The So-Called Tariff War: Political Theater or Reality?

How much of this can be taken seriously, and who is in on it?

View from China with an Austrian School of Economics Perspective

At the home of the zipper in Yiwu

Yiwu, located in Zhejiang province not far from Hangzhou, is the center of the worldwide zipper production. It allegedly produces 80% of the world’s zippers. The world’s leading zipper producer SBS Zipper is based there. Yiwu also produces ~60% of the world’s Christmas products, 70% of the world’s artificial flowers, 60% of all costume jewelry and even (allegedly!) something like 30% of all the world’s socks.

Faced with 145% customs fees, are Yiwu’s producers worried about their exports?

Apparently not. Certainly none of their customers are paying the fantastical 145% tariffs. As one exporter quipped: “20-30% might be somehow within the realm of plausibility. But 125%? Or 145%? That is obviously a joke.”

The government in Beijing apparently agrees, stating yesterday that their increase of retaliatory tariffs to 125% would be the last one, since at these levels no commerce was going to take place.

So – assuming for the sake of argument that this ‘tariff war’ continues – will these exports simply stop?

A friend who works with a number of Yiwu-based companies says that most are not worried.

For one thing, many of them long ago set up repackaging plants in Southeast Asia which they can use in need to relabel products and transship them to the US with a “Made in Vietnam” or “Made in Thailand” label on them.

And besides, with their enormous efficiencies of scale and highly mechanized production lines, who could possibly replace their production?

Of course, the US-based manufacturers long ago stopped making clothes, but American consumers doubtless end up buying large numbers of Yiwu zippers every year. That is not going to change any time soon, unless Americans stop buying clothes completely. Nor are they going to stop buying costume jewelry, and a lot of that is going to continue coming from Yiwu, one way or another.

Some of China’s smaller producers, especially those located in China’s southern Guangdong province, have announced temporary production suspensions in the wake of US order cancellations – a blow most certainly for many of these family-run businesses. Nonetheless, Chinese companies tend to be innovative in the face of such challenges, and – once again assuming that this ‘tariff war’ continues – most will probably ultimately find workarounds.

So yes, for some companies there is a real impact. But is it likely to be catastrophic, regardless of how things play out? Probably not.

Political Theater?

When many people hear the term ‘political theater’, they think of something which is comical. But that is not only rather inaccurate; it’s missing the point. Political theater means a pre-written multi-part script designed to evoke a particular reaction. It may not be completely dishonest, but in any case it IS designed to have a psychological effect on its audience.

Political theater also doesn’t mean that it can be safely ignored. Political theater can be deadly serious, with serious impacts on the real world.

Yet thus far not a single one of these new country-based ‘reciprocal’ tariffs announced in 2025 has been paid. Nor are they likely to ever be paid. To be clear, we are not referring to the new 10% base tariff, nor to the industry-specific tariffs (such as the 25% tariff Trump imposed on car imports from Canada and Mexico), nor to the 25% tariff on imports of steel and aluminum. These have been set at levels which though significant, are clearly payable.

Fight Fight Fight?

Despite all the “fight fight fight” rhetoric, the series of increasingly preposterous numbers like 125% or 145% have the unmistakable whiff of theater. Though there always are exceptions, very few importers are ever going to be willing to take the risk of paying such astronomical rates upfront. Yet can the United States survive without goods from its current #1 supplier of both finished and intermediary goods? This seems rather doubtful. Just consider the automotive industry which the Trump government allegedly plans to help revive with its tariffs. Can it do this if its primary supplier of auto parts disappears overnight?

And sure enough, on April 11^th the US government Customs and Border Protection released ‘guidance’ specifying exceptions from the tariffs. These include computers, smart phones and ‘chip-making equipment’. Can we take that to mean that the tariffs will not apply to anything deemed important?

Moreover, is it not curious that for some reason, somehow China is the only country with which this ‘tariff war’ has escalated? Sure, there have been grumblings here and there, and EU had said that it would impose 25% counter-tariffs on selected products, but somehow the United States never felt it necessary to react. And as for everyone else, basically… nothing. Not even a one. If this ‘war’ were real, how likely would that be?

OK, so maybe this war against the rest of the world was just fluff. So the remaining question is, is at least the ‘trade war with China’ real?

As most readers are probably aware, for the rest of the world Trump’s fanciful country-based ‘reciprocal’ tariffs have now been ‘suspended’ for 90 days. Only China remains, after several rounds of tit-for-tat, now with a theoretical tariff level of 145% (125% + 20%). This means that US importers will be able to use the entire world to sniff out potential replacement suppliers. Transshipments via 3rd countries will however doubtless continue, at least to an extent, and the list of exceptions will presumably grow longer and longer over time.

Until yesterday’s announcement of a moratorium on further increases, China responded to each upping of the ante with a similar theoretical tariff on the import of goods from the US, though notably not on the import of services.

If we are witnessing theater, is it all theater, or just in part? In other words, was the EU leadership party to the script in advance? How about Japan? Or Mexico? Or is perhaps even the Chinese top leadership in on it?

Is it not a bit bizarre that with all this talk about the US waiting on a call from China, that there is NEVER any mention of what the US actually wants?

For better or worse, unavoidably most of the Twitterati find it hard to imagine that much of what they comment on every day might actually be theater. There is for example endless talk about how Trump is ignorant about how to negotiate with the Chinese. Or how he was “surprised” by the stock market plunge.

The preference for believing that it’s all real seems to be overwhelming. But think about it: The public is supposed to believe that Trump is making ‘sudden’ decisions like Wednesday’s tariff suspension quasi on a whim. This is despite the fact that this stock market takedown was clearly planned months ago. Back on December 12, 2024 he pretty much said outright that a stock market takedown was in the pipeline¹.

A more plausible explanation

The folks who came up with this plan (whoever that is) surely also understand that even after dropping the play act about tariffs against the rest of the world, effectively implementing 100%+ tariffs against China would lead to massive shortages and inflation inside the US. (‘Effectively’ means by preventing transshipments.) Trump’s team is full of very talented people who have accumulated huge fortunes. It seems unlikely that they accomplished this without having a grasp of basic economics.

The obvious implication is that they believe it’s unlikely to ever come to this.

Yes, all new orders from the US have been cancelled. And new container shipments from China probably aren’t sailing to the US. But most US importers are sitting on ample stocks that they have accumulated in anticipation of tariffs, and according to some sources, until May 2nd the special exception for goods priced at under $800 is still in effect. At the same time, many Chinese exporters have set up transshipment bases in various southeast Asian countries to enable them to continue sales under another label. So at least for many, the changes will be merely cosmetic.

And as for the alfalfa and other goods on the way to China, China Customs have already declared that all shipments currently underway will not be subject to the now essentially unpayable rates.

So there is not likely to be any immediate impact.

Yet for some reason, there doesn’t seem to be much talk about this online. Instead of trying to understand what is going on, you read headlines like:

“The bond market just broke the White House.” OR
“It was Japan who forced Trump’s hand.”

OK. Maybe. But the obvious alternate explanation is that this was the plan from the beginning. After all, that’s pretty much what US Treasury Secretary Bessent said long before the 90-day tariff suspension announcement. In a recent appearance at a American Bankers Association panel discussion, he also talked about the possibility of building a joint front with US allies against China.

There is no reason to doubt that Trump is telling the truth when it comes to his ambition to reindustrialize the United States. He has been saying the same thing for literally decades. But he never promised WHEN exactly he envisions that coming about, and in which industries. It certainly seems highly unlikely that he is targeting the production of socks or zippers. Is such a goal realistic for some highly mechanized hi-tech industries? Perhaps, but even that is not going to happen anytime soon. In the meanwhile, they are going to need goods from…. China. There is simply no other country with the capacity to replace even a significant portion of those goods.

Moreover, few companies are going to be willing to green light the massive investments required to set up new manufacturing facilities if key policies change every week. So there is real time pressure on the US side to announce some kind of agreement promising at least medium term stability.

The Bessent Agenda

What Secretary Bessent has to say is however far more concrete and less ambitious. What he claims to want is simply to turn the tide and start reducing China’s suffocating dominance instead of continually increasing it.

What does that mean concretely? As stated in the previous article we published on this war of words, an exchange rate adjustment is the only realistic way to accomplish this. Multiple commentators in Trump’s inner circles have said as much, though always without saying it outright. Instead they talk about the problem of ‘currency manipulation’ and the like.

China is not solely at fault for the enormous trade gap. The West’s helicopter money policies, their massive deficit spending and their restrictions on the exports of hi-tech goods like high performance chips which China WANTS to buy also play a role. Nonetheless, with inflation being flat in China for the past several years while prices in the US and Europe have been rising rapidly, the price gap between China and the West has been growing steadily every year. Despite this, in the period between January 2021 and today, the People’s Bank of China actually devalued the yuan by over 14% against the US dollar – from 6.37 at the end of 2021 to 7.28 today.

The problem for the United States, and in fact for the West in general, is that it has absolutely no direct influence over yuan exchange rates, all of which are set by the People’s Bank of China. This is because the problem is NOT primarily an over-valuation of the US dollar. Devaluing the dollar against, say, the euro, is not going to accomplish much.

Today’s China faces significant internal economic headwinds, and while losing its exports to the US would not be economically fatal, losing its exports to the US + Europe + Japan would certainly lead to mass unemployment, and in any case the resulting chaos would be an internal political catastrophe. Again, this assumes that transshipments are effectively blocked.

The problem for China, or rather for its leadership, is that in light of the weak economy and poor business sentiment, a major yuan revaluation is seen by many as unthinkable. So perhaps this whole tariff war theater is precisely what the big kahuna needs to justify the unthinkable? Given the seeming ludicrousness of the script thus far, one cannot exclude the possibility that the entire play might have been cooked up in advance.

Could it perhaps have been in fact agreed upon between Elon Musk and Chinese Premier Li Qiang, the two of whom have a long-standing trust relationship which has stood the test of time? We’ll probably never know, but as always, it’s the results which count.

The past few days there have been rumors that ‘negotiations’ are ongoing in Singapore. Xi Jinping is scheduled to travel to Malaysia on the 15^th, and some wonder if a summit in Singapore could be under discussion.

So could some kind of settlement already be in the pipeline?

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1. See https://x.com/WatcherGuru/status/1867271423514853526. A more recent case in point: On Wednesday US President Trump was filmed in the Oval Office chuckling with several of his Wall Street friends about all the money they made that day. And indeed, 20 minutes before his announcement of the latest policy change, large numbers of new call positions were opened on the US stock market. So it certainly does pay to be an insider. But that aside, the point is that the effects of all these pronouncements on the market are most certainly anticipated and planned for. It’s highly unlikely that the people standing around Trump on Wednesday spend their days playing the markets; instead they make them. To claim otherwise merely reveals an ignorance of the fact that Wall Street and the US government are not two separate entities. And to be fair, at 9:37am (several hours prior to the big announcement) Trump posted on his Truth Social account that it was a “GREAT TIME TO BUY.” So the information was available to everyone. The bottom line: Financial wizardry, which is literally the lifeline of the Western economy, works best if you have a very good idea about what events are in the pipeline.