Trump 2025: What Washington’s China Commission Is Saying About U.S.-China Relations
The U.S. China Commission released their Annual Report this week. It's high on foreign policy blob's main topics of concern, and less on trade and globalization impacts on the homeland.
Re-intro to Double Plus.
Hi to my free subscribers. Hey, what do you want for free, right!? Been super busy at work, but I’m back to start this up again with my usual cast of sidekicks, including Smarty Pants from the faculty lounge. With Double Plus, I use my background in journalism and business intelligence and my insights on geoeconomics and political risk stemming from my day job in The Swamplands. Double Plus is an eye on global economics, with a focus on China. Woven within the fabric of Double Plus is an interest in what the Imperial Capital and Davos Man have in store for us plebs. Using off-record sources from the Hill and Wall Street, I try to provide straight-forward analysis and insights on political economics that could impact global business and investment.
In Chinese vernacular, Double Plus means “extra good” or “super great”. For us Americans, double plus is part of the constructed language in the George Orwell novel “1984” called Newspeak, a language constructed to control thought by simplified and emotionally laced narrative talking points, ya dumb racist.
Onward…
Trump won. China back in the crosshairs.
Last week, on Tuesday, the U.S. China Economic and Security Review Commission released its Annual Report to Congress. This 793-page report is full of recommendations for Congress to enact legislation against China. They made 10 recommendations. They held an open meeting about it, and took some questions from an audience though I am not aware where this audience was from. I am guessing DC-based think tanks and special interest groups. I don’t recall any journalists being there.
As I’ve warned here before, and during my past days with Forbes, the China story is at risk of being handed over to the national security state. This was very evident in the Annual Report with most of the recommendations, and nearly all of the Q&A session, being about defense and how to stop China’s rise in advanced technologies. China has warned about this to Washington. Xi told Biden in Brazil last week that one of the red lines for him was stopping China’s development. That’s what this Annual Report mostly recommends Congress do.
Within the trade and business recommendations, they want to shut down the so-called de minimis trade provision. This is how Shein and Temu survive. Any good priced under $800 comes into the U.S. duty-free. The Commission recommends shutting that down completely.
They might just want to do this for China, which coalesces around bills on Capitol Hill that would do that. The White House restricted de minimis imports from China in September targeting goods subject to the first Trump term – the Section 301 and Section 232 steel and aluminum products tariffs. Section 301 should impact Shein and Temu, so I will be curious to see in the months ahead if those shipments are now paying duties of around 25%.
[Forget a Shein IPO in U.S. That would be super ballsy if they pulled that off. Shares of Pinduoduo (Temu owner) are down 31.6% YTD, which is worse than ASHR, up 11.4%.]
The Commission also recommended removing China from its Most Favored Nation (MFN) status. Almost all World Trade Organization countries have this status. Russia was kicked off it in 2022 because of the war with Ukraine. If China loses this status, tariffs go up immediately to around 35%.
Removing China from de minimis and MFN was recommended last year by the House Select Committee on the CCP. De minimis has seen legislative action; MFN has not.
The Commission is also recommending restrictions on outbound investments and this time they will no longer only impact public markets – stocks and bonds. They will impact venture capital and private equity, making it harder for those guys to invest in the new up-and-coming China tech companies, as Silicon Valley has done with Shein and Temu and of course Tik Tok.
Sequoia Capital used to be a reliable lobbying force for Chinese tech startups but now that Neil Shen is gone and Democratic Party activist and Sequoia founder Michael Moritz is in a different division altogether, Shein and Temu have lost some muscle on Capitol Hill. Plus, some Sequoia guys have outwardly supported Trump on X, for what that is worth.
For public markets, they recommend Congress change tax rules for Wall Street firms investing in Chinese companies listed on the so-called Entity List. These lists are “off limit” companies are kept by State (for the Uyghur Forced Labor Law) and Treasury, for sanctions law. The Department of Defense also has a list of companies that they are banned from doing business with, like DJI drones, but no one else is.
The Commission thinks investors should be punished for investing in the handful of companies on these lists that issue stocks and bonds. Among the tax expenditures that would be eliminated prospectively are the preferential capital gains tax rate, the capital loss carry-forward provisions, and the treatment of carried interest. I think that recommendation goes nowhere.
It would be better to temporarily ban ownership of those securities until they are removed from the Entity List. If tax laws were changed for those Chinese companies, investment funds would likely sell those assets anyway rather than comply with the different tax laws.
The China trade and Trump’s 60% tariffs. What now?
Geopolitical risk to China will continue under Trump as it did under Biden.
There is a chance that Biden was pressured to keep the China tariffs and export restrictions on high technology goods, and bans on investments in defense contractors there, because of the Hunter Biden laptop fiasco. Although real, unlike Trump’s Russia fairy tale, the Biden laptop narrative made it so Biden could not go easy on China or would be made to look like he owed China some favor, as Trump was made to look regarding Russia and the buildup to the Ukraine War, and subsequent sanctions regime.
The trade war is bad for China because it leads to outsourcing labor from the mainland, a risk to China’s labor market. Because of the Section 301 tariffs, China now feels what Americans felt when China entered the WTO and businesses opted to outsource manufacturing and closed shop here.
Trump’s proposal of 60% tariffs…I am not sure if this will happen, actually. He could be happy if Congress quickly removed China from MFN. However, I can also see a 60% tariff being used as a way for China to sign agreements on imports, like in the previous administration. So if you were to see China importing more soybeans, or more beef, or LNG or LPG, I can see Trump removing some tariffs. Or if you got China to commit to investing in automotive manufacturing in the U.S. instead of Mexico, that too could be a release valve.
Another option for China to avoid higher tariffs would be to allow American Big Tech to breach the Chinese firewall. I give those odds at less than 10%. That depends on how desperate Xi is made to feel.
“I am relying on your overall take on China, Ken, which is that a lot of manufacturing in China is in trouble and moving to Southeast Asia. The direct tariff threat of 60% is that China manufacturing that left to Southeast Asia is not coming back to the mainland,” says Vladimir Signorelli, founder of Bretton Woods Research in New Jersey. “That doesn’t mean Chinese companies are going to fold, because Xi is fine with the export led model and if it doesn’t all take place in China, but takes place through Chinese subsidiaries in Southeast, Asia or increasingly in Mexico, he might be okay with that,” he said. “For China, their late 90s early 2000s trade window with the U.S. is closing. They have used other means to get into the U.S. market, like e-commerce. But if what Trump does is good for the U.S. economy, then it will be good for the global economy. I wouldn’t buy anything in China right now. It’s got a broken model at the moment.”
Outside of China, Trump has proposed a 10% universal tariff for all countries. Some have said it would be as high as 20%, which would be better because a 10% forex correction would eliminate the tariff cost.
Regardless of the forex correction, there are two ways to look at tariffs: the Trump/Robert Lighthizer way, and Wall Street’s way.
The Wall Street view is that tariffs bring in revenue to the government, which we need because we are in debt beyond our wildest dreams, with interest on our debt greater than the GDP of most large emerging markets other than China.
The Trump/Lighthizer view is that tariffs entice manufacturers to make things here instead of in Mexico and Asia.
The problem is that a 10% tariff:
A) Will be erased by forex rates devaluing, so manufacturing locally is not suddenly more attractive
B) Will unlikely apply to existing free trade agreement countries like Korea, Mexico, and Canada.
Trump’s Key Econ Picks & Tariffs
We all know this already, but in light of the Trump trade agenda, here is where these guys sit, I think:
Commerce: Howard Lutnick, 63, CEO of Cantor Fitzgerald. He is now okay with tariffs as a source of revenue to eat into our $2 trillion fiscal deficit. Lutnick also thinks this will make it easier to make the Trump-era tax cuts permanent (they expire next year), and cut even more taxes. He probably secretly hopes we can raise so much revenue from tariffs, that we can remove capital gains taxes, or lower the C-corp rate.
When you hear Tim Pool and Joe Rogan talking about tariffs as a means to replace income taxes, they are not talking about the C-corp rate, they are talking about Federal Income taxes for us plebs. Tariff revenue that helps multinationals lower taxes and billionaires pay less in capital gains do not guarantee industrial investment, or job and wage growth down market. Trump will have to be mindful of that or lose his base.
Treasury: Scott Bessent, 62, hedgie over at Key Stone Group. Bessent is an even-keel “America First” guy who understands tariffs as revenue and is unlikely to butt heads with Trump’s trade agenda. He is liked by Steve Bannon, the Svengali of the War Room posse, the political activist base of the War Room.
Bessent will be the one tasked with explaining Trump’s trade agenda to global finance ministers at G20 wine and dine events in European five-star hotels.
“Scott Bessent should refer to tariffs as a revenue wall because that will be the glue that binds this bipartisan consensus on trade together,” said Signorelli. “Look at Chinese tariffs from Trumps first presidency, Bidien didn’t knock that down because he saw a cash cow there. Once you bring in a revenue to government, both parties appreciate that. If you want to cement tariffs as revenue, who is going to kill that? You’d be saying goodbye to $500 billion and more in revenue. Bessent sees the tradeoff there: more revenue from tariffs and less on taxes at home. He even talked about getting rid of the income tax. Bessent is selling dramatic tax cuts to the electorate, and I think it is a double plus positive for the U.S.”
Bessent says: “I also feel strongly that we are in the midst of a great re-alignment, a Bretton Woods type realignment in global policy and global trade. And I'd like to be a part of it. Lastly, I'm convinced this new Republican party that's been reconsistituted is the party of the future: a melding of working class and business class people. And I'm determined that these constituencies get treated well. See, I started out very affluent, and my dad saw to it that we lost that. Now that I've made it back, I want to see for working people that things go well."
Office of Management and Budget: Russell Vought. Vought is pro-tariffs and will bring in experts to explain how a universal tariff can be a revenue driver and benefit industrial growth in the homeland, leading to higher wages. He currently runs this 5013c: Center for America Renewing.
New Trade Czar role for Robert Lighthizer; Lighthizer is expected to oversee and coordinate the administration's trade policies at least in the transition period. So I suspect he will be like a shadow USTR, while Lutnick may officially take that role. It is not clear to me that he wants a role and may be happy in retirement. He is 77 years old.
Time will tell…
Smarty Pants from the Faculty Lounge speaks
“Former Dem Party donor Scott Bessent gave a speech at the National Conservativism Conference this summer where he added further to his summer op-ed in The Economist – where he correctly diagnosed a lot of our trade problems. But I think he is stuck on 1990s solutions to those problems. Maybe it’s a generational thing. In his speech, he did an excellent job articulating a key benefit of tariffs. He says, “the lessons of China are instructive. Many wrongly assume that China's competitiveness was built by the Chinese government's selection and promotion of specific national champions. In fact, many leading Chinese companies emerged after a brutal subsidized competition with other would-be national champions. The United States should take this lesson to heart in pursuing our own industrial policy. Industrial policy solutions that rely on changing relative prices at the market level create better outcomes and will tend to be more effective than the programs we have seen from the Biden Administration which requires the government to pick winners and losers.”
This is why tariffs can be a potent economic policy tool since they operate at the market level. Tariff policy should reflect the realities of the international system, including differentiating risks and behaviors with different countries, potential responses, and the realities of international negotiations. Additionally, tariffs should be telegraphed well in advance, both to provide American businesses with the ability to plan and to signal a resolve to international counterparties. Only the specter of the loss of U.S. market access can motivate other countries to correct the underlying drivers of unfair competition, Bessent said.
He understands how tariffs can create a competitive domestic market compared to tax cuts or subsidies for special interests like new energy companies, or semiconductors. However, he's still a deep believer in multilateral engagement. And I'm therefore left with the impression that he wants to start a 10th GATT Multilateral Round to renegotiate trade, which is akin to getting 130 countries in a room and trying to get them all to agree to open their markets to goods they produce at home while telling them to stop making us bed linens and microwaves. And more discouragingly, he seems to think that the "tariffs of a century ago" (~35% average) were too high, which is absurd, especially when coupled with modern customs valuation law and a floating exchange rate regime.
In NAFTAs first year, on December 1, 1994, the Mexican peso was trading at approximately 3.4 pesos per dollar. It has since devalued seven-fold to around 21 cents per dollar meaning our dollars go farther in Mexico than they do here, and surely can buy more today than they used to in 1994. Imagine if you had a 10% tariff on them going back to the 90s. The weak peso would make that tariff useless as an incentive to manufacture products here instead of across the Rio Grande.”
One more thing…
On Friday, we learned that Congresswoman Lori Chavez-Deremer was tapped for Labor Secretary. Ladies and gentlemen, we have a LatinX!
Recommended reading:
Vlad recommends WSJ’s DOGE Plan to Reform Government
Ken recommends In The Weeds of the Swamp by James Kunstler
Smarty Pants recommends Queer Marxism Classes at Cornell for Spring Semester
Happy Thanksgiving, All!
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