China Trade War: A Fight With No Winners

MIKE TOWNSEND: Last week was a relatively calm one in Washington. Congress is taking a break, so there were no battles on Capitol Hill. And there were no major tariff announcements from the White House.

That's probably a good thing, because everyone from members of Congress to foreign leaders to investors to shoppers is still trying to sort out the implications from the sweeping tariff plan the president unveiled earlier this month. 

One thing is clear from the flurry of tariff announcements in recent weeks—the two largest economies in the world, the United States and China, are now in an all-time trade war. President Trump escalated tariffs on most imports from China to 145%. In response, China has set tariffs on imports from the United States at 125%. 

I've been thinking a lot about the practical implications of these sky-high tariffs. At its most basic level, it means that a $20 T-shirt imported from China will now cost $49—likely shutting down the market for that T-shirt. About 77% of imported toys come from China—prices will undoubtedly go up there, too. Shifting production of T-shirts and toys to another country isn't easy, but it's doable.

I was surprised to learn that about 75% of cookware and kitchenware—pots, pans, knives, flatware—comes from China. Furniture, sporting goods, shoes, stereo equipment—all are also heavily sourced from China and likely to get more expensive soon. But it also feels like there are alternatives.

But many things we import from China are far more complex. About 90% of iPhones are built in China, so the tariffs potentially have huge implications for the price of an iPhone here in the United States, and also for the world's largest company by market cap—Apple. About 87% of all video game consoles come from China. 70% of lithium-ion batteries. And as much as 90% of rare earth minerals, which are essential for everything from medicine to MRI machines to cars. 

Moving production, reworking supply lines, or finding other producers is no easy task for these kinds of products and materials—and that's where the trade war could be the most damaging.

For investors, it's particularly confusing, as no one seems certain how the across-the-board 10% tariffs on all imports and the China trade war will impact prices, inflation, jobs, the broader economy, or individual companies. Even companies themselves are having a tough time projecting what the rest of the year will be like. United Airlines, for example, took the unusual step of issuing two full-year forecasts last week—one if things remain relatively stable and one if the U.S. slips into a recession, calling the economy "impossible to predict." United is far from alone in being unsure about what the rest of 2025 will bring. 

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.   

Coming up in just a few minutes, I'm going to be welcoming back to the podcast Jeffrey Kleintop, Schwab's chief global investment strategist, to help us better understand the implications of the trade war with China. We'll talk about which imports from China matter most to the United States, how realistic it is to move production and supply lines, whether the standoff with China can end with both sides declaring victory, and how investors should be thinking about global investing in a time when so much seems uncertain.

But first, here are three things to watch in Washington right now.

Capitol Hill remains a bit quiet as Congress is finishing up the annual two-week Easter recess. But things will pick right back up next week, where the focus will be on the House of Representatives as it moves to the next, and most critical, stage in the effort to pass a massive bill of tax cuts along with spending cuts.

Prior to the Easter break, the House narrowly approved the "budget resolution," the framework for the budget bill, which is a necessary first step in the process. But while the resolution passed on a 216-214 vote, there was plenty of dissension among House Republicans about it. The key area of contention is over the amount of spending cuts in the budget bill. The original House-passed resolution called for a minimum of $1.5 trillion in cuts. But the Senate modified that to set a floor of just $4 billion in cuts. House conservatives got Senate Republicans to promise to try to get to the $1.5 trillion number, but there was no guarantee. This is likely to be a major issue further down the road in this process.

In the end, a number of House Republicans voted for the budget resolution reluctantly, and only to move the process forward. Now comes the hard part. Starting next week, House committees will begin meeting to put together the specifics of the actual bill, which means every individual tax provision and every individual spending cut. Up to now, the discussion has all been at the general level, with broad figures and no details. That will begin to change in the coming weeks. 

Particular attention is likely to be paid to the House Energy and Commerce Committee, which is aiming to cut nearly $900 billion in spending from programs under its jurisdiction. The largest program is Medicaid, which has become a flash point. In order to get to its savings target, the committee is likely to have to make significant Medicaid cuts, which could spark an internal battle among Republicans.

There are plenty of other difficult decisions that await Republicans as they sort out this gigantic bill, including how much to spend on border security and defense, how to handle the controversial state and local tax deduction, whether extending the expiring 2017 tax cuts should count against the overall cost of the bill, what other tax cuts to include in the package, and many others. One that has cropped up in the last couple of weeks that I'm keeping my eye on is the possibility that Republicans may consider raising the top individual income tax rate. Some lawmakers have floated taking the top rate, currently at 37%, to as high as 40% to help cover the cost of other tax provisions. But raising taxes on anybody would go against a fundamental belief for many Republicans, so it seems like a long shot. Still, the fact that it is even being discussed is indicative of just how hard the math is going to get on this bill.

On the spending-cut side of things, Republicans across the board are focused on big reductions in federal spending. But the next few weeks will require them to outline every single cut—and defend those to constituents back home, even when those cuts have a direct impact on their communities and their voters. It's a delicate process that I'm going to watch with fascination.

Second, I've also been keeping an eye on the debt ceiling. The United States is currently at the Congressionally mandated cap on how much debt it can accrue. The Treasury Department has been taking so-called "extraordinary measures" since mid-January to ensure that the United States does not default on its debts, buying Congress some time until legislation to raise the debt ceiling can be passed. But Treasury has been carefully watching tax receipts this month, as April typically produces a major influx of cash into the government's coffers.

Just a couple of weeks ago there was growing concern that tax receipts were running behind last year's pace. Lower-than-expected tax receipts would mean less cash for Treasury to use to pay the country's debts—and that would mean that the so-called "X date," the true deadline for Congress to raise the debt ceiling, could be sooner than expected.

However, Bloomberg reported last week that those concerns turned out to be overblown. Over the final days leading up to Tax Day on April 15, tax payments poured into the Treasury, and the largest one-day increase in the Treasury's cash balance in three years occurred on April 15 itself. That should help with the debt ceiling timing, possibly pushing the X date well into the third quarter, rather than June, as some had feared. 

Nothing is official yet, and Treasury is expected to provide an update on the debt ceiling situation at the end of April. But a longer lead time on the debt ceiling is good for Congress. Republicans have included a $5 trillion increase in the debt limit as part of the budget resolution. That would be enough to take the debt ceiling debate off the table until after the 2026 midterm elections. With the expectation that the budget bill could take until well into the summer to pass, there was some worry that the debt ceiling deadline would come before Congress could pass the bill. And that would necessitate breaking the debt ceiling off from the rest of the budget debate and passing an increase as separate legislation—a potentially complicated process. That problem now looks less likely.

Finally, I'm also watching the escalating tensions between President Trump and Fed Chair Jerome Powell. Last week, Powell gave a speech in Chicago, in which he said that there was a strong likelihood that consumers will face higher prices due to the president's tariff plan. He said that would create a "challenging situation" for the Fed because it would potentially put the two elements of its dual mandate—maintaining stable prices and promoting maximum employment—in conflict with each other. He said the Fed, which is scheduled to have its next monetary policy meeting on May 6 and 7, would wait for data before making any interest rate decision. "For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance," Powell said.

That did not sit well with President Trump, who has blasted Powell in a series of social media posts over the past several days, calling directly for rate cuts and publicly threatening to fire him. 

The Fed's independence has long been considered critical to the trustworthiness of the U.S. financial system. And the law seems clear that the president cannot fire the Federal Reserve chair. But Trump has been more than willing to push the limits on presidential authority since taking office in January. He has taken particular aim at independent agencies. Last week, he fired the two Democrats at the three-member Board of the National Credit Union Association, which supervises the more than 4,500 credit unions across the country. He has also fired Democrats at the Federal Trade Commission, as well as several other agencies, leaving them short of a quorum, meaning they cannot take any actions. Two such firings—one at the National Labor Relations Board and one at the Merit Systems Protection Board, which hears appeals from federal workers who feel they were wrongfully terminated—have already made it to the Supreme Court. The Court ruled that those firings could stand temporarily while it considers additional information. The administration hopes that a Supreme Court ruling in its favor will clear the way for more firings at independent agencies—potentially including the Fed.

The stakes on this are extraordinarily high. So far, Trump has done nothing more than complain loudly about the Fed's pause on interest rate cuts and in particular about Fed Chair Powell, whom he nominated during his first presidency. But actually firing Powell would likely be a major shock to the global markets, and it would set off a lengthy legal fight that would ultimately go all the way to the Supreme Court. Given the elevated volatility in the markets right now, jittery investors are hoping that the president confines his complaining about the Fed and its chairman to his social media feed.

On my deeper dive today, I want to take a closer look at the implications of the trade war on the economy, on the markets, and on our wallets, with a focus of the rapid escalation of the standoff with China. To do that, I'm pleased to welcome back to the podcast Jeffrey Kleintop, Schwab's chief global investment strategist. Not surprisingly, Jeff has been in high demand over the last few weeks because of his deep understanding of how our interconnected global markets work, so I'm really happy to get some of his time today. Jeff, thanks so much for coming back on the show. 

JEFFREY KLEINTOP: It's always great to be with you, Mike.

MIKE: Well, Jeff, let me begin by just reminding everyone where we are right now with tariffs. On April 5, the president's universal baseline tariff of 10% on all imports went into effect, and that's still in place now. What's confusing to a lot of people is that the higher profile tariffs, the so-called reciprocal tariffs, on about 90 countries went into effect briefly on April 9, and then the president paused them that same day for 90 days. But it's really important to remember that the across-the-board 10% tariff is in place because that in and of itself has raised the cost of doing business with the United States. No one wants to be left out of the U.S. market, so most countries will probably want to do some negotiating, and we are hearing that talks with various countries are going on now. But as of earlier this week, no trade deals with any country have been announced. We also have a separate range of tariffs on imports from Canada and Mexico, both of which have retaliated with levies of their own on U.S. products. And we have specific tariffs in place on steel, aluminum, cars, and car parts. New tariffs are expected to be announced soon on semiconductors and pharmaceuticals. But the biggest issue is with China, where the president has raised the tariff to an unheard of 145%. China has said it isn't going to raise its tariffs on the U.S. beyond the 125% they have imposed because it doesn't make any economic sense. It's grinding trade between the two largest economies to a halt. 

Everyone knows that we're a big consumer of goods and services from China. The U.S. imported more than $460 billion from China last year, and China bought a little bit less than 200 billion from us. That produces a huge trade deficit, and it's clearly that trade deficit that the president dislikes. On the surface, that may look like China will be hurt most by losing such a disproportional amount of revenue from the U.S. But Jeff, it doesn't really work that way, does it? 

JEFF: No, you're right, it's all about the context. China is looking to boost domestic growth as an offset to weaker trade with the U.S. About 40 to 50% of China's GDP comes from consumer spending inside China, and only about 3% comes from direct exports to the U.S., with maybe another 3 to 5% coming from indirect exports to the U.S. that pass through other countries or are otherwise not accounted for directly. So clearly, domestic spending is far more important to growth, and if they can boost it meaningfully, it can more than offset falling U.S. exports on overall GDP. Now, last year, China's GDP growth was around 5%, but most of that growth was exports, not consumer spending, which was very soft because this lingering housing depression they've got going on there. So if consumption can rebound this year, it can offset that slide in exports, and that's the plan. 

China has three budgets—the Government Funds Budget, the State Capital Operations Budget, and the Social Insurance Fund Budget. And if you combine all of them, it results in a plan to spend 11% of GDP this year. That is a record deficit. So far, spending in Q1 was not that much greater than last year—it was a little bit, but not a lot. So we aren't really seeing full-scale stimulus begin to be enacted just yet. But as we've been saying, they were likely waiting to see what the April 2 tariff announcements resulted for. So now it's the incoming data we will be watching to see if China is really boosting its domestic economy by as much or more than exports are sliding. 

MIKE: Well, usually in a trade war, the key leverage points come when it's difficult for a country that imports something from another country, and there aren't a lot of options to get that good or service from somewhere else. And it feels like China has the upper hand in that battle with the U.S. For example, it's been reported that China isn't going to buy anything from Boeing now, and Boeing is the number one exporter in the U.S. What are the areas of our economy that could suffer most from loss of sales to China? 

JEFF: Yeah, it's a good point. There's a lot of very specific things that the U.S. exports. Gaming and technology are two areas that have a lot of revenue exposure to China. So if you think among U.S. gaming operators, Las Vegas Sands, they've got the largest exposure to Macau, which contributes more than 60% of its revenue. So that's at risk. U.S. technology companies' sales in China mainly consists of inputs, things that are made by companies like KLA Corporation or Marvell Technology or Western Digital and Synaptics. All generated more than 40% of their revenues from China in 2024, based on their SEC filings. And they're not alone. Tech companies sell a lot into China as components—processors and semiconductors and analog modules, all that kind of stuff. Overall, U.S. exports to China represented about 7% of a little over $2 trillion of U.S. goods exported in 2024. The biggest categories—aircraft, machinery, oil and gas, and believe it or not, vegetables were the largest categories. So those are some vulnerabilities. 

But that's just looking at the numbers, and the vulnerabilities go beyond that. There are supply chains within supply chains. There's a lot of hidden exposure. For example, the U.S. National Bureau of Economic Research—that's the organization that dates recessions here in the U.S.—they pointed out in a recent paper that GM has about 900 suppliers, and those suppliers, in turn, have about 18,000 suppliers that they rely on. And their analysis shows that if you look through all of that, the amount of hidden exposure to China in U.S. supply chains is three times higher than to any other country. So costs and delays and other challenges getting products from China can have a sizable impact on U.S. output. 

And there's also retaliation risk to consider for some sectors, and that goes beyond merely the numbers due to production facilities and sales that they have within China. Revenue of U.S. companies' China operations, among the likes of like Apple and Nike and Starbucks, total around $300 billion. And they're big brands in China, vulnerable to retaliation, whether it's formal or an informal boycott. Tesla sold around two-fifths of its cars in China in the first three months of this year. And in March, China launched an antitrust investigation into DuPont's China operations that appeared politically motivated. And they've also restricted exports of certain metals to some U.S. companies, which could further cause supply chain issues. So all of these factors are things to consider when we think about the retaliation of the potential impact on U.S. businesses. 

MIKE: I think that's a really fascinating point you make about how complex some of these companies and supply lines are. Certainly the car industry has been a particular example of that, and that point you made of 900 suppliers that in turn have 18,000 sub-suppliers really illustrates that—really fascinating. 

Well, Jeff, from the U.S. perspective, how hard will it be to secure other sources for the things we rely on China for? The quick easing of tariffs on certain electronics, like cell phones and televisions, feels like an acknowledgement by the White House that they realize U.S. consumers won't support big price increases in at least those kinds of products. 

JEFF: Yeah, there's a lot of potential for price increases here. Last week, we got the U.S. trade data that revealed to what extent other countries are bearing the cost of U.S. tariffs. And the answer is, well, not at all. The U.S. import price data for March shows they were 100% being borne by U.S. importers. You know when we looked at the six largest trade partners for U.S. goods—Mexico, China, Canada, the EU, U.K., and Japan—U.S. importers paid for almost 100% of the tariffs. There was very little offset from their counterparts across the border. Import prices rose by the amount of the tariff. We know importers officially pay the price of the tariff to the Customs and Border Patrol, but there could always be some sort of negotiation between the buyer and the seller over this. Didn't happen. The buyer paid 100% of that. So that's really interesting and could be assigned to more inflation pressure to come. 

But the issues here and the delays may be less about the costs and more to target these products for sector tariffs rather than country-level tariffs. So when you talk about the delays on pharmaceuticals and semiconductors, we could see this for drugs. Like semiconductors, pharmaceuticals were exempted from those now paused tariffs, as you pointed out. However, that exemption could be pretty short-lived, and the Secretary of Commerce just initiated an investigation to determine the effects of pharmaceutical imports on national security. And while there are few sole suppliers of any product over the long term, in the near term, there can really be shortages for key input. So it's one thing if that could mean a shortage of iPhones; it's another if it means an input to a lifesaving drug is too costly to manufacture or simply unavailable in the U.S. 

MIKE: Well, to that end, we're hearing a lot about U.S. companies scrambling to figure out how to move production out of China or reorganize their supply chain. Is that realistic? I mean, how long does it take for a company to move its supply chain out of China? Three months? Six months? Longer? And how quickly can a factory be set up elsewhere? I mean, not every company can just pick up and move its operations to Vietnam or Malaysia or Cambodia overnight. 

JEFF: That's right. It's going to vary dramatically across product line and business. But keep in mind, businesses may not be interested in moving their entire supply chain out of China. Most foreign companies that operate in China do so to serve the Chinese market, the Chinese consumer. And that may not change unless they're targeted by China's retaliation against the U.S. Some that export from there, some businesses have been shifting production to facilities elsewhere in Asia, like Apple shifting some iPhone production to India. But that's something that was years in the making. Nike shifted some of its footwear and apparel manufacturing to Vietnam. Again, years it took. But that's a multi-year process, and not to be undertaken lightly, even for something as simple as the assembly of footwear. So when we talk about some more complex products, yeah, it could take a long time indeed. 

MIKE: Well, of course, one of the stated goals of the administration is not to have companies move their production from China to Vietnam, for example, but to move the manufacturing back here to the United States. But it seems that path would be even longer, and perhaps not even financially realistic because there are so many costs. You've got to secure the land. You've got to deal with permitting, building costs that are likely higher due to materials that now have tariffs on them, and of course labor costs. What's your sense of whether this is an option that companies are considering? 

JEFF: Right. All great points. When we talk about moving jobs to Vietnam from China, we are talking about low-cost jobs. And Commerce Secretary Lutnick has said these low-cost labor jobs wouldn't be done by people in the U.S. They'd be done by automation in the U.S. We would bring them back, or even establish them here in the first place if they were never here, but we would do it with robots and machines. 

Now, the Miami Formula One event is coming up, and people may be familiar with Haas Automation because it has an F1 team. Haas is one of the U.S.'s biggest providers of computer-controlled manufacturing equipment. If anyone would know if the U.S. is investing to bring this type of manufacturing to the U.S., it would likely be them. But earlier this month, they reported what they termed a dramatic decrease in demand as a result of the trade tariffs. And they noted that they had reduced production, they had eliminated overtime, and they halted hiring while they're studying the impact of the tariffs on their operations. So if it is an option, Mike, it doesn't seem anyone is working on it just yet. 

MIKE: Well, of course, China is not going to get out of this pain-free either. If U.S. companies are moving their production out of China, that's job losses for China. Individual companies that sell to the U.S., like toy manufacturers, I mean, can they even survive the loss of the U.S. market? What are the broader implications for China's economy? 

JEFF: As it pertains to China, I think a lot depends on how successful China is at stimulating its own domestic consumer spending and using tariff revenue to support their export businesses. Also, China exports more to Europe than it does the U.S. And Europe has shown some signs of stronger demand this year, as they've kind of been in two years of a rolling recession, and they're picking up there. So an acceleration in demand from their biggest customer may offset a slowdown from one of their other customers, the U.S. 

But if we step back for a minute, it's important to take all these seemingly precise estimates of the impact of tariffs on GDP. Just this morning, we got the IMF data on exactly, to one decimal point, exactly what the economic and inflation hit from the tariffs is going to be. But we got to step back a little bit from that. We don't know how successfully the tariffs will be avoided, and the incentives to avoid tariffs are very high. You've got China tariffs over 100%, and only 10% or less on neighboring countries where Chinese businesses have subsidiaries. And one way is by what we call transshipping. That means shipping from China via Vietnam or another country and paying a much lower tariff rate on its way to the U.S., something that data shows China has been doing increasingly since those first Trump tariffs in 2018 and '19. Another way is to under-invoice the value of Chinese goods. This under-invoicing began with the first rounds of the Trump tariffs on China back in 2018 and 2019, which of course were maintained and widened under the Biden Administration. Now, the value of imports claimed in the U.S. from China has gone from being above what was claimed to be exported from China, that was over invoicing, to get money out of China and avoid capital controls, that was prior to the 2018-'19 tariffs, to now being more than 100 billion below, under-invoicing in the U.S. to avoid tariffs. And it's big in percentage terms. This means that already 20% of the value of China's exports to the U.S. are not being accounted for in the U.S. imports data. So if you add the roughly 25% that may be coming on a trans-shipped basis and not being accounted for directly, another 20% that's being under-invoiced, you could get to nearly 50% of China's exports to the U.S. already not being accounted for in the official data. The risks from the high China tariffs are somewhat mitigated by, of course, the tariff exclusions that were put in place, the delays, but also all these avenues of avoidance. 

MIKE: But are these companies making false trade declarations at all worried that they'll get caught when their shipments pass through U.S. Customs?

JEFF: Well, it depends how well U.S. Customs is staffed. I think they are understaffed to deal with this issue. So I think it's unlikely. By my estimates there are a little over a thousand Customs and Border Patrol import specialists at U.S. ports spread around 70 ports in the U.S. Now, the ports of Los Angeles and Long Beach by themselves will process about 115,000 containers this week. And the way I break it down, that means that the custom specialists there are each responsible for inspecting at least 50 containers per day. And a container with any discrepancies on an X-ray needs to be completely unloaded, and cataloged, and reassessed, which can take hours. So it seems to me that the CPB is dramatically under-resourced to evaluate every incoming shipment to avoid further widespread under-invoicing for tariff avoidance. I mean, if 1% get caught, hey, that's a cost the importer will have to bear because 99% of them may not be. And with the incentives to avoid tariffs this high, it may mean the import data becomes less reliable, and a significant percentage of China's exports to the U.S. face a lower effective tariff rate.

MIKE: That's really interesting, Jeff. I had no idea that the avoidance was already going on to that degree. 

Well, another angle of the U.S.-China standoff is the 286 Chinese companies that are listed on U.S. exchanges, and there are reports that Trump and Republicans in Congress are looking at delisting Chinese companies. So what are the implications for China and for U.S. investors if that happens? 

JEFF: Less than they might seem on the surface. We don't see broad delisting of Chinese companies from the U.S. exchanges as likely to happen abruptly. But it's important to realize that the U.S.-listed shares are very thinly traded compared to their Hong Kong listed shares anyway, which U.S. investors can access and do access. So it's probably not that big of a deal. 

It's worth noting that this could be a two-way street, though, with negative implications for U.S. companies. By my estimates, the amount Chinese investors could be forced to divest if China reciprocates, and says, "OK, Chinese investors can't own U.S. investments," they would need to sell U.S. financial assets, probably double what U.S. investors would need to sell of investments in China. So it could end up hurting the U.S. more. Instead, I'd expect increased political and regulatory scrutiny over this issue and a higher risk that specific Chinese companies are added to the Treasury Department's investment blacklist of Chinese military-linked companies than outright delistings. 

MIKE: Well, given how savvy China is about working around the tariffs, people are trying to figure out how to make them comply. One thought is that we forge trade deals with key allies—Japan, South Korea, the EU, other Asian nations—and then confront China as a group. But that feels like it will take a lot of time, and not even clear it would work.

JEFF: It seems multilateral agreements are out. Trump's proven to be pretty difficult to pin down on exactly what he wants. And then for other leaders to work with that and try and build a detailed and comprehensive plan that benefits all kinds of different national constituencies—it seems like Trump has a different plan for each country. So I think it would be a challenging thing to form a multilateral agreement that would have to be formed over a long period of time. 

MIKE: Well, at the end of the day, Jeff, this feels like a staring contest between President Trump and President Xi of China, and I think it's clear that China has more leverage over the U.S. than the U.S. has over China. China can simply absorb more pain. So how do you see this playing out? Who blinks first? Is there a way for both leaders to come out of this with a deal that they can each call a win? 

JEFF: Well, I certainly hope so, Mike. Some history may offer some perspective on that. On the evening of the tariff day, April 2, President Trump said that he's open to tariff negotiations if other countries offer something phenomenal. Now, I know that sounds like a high hurdle, but historically, Trump seems to have had a very flexible definition of what a phenomenal deal is. He literally called the updated trade agreement with Japan back in 2019 phenomenal and a tremendous agreement. He raved about how great the update to the NAFTA agreement was, retitled it as the USMCA when he made it. He called it a great deal and a colossal victory. He called the phase one trade deal with China momentous and historic and transformative. So Trump may be prepared to push harder this time to try and get more of what he wants from deals, but the U.S. bond market may limit what he's able to hold out for and prompt him to declare some kind of face-saving victory. And I could see President Xi also look to try and make a deal as quickly as he can to help boost consumer confidence in China, which of course remains pinned at recession levels. 

Now that said, during Trump 1.0, the U.S. and Japan announced a negotiation in September of 2018, and then a framework was announced one year later. That's how long it took to craft that deal. And that was at the time considered an amazingly fast timeline, expedited in part by then Prime Minister Abe, who was an unusually strong leader for the Japanese system, and who had a good relationship with Trump, was able to drive that through in a year—90 days is not a lot of time. So there are both content and timeframes for a deal to be considering here. But there are some signs that maybe a deal's being worked on, and maybe the vague outlines of it could calm markets a little bit here and business leaders over this 90-day pause. 

MIKE: Yeah, and I think that's the goal of the White House. They haven't announced any trade deals yet, but certainly have given a lot of indications that negotiations are going on with specific countries. And I think that's what we'll see is, try to calm the markets to show progress on some of these country-by-country negotiations. 

Well, Jeff, one area of great interest to both the U.S. and China is Taiwan, specifically because of its importance in the manufacturing of semiconductors. Taiwan produces about 90% of the world's most advanced microchips. It's not part of the China tariffs, but it is now subject to the universal 10% tariff, and the president has said that he will soon announce a new tariff on semiconductors. TSMC, the semiconductor giant on Taiwan, is already building a massive plant in Phoenix, and has promised more investment, so they're already doing what the president wants. What are the implications for the technology sector of new tariffs on chips? 

JEFF: Well, based on what I know of the company, TSMC would like to produce chips near where they're sold and not just produce everything in Taiwan, but there's a reason they haven't done so before. The exacting technology and the talent required to do that equally in each region is very tricky. 

Now, enthusiasts for the revitalization of U.S. manufacturing have been heartened by recent news that TSMC's Arizona chip fabrication plant where they make these chips is delivering higher production yields than the company's fabrication plants back in Taiwan. And this appears to be good news for the competitiveness of U.S. manufacturing, particularly in semiconductors. But if you dig beneath the surface, things are a little less simple than that. TSMC's high yields were achieved in very small-scale trials, and they may not be replicable in full-scale production. And even if they can be delivered consistently, they're unlikely to offset the things you pointed at, higher U.S. construction costs, higher operating costs. The three U.S. plants cost $65 billion, and at the same time, TSMC is also planning to build three plants in Taiwan at a cost of 9 billion U.S. dollars. So if you compare that, that's like a 700% more expensive cost to build in the U.S. for the same structures, and the trial yields were just 4% better than in Taiwan. So TSMC is an example of what other companies and sectors that are similarly affected are going through as they consider the expensive and challenging options to have their products cross fewer borders. 

MIKE: That's really interesting, Jeff. I appreciate you sharing that perspective. And I really appreciate the focus on China today, but I do want to ask you one broader question. Because of the market reaction to the president hitting the pause button on the reciprocal tariffs a couple of weeks ago, and the media's focus on that, the fact that the 10% across-the-board tariffs on all imports are now in place feels like it's happening beneath most people's radar screen. Are we underestimating the implications of a new tariff regime that is already higher and broader than anything the U.S. has seen in nearly a century? 

JEFF: Yeah, this is huge, Mike, the U.S. weighted average effective import tariff rate is the highest since the Great Depression era of the 1930s. And the uncertainty over future tariff changes alone may be a significant drag on hiring and investment by businesses. 

You know, perhaps the nearest parallel to what we may be experiencing took place in 1971, when then President Nixon took the dollar off the gold standard, implemented a 10% import tariff, and introduced temporary price controls. And that abrupt change of the regime resulted in a period of global economic instability and uncertainty. It not only caused a loss in business confidence, but it led to stagflation. And the whole episode was a pivotal contributor to the huge inflation of the 1970s. 

Now, that said, I mean, things have changed a lot since the 1970s, obviously, in terms of the structure of the U.S. and the global economy. And while huge tariffs increase the risk of recession and the return of inflation, there are offsetting factors and off-ramps, I hope, that may keep us from following the paths of the 1970s. It used to be said that when the U.S. sneezes, the rest of the world catches a cold, meaning what happens in the U.S. can have an even greater economic and market impact outside its borders. But it's worth noting that total exports to the U.S. from all other countries only account for about 5% of non-U.S. world GDP. And as a result, the OECD, that's a big global economic think tank, the Organization for Economic Cooperation and Development, they have estimated in mid-March of this year that a 10% tariff on all U.S. imports and exports would reduce U.S. GDP by seven times more than in China, three times more than in the Eurozone, and have a bigger impact on U.S. inflation than anywhere else. So it may be that the impact is the other way around this time. The U.S.'s cold may only get a sneeze from most other countries. 

MIKE: Yeah, I think this is exactly what has so many economists scratching their heads. We don't know exactly how this will all play out in the months ahead, but for a lot of economists, the risk-reward ratio of the administration's tariff plan is just out of whack—too much risk to the economy, too little chance of a reward for the U.S. economy. We'll see. 

Well, Jeff, this has been a great discussion, as always. I want to end where I usually do, with the investing side of things. International market performance has outpaced the U.S. market year-to-date, and for quite a while now. Do you see that continuing, and what are you favoring right now for investors seeking to up the international portion of their portfolio? 

JEFF: Mike, on your podcast, I've consistently favored international diversification, particularly increasingly here in the last few years. I've been a big proponent of investing in Europe this year as a likely safer haven from the tariffs and economic risks, particularly European defense stocks. But since we're focusing on China, Latin America's biggest exports are to China, not the U.S., and its stocks are therefore more tied to China's domestic growth than that of the U.S. If we go all the way back to the inception of the MSCI Emerging Market Latin America Index back in 2004, it's delivered a positive average monthly annualized return of 5% when China's Caixin Manufacturing Purchasing Managers Index—that's the PMI; It's my favorite global economic piece of data every month—when that's above 50. 50 is the threshold between growth and contraction for manufacturing. And so when China's manufacturing sector was in growth, even when the U.S. was in contraction, meaning the U.S. PMI was below 50, Latin American stocks posted gains. The opposite was true when the China PMI was below 50, in contraction, and the U.S. PMI was above 50, in growth. Then average returns were negative. So Latin America has a lot more tied to China than it does the U.S. in terms of the stock market performance. 

What we're seeing here is that shaping up this year. For example, this year, the stock market of Brazil, Latin America's biggest economy, has risen about 12% this year, measured by the MSCI Brazil Index in U.S. dollars. And that's really reflecting the positive China PMI above 50, while the U.S. PMI slipped below 50. And we had March stimulus announcements from the Chinese government that helped lift sentiment, and Brazil stocks even posted gains on Thursday, April 3, the day after President Trump made the tariff announcement on April 2. So they're really proving more focused on China than the U.S. So if we do see that China stimulus, Latin American stocks may prove to be a safer haven as well.

MIKE: Well, appreciate the perspective, Jeff. I know how busy you've been over the last couple of months, so really grateful that you made the time to talk today. 

JEFF: My pleasure. Thanks for having me on, Mike.

MIKE: That's Jeff Kleintop, Schwab's chief global investment strategist. I highly recommend that you follow him on X, formerly Twitter, where you can find him @JeffreyKleintop. 

That's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. 

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 For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.