Trump Continues Swinging His Wrecking Ball, China Makes Strides In Chip Race

US president Donald Trump continued to swing his wrecking ball at the world trading system. He has said that he would impose a tariff of 30% on Mexico and the European Union, and 35% on some goods from Canada. He has threatened loyal Asian allies South Korea and Japan with a duty of 25%. On pharmaceuticals, he has promised an import duty of 200%.

Vietnam, he said, has agreed to duty-free entry of American goods while that country’s exports to the US would bear 20% duty. Vietnamese officials, however, demurred. They said they have only agreed to a 11% duty US imports of Vietnamese goods. This casts doubt on his 19% duty on imports from Indonesia. That scepticism should apply to Trump’s claim that India, too, would agree to let in American goods without let or hindrance.

Tariff Tantrum

Trump has, probably, carried his tariff threats too far. Virtually every country now faces steep tariffs. This makes a level playing field, almost, for all exporters. If Trump were to levy a 20% duty on Indian exports to the US, and India were to say, go ahead with the levy, where would the US source cheaper alternatives to the Indian supplies?

If the US levies virtually the same level of punitive duties on imports from all low-wage countries, the level of competition among the low-wage countries for the US market remains unaffected. The American consumers would have to pay more, and probably, buy less, shrinking the market overall, without particularly affecting each exporter’s market share.

Let us do a thought experiment. What if Mexico and Canada now withdrew from the US-Canada-Mexico Free Trade Agreement, levied an export duty equivalent to the duty Trump had reserved for them, and challenged Trump to levy whatever tariff he wanted? What could Trump do?

He could try to break the exporters’ alliance by offering duty concessions to one country or the other. But if they refuse to give in to temptation, Trump will be faced with expensive parts, components and final goods that would make American companies and consumers curse their woolly-headed president.

If all US trade partners could enter into and stick to similar pacts, rejecting selective tariff concessions from Trump, his hope of leveraging the US market size to extract unilateral concessions from other nations would be dashed. But, of course, in the real world, such cooperation among nations is difficult to obtain and sustain.

Those familiar with the game, Prisoner’s Dilemma, would appreciate that the inability to trust other potential cooperators is at the heart of the reason why people choose suboptimal options.

Trump Can Be Foiled

In the game, two thieves are caught for a robbery, but the police have no proof, and can obtain a conviction, only if either of the two accused agrees to testify against the other. Each prisoner is interrogated separately, with no chance to communicate with the other. The police offer each one of them a chance to confess, with the promise that if he testifies against the other, he will walk free, while the co-accused goes to jail for years. If both confess, however, both would get a moderate sentence. The optimal choice for either thief is to keep his mouth shut, and both would walk free, as the police would have no proof.

Each is tempted to implicate the other and walk away free. If both were sure that his partner in crime would not welsh on their mutual compact, they could refuse to talk, and both would walk free. But neither is sure that honour among thieves is real.

The choice before each is: a) keep shut, and if his partner confesses, go to jail for years, b) confess, and walk free if the partner refuses to talk, or suffer a moderate sentence along with the partner. The rational choice, in the absence of trust, is to confess, and either walk free, with a guilty conscience, or undergo a moderate sentence in the company of his partner. Rational criminals would confess, implicate one another, and undergo moderate sentences, avoiding the worst option of a lengthy prison term.

Honourable thieves would refuse to confess and walk free. But can nations expect all other nations to be honourable like those exceptional thieves, and not be tempted by Trumpian concessions just for them? All for one and one for all is a principle for the Three Musketeers and NATO, not for common folk. But even if some large diversified producers can reach a pact among themselves and stick to it, Trump can be foiled.

Some Backtracks And Nvidia’s Climb

Trump’s threat to sack Fed chairman Jerome Powell backfired. The markets reacted, and Trump said he had no intention of seeking Powell’s removal before the end of his tenure next year.

Israel did a different kind of backtracking. It breached its ceasefire agreement with Lebanon and bombed what Israel claimed was a Hezbollah arms cache. Israel also bombed some parts of Syria, even as that country struggles to keep chaos at bay, as Assad loyalist, embattled druids and some other groups bare their teeth. Israel continued to slaughter Palestinians in Gaza. The toll of those killed at and around the food distribution centres from Israeli fire has climbed to about 700.

Nvidia is doing another kind of climbing. It has become the first company in the world to be valued more than $4 trillion. China, it would appear, has extracted a concession from the Trump administration by way of resumption of exports of some high-end chips from Nvidia useful for creating artificial intelligence (AI), in return for ending its export ban on rare earths and critical minerals to the US. The most advanced Nvidia chips still remain outside China’s reach. But for how long?

China’s Chip Chase

China is making rapid strides in its project to indigenise the entire chip-making ecosystem. China’s top chip manufacturer, Semiconductor Manufacturing International Corporation, can churn out 7 nanometre chips, but is bent on producing the 3 nm and 2 nm chips that Taiwan Semiconductor Corporation Ltd and Samsung make.

What remains for China to crack is to make in China the extreme ultraviolet lithography machines, currently a monopoly of the Dutch company ASML. Ultra-thin circuits are built on silicon chips by lithography, that is, training focused laser beams on silicon wafers to create the tiny grooves, into which vaporised copper is subsequently deposited to create the nano-circuits.

Three Chinese companies are in the lead to create Chinese versions of extreme ultraviolet lithography machines: Huawei-linked chipmaking equipment supplier SiCarrier, Shanghai Yuliangsheng and Shanghai Micro Electronics Equipment, even as smaller firms beaver away at the same goal, with the support of local governments, to create the extreme internal competition that, together with oodles of subsidy, makes Chinese products so competitive in the global market.

The competition is so intense in electric car manufacture that the Chinese government is stepping in to prevent a disastrous race to the bottom. Two phone makers, Huawei and Xiaomi, have launched their own electric cars to roil the Chinese EV market further. Taiwanese electronics contract manufacturer Foxconn is partnering with struggling Nissan, in the sense of using some Nissan facilities to put together Foxconn’s own EV aspirations.

The Chinese economy grew 5.2% in the June quarter, beating expectations. The Indian economy is not yet in this happy position, with the suggestion that plunging retail prices could indicate economic distress for some sections of the population, even as the economy as a whole plods along.