May 7, 2025 • 35 mins
Southeast Asian countries such as Vietnam, Thailand and Malaysia benefited from US President Donald Trump's first administration, as Chinese companies re-routed shipments to these regions to avoid US tariffs. In his current term, President Trump's reciprocal tariffs aim to eliminate this arbitrage, but the significant tariff rate differentials between countries are creating an even greater incentive for Chinese companies to use transshipments.
US efforts to enforce tariffs have become a game of whack-a-mole, according to Ebehi Iyoha, a trade economist and an assistant professor at Harvard Business School. Iyoha also highlights how small US businesses are disproportionately affected by tariffs compared with large corporations. She joins John Lee and Katia Dmitrieva on the Asia Centric podcast.
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Episode Transcript
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Speaker 1 (00:00):
When it comes to trade, there are a number of
ways that a country can address grievances with partners. The
past century or so, that's meant a lot of negotiation
and more recently the involvement of the World Trade Organization.
But President Donald Trump is relying on tariffs and in
a big way.
Speaker 2 (00:19):
Well, it may be effective from one angle, with dozens
of country leaders now angling to negotiate and promise to
buy more from the US, it has consequences for US
businesses and global investment, and it doesn't necessarily tackle one
of the administration's concerns, which is Chinese companies evading tariffs
through third countries. We're all listening to Asia Centric from
(00:43):
Bloomberg Intelligence. I'm John Lee in Hong Kong.
Speaker 1 (00:46):
And I'm Katadmitriyeva, also in Hong Kong. And today we're
talking to Abehi Ioha. She's a trade economist and assistant
professor at Harvard Business School, and she's going to help
us unpack tariffs, trade policy and all this other fun stuff.
Thanks for joining us today.
Speaker 3 (01:03):
Be Hey, thanks for having me.
Speaker 1 (01:05):
Now we've had a lot of news on tariffs and
trade policy. I want to ask you, just as an
economist in this space, can you talk a bit about
your kind of initial reaction, like when tariffs come in,
what are the likely outcomes in the short term and
also the long term.
Speaker 4 (01:26):
I think there are two aspects of the current trade
policy environment.
Speaker 3 (01:31):
That are important to focus on.
Speaker 4 (01:34):
So there's how high tariffs actually will be ultimately, but
then there's also the uncertainty about what the tariffs are
and how they will keep changing over time, and so
those things actually have different impacts. So you could think,
for example, there's a world in which tariffs ultimately end
(01:55):
up being ten percent on every country, every US trade partner,
and then maybe everybody retaliates and it's ten percent all round,
and businesses know that in advance, and so they plan
and they factor that into their projections and how they
think about hiring and investment and locating and all of
(02:16):
those decisions. And so the reaction is going to be
very different from a world in which we still end
up in the same ten percent tariff world. But there's
a lot of uncertainty along the way about where tariffs
really will be because there are changes in businesses behavior
and decisions given uncertainty, right, so there's likely to be
(02:37):
less investment because everybody's waiting to see where things will
ultimately land. Potential planned expansion or growth might be paused
because people are hedging against risk of things changing over
time because they don't know where things will end up.
So my initial reaction to the current trade policy environment
(02:57):
is really that we're getting a double whammy of both
the tariffs themselves, like the impact of the tariffs, but
also the impact of the uncertainty of the business environment
on what businesses are able to plan to do and
what they're able to do in the short term and
the medium term. And so those are two things that
I don't think people often distinguish between, but for the
(03:21):
time being, I think it's the uncertainty that's actually having
a significant impacts, even on businesses that are not directly
trade exposed.
Speaker 2 (03:30):
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(03:53):
If you like what you're hear, don't forget to subscribe
and share. Abiah, you're an expert in global trade. What
do you think is the current administration's goals in implementing
these tariffs? Is it to reduce the trade deficit? Is
it to bring jobs back to the US?
Speaker 4 (04:10):
So, I think explicitly, and you can tell from the
way in which the reciprocal tariffs that were announced on
April second, also known as Libration Day, the way those
tariffs were calculated. Essentially, we're calculated not based on you know,
Vietnam charges US four percent times, so we're going to
charge them four percent tires, but really tariff explicitly based
(04:31):
on the trade deficit that the US has with Vietnam.
And so for that reason, I think it's pretty clear
that the trade deficit is a key motivation for the
tariff policies that are being put in place today, in
the sense that I think the government, the current administration,
(04:51):
really sees significant value in shrinking the overall US trade
deficit in goods with its trade partners. One thing to
keep in mind, I specify in goods because the US.
Speaker 5 (05:03):
Actually a net exporder of services but it has a
trade deficit.
Speaker 1 (05:07):
Inputs with that point on the reducing the deficit, can
you talk a bit about because there is a lot
of information also misinformation, about what a trade deficit actually
means for the US. Trump has said that it's a
sign that the country is being taken advantage of that
it's not selling its goods abroad, it's buying from other
(05:28):
countries and helping those economies grow. Can you talk a
bit about what the US trade deficit? To you as
a trade economist, what does that mean?
Speaker 4 (05:38):
So to be perfectly transparent, lots of factors can lead
to a trade deficit. I think fundamentally you can just
start with comparative advantage. Right, So, for example, you have
likely have a trade deficit with your yoga teacher.
Speaker 3 (05:55):
Do you do.
Speaker 1 (05:55):
Yoga y in what way?
Speaker 4 (05:59):
You probably pay your yoga instructor money for services rendered
i e.
Speaker 3 (06:05):
Teaching you yoga?
Speaker 4 (06:06):
I don't know how much your yoga instructor buys from you,
and so you probably are a net importer of yoga
services from your yoga instructor unless you make stuff that
your yoga instructor really loves to buy.
Speaker 3 (06:20):
But if you think about the bilateral yeah, exactly.
Speaker 4 (06:25):
But if you think of the bilateral trade deficits, those
are often a function of multiple things. So of course
they could be the function of trade barriers that countries
might have non tariff barriers like standards or quotas, or
foreign exchange restrictions, all sorts of things.
Speaker 3 (06:43):
But they're also likely a function of comparative advantage, i e.
Speaker 4 (06:46):
Some countries are better at producing some things than others.
Some countries are relatively better at producing some things than others,
such that there is gains from trade. And so, for example,
Cambodia cannot afford most of the kinds of goods that
the US produces because the US is a very rich
country that produces very high quality goods, and Cambodian consumers
(07:09):
tend to not have the high enough incomes to purchase
the kinds of goods that US produces. But the US
tends to purchase the kinds of goods the Cambodia produces
because they produce apparel that you buy from Walmart. So
those kinds of things will lead to a bilateral trade deficit.
And so for some countries you might have a state
surplus because of comparative advantage. And for other countries, you
might have a bilateral trade deficit. US has a bilateral
(07:32):
trade surplus in goods with Australia, for example, and so
that's on the bilateral side. But I think there is
a concern about the US overall trade deficit, So the
aggregate trade deficit, if you add up the surpluses and
the deficits across all its trading partners, that total amount
and the fact that it has been a deficit over
(07:54):
a period of time, I think is something that this
administration is particularly interested in tackling, in the sense that
maybe it is viewed as the result of potentially unfair
trade practices across a broad set of countries, or maybe
it's also a signal that somehow the US isn't as
(08:14):
competitive as it otherwise could be in global trade and
in the global economy and the global production system. But
one other thing to keep in mind, and I won't
go any further on this, since I'm not an international
finance economist, but there is something about the balance of payments,
which is just the difference in money that US residents
(08:37):
and US it doesn't spend versus money that they receive from.
Speaker 3 (08:40):
Others, and that balance of payments.
Speaker 4 (08:43):
Part of that difference also has to do with the
fact that the dollar is a global reserve currency, so
people do like to hold dollars even if they're.
Speaker 3 (08:52):
Not necessarily like using it in the short term to
do things.
Speaker 1 (08:55):
Just to follow up on that, so, I guess what
I'm trying to get at is is a trade deficit
always a bad thing? Like, is the US the fact
that the US has a trade deficit? Is it necessarily
a negative thing?
Speaker 4 (09:07):
So no, Actually, if the US was a small, open
economy that was subject to, you know, the vagaries of
shocks from the rest of the world, you might be
a little more concerned because basically decisions that the US
makes wouldn't impact the world, but the world would impact it.
The US is a large, open economy, and the strength
(09:27):
of the US dollar is so important and said that
it really is like hard currency across the world. And
so to that extent, it's actually not inherently a negative
thing for a large open economy to have a trade deficit,
because it's a function of multiple factors beyond just oh,
you know, we're not producing enough or we're not competing enough.
(09:50):
It could also be a function of people wanting to
hold your currency. You could also be a function of
people wanting to buy the government's bonds for example, and.
Speaker 2 (09:59):
Hold that maybe I wanted to bring back the discussion
on something you just mentioned that was services. Now for
the listener, the trade deficit basically just takes me into
account the trade of goods, so final products, but not services.
And isn't services where the US is really strong, Like
if you think of Google, Meta, Microsoft, like Disney films,
(10:21):
this is where the US is strong. So is this
in a way distorting the competitive advantage of the US.
Speaker 3 (10:28):
So that's a really good question.
Speaker 4 (10:29):
So if you add up both the US's trade surplus
in services and then the US trade deficit in goods,
it is an overall test. Yeah, so the services surplus
does not exceed the deficit in goods. But to talk
about the services surplus, yes, the US is a net
exporter of services because it really does have a comparative
(10:52):
advantage in services, and not just you know, thinking about
services in terms of like tourism, but as you point out,
in terms of like intellectual property in terms of innovation.
One of the interesting things is people always talk about,
you know, where the screws are put into iPhones and
how much of that value is being captured by the US.
(11:13):
But a lot of the value of an iPhone accrues
to Apple.
Speaker 3 (11:18):
Apple is not a manufacturer.
Speaker 4 (11:21):
All of the iPhone manufacturing is done by foxcon right,
Apple does not manufacture physical goods. Yet most of the
value of Apple is in the design, is in intellectual
property en case within that iPhone, and most of that
value actually accrues to the United States through the fact
that there's essentially that's an export of services as an
(11:44):
export of intellectual property. And so that's something that I
think is left out of this conversation about treating goods.
Because the US does have a significant comparative advantage in
knowledge production, in innovation, and whatever is being done on
the goods side, one always needs to take into account, well,
what could be the effects and the tradeoffs in terms
(12:05):
of how innovation will continue to happen in the US
and how the US will still be able to be
a leader in innovating and producing these high value knowledge goods.
Speaker 2 (12:15):
Yeah, that's exactly why on the Apple iPhone cases is
designed in California, right, rather than made in China.
Speaker 3 (12:22):
Yes, precisely, But tell us.
Speaker 2 (12:25):
What's the impact on us small businesses. Can they pass
on these tariffs in terms of higher prices.
Speaker 3 (12:32):
Yeah.
Speaker 1 (12:32):
Aberhei recently did a survey of about four thousand small businesses,
and a lot of the findings were around kind of
a lack of knowledge of tariffs, but also the inability
of these companies potentially to pass on some of these costs.
So we'd love to hear some of the other findings.
Speaker 3 (12:51):
Yeah.
Speaker 4 (12:51):
So interestingly enough, the survey was done shortly before the
April second announcement, and the reason was we actually wanted
to capture the full range, the full variation in the
leafs and expectations about what would happen after April second.
Speaker 3 (13:10):
We're planning to do a follow up.
Speaker 4 (13:11):
But essentially, one of the key things that I think
people forget is that compared to a large company, you
should actually expect to see impacts of tires on small
businesses sooner than you see on large firms. So people
often have this perception that, you know, international trade is
a large business game, and so small businesses aren't really
(13:33):
that connected to the international economy in any direct sense.
But what we were able to see in our survey
is that actually there was a good share of small
businesses that potentially could benefit because they compete with foreign
products in the US market, but then could be affected
on the cost side because they import foreign products, some
from China, some from other parts of the world. And
(13:56):
one key thing you always want to figure out when
tariffs are implemented is that it's not always obvious who's
going to pay for tariffs just because the tariff has
been increased because them give you an example, if I
have lots of substitute suppliers, right, I could go to
a lot of other suppliers, and for example, there were
(14:16):
one hundred US suppliers who could give me the same
thing I was important from China, and so tires go
up twenty five percent one hundred and forty five percent.
I could essentially get negotiate with my form supplier to
eat some of that cost because they know I can
go somewhere else. So in that case, just because the
tariff increases doesn't mean my cost.
Speaker 1 (14:35):
Increases, right, your supplier could end up paying that exactly.
Speaker 4 (14:38):
So how do you actually get at that like the
measure of how much of those costs you'd have to eat?
So one question the business owners were asked was, well,
if things were twenty five percent more expensive, like how
much of a discount will your supplier give you? And
for a large air of them, no discount, So they
would have to eat the additional cost of the tariff
because they don't have you know, good alternatives and not
(15:01):
that much bargaining power with their suppliers, which is not
surprising because they're small firms, right, and so how are
they able to pass on those costs? Again, you might
be able to pass on those costs if everybody around
you is raising their costs then raising their prices rather
on their customers, then actually maybe you might be able
to get away with them without losing market share. Again,
(15:23):
not to get too into the leads, but essentially you
can always think of two things. So think of whatever
industry there is. You can think of the overall size
of the pie in the industry, whether that's shrinking or expanding,
And then you could also think about slices of the pie,
how much market share you have within that industry. And so,
for example, if everybody has to raise your prices and
(15:45):
it's something that's non essential good, it's likely that the
industry will shrink, right, because it's got to be more expensive.
So people can spend less on that thing, but then
maybe your market share won't increase that much. But if
you know you're competing with large companies who have that
are negotiating power with their suppliers can eat some of
those costs and not increase their prices. Whereas you're the
(16:06):
only one who has to increase your price, then you're
probably going to do some customers to your competitors. And
so for small businesses, that's the serious copy that they're
having to do, which is that even if I try
to pass this on to my customers, how much will
I be losing to my competitors on this end? And
I think you see a little bit in the media.
People are getting creative with how they will communicate this
(16:28):
to the customers. Some people are adding a little line
to their invoices and we see its showing this is
the tariff's surcharge right on.
Speaker 3 (16:36):
So this is why your price is highed.
Speaker 4 (16:37):
It's just because there's a thirty five percent extra charge
because steel is more expensive or something.
Speaker 2 (16:42):
We're starting to do that already.
Speaker 4 (16:44):
Oh yes, actually, and it's not even small businesses alone.
I think fabletics also started doing that as well.
Speaker 2 (16:51):
But yes, I wanted to shift the discussion to Asia.
Under Trump's first administration, one of the big impact was
a lot of companies leaving production away from China to
Southeast Asia, and some of these countries, like Vietnam, were
considered big winners. Is that going to be the case
this time around?
Speaker 4 (17:11):
So, well, the reciprocal tariffs that are now postponed at
least for the next ninety days on Vietnam. Vietnam is
facing one of the higher tariff increases because the US
has by a lot of oral trade deficit with Vietnam,
and so will Vietnam be another winner in this new
(17:35):
round of tariff increases. It's not clear that that's the case,
which is a big problem for the multinational companies who
invested a lot of money in setting up manufacturing in Vietnam. Well,
we might see other winners, So it's not the case
that overall you won't see maybe new winners emerged. So,
for example, I think the Philippines has been actually quite excited.
(17:56):
So their reciprocal tariff rate was I think about seven
teen percent if I recall correctly, but they viewed as well,
it's still significantly lower than most of the countries in
Southeast Asia. It's lower than Thailand, it's lower than Vietnams,
and so maybe there's scope for moving some of that
production and some of that manufacturing over to the Philippines
to take advantage of now the more favorable tax treatment.
(18:22):
The key thing though, is that because we are in
an error that's so uncertain, and there have been so
many changes to TIFT policies that have been announced, it's
likely that businesses will probably do some scouting.
Speaker 3 (18:34):
Right, Multinationals will do scouting, and.
Speaker 4 (18:36):
They have entire departments that are trying to lay out
what their optimal strategies are. But it will be some
time to actually see anything manifest because people don't want
to sink in, you know, hundreds of billions of dollars
in capital investments in locations that might end up being
hit with high tiers after all.
Speaker 1 (18:54):
And there's also, of course, you know, just in terms
of small businesses, you probably have supply chains that have
been carved over many years and those relationships that have
been developed, and you know, how easy is it for
companies to switch to a country a different country.
Speaker 3 (19:12):
Yeah, it's not easy.
Speaker 4 (19:12):
So actually, one strand of research that has emerged over
and actually was I think motivated by COVID actually, but
I think applies here as well, is folks like Benklob
who basically study these if you think of them like
the scarring effects of shocks to supply change, right, so
in the sense that some trade relationship are very kind
(19:37):
of market based, so in the sense that like I
really could buy my widget from a broad set of people,
or I could buy if you think about goods that
are considered like commodities, it's essentially like one.
Speaker 3 (19:48):
Supply is as good as the other.
Speaker 4 (19:50):
The issue is that when you're producing differentiated goods, so
goods that kind of require a lot more customization, that
a little more specialized that it's really important. That requires
like precision manufacturing for example, where it's really important you
get those specs.
Speaker 3 (20:04):
Right and you do the QA.
Speaker 4 (20:06):
Then those relationship specific investments are really important, and it
takes some time to switch because on the one hand,
you of course care about cost, right cost including the tariffs,
but then on the other hand there are costs of
not getting it right. So for example, I switch to
a new supplier even if the tariffs are you know,
(20:28):
because I'm trying to save something on like a twenty
five percent or even one hundred percent tiff, but then
my quality control declines by fifty percent. It's not clear
how much I'm actually saving, right, So that's a key
factor here in that some of these, especially like consumer electronics,
which is potentially why they have that carve out because
(20:50):
consumer electronics, some of these can be quite complex to
produce and require these relationship specific investments. And even if
the goal for the US to ultimately bring some of
that manufacturing back, it will take a lot of time
to build in terms of kind of reorganizing those very intricate,
very complex supply chains that are able to deliver these
(21:12):
these electronic goods.
Speaker 2 (21:13):
And I think Kim Cook from Apple has gone on
record a number of times saying that they produce iPhones
in China, not because it's the low cost producer, but
a lot of the workers have skills you can't find
anywhere else.
Speaker 1 (21:24):
Precisely, we've talked so far in this conversation about trade
in goods and services with sort of official trade, but
one of the things that the Trump administration has cited
as a reason for these tariffs, but also area of
concern is sort of transshipments or rerouting of goods, which
(21:44):
is actually different from normal trade, where you sort of
take an item, add some value, ship it from that location.
And there's this sense that Chinese companies in particular might
be trying to avoid teriffs. Can you talk a bit
about the different is between like regular trade and then
this sort of transshipment trade.
Speaker 4 (22:04):
Yes, so transhipment is and or rerouting, however you might
choose to call it rerouting relabeling transhipment. So this activity
is essentially illegal activity in the sense that people who
engage in that activity are mislabeling the true country of.
Speaker 3 (22:23):
Origin of the good in order to avoid tariffs.
Speaker 4 (22:26):
So it would be something like I fully produced that
good in China and then I ship it to location A,
and there we change the label on the box to
make it say made in country A. We you know,
lie on the certificate of origin saying this was made
(22:47):
in country A. And the reason we do that is
because you know, US tariffs on Chinese goods are much
higher than US tariffs on country as goods, and therefore
we do that to get access to the law.
Speaker 3 (23:00):
Or tariff rate.
Speaker 4 (23:01):
So the key difference between transhipment and what could otherwise
be just like a normal global value chain activity where
maybe some of it is done in China, but then
it gets shipped elsewhere and some value is added there
and then it gets shipped to the US. And so
those are two very different activities. And anytime you have
(23:22):
for the same product differential tariff rates for different countries,
then there's that incentive to do transhipment because there's basically
a window of arbitrage right now. The bigger that gap is,
the greater there is an incentive to do that for listeners.
Speaker 1 (23:40):
So basically like in twenty eighteen, which is what we
saw twenty eighteen, twenty nineteen, which is like China high tariffs,
where can we get lower costs, Vietnam, Indonesia, Thailand right precisely.
Speaker 3 (23:54):
Now.
Speaker 4 (23:54):
The interesting thing is this time around, so we're not
in reciprocal tariff land yet because those have been paused.
The rest of the world is facing something like ten
percent have Chinese goods are facing one hundred and forty
five per certain lavely on average, and so that gap
is quite large, and so the scope for transshipment is
(24:15):
actually much bigger now than it was in twenty eighteen
twenty nineteen, because then we were talking about differences of
you know, ten twenty five percent versus five percent or
four percent, and so that is a huge window in
which you can absorb some know, costs of shipping things
through other countries. You can you know, split the difference
with all the collaborators involved in this legal activity and
(24:37):
still mix them back.
Speaker 2 (24:39):
You said that this re routing is illegal, but it
must be hard for the US to track, Like what
happens if you just get this box it says made
in China and you just instead of you delete that
and say made in Philippines or made in Vietnam. It's
can they do anything about it?
Speaker 3 (24:54):
Yeah?
Speaker 1 (24:54):
And how much is this actually happening?
Speaker 3 (24:57):
That's a great question. So the interesting thing is in
the Vietnam's case.
Speaker 4 (25:00):
So what we studied in our paper was that we
actually were able to use Vietnamese customs data and we
could actually track what looked like suspicious flows where all
of a sudden, you see relatively high imports of a
specific product from China into Vietnam by like the same company,
and then you see that same company in a short
(25:21):
period of time export.
Speaker 3 (25:23):
The same product to the US.
Speaker 4 (25:26):
And you're seeing that as a pattern that's not necessarily
happening with their exports anywhere else or their imports from
anywhere else, and so that's suggestive of what looks like
childie shipment. So of course, you know CBP Customs on
Border Patrol could do some data analysis to kind of
track that, and they do do some of this in
the sense that they do analyze data to see what
(25:48):
looks like suspicious trade flows.
Speaker 3 (25:51):
But for the most part, the enforcement.
Speaker 4 (25:53):
Actually happens a lot of time after the good is
already in the country.
Speaker 3 (25:59):
So what happens is.
Speaker 4 (26:00):
CBP will see what they suspect to have been evaded
tariffs and then go to the importer and try to
recover some of those gvs, saying, we think some of
the goods you imported were actually made elsewhere and you
lied to us about where they were made, and so
we're going to charge with the tariffs that you should
(26:21):
have been charged in the first place.
Speaker 3 (26:22):
Part of how they get that information is.
Speaker 4 (26:24):
There's a reporting system that people can So let's say
I am a competitor with the Chinese firm that's opposed
to all of a sudden this be subject to these
high tariffs, and I'm seeing that these goods are still
somehow ending up in the country. Really niarly, and I
suspect that there's some TIFFs circunvention going on, so I
can go on the CVP's website and actually report that
(26:46):
I suspect that this particular country is abating TARSK. So
that's part of how they get the information. Part of
it is by analyst in data. But how much actually happened.
So the interesting thing is for Vietnam specifically, which we
study in our paper, we actually find that between twenty
eighteen and twenty twenty two, Vietnam's exports to the US
grew by about eighty billion, so something around seventy eight
(27:08):
billion dollars, and only like ten percent of that by
like our benchmark measures could be attributed. We could attribute
towards rerouting or transhipment, and so you could think ninety
percent of that was actually because there were a lot
of multinationals that had made the investment to do actual
production in Vietnam, even if they might be using some
Chinese inputs, and so it wasn't as large a share
(27:31):
as I think people.
Speaker 3 (27:32):
Perceived it to be.
Speaker 4 (27:33):
Where people really perceived that, like, you know, more than
half of what was coming from Vietnam was really made
in China. Will that be the case now with the
higher you know, the larger wedge and this kind of gap,
and what other locations might be potential rerouting or transhipment hubs.
It's going to be an empirical question that I'm excited
to dig into, because every time you have this disparity,
(27:56):
you always create this incentive.
Speaker 1 (27:57):
It kind of sounds like the US might be shooting
itself in the foot with these terraffs. So like to
your point, I mean, if there's a bigger gap between
the Chinese tariffs and Vietnamese tariffs, then that would only
to your point, encourage more transhipments now or more rerouting.
Speaker 2 (28:12):
Yes.
Speaker 4 (28:13):
So actually, from a policy like to minimize implementation costs perspective,
something like the steel and aluminum tariffs actually make more
sense in the sense that you have a uniform tariff
across all locations. There's no incentive for transhipment in that case. Right,
everybody's anything regardless of where it comes from. It's twenty
five percent, So who cares whether I ship it from
(28:33):
China or from Vietnam or from Thailand. So product specific
uniform TIFFs are not going to be subject to chair
shipment in the way that country specific tariffs will be,
and so you end up playing this game of whack
a mole. And the sad part about the enforcement is
that every time you create this disparity with policy, you
(28:55):
essentially run the risk in your enforcement activities of peneli
seeing legitimate producers abroad and potentially missing in your thirst
to like catch in your quest to catch the transhippers.
And the sad part is the legitimate producers actually have
made capital investments and made these, you know, investments in production,
(29:16):
whereas the rerounters don't need to make those investments, and
they can kind of just like hop from So of
course there's some costs of setting up an operation and
finding collaborators and invading the authorities, but like they can
kind of hop from place to place and you could
be playing Wapamo with them for a long time. But
the legitimate producers do have those fixed investments. So one
thing CBP does do when when, especially in cases where
(29:36):
it thinks it's particularly egregious, is that CBP will go
to locations abroad, whether the factory supposedly is to inspect
it to see whether it looks like there's actual production
going on there. Now, you can imagine that's very expensive
and it's very happy to do when you have, you know,
hundreds of millions of dollars worth of goods flowing into
the country on a regular basis. But to the extent
(29:57):
that they can use sophisticated data intelligence tools.
Speaker 3 (30:01):
Now, with the.
Speaker 4 (30:02):
Access of data that we have, it might be possible
to at least pinpoint likely candidate and go inspect some
of these facilities.
Speaker 2 (30:10):
Has it ever been a successful case of tariffs being
used by a country to, you know, bring jobs back
to the country.
Speaker 4 (30:18):
So I think there's been this broad set of import
substitution policies right in the sense that you use tariffs
to essentially protect an industry such that it woke grow.
Has there been a case in recent history of using
tariffs in this way to bring back an industry that
had previously existed and left through our shoring. Not to
(30:43):
my knowledge, although I might be wrong because I'm not
CHATGPI don't have the full breath of the entire existence
of the world. But I will say that in the
history of like us, the current advanced economies, you know, Japan,
et cetera, like multiple stages.
Speaker 3 (31:00):
Tariffs have been used to protect.
Speaker 4 (31:03):
Industries from declining or to allow some industries grow. So
usually the interesting thing is countries often need to do
like three key things if you're going to be doing
something like this, which is it's not enough to reduce competition,
because what happens when you reduce competition is that companies
(31:23):
have less of an incentive to innovate or be very
efficient or productive. So if all you do is just
have a barrier to foreign competition, you're not necessarily going
to lead.
Speaker 3 (31:34):
To a thriving industry domestically.
Speaker 4 (31:37):
So what a lot of countries have done in the past,
and I'm pretty sure like Korea and Japan actually used
some form of infant industry protection when they were building
out their own manufacturing capabilities, is that there's both the
carrot and the stick, right, So, yes, you're protecting those
industries from foreign competitions such that they grow and they expand,
(32:00):
But then there also has to be the stick and
kind of incentives to make sure that these industries have
some incentive to be competitive, to be efficient, to innovate.
And what that looks like from like a domestic policy
perspective is, yes, we might give you, you know, subsidies,
et cetera.
Speaker 3 (32:19):
And we might give you some of this protection, but
you have.
Speaker 4 (32:21):
To reach some goal of exporting to this extent within
the next few years, or you have to reach some
level of like R and D spend that actually shows
us that you're really investing in growing your productivity and
growing your efficiency and growing your innovation rather than just
sitting on your laurels and you know, getting fat off
(32:42):
the benefits and the profit margins from having little competition.
I will say one area in which actually you do
see a lot of trade barriers to make sure some
production is done in industries is in agricultural goods. So
if you go, for example, just go check like WT
or tiret schedules.
Speaker 3 (33:01):
I do that for fun. I don't know if you
like to do that over your weeks.
Speaker 4 (33:05):
But you always see, you always see this distinction between
agricultural and non agricultural goods and kind of the tires
that countries have.
Speaker 3 (33:14):
And part of the reason is countries generally tend to.
Speaker 4 (33:16):
Have higher tires on agricultural sector, so in parts of
agricultural goods than they do on non agricultural goods. And
the reason for that is there is this kind of
like natural security self sufficiency argument for we need to
make sure at least we retain some of our.
Speaker 3 (33:33):
Food production within this country because.
Speaker 4 (33:37):
In the event of whatever might happen geopolitically, we want
to make sure that our citizens can be fed. Among
other reasons, but that's one of them.
Speaker 1 (33:47):
So we have talked about a lot in trade world
ape Hey, what is on your mind these days?
Speaker 4 (33:56):
So I think just overall, the most interesting aspect actually
of the current changes in US trade policy is that
it's really challenging. You know, what has seemed like a
pretty stable global trading system, you know, since GAT and
the WTO, and so here is the United States taking
(34:17):
unilateral action relative to a lot of its trading partners
in ways that many of them would argue are not
consistent with being part of the WTO. And so I
think one key question in everyone's mind is, well, what
will happen not just with US China relations, or US
(34:37):
Canada or US Mexico or U s relations, but whether
we're really in an age where that period of free
trade consensus, globalization consensus is really over.
Speaker 3 (34:49):
Whether this marks kind of a pivotal moment.
Speaker 5 (34:53):
In the overall global trading system, where countries might be
a lot more protectionists, maybe even pmtive B that they
used to be and that they have been for the
last few decades.
Speaker 1 (35:07):
Yeah, there's sort of an ending of an era and
entering potentially a more protectionist one, something we hope to
unpack over future episodes for sure. Thanks so much for
joining us today.
Speaker 3 (35:18):
No, thank you, This was a lot of fun.
Speaker 1 (35:21):
You've been listening to the Asia Centric podcast from Bloomberg
Intelligence and Cutting me Treva in Hong Kong, and I'm
John Lee.
Speaker 2 (35:28):
You can listen to all our episodes on Apple Podcasts, Spotify,
or wherever you listen. This podcast was also produced and
edited by Clara Chen and thanks for listening.
When it comes to trade, there are a number of
ways that a country can address grievances with partners. The
past century or so, that's meant a lot of negotiation
and more recently the involvement of the World Trade Organization.
But President Donald Trump is relying on tariffs and in
a big way.
Speaker 2 (00:19):
Well, it may be effective from one angle, with dozens
of country leaders now angling to negotiate and promise to
buy more from the US, it has consequences for US
businesses and global investment, and it doesn't necessarily tackle one
of the administration's concerns, which is Chinese companies evading tariffs
through third countries. We're all listening to Asia Centric from
(00:43):
Bloomberg Intelligence. I'm John Lee in Hong Kong.
Speaker 1 (00:46):
And I'm Katadmitriyeva, also in Hong Kong. And today we're
talking to Abehi Ioha. She's a trade economist and assistant
professor at Harvard Business School, and she's going to help
us unpack tariffs, trade policy and all this other fun stuff.
Thanks for joining us today.
Speaker 3 (01:03):
Be Hey, thanks for having me.
Speaker 1 (01:05):
Now we've had a lot of news on tariffs and
trade policy. I want to ask you, just as an
economist in this space, can you talk a bit about
your kind of initial reaction, like when tariffs come in,
what are the likely outcomes in the short term and
also the long term.
Speaker 4 (01:26):
I think there are two aspects of the current trade
policy environment.
Speaker 3 (01:31):
That are important to focus on.
Speaker 4 (01:34):
So there's how high tariffs actually will be ultimately, but
then there's also the uncertainty about what the tariffs are
and how they will keep changing over time, and so
those things actually have different impacts. So you could think,
for example, there's a world in which tariffs ultimately end
(01:55):
up being ten percent on every country, every US trade partner,
and then maybe everybody retaliates and it's ten percent all round,
and businesses know that in advance, and so they plan
and they factor that into their projections and how they
think about hiring and investment and locating and all of
(02:16):
those decisions. And so the reaction is going to be
very different from a world in which we still end
up in the same ten percent tariff world. But there's
a lot of uncertainty along the way about where tariffs
really will be because there are changes in businesses behavior
and decisions given uncertainty, right, so there's likely to be
(02:37):
less investment because everybody's waiting to see where things will
ultimately land. Potential planned expansion or growth might be paused
because people are hedging against risk of things changing over
time because they don't know where things will end up.
So my initial reaction to the current trade policy environment
(02:57):
is really that we're getting a double whammy of both
the tariffs themselves, like the impact of the tariffs, but
also the impact of the uncertainty of the business environment
on what businesses are able to plan to do and
what they're able to do in the short term and
the medium term. And so those are two things that
I don't think people often distinguish between, but for the
(03:21):
time being, I think it's the uncertainty that's actually having
a significant impacts, even on businesses that are not directly
trade exposed.
Speaker 2 (03:30):
Asia Centric is produced by Bloomberg Intelligence. We're more than
five hundred experienced analysts and strategists work around the clock
to bring you timely, world class research. Our coverage spans
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(03:53):
If you like what you're hear, don't forget to subscribe
and share. Abiah, you're an expert in global trade. What
do you think is the current administration's goals in implementing
these tariffs? Is it to reduce the trade deficit? Is
it to bring jobs back to the US?
Speaker 4 (04:10):
So, I think explicitly, and you can tell from the
way in which the reciprocal tariffs that were announced on
April second, also known as Libration Day, the way those
tariffs were calculated. Essentially, we're calculated not based on you know,
Vietnam charges US four percent times, so we're going to
charge them four percent tires, but really tariff explicitly based
(04:31):
on the trade deficit that the US has with Vietnam.
And so for that reason, I think it's pretty clear
that the trade deficit is a key motivation for the
tariff policies that are being put in place today, in
the sense that I think the government, the current administration,
(04:51):
really sees significant value in shrinking the overall US trade
deficit in goods with its trade partners. One thing to
keep in mind, I specify in goods because the US.
Speaker 5 (05:03):
Actually a net exporder of services but it has a
trade deficit.
Speaker 1 (05:07):
Inputs with that point on the reducing the deficit, can
you talk a bit about because there is a lot
of information also misinformation, about what a trade deficit actually
means for the US. Trump has said that it's a
sign that the country is being taken advantage of that
it's not selling its goods abroad, it's buying from other
(05:28):
countries and helping those economies grow. Can you talk a
bit about what the US trade deficit? To you as
a trade economist, what does that mean?
Speaker 4 (05:38):
So to be perfectly transparent, lots of factors can lead
to a trade deficit. I think fundamentally you can just
start with comparative advantage. Right, So, for example, you have
likely have a trade deficit with your yoga teacher.
Speaker 3 (05:55):
Do you do.
Speaker 1 (05:55):
Yoga y in what way?
Speaker 4 (05:59):
You probably pay your yoga instructor money for services rendered
i e.
Speaker 3 (06:05):
Teaching you yoga?
Speaker 4 (06:06):
I don't know how much your yoga instructor buys from you,
and so you probably are a net importer of yoga
services from your yoga instructor unless you make stuff that
your yoga instructor really loves to buy.
Speaker 3 (06:20):
But if you think about the bilateral yeah, exactly.
Speaker 4 (06:25):
But if you think of the bilateral trade deficits, those
are often a function of multiple things. So of course
they could be the function of trade barriers that countries
might have non tariff barriers like standards or quotas, or
foreign exchange restrictions, all sorts of things.
Speaker 3 (06:43):
But they're also likely a function of comparative advantage, i e.
Speaker 4 (06:46):
Some countries are better at producing some things than others.
Some countries are relatively better at producing some things than others,
such that there is gains from trade. And so, for example,
Cambodia cannot afford most of the kinds of goods that
the US produces because the US is a very rich
country that produces very high quality goods, and Cambodian consumers
(07:09):
tend to not have the high enough incomes to purchase
the kinds of goods that US produces. But the US
tends to purchase the kinds of goods the Cambodia produces
because they produce apparel that you buy from Walmart. So
those kinds of things will lead to a bilateral trade deficit.
And so for some countries you might have a state
surplus because of comparative advantage. And for other countries, you
might have a bilateral trade deficit. US has a bilateral
(07:32):
trade surplus in goods with Australia, for example, and so
that's on the bilateral side. But I think there is
a concern about the US overall trade deficit, So the
aggregate trade deficit, if you add up the surpluses and
the deficits across all its trading partners, that total amount
and the fact that it has been a deficit over
(07:54):
a period of time, I think is something that this
administration is particularly interested in tackling, in the sense that
maybe it is viewed as the result of potentially unfair
trade practices across a broad set of countries, or maybe
it's also a signal that somehow the US isn't as
(08:14):
competitive as it otherwise could be in global trade and
in the global economy and the global production system. But
one other thing to keep in mind, and I won't
go any further on this, since I'm not an international
finance economist, but there is something about the balance of payments,
which is just the difference in money that US residents
(08:37):
and US it doesn't spend versus money that they receive from.
Speaker 3 (08:40):
Others, and that balance of payments.
Speaker 4 (08:43):
Part of that difference also has to do with the
fact that the dollar is a global reserve currency, so
people do like to hold dollars even if they're.
Speaker 3 (08:52):
Not necessarily like using it in the short term to
do things.
Speaker 1 (08:55):
Just to follow up on that, so, I guess what
I'm trying to get at is is a trade deficit
always a bad thing? Like, is the US the fact
that the US has a trade deficit? Is it necessarily
a negative thing?
Speaker 4 (09:07):
So no, Actually, if the US was a small, open
economy that was subject to, you know, the vagaries of
shocks from the rest of the world, you might be
a little more concerned because basically decisions that the US
makes wouldn't impact the world, but the world would impact it.
The US is a large, open economy, and the strength
(09:27):
of the US dollar is so important and said that
it really is like hard currency across the world. And
so to that extent, it's actually not inherently a negative
thing for a large open economy to have a trade deficit,
because it's a function of multiple factors beyond just oh,
you know, we're not producing enough or we're not competing enough.
(09:50):
It could also be a function of people wanting to
hold your currency. You could also be a function of
people wanting to buy the government's bonds for example, and.
Speaker 2 (09:59):
Hold that maybe I wanted to bring back the discussion
on something you just mentioned that was services. Now for
the listener, the trade deficit basically just takes me into
account the trade of goods, so final products, but not services.
And isn't services where the US is really strong, Like
if you think of Google, Meta, Microsoft, like Disney films,
(10:21):
this is where the US is strong. So is this
in a way distorting the competitive advantage of the US.
Speaker 3 (10:28):
So that's a really good question.
Speaker 4 (10:29):
So if you add up both the US's trade surplus
in services and then the US trade deficit in goods,
it is an overall test. Yeah, so the services surplus
does not exceed the deficit in goods. But to talk
about the services surplus, yes, the US is a net
exporter of services because it really does have a comparative
(10:52):
advantage in services, and not just you know, thinking about
services in terms of like tourism, but as you point out,
in terms of like intellectual property in terms of innovation.
One of the interesting things is people always talk about,
you know, where the screws are put into iPhones and
how much of that value is being captured by the US.
(11:13):
But a lot of the value of an iPhone accrues
to Apple.
Speaker 3 (11:18):
Apple is not a manufacturer.
Speaker 4 (11:21):
All of the iPhone manufacturing is done by foxcon right,
Apple does not manufacture physical goods. Yet most of the
value of Apple is in the design, is in intellectual
property en case within that iPhone, and most of that
value actually accrues to the United States through the fact
that there's essentially that's an export of services as an
(11:44):
export of intellectual property. And so that's something that I
think is left out of this conversation about treating goods.
Because the US does have a significant comparative advantage in
knowledge production, in innovation, and whatever is being done on
the goods side, one always needs to take into account, well,
what could be the effects and the tradeoffs in terms
(12:05):
of how innovation will continue to happen in the US
and how the US will still be able to be
a leader in innovating and producing these high value knowledge goods.
Speaker 2 (12:15):
Yeah, that's exactly why on the Apple iPhone cases is
designed in California, right, rather than made in China.
Speaker 3 (12:22):
Yes, precisely, But tell us.
Speaker 2 (12:25):
What's the impact on us small businesses. Can they pass
on these tariffs in terms of higher prices.
Speaker 3 (12:32):
Yeah.
Speaker 1 (12:32):
Aberhei recently did a survey of about four thousand small businesses,
and a lot of the findings were around kind of
a lack of knowledge of tariffs, but also the inability
of these companies potentially to pass on some of these costs.
So we'd love to hear some of the other findings.
Speaker 3 (12:51):
Yeah.
Speaker 4 (12:51):
So interestingly enough, the survey was done shortly before the
April second announcement, and the reason was we actually wanted
to capture the full range, the full variation in the
leafs and expectations about what would happen after April second.
Speaker 3 (13:10):
We're planning to do a follow up.
Speaker 4 (13:11):
But essentially, one of the key things that I think
people forget is that compared to a large company, you
should actually expect to see impacts of tires on small
businesses sooner than you see on large firms. So people
often have this perception that, you know, international trade is
a large business game, and so small businesses aren't really
(13:33):
that connected to the international economy in any direct sense.
But what we were able to see in our survey
is that actually there was a good share of small
businesses that potentially could benefit because they compete with foreign
products in the US market, but then could be affected
on the cost side because they import foreign products, some
from China, some from other parts of the world. And
(13:56):
one key thing you always want to figure out when
tariffs are implemented is that it's not always obvious who's
going to pay for tariffs just because the tariff has
been increased because them give you an example, if I
have lots of substitute suppliers, right, I could go to
a lot of other suppliers, and for example, there were
(14:16):
one hundred US suppliers who could give me the same
thing I was important from China, and so tires go
up twenty five percent one hundred and forty five percent.
I could essentially get negotiate with my form supplier to
eat some of that cost because they know I can
go somewhere else. So in that case, just because the
tariff increases doesn't mean my cost.
Speaker 1 (14:35):
Increases, right, your supplier could end up paying that exactly.
Speaker 4 (14:38):
So how do you actually get at that like the
measure of how much of those costs you'd have to eat?
So one question the business owners were asked was, well,
if things were twenty five percent more expensive, like how
much of a discount will your supplier give you? And
for a large air of them, no discount, So they
would have to eat the additional cost of the tariff
because they don't have you know, good alternatives and not
(15:01):
that much bargaining power with their suppliers, which is not
surprising because they're small firms, right, and so how are
they able to pass on those costs? Again, you might
be able to pass on those costs if everybody around
you is raising their costs then raising their prices rather
on their customers, then actually maybe you might be able
to get away with them without losing market share. Again,
(15:23):
not to get too into the leads, but essentially you
can always think of two things. So think of whatever
industry there is. You can think of the overall size
of the pie in the industry, whether that's shrinking or expanding,
And then you could also think about slices of the pie,
how much market share you have within that industry. And so,
for example, if everybody has to raise your prices and
(15:45):
it's something that's non essential good, it's likely that the
industry will shrink, right, because it's got to be more expensive.
So people can spend less on that thing, but then
maybe your market share won't increase that much. But if
you know you're competing with large companies who have that
are negotiating power with their suppliers can eat some of
those costs and not increase their prices. Whereas you're the
(16:06):
only one who has to increase your price, then you're
probably going to do some customers to your competitors. And
so for small businesses, that's the serious copy that they're
having to do, which is that even if I try
to pass this on to my customers, how much will
I be losing to my competitors on this end? And
I think you see a little bit in the media.
People are getting creative with how they will communicate this
(16:28):
to the customers. Some people are adding a little line
to their invoices and we see its showing this is
the tariff's surcharge right on.
Speaker 3 (16:36):
So this is why your price is highed.
Speaker 4 (16:37):
It's just because there's a thirty five percent extra charge
because steel is more expensive or something.
Speaker 2 (16:42):
We're starting to do that already.
Speaker 4 (16:44):
Oh yes, actually, and it's not even small businesses alone.
I think fabletics also started doing that as well.
Speaker 2 (16:51):
But yes, I wanted to shift the discussion to Asia.
Under Trump's first administration, one of the big impact was
a lot of companies leaving production away from China to
Southeast Asia, and some of these countries, like Vietnam, were
considered big winners. Is that going to be the case
this time around?
Speaker 4 (17:11):
So, well, the reciprocal tariffs that are now postponed at
least for the next ninety days on Vietnam. Vietnam is
facing one of the higher tariff increases because the US
has by a lot of oral trade deficit with Vietnam,
and so will Vietnam be another winner in this new
(17:35):
round of tariff increases. It's not clear that that's the case,
which is a big problem for the multinational companies who
invested a lot of money in setting up manufacturing in Vietnam. Well,
we might see other winners, So it's not the case
that overall you won't see maybe new winners emerged. So,
for example, I think the Philippines has been actually quite excited.
(17:56):
So their reciprocal tariff rate was I think about seven
teen percent if I recall correctly, but they viewed as well,
it's still significantly lower than most of the countries in
Southeast Asia. It's lower than Thailand, it's lower than Vietnams,
and so maybe there's scope for moving some of that
production and some of that manufacturing over to the Philippines
to take advantage of now the more favorable tax treatment.
(18:22):
The key thing though, is that because we are in
an error that's so uncertain, and there have been so
many changes to TIFT policies that have been announced, it's
likely that businesses will probably do some scouting.
Speaker 3 (18:34):
Right, Multinationals will do scouting, and.
Speaker 4 (18:36):
They have entire departments that are trying to lay out
what their optimal strategies are. But it will be some
time to actually see anything manifest because people don't want
to sink in, you know, hundreds of billions of dollars
in capital investments in locations that might end up being
hit with high tiers after all.
Speaker 1 (18:54):
And there's also, of course, you know, just in terms
of small businesses, you probably have supply chains that have
been carved over many years and those relationships that have
been developed, and you know, how easy is it for
companies to switch to a country a different country.
Speaker 3 (19:12):
Yeah, it's not easy.
Speaker 4 (19:12):
So actually, one strand of research that has emerged over
and actually was I think motivated by COVID actually, but
I think applies here as well, is folks like Benklob
who basically study these if you think of them like
the scarring effects of shocks to supply change, right, so
in the sense that some trade relationship are very kind
(19:37):
of market based, so in the sense that like I
really could buy my widget from a broad set of people,
or I could buy if you think about goods that
are considered like commodities, it's essentially like one.
Speaker 3 (19:48):
Supply is as good as the other.
Speaker 4 (19:50):
The issue is that when you're producing differentiated goods, so
goods that kind of require a lot more customization, that
a little more specialized that it's really important. That requires
like precision manufacturing for example, where it's really important you
get those specs.
Speaker 3 (20:04):
Right and you do the QA.
Speaker 4 (20:06):
Then those relationship specific investments are really important, and it
takes some time to switch because on the one hand,
you of course care about cost, right cost including the tariffs,
but then on the other hand there are costs of
not getting it right. So for example, I switch to
a new supplier even if the tariffs are you know,
(20:28):
because I'm trying to save something on like a twenty
five percent or even one hundred percent tiff, but then
my quality control declines by fifty percent. It's not clear
how much I'm actually saving, right, So that's a key
factor here in that some of these, especially like consumer electronics,
which is potentially why they have that carve out because
(20:50):
consumer electronics, some of these can be quite complex to
produce and require these relationship specific investments. And even if
the goal for the US to ultimately bring some of
that manufacturing back, it will take a lot of time
to build in terms of kind of reorganizing those very intricate,
very complex supply chains that are able to deliver these
(21:12):
these electronic goods.
Speaker 2 (21:13):
And I think Kim Cook from Apple has gone on
record a number of times saying that they produce iPhones
in China, not because it's the low cost producer, but
a lot of the workers have skills you can't find
anywhere else.
Speaker 1 (21:24):
Precisely, we've talked so far in this conversation about trade
in goods and services with sort of official trade, but
one of the things that the Trump administration has cited
as a reason for these tariffs, but also area of
concern is sort of transshipments or rerouting of goods, which
(21:44):
is actually different from normal trade, where you sort of
take an item, add some value, ship it from that location.
And there's this sense that Chinese companies in particular might
be trying to avoid teriffs. Can you talk a bit
about the different is between like regular trade and then
this sort of transshipment trade.
Speaker 4 (22:04):
Yes, so transhipment is and or rerouting, however you might
choose to call it rerouting relabeling transhipment. So this activity
is essentially illegal activity in the sense that people who
engage in that activity are mislabeling the true country of.
Speaker 3 (22:23):
Origin of the good in order to avoid tariffs.
Speaker 4 (22:26):
So it would be something like I fully produced that
good in China and then I ship it to location A,
and there we change the label on the box to
make it say made in country A. We you know,
lie on the certificate of origin saying this was made
(22:47):
in country A. And the reason we do that is
because you know, US tariffs on Chinese goods are much
higher than US tariffs on country as goods, and therefore
we do that to get access to the law.
Speaker 3 (23:00):
Or tariff rate.
Speaker 4 (23:01):
So the key difference between transhipment and what could otherwise
be just like a normal global value chain activity where
maybe some of it is done in China, but then
it gets shipped elsewhere and some value is added there
and then it gets shipped to the US. And so
those are two very different activities. And anytime you have
(23:22):
for the same product differential tariff rates for different countries,
then there's that incentive to do transhipment because there's basically
a window of arbitrage right now. The bigger that gap is,
the greater there is an incentive to do that for listeners.
Speaker 1 (23:40):
So basically like in twenty eighteen, which is what we
saw twenty eighteen, twenty nineteen, which is like China high tariffs,
where can we get lower costs, Vietnam, Indonesia, Thailand right precisely.
Speaker 3 (23:54):
Now.
Speaker 4 (23:54):
The interesting thing is this time around, so we're not
in reciprocal tariff land yet because those have been paused.
The rest of the world is facing something like ten
percent have Chinese goods are facing one hundred and forty
five per certain lavely on average, and so that gap
is quite large, and so the scope for transshipment is
(24:15):
actually much bigger now than it was in twenty eighteen
twenty nineteen, because then we were talking about differences of
you know, ten twenty five percent versus five percent or
four percent, and so that is a huge window in
which you can absorb some know, costs of shipping things
through other countries. You can you know, split the difference
with all the collaborators involved in this legal activity and
(24:37):
still mix them back.
Speaker 2 (24:39):
You said that this re routing is illegal, but it
must be hard for the US to track, Like what
happens if you just get this box it says made
in China and you just instead of you delete that
and say made in Philippines or made in Vietnam. It's
can they do anything about it?
Speaker 3 (24:54):
Yeah?
Speaker 1 (24:54):
And how much is this actually happening?
Speaker 3 (24:57):
That's a great question. So the interesting thing is in
the Vietnam's case.
Speaker 4 (25:00):
So what we studied in our paper was that we
actually were able to use Vietnamese customs data and we
could actually track what looked like suspicious flows where all
of a sudden, you see relatively high imports of a
specific product from China into Vietnam by like the same company,
and then you see that same company in a short
(25:21):
period of time export.
Speaker 3 (25:23):
The same product to the US.
Speaker 4 (25:26):
And you're seeing that as a pattern that's not necessarily
happening with their exports anywhere else or their imports from
anywhere else, and so that's suggestive of what looks like
childie shipment. So of course, you know CBP Customs on
Border Patrol could do some data analysis to kind of
track that, and they do do some of this in
the sense that they do analyze data to see what
(25:48):
looks like suspicious trade flows.
Speaker 3 (25:51):
But for the most part, the enforcement.
Speaker 4 (25:53):
Actually happens a lot of time after the good is
already in the country.
Speaker 3 (25:59):
So what happens is.
Speaker 4 (26:00):
CBP will see what they suspect to have been evaded
tariffs and then go to the importer and try to
recover some of those gvs, saying, we think some of
the goods you imported were actually made elsewhere and you
lied to us about where they were made, and so
we're going to charge with the tariffs that you should
(26:21):
have been charged in the first place.
Speaker 3 (26:22):
Part of how they get that information is.
Speaker 4 (26:24):
There's a reporting system that people can So let's say
I am a competitor with the Chinese firm that's opposed
to all of a sudden this be subject to these
high tariffs, and I'm seeing that these goods are still
somehow ending up in the country. Really niarly, and I
suspect that there's some TIFFs circunvention going on, so I
can go on the CVP's website and actually report that
(26:46):
I suspect that this particular country is abating TARSK. So
that's part of how they get the information. Part of
it is by analyst in data. But how much actually happened.
So the interesting thing is for Vietnam specifically, which we
study in our paper, we actually find that between twenty
eighteen and twenty twenty two, Vietnam's exports to the US
grew by about eighty billion, so something around seventy eight
(27:08):
billion dollars, and only like ten percent of that by
like our benchmark measures could be attributed. We could attribute
towards rerouting or transhipment, and so you could think ninety
percent of that was actually because there were a lot
of multinationals that had made the investment to do actual
production in Vietnam, even if they might be using some
Chinese inputs, and so it wasn't as large a share
(27:31):
as I think people.
Speaker 3 (27:32):
Perceived it to be.
Speaker 4 (27:33):
Where people really perceived that, like, you know, more than
half of what was coming from Vietnam was really made
in China. Will that be the case now with the
higher you know, the larger wedge and this kind of gap,
and what other locations might be potential rerouting or transhipment hubs.
It's going to be an empirical question that I'm excited
to dig into, because every time you have this disparity,
(27:56):
you always create this incentive.
Speaker 1 (27:57):
It kind of sounds like the US might be shooting
itself in the foot with these terraffs. So like to
your point, I mean, if there's a bigger gap between
the Chinese tariffs and Vietnamese tariffs, then that would only
to your point, encourage more transhipments now or more rerouting.
Speaker 2 (28:12):
Yes.
Speaker 4 (28:13):
So actually, from a policy like to minimize implementation costs perspective,
something like the steel and aluminum tariffs actually make more
sense in the sense that you have a uniform tariff
across all locations. There's no incentive for transhipment in that case. Right,
everybody's anything regardless of where it comes from. It's twenty
five percent, So who cares whether I ship it from
(28:33):
China or from Vietnam or from Thailand. So product specific
uniform TIFFs are not going to be subject to chair
shipment in the way that country specific tariffs will be,
and so you end up playing this game of whack
a mole. And the sad part about the enforcement is
that every time you create this disparity with policy, you
(28:55):
essentially run the risk in your enforcement activities of peneli
seeing legitimate producers abroad and potentially missing in your thirst
to like catch in your quest to catch the transhippers.
And the sad part is the legitimate producers actually have
made capital investments and made these, you know, investments in production,
(29:16):
whereas the rerounters don't need to make those investments, and
they can kind of just like hop from So of
course there's some costs of setting up an operation and
finding collaborators and invading the authorities, but like they can
kind of hop from place to place and you could
be playing Wapamo with them for a long time. But
the legitimate producers do have those fixed investments. So one
thing CBP does do when when, especially in cases where
(29:36):
it thinks it's particularly egregious, is that CBP will go
to locations abroad, whether the factory supposedly is to inspect
it to see whether it looks like there's actual production
going on there. Now, you can imagine that's very expensive
and it's very happy to do when you have, you know,
hundreds of millions of dollars worth of goods flowing into
the country on a regular basis. But to the extent
(29:57):
that they can use sophisticated data intelligence tools.
Speaker 3 (30:01):
Now, with the.
Speaker 4 (30:02):
Access of data that we have, it might be possible
to at least pinpoint likely candidate and go inspect some
of these facilities.
Speaker 2 (30:10):
Has it ever been a successful case of tariffs being
used by a country to, you know, bring jobs back
to the country.
Speaker 4 (30:18):
So I think there's been this broad set of import
substitution policies right in the sense that you use tariffs
to essentially protect an industry such that it woke grow.
Has there been a case in recent history of using
tariffs in this way to bring back an industry that
had previously existed and left through our shoring. Not to
(30:43):
my knowledge, although I might be wrong because I'm not
CHATGPI don't have the full breath of the entire existence
of the world. But I will say that in the
history of like us, the current advanced economies, you know, Japan,
et cetera, like multiple stages.
Speaker 3 (31:00):
Tariffs have been used to protect.
Speaker 4 (31:03):
Industries from declining or to allow some industries grow. So
usually the interesting thing is countries often need to do
like three key things if you're going to be doing
something like this, which is it's not enough to reduce competition,
because what happens when you reduce competition is that companies
(31:23):
have less of an incentive to innovate or be very
efficient or productive. So if all you do is just
have a barrier to foreign competition, you're not necessarily going
to lead.
Speaker 3 (31:34):
To a thriving industry domestically.
Speaker 4 (31:37):
So what a lot of countries have done in the past,
and I'm pretty sure like Korea and Japan actually used
some form of infant industry protection when they were building
out their own manufacturing capabilities, is that there's both the
carrot and the stick, right, So, yes, you're protecting those
industries from foreign competitions such that they grow and they expand,
(32:00):
But then there also has to be the stick and
kind of incentives to make sure that these industries have
some incentive to be competitive, to be efficient, to innovate.
And what that looks like from like a domestic policy
perspective is, yes, we might give you, you know, subsidies,
et cetera.
Speaker 3 (32:19):
And we might give you some of this protection, but
you have.
Speaker 4 (32:21):
To reach some goal of exporting to this extent within
the next few years, or you have to reach some
level of like R and D spend that actually shows
us that you're really investing in growing your productivity and
growing your efficiency and growing your innovation rather than just
sitting on your laurels and you know, getting fat off
(32:42):
the benefits and the profit margins from having little competition.
I will say one area in which actually you do
see a lot of trade barriers to make sure some
production is done in industries is in agricultural goods. So
if you go, for example, just go check like WT
or tiret schedules.
Speaker 3 (33:01):
I do that for fun. I don't know if you
like to do that over your weeks.
Speaker 4 (33:05):
But you always see, you always see this distinction between
agricultural and non agricultural goods and kind of the tires
that countries have.
Speaker 3 (33:14):
And part of the reason is countries generally tend to.
Speaker 4 (33:16):
Have higher tires on agricultural sector, so in parts of
agricultural goods than they do on non agricultural goods. And
the reason for that is there is this kind of
like natural security self sufficiency argument for we need to
make sure at least we retain some of our.
Speaker 3 (33:33):
Food production within this country because.
Speaker 4 (33:37):
In the event of whatever might happen geopolitically, we want
to make sure that our citizens can be fed. Among
other reasons, but that's one of them.
Speaker 1 (33:47):
So we have talked about a lot in trade world
ape Hey, what is on your mind these days?
Speaker 4 (33:56):
So I think just overall, the most interesting aspect actually
of the current changes in US trade policy is that
it's really challenging. You know, what has seemed like a
pretty stable global trading system, you know, since GAT and
the WTO, and so here is the United States taking
(34:17):
unilateral action relative to a lot of its trading partners
in ways that many of them would argue are not
consistent with being part of the WTO. And so I
think one key question in everyone's mind is, well, what
will happen not just with US China relations, or US
(34:37):
Canada or US Mexico or U s relations, but whether
we're really in an age where that period of free
trade consensus, globalization consensus is really over.
Speaker 3 (34:49):
Whether this marks kind of a pivotal moment.
Speaker 5 (34:53):
In the overall global trading system, where countries might be
a lot more protectionists, maybe even pmtive B that they
used to be and that they have been for the
last few decades.
Speaker 1 (35:07):
Yeah, there's sort of an ending of an era and
entering potentially a more protectionist one, something we hope to
unpack over future episodes for sure. Thanks so much for
joining us today.
Speaker 3 (35:18):
No, thank you, This was a lot of fun.
Speaker 1 (35:21):
You've been listening to the Asia Centric podcast from Bloomberg
Intelligence and Cutting me Treva in Hong Kong, and I'm
John Lee.
Speaker 2 (35:28):
You can listen to all our episodes on Apple Podcasts, Spotify,
or wherever you listen. This podcast was also produced and
edited by Clara Chen and thanks for listening.
Hosts And Creators
John Lee
Tom Corbett
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