies and products. This describes a scorecard of corporate India over the last three decades. 

This failure is now being ventilated by government officials and corporate leaders themselves. See this, this, and this. 

Nothing manifests this failure more starkly than the IT industry. There’s a compelling argument that, despite all its acclaimed successes, India’s software industry will also be seen in economic history as a canonical example of stagnation and failure to move up the value chain. Thanks to a fortuitous confluence of factors, India gained a head-start in the software industry, an industry at the cutting edge of technology innovation. It even had large multinational companies with the finances and talent to become global leaders in the industry. Further, in the last two decades, the industry has spawned technologies with transformative potential - SaaS, IoT, cloud computing, automation and robotics, data analytics, and now a general-purpose technology, AI.

The industry could have become the springboard and platform for innovation and productivity growth, and for taking the economy to the next frontier. It could have become the anchor for the mass flowering of an ecosystem of technology startups that would be pursuing cutting-edge innovation. 

Unfortunately, India’s large software firms have foregone all these opportunities and preferred to stay attached to low-value, manpower-intensive services. They could have capitalised on their industry headstart to move up the value chain and become innovative product companies. They could have provided India with the invaluable anchor around which R&D and innovation could have flourished. Instead of breaking out and leading the way for the rest of corporate India, they have fallen prey to the country’s dominant corporate culture. 

Anuj Bhatia has a very good article on where India’s software firms lost their way and failed to capitalise on their head-start and contribute more meaningfully to national economic 

Take a look at India’s biggest tech companies. They are all ‘services’ companies, like Tata Consultancy Services, Infosys, and Wipro, and have nothing to do with the creation of IP. They essentially acquire clients and do coding for them at a cheaper cost, primarily handling maintenance work. They are not developing software or platforms that they sell to consumers or enterprises. Ask anyone who works for TCS, and they will tell you the difference between working for a services company and a product-facing company like Google. A lie has been sold for years that TCS and Infosys are software companies. However, in reality, US tech companies lead in software, including the likes of Microsoft, Oracle, Salesforce, Adobe, and Google. While India’s services companies may create jobs, they don’t drive innovation, and they certainly don’t position India as a tech powerhouse in the future.

And this is about the importance of IP

It all comes down to intellectual property, and India certainly isn’t an IP-based economy. Intellectual property is the most prized possession a tech company or startup could have… IP can protect you from competitors using your tech, giving you a competitive edge, securing funding, and even safeguarding you from being acquired by a large company. Take Apple’s iPhone, for example. The iPhone’s design, software, product name, concepts, patents, copyrights, trademarks, and trade secrets all fall under IP. Some may say the iPhone is a smartphone, but Apple never calls the iPhone a smartphone, and the reason is… well, the iPhone is a platform. That means Apple has exclusive rights to the platform and can expand it, create new products, develop solutions, tweak software algorithms, or make changes to the manufacturing processes whenever it feels. Hence, Apple protects its intellectual property, which is why the company’s top lawyer, Kate Adams, Apple’s General Counsel, earned a compensation of $27.2 million last year.

Similarly, Android is a trademark of Google, and that’s how the company controls the smartphone market being the owner of Android and Play Store. While Apple follows a closed model with iOS, the software powering the iPhone, Google gives Android for free to any company but charges a licensing fee to use the “Google Mobile Services” suite of apps, which includes the Google Play Store. Nintendo, too, is sensitive about its IP, which includes the characters, franchises, game titles, logos, and designs associated with its video games, such as Mario, Zelda, Pokémon, and Animal Crossing, among others… The point is, without intellectual property, patents (for example, Apple filed 5,000 patents for the technologies that contributed to the development of its Vision Pro headset), and a mechanism to protect your IP, it is hard to create a tech company with a foundation based on original ideas and creativity. And these are areas where India lacks in both aspects. This is why we have not seen an AI research lab like OpenAI in Bengaluru or a product like the iPhone emerge from India. All of this is because we never tried to develop the technology or take risks.

The article also makes a point about claims of India attracting tech companies.

We always talk about how big the market is and why tech companies are setting up shop in India. Of course, any major tech company would like to come to India: a) to access the large talent pool, and b) because there is little competition from local tech companies. However, the same tech companies face a lot of competition in China, where they are barred from doing business and have often failed to compete with local companies. But China itself has created its own unique tech ecosystem (take WeChat, TikTok, and how Huawei has finally ditched the Android mobile operating system for its own proprietary, HarmonyOS, for example), and that has helped it gain technological know-how to power its economy and challenge the geopolitical order…

Until we own platforms—be it on the hardware side, software, or cloud—and build the ecosystem, our tech companies and startups won’t be able to transform into tech giants. India Inc. may be keen on collaborating with US tech giants (and that has been the case for years), but that doesn’t change India’s position in the tech world. No tech company (or country, for that matter) would want to share its trade secrets with others—think of formulas, IPs, research and data, and algorithms.

In this context, it’s not surprising that India’s share of global granted AI patents was an abysmally low 0.22%, far below even countries like Australia, South Korea, Cananda, and Taiwan. 

Of the $43 bn worth of AI investments globally in 2024, India got just $179.3 million. The Indian technology majors’ investments in AI pale into insignificance before the US Big Tech and Chinese firms. 

On similar lines, I have written earlier on our disappointing startup landscape. Forget cutting-edge innovation, they have struggled to meet any of the several development problems that a country like India faces. 

It remains to be seen how the much hyped Edtech unicorns will go beyond marginally improving the learning environment of a tiny sliver of students from middle-class families to helping improve the massive problem of poor learning levels that affect more than 90% of Indian students. Or whether Agtech firms will address any of India's several agriculture sector problems. Or the biotech and medtech companies will address the problem of access to affordable and good quality health care for more than 80% of Indians. Or whether the fintech companies will help address the problem of improving financing intermediation by increasing access to mass-market financial products and increasing India's financial savings, besides making formal finance mainstream for the 80% of the labour force working in the informal sector. Or ensuring access to finance simple for businesses in the informal sector. Or whether, like Alibaba's rural Taobao's, India's e-commerce sector has significantly improved market access and incomes in the aggregate to small manufacturers and traders.

It’s difficult to identify startups that have managed to break into the top echelons or have the promise to do so in areas like cloud computing, IoT, AI, data analytics, robotics, quantum computing, chip design, etc. 

Instead, India’s startups appear content to follow the footsteps of the IT firms and focus on the simple, low-hanging fruit of copying consumer-facing services like e-commerce and media. 

Just 5% of Indian startup funding went into DeepTech sectors, compared to China’s 35%. Semiconductor chip design, for example, has attracted just about Rs 200 Cr each in the last two years. 

Of the $2-3 bn or so of VC capital raised from India-based investors (data is very difficult to get, and most likely is even lower), very little went into these risky and innovative areas. This low level of funding of riskier areas like deep-tech belies the optimism that the first generation founders and investors from the large and growing number of unicorns and decacorns would plough risk capital into these cutting-edge areas as in Silicon Valley. They have instead preferred primarily public markets and secondarily only the derisked and safer areas like consumer technology, healthcare, real estate and infrastructure. 

This is also reflected in the aggregate corporate expenditures on R&D, a topic on which I have blogged here recently. India’s gross expenditure on R&D is less than 1% of GDP, far behind the US (3.5%) and China (3.4%). Further, it has been falling continuously since peaking at 0.86% of GDP in 2008 and stood at a long-term low of 0.65% in 2020. The cumulative funding that went in AI startups in India in the 2022-25 period was just $1.09 bn, compared to $7.89 bn for China and $103.21 bn for the US. 

This disappointing reality is also reflected across sectors. Take the example of consumer durables manufacturing. 

The Ken has an article exploring the air conditioner manufacturing industry in India. With rising temperatures, ACs, once considered a luxury product, are now a necessity. Reflecting this, AC sales have been growing at around 20%, double that of other home appliances, and are estimated to be 12 to 12.5 million units. The Rs 27,500 Cr ($3.3 bn) industry is expected to double. 

The market leader is Tata-owned Voltas, followed by others like Blue Star, Daikin, Lloyd, LG, Godrej etc. Despite the PLI scheme for white goods launched in 2021, more than 60% of the AC components are imported. In fact, 65% of the compressors, which makes up 30% of the product cost, are imported from China. 

The three main domestic contract manufacturers are Blue Star, Amber Enterprises, and PGEL. Compressors are manufactured by just four companies - Guangdong Meizhi Compressor Co. (GMCC, a Midea Group company), Highly India, Daikin, and LG Electronics. The first two are Chinese and the others are Japanese and South Korean. 

The uptake in PLI for compressor manufacturing was confined to just two companies - Daikin and LG. Voltas joined only in the third round with a Rs 256 Cr investment. Godrej and Havells, the other big domestic brands, skipped PLI completely. Others focused on the cheaper, lower-value components like heat exchangers and plastic moulding.

Like with most others, the unsatisfactory response to domestic manufacturing of compressors and components has to do with the Chinese competition. Even with higher import duties (it has gone up by 19% over the decade), importing them from China is still cheaper than making them in India. In particular, high-value components are not incentivised by small sales incentives. The article mentions that “localising production would be at least 25% more expensive than relying on Chinese imports.”

In this context, an oped in The Indian Express by Anand P Krishnan compares the private sectors of India and China and points to how they have taken the lead in the latter in national economic growth. 

According to China’s State Administration of Market Regulation, as of 2024, there are over 55 million private companies in the country. The private sector accounts for over 50 per cent of tax revenue, over 60 per cent of GDP, over 70 per cent of technological innovation, over 80 per cent of urban employment, and over 90 per cent of the total number of enterprises (in comparison, India’s private sector has a share of 36 per cent in tax revenue, 91 per cent of GDP, 36 per cent in technological innovation, 11 per cent in employment, and over 95 per cent of the total number of registered enterprises).

He writes about how the Chinese firms have leveraged their strategic advantages to strngthen their roles. 

Chinese private companies, with their sleek and sophisticated products, have been able to connect with global consumers and are pivotal entities in building an ‘industrial diplomacy’ – to borrow the phrase from sociologist Kyle Chan – to reshape global production networks and make them centred around Beijing. This is visible in a range of modern sectors and industries, that are qualitatively superior and critical in a technologically interconnected world, such as Electric Vehicles, consumer electronics and digital gadgets, lithium batteries, and solar panels. Chinese private companies form vital nodes in global supply chains in these industries, and their inextricability is used by Beijing for competitive advantage. Through these companies, China has remained attentive to building backward and forward industrial linkages – making components and specialised machinery, along with developing skilled personnel with the technical know-how – and holistically dominates the wider ecosystem while also guarding against the sharing of technology. The ability of Chinese smartphone companies to endure and build a loyal consumer base in a country like India (given the hostile geopolitical equation) is a testament to their adaptive capabilities.

All this necessitates deep introspection within corporate India about its role in economic growth.

Weekend reading links

1. On US Treasuries Basis Trades.

The basis trade focuses on the price difference between Treasury bonds and futures contracts tied to those same bonds. Sometimes the price of a bond futures contract rises above the underlying bond price because of heavy futures purchasing by pension funds, insurance companies and other institutional investors. These asset managers often prefer to buy bond futures instead of the bonds themselves because futures require less cash upfront. To take advantage of the price discrepancy, a hedge fund will sell Treasury futures and simultaneously buy the corresponding lower-price bonds. By buying cheaper bonds in one market and selling expensive ones in the other, traders can profit from the small price differences, whether bond prices go up or down. 

The profit from these price differences is so tiny — as little as a small fraction of a penny — that traders typically borrow a lot of cash to multiply their bets. What makes this strategy risky is the combination of hedge funds’ heavy borrowing to execute the trades — as much as $50 borrowed for every $1 of their own capital that they’re investing — and a heavy reliance on short-term borrowing in particular. US Treasury bonds are normally considered low-risk investments because they are backed by the full faith and credit of the US government. But a sudden disruption to financial markets could cause short-term borrowing costs to skyrocket. When that happens, hedge funds are forced to repay the loans and dump Treasuries to unwind the basis trade. That could cause Treasury markets to seize up, and the resulting higher bond yields could ripple through the financial markets, raising the cost of everything from corporate borrowing to home mortgages.

2. Three graphics that capture the challenges that the US will face in rapid decoupling from China. This shows the US dependency on imports from China.

This shows the high level of dependency on China for electronics.

Finally, this shows the product category-wise contribution of China and that of rest of the world to US imports. 

Abrupt decoupling will be painful.

3. China has responded to the Trump tariffs with its tit-for-tat retaliatory tariffs. Apart from this, it has also opened the door on exchange rate response, allowing the renminbi to weaken against the dollar. The offshore renminbi has hit a 18-year low. The onshore renminbi is subjected to a band that restricts moves beyond 2% per day. 

4. Meanwhile, Stephen Miran has expanded on his proposal for an accord with trade partners where they agree to pay for the US security umbrella and access to the large US domestic market. He has outlined five options available with other countries for burden sharing. 

First, other countries can accept tariffs on their exports to the United States without retaliation, providing revenue to the U.S. Treasury to finance public goods provision. Critically, retaliation will exacerbate rather than improve the distribution of burdens and make it even more difficult for us to finance global public goods.

Second, they can stop unfair and harmful trading practices by opening their markets and buying more from America;

Third, they can boost defense spending and procurement from the U.S., buying more U.S.-made goods, and taking strain off our servicemembers and creating jobs here;

Fourth, they can invest in and install factories in America. They won’t face tariffs if they make their stuff in this country;

Fifth, they could simply write checks to Treasury that help us finance global public goods.

5. Michael Moritz makes some important points on the basis of China's manufacturing prowess.

Since the 1970s, China and countries in south-east Asia have perfected a formidable triple axle comprised of the command of raw materials, mastery of component manufacturing and packaging, and now — by dint of drive, creativity and a formidably well-educated cadre of scientists and engineers — an array of products that put the west to shame. Just look at the manufacturing knowhow of Foxconn and TSMC and the product line-up of companies such as Huawei, BYD and Xiaomi — the last of which is only 15 years old. They are enough to make Americans weep. And that’s before you calculate the size of their workforces or contemplate that about 450,000 cars were built in China in 1987 compared with 31mn in 2024.

6. Italian cheese facts of the day

The US imported €7.8bn worth of Italian cheese, olive oil, wines and other delicacies last year... parmesan cheese... is produced in regulated quantities in Italy’s Emilia-Romagna region. Producers there must adhere to 17-pages of strict rules that even dictate what cows can eat — and where their fodder is grown. The Parmigiano-Reggiano consortium allocates coveted cheese quotas to local dairies, polices the process and has to certify cheese as genuine and up to standard.

7. Important graphic on Indian middle class incomes.

8. India's manufacturing is a very big outlier in declining as the economy grows. 

9. Wall Street is also worried because the Trump trade wars may deal a fatal blow to the march of American financial institutions. 

For the past 15 years, the big US banks and money managers have been on the march... Goldman Sachs, JPMorgan, Morgan Stanley and Bank of America each captured at least 5 per cent of last year’s global investment banking fees. The top European bank, Barclays, pulled in just 3.3 per cent... In some quarters, BlackRock has recorded more inflows than the entire European asset management industry combined. Americans also dominate the custody market, holding four of the top five slots. All of them benefited from a vibrant US economy, deep capital markets, and the fundamental appeal of American equities and bonds to international buyers... 

But just when American finance was looking unstoppable, Trump pulled out the rug. His aggressive “liberation day” tariffs, followed by a partial 90-day pause, sent the markets into a tizzy. Other belligerent policies, including threats by his advisers to weaponise finance, are forcing overseas companies and governments to question their dependence on US financial institutions and their use of Treasuries as a standard risk-free asset. Foreign firms are reconsidering their US ties, looking for local service providers and making contingency plans to issue debt in home currencies rather than the now-less stable dollar. Governments are shedding their laissez-faire attitude to US dominance in technology and banking... The lack of European alternatives to Google, Microsoft and the like make it hard to reduce dependence on US technology, but financial services are a different story. European banks are not as big or as globally feared as the Wall Street beasts, but their top employees are experts at raising funds and closing mergers. Even before Trump set world markets on fire, Swiss lawmakers had raised concerns about the wisdom of using a US bank as custodian for SFr46bn in social security funds.

10. One more article on how the US is more dependent on China than the other way round, harping on the substitutability of US agricultural exports compared to the Chinese technology exports.

While the exposures may be so, there's so little discussion on the  job losses for the 10-20 million Chinese workers who are exposed to US-bound exports, whose re-routing will be extremely challenging in this hostile environment of protectionism globally. 

The one thing that the Chinese have a clear upper hand is in that the trade wars will most likely galvanise the country into becoming united despite the suffering to fight the US, a sentiment that's unlikely with the US.

11. The first quarter of 2025 economic data from China has some interesting insights. The headline growth of 5.4% has a good share of front-loaded exports to beat the Trump tariffs. This is reflected in the 12.4% rise in exports in Match. Disturbingly, industrial production and fixed investment rose sharply in March reflecting the continued expansion of manufacturing capacity, even as imports fell 4.3% for the the month. 

12. As we rail at China, it's an opportune moment for everyone to reflect on how they have been complicit in allowing China to become so dominant in manufacturing, none more so than the US.

China shook the world in 2010 when it imposed an embargo on exports of crucial rare earth metals to Japan... The embargo, prompted by a territorial dispute, lasted only seven weeks... When the embargo was over, China took forceful control of its mineral bounty... and consolidated the industry under state control... The mines were later nationalized and consolidated into a single state-run company, China Rare Earth Group... The world was put on notice, especially Japan and the United States, two of China’s biggest customers for rare earth metals used in everything from cars to smartphones to missiles. Governments from both countries drafted detailed plans for how to mitigate their dependence on China. Japan has largely followed through on its plans and today can source the minerals from Australia. Not the United States. Even after 15 years, the country is still almost entirely reliant on China for the processing of rare earth metals. As a result, American automakers, aerospace companies and defense contractors have been left vulnerable.

Angry about President Trump’s tariffs, China has suspended all exports of certain rare earths, as well as the even more valuable magnets made from them. These small yet powerful magnets — no bigger than a ring for a person’s finger, yet with 15 times the force of a conventional iron magnet — are an inexpensive and often overlooked component of electric motors. They are used in electric and gasoline-powered cars as well as robots, drones, offshore wind turbines, missiles, fighter jets and many other products... China now produces 90 percent of the world’s magnets. Further construction was underway at two of Ganzhou’s largest magnet factories last week...

China’s top leader, Xi Jinping, said in a speech in 2020 that it was important for China’s national security that the West’s supply chains remain dependent on his country. “We must build up our strengths and consolidate our international lead in industries where we have an advantage,” he said a few months after visiting Ganzhou’s most advanced magnet factory. He called for “intensifying the dependence of international industrial supply chains on China, forming a powerful capacity to counter and deter deliberate supply cutoffs by foreigners.”

More on rare earths and China's dominance

China dominates the mining and processing of rare earths, a collection of 17 elements that are essential to the auto, semiconductor, aerospace and defense industries. While abundant in the Earth’s crust, they are difficult to extract and separate, and the United States and other Western nations have largely left the work to China. For some critical “heavy” rare earths — named because they have higher atomic numbers on the periodic table — China is essentially the only country that can separate and process them. Rare earths have become so coveted because they help make the powerful magnets needed for new cars, missiles and drones. While “light” rare earths make up far more of those magnets, heavy rare earths are also needed to keep the magnets from weakening or being destroyed at high temperatures. Heavy rare earths have overwhelmingly come from mines in China and Myanmar, which has sold its output to its powerful neighbor, because those countries have natural clay deposits rich in the elements.

Japan has been alert to the dependence on China for critical minerals and has responded strategically. In response to export controls imposed by Beijing in 2010, Japanese companies and government agencies stockpiled these minerals and developed alternative sources, cutting their dependency on China from 90% to 58%. 

13. Talk of cutting the branch on which you are sitting, the case of Trump tariffs on Lesotho.

Lesotho is the largest African garments exporter to the US and a rare success story born out of Washington’s 25-year-old African Growth and Opportunity Act (Agoa), introduced under then-president Bill Clinton to offer tariff-free access to the world’s poorest continent. All that is now at stake... the US president has threatened to impose on Lesotho, one of the highest rates on any country. At $240mn of exports, Lesotho accounts for less than 0.02 per cent of the US’s trade deficit. Yet even without Trump’s higher “reciprocal” tariffs, which have now been paused for 90 days, executives and officials say the new blanket tariff rate of 10 per cent could still destroy an industry built on razor-thin margins and the US’s own decades-old trade policy. The duties “make a mockery of Agoa, which was intended to help developing economies grow”, said Nkopane Monyane, a businessman and former ambassador who for years ran a major garment factory... 

Faced with catastrophic economic consequences, Lesotho has been forced to join the queue of countries seeking to appease Trump with economic concessions... Lesotho this week granted Trump adviser Elon Musk’s Starlink a 10-year operating licence... foreign minister Lejone Mpotjoane also offered to greenlight the construction of a Marriott hotel and consider importing corn and wheat from the US. Lesotho is also considering accepting third country national deportees from the US and deploying soldiers to protect US companies in mineral-rich DR Congo...

In 2002, following Agoa’s implementation, more Asian investors saw an opportunity to use their knowhow and global garment connections to tap the pact’s benefits. Taiwanese multinational Nien Hsing, which also runs operations in Mexico and Vietnam, built its largest operation in Lesotho, where it makes some 600,000 units of clothing monthly for brands including Levi’s. A fifth of its exports go to neighbouring South Africa, while the rest is US-bound. The apparel sector is the southern African country’s biggest private sector employer, with 30,000 direct jobs and tens of thousands more people working indirectly, according to the country’s main business chamber. The reams of cotton being stretched, cut and sewn at Nien Hsing’s factory are a testament to the global nature of the business: cotton sourced from Egypt and West Africa is spun into denim, which then travels to South African ports before landing in the US.

14. Importance of the dollar, or the "burden of being the reserve currency" as per the Trump administration. 

Nowadays, the US only accounts for about a quarter of the global economy, but more than 57 per cent of the world’s official foreign currency reserves are in dollars, according to the IMF... There are many other pots of sovereign and quasi-sovereign money that are not captured by the IMF’s data on foreign exchange reserves, and whether you are a bank in Mongolia, a pension plan in Chile, a European insurance group or a Singaporean hedge fund, dollars are the ultimate reserve asset. The dollar is equally central in trade, with 54 per cent of all export invoices denominated in dollars, according to the Atlantic Council. In finance, its dominance is even more total. About 60 per cent of all international loans and deposits are denominated in dollars, and 70 per cent of international bond issuance. In foreign exchange, 88 per cent of all transactions involve the dollar. Even physical US bank notes are widely held abroad, thanks to the dollar’s broad acceptance. In fact, about half of the more than $2tn worth of US bank notes in issue are held by foreigners, according to the Federal Reserve. This enormous international demand for dollars translates into an embedded premium to US assets and means that the US borrows more cheaply than it would otherwise do — what France’s former president, Valéry Giscard d’Estaing, once famously referred to as America’s “exorbitant privilege”. It also gives the US the power to sabotage another country’s financial system through sanctions.

The effect of the Trump tariffs

Last week the DXY dollar index — which measures the strength of the currency against a basket of its biggest peers — fell 2.8 per cent. This was its seventh-worst week in the past three decades. It has kept dipping this week, extending its 2025 decline to 8.2 per cent... Most notably, the dollar has been particularly weak against other “haven” currencies that typically strengthen when markets are turbulent, such as the Swiss franc and the Japanese yen, and against gold. That the greenback is seemingly being excluded from this select club of currencies is a shocking development to many analysts and investors.

But there are no alternative to the dollar and it's still far from its lows. Despite the April declines, the DXY dollar index is 12% higher than it was its lows in 2020 and 40% over its lowest in early 2008. 

15. Alan Beatie points to the incentive distortions facing US car manufacturers. The US production of light-trucks, including poc

The EU import duty on standard cars such as hatchbacks and minivans is indeed 10 per cent versus the US’s 2.5 per cent. But the US production of light trucks, including pick-ups, has long sheltered behind a 25 per cent tariff wall. The duty is known as the “chicken tax” after Lyndon B Johnson imposed it in 1964 in retaliation for European levies on American poultry. Industry experts say the Big Three car companies in Detroit — Ford, General Motors and Chrysler (now part of the Stellantis group) — have accordingly increasingly focused their innovation on making pick-up trucks and used the same platforms and components to develop gas-guzzling large sport utility vehicles (SUVs). Felipe Munoz, senior analyst at the market intelligence company Jato Dynamics, told me that while pick-ups and heavy SUVs were only 17 per cent of US light vehicle sales, “it’s where the Big Three US manufacturers make most of their money in the American market”. The rest of the world, however, tends to have narrower roads and higher fuel taxes than the US. “The protection has made the US car manufacturers less competitive globally,” Munoz told me. Japanese companies make family cars popular around the world: Detroit does not... It’s not EU protectionism that hurts American carmakers abroad. The European Commission has long had an open offer to the US to cut all industrial goods tariffs including cars to nil, which the US has failed to take up.

16. OpenAI facts of the day

No other company has ever built a consumer internet empire so fast. It took Google 13 years to reach 1bn users, while Facebook reached the same milestone in eight. Thanks to the viral success of ChatGPT, OpenAI looks on track to get there in three... chief executive Sam Altman said last week that its audience had doubled in a matter of weeks and now comprises a tenth of the world’s population. This is mind-boggling — ChatGPT only passed 200mn weekly visitors last August. Rapid growth has left the company little time to address some of the most fundamental questions for any consumer internet company.

17. Semiconductor chip supply chain 

Those supply chains cross so many borders that “no one [country] is self sufficient — not even close,” Chris Miller, a Tufts professor, added, noting that while Japan dominates the wafer business (with a 56 per cent market share), the US has a 96 per cent share in electronic design automation software and Taiwan controls more than 95 per cent of advanced chipmaking. Meanwhile, China processes more than 90 per cent of many critical minerals and magnets needed to make digital goods.