The Grandest Game of ‘Chicken’ Ever Played

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There will be no hot war between the U.S. and China. No “Battle of Beijing”.

With both sides armed with nuclear missiles, this is an impossibility.

Technically, there could be a proxy war via Taiwan. But this is also highly unlikely. Too much World War III risk. Plus, the Taiwanese have witnessed what happened in Ukraine, and are not keen to be next in line.

Trade is the field where this contest will play out. And eventually, a deal with China will be signed. The stakes are too high for both sides.

China relies on the U.S. for about 15% of its direct exports, but the true number may be 30% or more once we factor in indirect shipments (many Chinese products are assembled and packaged in Mexico, Vietnam, and elsewhere to avoid tariffs).

Meanwhile the U.S. relies heavily on China for rare earth minerals such as gallium, which are critical for advanced manufacturing and would take at least a decade to find alternate sources. We also depend on the country for bulk semiconductors, electronics, transformers, and other equipment we will need to build up domestic manufacturing.

Even our military heavily depends on Chinese semiconductors, motors, and other parts. Here were the findings of 2023 research into how dependent American defense contractor Raytheon is on mainland Chinese manufacturing:

• 95% of the commodities related to aircraft and spacecraft parts come from Chinese suppliers
• 100% of tubes, pipes, hoses, and fittings are supplied by Chinese companies 
• 54% of Raytheon’s electric motors and generators are supplied from China 

In order to have a complete break, both countries would need at least a decade to prepare, and probably longer. It can’t happen anytime soon.

However, a trade deal could take a year or more to get done. In the meantime, more chaos will ensue.

This is the grandest game of chicken ever played. Neither side can afford to be seen as weak or backing down. Yet both need to eventually sign a deal.

Market Signals

Let’s look at what the market is telling us about the likelihood of a trade deal with China. Apple is my favorite company to watch here, because their fate depends on a continuing trade relationship with China.

About 85% of Apple’s iPhones (by far their most important product) are made in China. The remaining 15% are assembled in India, but the vast majority of parts are still made in China. This effort to diversify production to India began in 2017.

The lesson here is that moving production takes time. The supply chains which support Apple’s manufacturing base in China have been built up over at least three decades. It will take time to build alternatives abroad and domestically.

Apple (AAPL) shares currently trade near $200, giving the company about a $3 trillion valuation. The stock has pulled back, but by no means has it crashed. In fact, it is still richly valued at about 30x earnings with a paltry 0.5% dividend yield.

If high tariffs apply to smartphones, or we were to sever ties completely with China, the crash in Apple shares would be one for the ages.

The company would be forced to scramble manufacturing out of China. And as much as I would love to see Apple bringing production back home to the U.S., it’s simply not a realistic option at this point.

Before that happens, America needs to:

• Rapidly expand power production (via natural gas and coal in the short-term, and nuclear eventually)
• Launch a massive training program for skilled manufacturing workers
• Double or triple the number of engineers we train

If we attempt to force Apple to bring manufacturing back home before we’re ready, it will cripple the company. Its competitors in South Korea (Samsung) and China (Huawei and others) would seize the opportunity and gobble up global market share. The price of a new iPhone could double (once production comes back online).

Additionally, Apple still depends on iPhone sales in China for a big portion of its profits. Here is a chart showing Apple’s annual operating profits from China:

Source: Kyle Chan

In a “total break” scenario, Apple stands to not just lose access to its manufacturing in China, but also the lucrative Chinese consumer market. It would be a disaster.

Currently, the market is telling us that there will be a deal, and it will largely spare Apple’s operations in China. Of course, the market could be wrong. But it has a pretty good track record of predicting the outcomes of these types of situations.

If we begin to see a major crash in Apple shares, this could be a sign that the market’s view is changing. We will continue to watch this one closely.

NVIDIA Falls Sharply

Let’s look at another market signal. Yesterday the Trump administration put new restrictions on NVIDIA’s GPU sales to China. Currently the company is only allowed to sell a crippled version of its AI hardware, known as the H20, to China.

Even in its crippled state, the H20 GPU is cutting-edge in China. So this is a significant blow to China’s AI efforts.

NVIDIA shares are down 6.3% on the news as I write this around 10:00 am on 4/16/2025. The company announced $5.5 billion in charges related to the change.

What is interesting is that after this NVIDIA announcement, China quickly signalled its willingness to negotiate. Here’s what China’s Ministry of Foreign Affairs posted on X this morning:

If the U.S. truly wants a negotiated solution, it should quit using maximum pressure, stop threatening and blackmailing China and seek dialogue based on equality, respect and mutual benefit.

This comes after a sustained period of tough talk, followed by radio silence from China. This is a signal that they still seek a deal.

But as we mentioned earlier, neither side wants to be the one to make that first call. Eventually the pressure will build to such a point that forces negotiation.

Do not misunderstand me here. I desperately want advanced manufacturing to return to America. It is inevitable. But we must realize that this will take time. If done correctly, it will take decades. If done incorrectly, the effort could fail.

What we are witnessing today is President Trump attempting to make the best deal possible with China. Godspeed, Mr. Trump.

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