February 12, 2024 • 41 mins
China’s economy has been in rough shape, and the government is trying to address it. But there’s another threat on the horizon: the US election.
During their presidencies, both Joe Biden and Donald Trump backed policies that drove the US and China further apart. Now, they're both campaigning for re-election on continuing on that trajectory.
In this episode, Joe Weisenthal and Tracy Alloway from the Odd Lots podcast speak with Tom Orlik, chief economist at Bloomberg Economics, and Mackenzie Hawkins, US industrial policy reporter for Bloomberg News. They’ve measured what a Trump or Biden victory in 2024 could mean for China’s economy, and beyond. Subscribe to Odd Lots to get all of their episodes.
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Speaker 1 (00:03):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
China's economy is in rough shape.
Speaker 3 (00:11):
China's real estate factor is in a significant correction.
Speaker 1 (00:14):
This inflation number is just crossing the Bloomberg right now.
Speaker 2 (00:18):
Ouch.
Speaker 3 (00:18):
We've seen monthly losses now for six months in a row.
Speaker 2 (00:21):
Six trillion dollars worth of market capitalization wiped out. There's
a property crisis, exports are down, and the stock market's
been in a tailspin. Last month, consumer prices fell at
the quickest pace since the two thousand and eight financial crisis.
The Chinese government's been under increasing pressure to do something,
(00:41):
and it has. But there's another threat on the horizon
when it comes to China's economy, the US election. During
their presidencies, both Joe Biden and Donald Trump backed policies
that drove the US and China further apart. That's only
continued now that the two twenty twenty four campaign is underway.
(01:02):
In November, Biden doubled down on his statement that China's
President Shijinping is a dictator, and earlier this month, on
Fox News's Sunday Morning Futures, Trump said that he might
raise tariffs on Chinese imports to over sixty percent. This
wouldn't just hurt China. Ratcheting up tensions between these two
(01:23):
nations might mean American consumers feel the cost at home,
like with the prices of everyday goods getting higher and
the rest of the world. With the world's two largest
economies fighting, well, they might end up as collateral damage.
This is the Big Take DC podcast from Bloomberg News.
I'm Salaia Mosen. Today I'm turning over the mic to
(01:45):
Joe Weisenthal and Tracy Alloway, co hosts of our sister podcast,
Odd Lots. They sat down with two colleagues from Bloomberg's
Washington bureau who measured just what a Trump victory in
twenty twenty four could mean for China's economy and beyond.
Speaker 4 (02:11):
Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1 (02:15):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 4 (02:17):
Tracy, here's something that I've thought about that's been interesting
for a few years. The Trump administration obviously sort of
took this hawkish line on China, introduced the tariffs on
a lot of Chinese exports to the US, and then
when the Biden administration took over, it kind of seems
like we basically got continuity on that front. There was
(02:40):
no roll back, yeah, anything, Maybe some of the screws
have been tightened even further.
Speaker 1 (02:44):
I think that's exactly right. And it's kind of funny,
as you mentioned that it's flown a little bit under
the radar. And I'm thinking back to Trump's statement trade
wars are good and easy to yeah, and I mean
he got a lot of flak for that, probably rightfully so.
But if you think about what's been happening over the
past few years, it seems like the US is kind
(03:04):
of winning the trade war against China in some respects.
I mean, the US economy outperforming much of the rest
of the world. I think GDP growth was something like
three percent in twenty twenty three. China's GDP growth is
still higher. I believe it was at five percent, but
it's slowing a lot. And if you look at what's
going on with the economy right now, it seems like
(03:25):
it is really struggling in various ways.
Speaker 4 (03:27):
It's interesting that they're winning. I hadn't really winning.
Speaker 1 (03:31):
Might be strong, but like, well.
Speaker 4 (03:33):
Our contry is clearly doing better.
Speaker 5 (03:34):
Yeah.
Speaker 4 (03:34):
Least on the other hand, China clearly has a handful
of industrial powerhouses that are creating anxiety for legacy industrial
powerhouses in the US and Europe. And we could say
that clearly when it comes to ev first legacy automakers,
we can look at, you know, the rising number of
conversations like Oboeing is faltering, will Comac and the CM
(03:57):
whe nine eventually takes significant market share in commercial aerospace.
We did an episode, I think near the end of
last year that actually, despite all of the restrictions on
equipment imports into China for semiconductors, that the domestic semiconductor
industry is making gains. So like in the GDP sense
of the word like clearly China is struggling, but on
(04:20):
these sort of like key industrial strategic areas of the economy,
there is the word things still seem to be working out.
Speaker 1 (04:27):
No, absolutely, And I think there is this overall angst
in the US with this idea that China is somehow
better at doing this kind of targeted industrial policy. We
used to talk about the Chinese command economy. They have
experience with pouring lots and lots of money into areas
that they identify as strategically important. That doesn't mean they
(04:47):
do it perfectly every time. I mean, we basically saw
that with some of the consumer tech companies, where there
was a reversal of the government stance towards them, lots
of talk of disorderly capital flowing into that space. But
then what we saw is, you know, they said that
they cracked down on the sector, and then they said,
what we really want you to invest in is things
(05:09):
like solar panels and electric vehicles and semiconductors, And so
we saw those areas start to boom. So I think
there is a real sense of concern in the US
that maybe China, if they're not better at it, they
certainly have done it for a longer time on a
more consistent basis.
Speaker 4 (05:27):
Right, And so it feels like now the debate in
the US is like, Okay, everyone is sort of accepted
that the tariffs that Trump introduced, that the idea that
the US in various ways tries to constrain Chinese exports
or constrain Chinese industry. It feels like that's become conventional
wisdom now, or that everyone sort of agrees we do
that in Washington, and now the question is how much.
(05:47):
And of course recently we heard Trump say that were
he to be elected president, he would ratch up the
tariffs even more. I think he put the number like
sixty percent, which I have to imagine would like totally clobber.
Speaker 1 (05:58):
He did say sixty but then I saw right before
we came on, let's see, we're recording this on February eighth.
I think there was an interview from like February six
where he basically said that the tariffs could be even
bigger than sixty percent. So I don't know where he's
quite getting those round numbers from, but maybe more than
sixty percent right now.
Speaker 4 (06:19):
So as much as Biden has been a continuation and
extension and an expansion of Trump policies, maybe Trump, if
you were to win the presidency in November, would be
a continuation and expansion even further. Anyway, we should talk
about what a Trump victory, which is of course certainly possible,
what it would mean for the US China relationship, and
(06:41):
what it might look like, what the direction all this
is heading. Let's do it all right, Well, we have
two absolutely perfect guests today. We're going to be speaking
to Tom Orlick, previous Odd Lots guest, multiple times, chief
economist for Bloomberg Economics and Mackenzie Hawkins, she's the US
Industrial policy reporter for Bloomberg in DC. Both of them
worked on a big new reports sort of examining this question,
(07:03):
which everyone should go and read. But thankfully they are
taking the time to speak with us. So Tom and McKenzie,
thank you so much for joining us.
Speaker 3 (07:10):
Great to be here. Thanks Jo, Thanks Tracy, thanks.
Speaker 5 (07:12):
For having us on.
Speaker 4 (07:13):
Actually, Tom, let me just start with you with like
the most vague theoretical question there is, from a purely
economist standpoint, what do tariffs do?
Speaker 3 (07:23):
So tariffs increase the cost of imports, and when the
cost goes up, the demand goes down. So in the
first Trump administration, we saw twenty five percent tariffs on
a swathe of Chinese exports to the United States, and
(07:45):
we've got a bunch of data on the impact that
those tariffs had, so we can kind of say what
the impact was. And we're seeing Chinese sales to the
US in the categories of goods that face the tariffs
down more than one hundred billion dollars relative to where
they would have been if no tariffs have been put
(08:06):
in place. Now Here we are at the start of
twenty twenty four, still a few months to the election,
but Donald Trump clearly in the lead for the Republican nomination,
running ahead of Joe Biden in the polls in some
key swing states, and talking about a sixty percent tariff
on all Chinese imports. Well, if twenty five percent tariffs
(08:31):
put a bit of a hole in revenue for Chinese factories,
sixty percent tariffs, I think would turn that hole into
more like a crater.
Speaker 1 (08:40):
So Joe asked a very theoretical question, and I guess
I'm going to ask something a little bit more specific,
but talk to us about how targeted or I guess
customized the tariffs are that we've seen from the Trump
administration and then the Biden administration, Because of course Trump's
export curbs did involve semi conductors when he was president,
(09:01):
but then Biden came in, and I believe he targeted,
you know, advanced semiconductor technology and China's access to it,
and in some ways he was even more strategic in
the things that he was limiting.
Speaker 5 (09:14):
So in the Trump administration you saw this sweeping terror
review that affected a wide range of Chinese industries, and
the Biden administration has held those tariffs in place. There's
been sort of a quote unquote imminent tariff review for
months now, and a big question in Washington is whether
the administration will stay the course with the sectors that
Trump targeted or have a more refined approach that might
(09:38):
focus on key strategic sectors for the US, like evs
and other clean energy products, which of course the Biden
administration is trying to subsidize at home. But then you
saw Biden look at a whole suite of other tools
of economic statecraft that have actually become his favorite mechanisms
to get at the Beijing question. One of those, as
you said, Tracy, is export controls on A and semiconductors.
(10:01):
These are the critical electronic components that power everything from
your phone to your car to nuclear missiles. And there's
a big fear in Washington that if China catches up
with US technology that they could use AI to power
weapons systems, that it could pose a significant military threat
to the US. And so you saw in October twenty
(10:21):
twenty two sweeping controls on the ability of US companies
to export the most advanced semiconductor technology and ship making
equipment to any Chinese company.
Speaker 4 (10:32):
McKenzie just as a follow up on that specifically and
talking about politically, like as we said in the introduction,
and as Tracy just mentioned, you know, Biden continued with
a lot of these terrify views. They're ongoing, they've become
even more targeted. How did this become the consensus that
the idea of just dropping tariffs and sort of returning
to the pre Trump status quo with regards to trade
(10:54):
now doesn't even seem on the table anymore, and it
doesn't seem like anyone advocates for that. How did this
just become like the bipartisan consensus that setting aside the
degree of restrictions, that some restrictions must be applied.
Speaker 5 (11:08):
It's a great question. You know, when you talk to
folks on both sides of the aisle on the hill,
they say, the one thing that everyone agrees on is China,
and the question is not what, but how much? And
you know, you really saw the Trump administration, you know,
early on introduce this tariff's question, and then later on
towards the latter years, start to target specific Chinese firms.
(11:28):
Like a great example is Huawei, the Chinese telecommunications giant,
which you saw Trump sanction in twenty nineteen over concerns
about the security of their telecommunication systems that are all
over the US. And then once that sort of entered
the Washington think tank sphere and people really started seeing
Huawei as a security threat, it became Okay, what else
(11:51):
is Huawei doing that's a security threat? And you know,
the initial sanction sort of crippled their telecommunications business and
their smartphone business for quite some time time. But we
saw Juawe debut a smartphone in August that's powered by
its ship that's far more advanced than where the US
was hoping to hamstring China's rise. And so as we've
seen China sort of make incremental technological progress in these
(12:14):
areas that Washington has decided it's quite concerned about, there
doesn't really seem to be a big debate over whether
should we really be doing expert controls in the first place.
It's we've been on this path, we've seen China continue
to make progress. What are additional measures that we can
take with our allies to prevent any further progress from
these firms that now for five years have been thought
(12:37):
of as a significant security threat in DC.
Speaker 3 (12:39):
I just build on that briefly and point to three
big factors which I think have changed the dynamic here
in Washington, DC and made anti China into a sort
of broad and firm consensus. I think the first thing
driving it has been China's sudden rise. Right when everyone
was agreeing that China could join the Double Wuto back
(13:01):
in nineteen ninety nine two thousand, China's GDP was a
fraction of US GDP. China's military capabilities were nowhere near
US military capabilities, and so China really wasn't regarded as
a threat, and it was still possible to regard China
as a kind of almost like a disciple. That's now
clearly changed. I think the second thing, which is important
(13:24):
is the kind of the peculiarities of the US election system,
which gives a disproportionate amount of power to the votes
and the voices of a constituency in a few swing states,
places like Pennsylvania, which are in the US rust Belt
and which have suffered disproportionately from China's rise as a
(13:44):
manufacturing power, and so where tough on China is a
very popular vote winner. And then I think the third factor,
which we have to acknowledge is the kind of the
strange genius of Donald Trump, right, who kind of revealed
in his campaign in twenty sixteen that being really tough
on China was a powerful motivating factor for the voters
in those swing space.
Speaker 1 (14:20):
Whatever happened to the sort of old simplistic argument for protectionism,
which was what we want to know, reshore manufacturing, create
more jobs in the US. It feels like it's sort
of evolved into this very specific anti China action and
we haven't seen correct me if I'm wrong, but we
(14:42):
certainly haven't seen as stringent actions on other countries and
other manufacturing threats. I mean, we know Mexico is exporting
tons to the US now, sort of filling some of
the gap that China has left. But what happened to
that argument? That feels like it's lost a little bit
of popularity in DC. Everything feels very strategic, very security focused.
Speaker 3 (15:06):
So I think when it comes to China, these two
things come together from a US policy perspective rather nicely. Right,
Here's China, a single party state, a state dominated economy,
rising quickly one point three billion people. It's easy to
see why this is regarded as a national security threat,
(15:29):
and so why it's easy to win the argument in
DC for things like banning sales of leading edge semiconductors
because potentially they could fuel China's military capabilities. At the
same time, China's enormous success in grabbing global market share
in the manufacturing sector and the consequences of that for
(15:52):
US manufacturing, where factory towns have been hollowed out and
people have lost their jobs, makes the case that this
is really important, not just from a national security perspective,
but also from a kind of social well being allowing
everyone to benefit from the growth of the US economy perspective.
So it's a complicated picture now when it comes to China,
(16:14):
those national security arguments and those concerns about the hollowing
out of the manufacturing sector come together very nicely. The
messiness of it, which I think you're sort of alluding to, Tracy,
is that near assuring and friendsuring. That addresses the national
security piece of it, but it certainly doesn't help people
(16:35):
who lost their manufacturing jobs here in the United States.
They're not going to be super delighted to see those
jobs coming back to Mexico or Vietnam or other places,
which don't really help them.
Speaker 5 (16:46):
Out, and the manufacturing argument still has a lot of
salience in DC and on the campaign trail. You know,
you can think of one tranch of Biden's China policy
as sanctioned controls on outbound investment, export controls on semiconductor ships,
and the continuation of Trump tariffs. But you can think
of the other side of the coin as the massive
industrial policy effort that the US has embarked on over
(17:07):
the past couple of years. The Chips and Science Act,
the Inflation Reduction Act, which is democrats signature climate Law,
and the bipart is In Infrastructure Law have poured well
over a trillion dollars of federal funding into revitalizing these
domestic manufacturing bases in areas that lost a lot of
jobs to the so called China shock.
Speaker 1 (17:28):
It is true also that I think Trump has talked
about doing a blanket ten percent tariff on all imports
to the US, so basically ring fencing the entire economy.
Speaker 4 (17:38):
Well, this is dovetails with what I was about to
ask next time, and it's sort of another theoretical economics question,
kind of like when I asked what tariffs do, but
why didn't we have inflation? Why don't they. Why weren't
the inflationary in the Trump period? And how do economists
think about the inflation risks associated with aggressive tariffs either
on one country or blanket tariffs on it.
Speaker 3 (18:01):
So it's a really good question if we think about
the kind of the big picture over the last thirty years,
globalization and the ability of consumers in the United States
to tap cheap goods made in China has been one
of the factors that was pretty helpful in keeping inflation
(18:22):
around the FEDS two percent target, at least until the
post pandemic inflation surge. Now, why didn't the Trump tariffs
have a more significant impact on that dynamic? I think
the reason is there's a few factors at work. The
first factor is goods inflation is important in the US,
but it's not as important as services inflation, and services
(18:45):
inflation doesn't really get impacted by tariffs that you put
on goods. The second factor is, yes, China is a
really important supplier of goods to the United States, but
it's not the only supplier. And then the third factor
at work is tariffs aren't the only thing going on. Yes,
the Trump administration put twenty five percent tariffs on but
(19:08):
over the same period we saw a significant depreciation of
China's yuan. China's factories were able to absorb some of
the shock by taking lower profit margins, and that provided
a little bit of an officer.
Speaker 1 (19:20):
So, just on this note, have you done any number
crunching on what Trump's proposal would mean for inflation?
Speaker 5 (19:27):
Now?
Speaker 1 (19:28):
Do you have specific numbers?
Speaker 3 (19:30):
So we have actually been crunching the numbers, Tracy, And
here I want to give a shout out to Eleanora
Mavrodi in our modeling team in Paris. She's taken a
big model of the global economy and she's plugged in
that Trump proposal for a sixty percent increase in tariff's
on US imports from China. And what the model is
(19:52):
telling us is that that has a pretty catastrophic impact
on trade. In fact, if the US goes ahead with
sixty percent tariffs and China reciprocates with sixty percent tariffs,
matching the pattern of kind of tit for tat retaliation
we saw during the first Trump term, that pretty much
turns off trade between the world's two biggest economies. The
(20:15):
impact on inflation, well, it's there. If import costs go up,
then that's a positive impact on inflation, but it's not
particularly marked. That's partly for the reasons I was just
sharing services inflation is more important than goods inflation. It's
also because there's an offsetting drag. Import prices go up,
(20:35):
and that directly affects the CPI. But tariffs also have
a depressing effect on growth, and that means the economy
is weaker, and that's an offset on inflation.
Speaker 4 (20:45):
If the US and China, there's two huge trading partners
suddenly stop trading, what other knock on effects do we
see from there?
Speaker 3 (20:51):
So I can speak to the economics of that, and
maybe Mackenzie has some thoughts on the sort of broader
policy implications. So on the economics, I think, I think
it's interesting to think about this not just at the
aggregate level, but also at the sector level, and not
just about the impact on the US and China, but
also about the impact on other economies around the world.
(21:12):
So at the sector level, in the United States, it's
kind of a policy to support the industries of the past, right, mining,
production of steel. These are industries which are crucially important
to the United States in an earlier stage of its development.
Not so important. Now those would be the industries which
would be the main beneficiary of a sixty percent tariff.
(21:36):
Who loses out, Well, it's kind of the industries of
the future, right, it's the people making the semiconductors, is
the people making the advanced electronics, the people with the
exposure to that East Asian electronics supply chain. And thinking
about the global impact, Well, if we break the trade
relationship between China and the United States, that's bad for
(21:59):
those two countries. But there are some other countries that
could well gain thinking about those connect to economies, places
like Vietnam, places like Mexico that have a strong manufacturing base,
that have low costs, and that have pretty good trade
relationships with those two economies.
Speaker 5 (22:17):
And when you think about the bilateral relationship between Washington
and Beijing. At the same time as Biden has become
increasingly hawkish on China, employing sort of novel tools of
economic statecraft to get at advanced industries in the country,
there's also been this significant back channel effort to improve
direct diplomatic tize military to military communications, culminating in a
(22:42):
meeting between the two leaders on the sidelines of the
Apex Summit. In San Francisco, And so you can imagine,
you know, after establishing formal communication networks between the Treasury
Department and their counterparts in China, formal communications networks between
the Commerce Department here and MOFCOMM and China, this sort
of deterioration of a lot of this sort of day
(23:03):
to day's slow working diplomatic effort that's been happening under
President Biden, if the US were to sort of blow
up the trade relationship between the two countries under a
potential Trump administration.
Speaker 1 (23:29):
Mackenzie, you mentioned earlier the Infrastructure Investment Act, and the
other big set piece from the Biden administration has been
the clean energy transition and the money that is pouring
in there. And this is a question that I've asked
a couple people on this podcast at this point, But
it seems like the US has a desire to shift
(23:51):
away from fossil fuels, maybe build up home capacity of
clean energy technology like solar panels. But at the same time,
it is also very true that China is good at
producing lots of cheap solar panels and things like that.
So I guess I'm curious what you're hearing from the
administration in terms of I guess the need to build
(24:14):
up or increase some of that capability at home and
make it more efficient versus the lower cost and sheer
volume of production that you would get from Chinese made
renewable technology or even semiconductors.
Speaker 5 (24:29):
It's a great question. The solar panel question is kind
of the most often cited explanation of the danger that
China poses to these sort of more nascent industries in
the US on hydrogen, on wind, and also on electric
vehicles and semiconductor ships, where the US was long the
technological leader and then seated a lot of that production
(24:51):
capability to East Asia. And so when we think about
the sort of critical industries that the US is investing
in right now, you identified them right off the bed.
It's semiconductor ships, it's electric vehicles, it's solar, wind, hydro,
a bunch of types of clean energy through the Chips
and Science Act and the Inflation Reduction Act. And the
worry is that the US could pour significant amounts of
(25:11):
government capital trying to crowd in private capital to build
up these industries. But if Chinese firms are not operating
in the same market environment, there could be a significant
dumping risk. The fear on chips, for example, is that
China's been building up capacity in the sort of mature,
older generation semiconductors that still power the entire global economy,
(25:33):
even if they're not the cutting edge. Those are not
the ones that the US is trying to deal with
with export controls. And that's why the Biden administration is
talking about tariffs. They say, we see this following this
same trajectory that we saw with solar panels and on
electric vehicles as well. The US is pouring billions of
dollars and trying to get American auto giants to build
(25:57):
cleaner cars in the US, but Chinese models are on
offer for less than half the cost, and the only
reason they haven't entered US markets yet, or the primary reason,
is that there's a twenty seven point five percent tariff
imposed under Donald Trump, and you're hearing a lot of
concern in Washington. Maybe we might need to increase that
number to protect these industries that we're investing in so
(26:17):
much at home.
Speaker 4 (26:17):
I'm glad you went there. There's literally going to be
what I ask because when you talk about the Chinese
EV boom, most of the people talk about the European
market specifically, and how it's a threat to BMW and
the various legacy automakers. But in theory, right, like if
the quality continues to improve, if they continue to go down,
(26:39):
like the sort of learning cost curve of costs, like
is it only a matter of time at current rates
before we start seeing bid cars in the US competing
against you know, obviously Tesla, but also the EV efforts
of the Detroit three and others that so far haven't
gone all that great as far as I can tell.
Speaker 5 (26:57):
So that is one of the central question I think
the policymakers in the administration are thinking about right now.
You know, the EV question in the US is manifold one.
There is concern that Chinese EV supply chain companies will
try to take advantage of the tax credits offered for
US production. There's been a lot of focus, for example,
on this forward facility in Michigan, which has a licensing
(27:20):
agreement with Cattle, which is the preeminent global battery maker,
and a lot of China hawks on the hill, you know,
in some cases on both sides of the aisle are
saying we should really keep a close eye on that.
Is this sort of an attempt by China to work
around restrictions that say you can't take advantage of the
tax credits if you have a certain threshold of Chinese
(27:40):
investment in your supply chain to sort of tap into
this inflation Reduction Act fueled EV boom in the United States.
Then there's the question of will Bid and other Chinese
companies try to invest in Mexico. You know, you saw
Treasury Secretary Janet Yellen in December on a trip to
Mexico City saying we want to help Mexico fortify against
(28:02):
you know, foreign investment threats, including specifically China, and Commerce
Secretary Gina Raimondo last week sort of opened the door
to a little bit of a novel take on Chinese
EV's coming from the administration citing data security risks. So
not even just talking about the market dynamics and the
trade threat, which was the logic behind the Trump tariffs
(28:24):
to begin with, and this sort of long going conversation
among Biden officials about whether to adjust or potentially increase
those tariffs, but also the question of you know, these
cars are equipped with thousands of sensors, and she asked
the question, do we really want all of that data
going to Beijing, and so that was almost seating the
floor a little bit to maybe this quote unquote small
(28:47):
yard high fence approach that the Biden administration has touted
for years is becoming or could become a slightly larger
yard and higher fence. Looking at other forms of critical
technologies that compare to sort of the market risks that
Tom was talking about earlier that fueled sort of the
traditional US China trade battle. Now we're thinking about information
(29:08):
technology that lends a national security argument to some of
these same products.
Speaker 1 (29:13):
So just thinking about things that have changed since the
Trump years twenty sixteen to twenty twenty. One of the
big things has to be Russia's invasion of Ukraine, and
I guess the sort of economic alliance that we've seen
between China and Russia emerged since then. And I'm wondering
We've obviously been focused a lot on the US China
(29:34):
relationships specifically, but could we potentially see the emergence of,
for lack of a better term, East West trade blocks.
Speaker 3 (29:43):
I think that's a really interesting question, Tracy, and it
reminds me of the kind of the miscalculation that many
here in the United States made about the impact of
US sanctions and European sanctions on Russia in the days
after Putin's tanks rolled across the border into Ukraine. You
(30:04):
remember back two years ago, there was sweeping sanctions, right,
Russia essentially locked out of the dollar financial market, Russian firms,
with some exceptions in energy, essentially locked out of trade
with the US and Europe. And at that moment there
was a rush to sort of call the collapse of
(30:24):
the Russian economy. Right, the US is sanctioning them, Europe
is sanctioning them, They can't participate in the global financial system.
This must be the first moment of a crisis. And
in fact, two years on we can see that these
sanctions and these controls have certainly had a negative impact
on Russia, but it's certainly not tipped them into crisis.
(30:46):
Why is that Well, I think the unfortunate reality for
policymakers here in DC and in Brussels is that they
no longer have the same impact that they once did.
And the reason for that is because of China and
to a lesser extent, India, which has also maintained more
or less normal trading relations with Russia. And so what
(31:07):
that suggests is that as China rises, and as India rises,
and other major emerging markets which don't necessarily fall into
line with DC start playing a bigger role in the
global economy, the capacity of the United States and its
allies to shape outcomes for particular countries by imposing sanctions
(31:29):
or tariffs becomes that much less. And to your question, Tracy, yes,
that possibility of an East West trade block is very
much there. Bad for global growth, but a buffer for
countries that find themselves at the wrong end of US
economic statecraft.
Speaker 5 (31:47):
And China's alignment with Russia has actually lent a lot
more credence to US arguments about the national security risks
that a lot of European allies have been lukewarm on
for some time. So, you know, they've seen China as
a market opportunity, not necessarily the geopolitical threat that Washington sees,
but they've started to pay more attention to US warnings,
(32:10):
particularly about the risk of invasion of Taiwan, since they've
felt this pressure from Russia and then the alignment between
those two powers. And you know, one of the best
examples of this is in order for the US to
restrict China's access to advanced semiconductors, they had to get
key allies with key companies in the supply chain on board.
(32:30):
One of the best examples is ASML, the leading maker
of chip making equipment, which is based in the Netherlands.
And if the US is going to prevent China from
developing advanced chips, they have to convince the Dutch government
to block ASML from sending the most high tech machines
over to China. And so this sort of increasing threat
from Russia, where a company like ASML might say, we
(32:53):
want to trade China's a fantastic customer. China just became
sort of proportionally the largest share of ASMA sales just
a month or two ago. The alignment between China and
Russia has sort of helped bring European powers around to
the idea that no, China does pose a significant risk
if they invade Taiwan, which houses the world pre eminent
chip maker where we get all of the most advanced
(33:16):
chips that power all of our most advanced technology. That
is a threat that we need your alignment on.
Speaker 2 (33:21):
Tom.
Speaker 4 (33:21):
I know when trade deals are crafted, when people think
about tariffs, the actual country of origin for a given
good is always people try to figure that out essentially,
so that you know, if we want to restrict Chinese
exports to the US, that they can't just like land
in Mexico first and then across the border and say
it's some Mexican good. But we do know that imports
(33:42):
into the US from Mexico have been surging, and as
you mentioned, Mexico could be a beneficiary if they were
cut off. Like, how leaky is that? And to what
degree can other countries other destinations be de facto yes,
we're importing from Mexico, but really this is a continuation
of importing from China.
Speaker 3 (33:59):
Yeah, really good question, Joe. It reminds me of a
funny moment in a Chinese novel I read a few
years ago, Shandi or Brothers, And there's a moment in
the novel where there's a kind of rise in anti
Japanese sentiment in China and there's a violent mob that
goes out and tries to smash Japanese products, and they're
on the cusp of smashing what they think is a
(34:20):
Japanese car, and one of the characters says, wait, this
car was made of the joint venture enterprise in China,
and then another protagonist says, Okay, let's just smash half
of it. And I think that's kind of like that's
the reality of global trade, right, I mean, the sort
of the classic example is the iPhone technology and branding
(34:41):
here in the United States, semiconductors from Taiwan snaps together
in mainland China. If there's going to be a trade war,
which bit of it are you going to impact?
Speaker 6 (34:51):
Right?
Speaker 3 (34:52):
Well, the reality is that you can't impact one bit
of it without impacting another. We're seeing some of that
complexity playing out in different ways in the years since
the Trump tariffs came into place. We're seeing Chinese companies
setting up shop in Vietnam, Chinese companies attempting to set
up shop in Mexico, so they'd be exporting from those
(35:14):
countries to the United States, dodging the Trump tariffs. But
where does the revenue go, in many cases still going
to those Chinese firms. It's a complex system, and that
makes it that much harder to wield these tools of
economic state craft without creating some unintended collateral damage.
Speaker 5 (35:32):
And there's always the question of how deep in the
supply chain are you going to go when you think
about chips or you think about evs down to the
raw components, the minerals. I mean, China has been snapping
up mines across the world. And if you say we
don't want any Chinese investment anywhere in the supply chain
for any of the goods that we're going to subsidize
or even allow to be impoured into the US, you
(35:52):
could end up with zero goods at all.
Speaker 1 (35:55):
So, on the one hand, we have Trump running on
this idea of sixty percent tariffs on China, maybe more,
plus perhaps a ten percent ring fence on all imports
into America. On the other hand, you have the Biden administration,
which is already in office and has already continued some
(36:15):
quite stringent restrictions on China. When you talk to policymakers
in China, or when you look at surveys of the
domestic Chinese population, what do they say about their preferred candidate?
Do they express a preference?
Speaker 5 (36:31):
So we cite a survey in our story and online
survey figured out trying to figure out how the Chinese
public feels about the upcoming US vote, and about sixty
percent of the respondent's preferred Trump. But it wasn't that.
You know, his China plans stack up better for them
against Biden's, but they thought that he would ease the
(36:52):
pressure on China by bringing chaos to America.
Speaker 4 (36:58):
Well, we'll see what happen. Mackenzie and Tom, thank you
so much for coming on. Fascinating work. Everyone should go
read your Big Take article out on the Bloomberg now
and we'll have to have you both back on odd
Lots maybe after the November election. We'll see what happening.
Speaker 5 (37:13):
Thanks so much for having us.
Speaker 6 (37:14):
Thanks Jay, Thanks Tracy, Tracy.
Speaker 4 (37:28):
I thought that was great. There was a lot interesting
in there. One thing that I'll pick out that was
sort of something McKenzie said about even as these economic
constraints have grown, there has been some other progress, like
military to military communication, treasury to treasury communication. It reminds
me of something, you know, we talked to Adam Posen
generation and that was one of his concerns about trade wars,
(37:50):
which is that trade freedom doesn't necessarily lead to peace,
but trade constraints can create geopolitical.
Speaker 1 (37:57):
Problems, right, which makes a lot of sense.
Speaker 2 (37:59):
Yeah.
Speaker 1 (37:59):
Well, on that note, the other thing that both of
them really emphasized was this idea of China sort of
in a sweet spot for this kind of trade restriction,
where you do have concerns over the loss of jobs
and manufacturing that have been going on for decades, but
then on the other hand, you do have the strategic
concerns strategically important industries. Is the US going to be
(38:20):
able to compete on semiconductors or clean energy tech? And
also that military aspect of it. So it sort of
makes sense why the US would focus on China and
why it's politically appealing totally.
Speaker 4 (38:34):
Can I express an unpopular opinion? I don't know if
it's unpopular. I just don't hear many people say it.
I really believe that if there's you know, if there's
one country in the world that could do true like
add tarchy, like it's obviously the US, right, Like it
would probably be very economically harmful to literally no longer
trade with the world.
Speaker 1 (38:51):
Just to be clear, you are not recommended, but as
a thought expert.
Speaker 4 (38:55):
A thought experiment, if there's one place that is all
the food, all of the minerals, all of the oil,
all the natural gas, all the talented companies, all of
the high tech, Like, if there's one place that I
think could possibly pull it off. It's clearly the US,
So like, again, this is not me making a policy recommendation.
I just think, like, I think we could. It would
be very disruptive, and I'm not in favorite, but I
(39:17):
think we could survive.
Speaker 1 (39:18):
Someone is going to take that quote completely out of
context and tweet it.
Speaker 5 (39:23):
Well.
Speaker 1 (39:23):
The one other thing I was thinking, and it's a
shame we didn't get into this, but maybe we should
do an episode more related to this down the road.
But I never quite figured out Trump's policy on currency,
because he seemed to switch or vary between wanting a
strong dollar because it sounds good to have a strong dollar,
but then also wanting a week dollar to be because it's
(39:44):
good fort for it.
Speaker 4 (39:45):
You know, that's very funny because right like strong dollar,
it sounds very trumpy, right, But he also had some
like intuitions that it wasn't quite right, and even I
remember once on the campaign trail he said something to
the effect of like, yeah, I'd like want a week dollar.
It's good for borrowing, it's good for exports. It's one
of those things where like it's counterintuitive but also makes sense. Yeah,
it's not retorted. No one rhetorically wants to come on
(40:07):
for a week dollar, but it's.
Speaker 1 (40:10):
You never quite made up his mind. Well, maybe someone
will ask him about that on the campaign trail.
Speaker 4 (40:15):
Maybe he'll come on Oddlocks talk about his currency policy.
Speaker 5 (40:17):
All right.
Speaker 1 (40:18):
In the meantime, shall we leave it there.
Speaker 4 (40:20):
Let's leave it there.
Speaker 1 (40:21):
This has been another episode of the Authots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (40:27):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guest McKenzie Hawkins. She's at Matt Hawk. Follow
tom Orlick at tom Orlick. Follow our producers Carman Rodriguez
at Carman Erman, dash Oll, Bennett at Dashbot and cal
Brooks at cal Brooks. Thank you to our producer Moses Onam.
For more Oddlots content, go to Bloomberg dot com slash Odlots,
(40:48):
where we have a blog, transcripts and a newsletter. And
check out the discord Discord dot gg slash odd Lots
where you can chat with fellow listeners.
Speaker 1 (40:56):
Twenty four seven And if you enjoy Oddlots, if you
like it when we examine the Trump and Biden tariffs,
then please leave us a positive review on your favorite
podcast platform. And don't forget, if you are a Bloomberg subscriber,
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Just connect your Bloomberg subscription to Apple Podcasts. Thanks for listening.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
China's economy is in rough shape.
Speaker 3 (00:11):
China's real estate factor is in a significant correction.
Speaker 1 (00:14):
This inflation number is just crossing the Bloomberg right now.
Speaker 2 (00:18):
Ouch.
Speaker 3 (00:18):
We've seen monthly losses now for six months in a row.
Speaker 2 (00:21):
Six trillion dollars worth of market capitalization wiped out. There's
a property crisis, exports are down, and the stock market's
been in a tailspin. Last month, consumer prices fell at
the quickest pace since the two thousand and eight financial crisis.
The Chinese government's been under increasing pressure to do something,
(00:41):
and it has. But there's another threat on the horizon
when it comes to China's economy, the US election. During
their presidencies, both Joe Biden and Donald Trump backed policies
that drove the US and China further apart. That's only
continued now that the two twenty twenty four campaign is underway.
(01:02):
In November, Biden doubled down on his statement that China's
President Shijinping is a dictator, and earlier this month, on
Fox News's Sunday Morning Futures, Trump said that he might
raise tariffs on Chinese imports to over sixty percent. This
wouldn't just hurt China. Ratcheting up tensions between these two
(01:23):
nations might mean American consumers feel the cost at home,
like with the prices of everyday goods getting higher and
the rest of the world. With the world's two largest
economies fighting, well, they might end up as collateral damage.
This is the Big Take DC podcast from Bloomberg News.
I'm Salaia Mosen. Today I'm turning over the mic to
(01:45):
Joe Weisenthal and Tracy Alloway, co hosts of our sister podcast,
Odd Lots. They sat down with two colleagues from Bloomberg's
Washington bureau who measured just what a Trump victory in
twenty twenty four could mean for China's economy and beyond.
Speaker 4 (02:11):
Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1 (02:15):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 4 (02:17):
Tracy, here's something that I've thought about that's been interesting
for a few years. The Trump administration obviously sort of
took this hawkish line on China, introduced the tariffs on
a lot of Chinese exports to the US, and then
when the Biden administration took over, it kind of seems
like we basically got continuity on that front. There was
(02:40):
no roll back, yeah, anything, Maybe some of the screws
have been tightened even further.
Speaker 1 (02:44):
I think that's exactly right. And it's kind of funny,
as you mentioned that it's flown a little bit under
the radar. And I'm thinking back to Trump's statement trade
wars are good and easy to yeah, and I mean
he got a lot of flak for that, probably rightfully so.
But if you think about what's been happening over the
past few years, it seems like the US is kind
(03:04):
of winning the trade war against China in some respects.
I mean, the US economy outperforming much of the rest
of the world. I think GDP growth was something like
three percent in twenty twenty three. China's GDP growth is
still higher. I believe it was at five percent, but
it's slowing a lot. And if you look at what's
going on with the economy right now, it seems like
(03:25):
it is really struggling in various ways.
Speaker 4 (03:27):
It's interesting that they're winning. I hadn't really winning.
Speaker 1 (03:31):
Might be strong, but like, well.
Speaker 4 (03:33):
Our contry is clearly doing better.
Speaker 5 (03:34):
Yeah.
Speaker 4 (03:34):
Least on the other hand, China clearly has a handful
of industrial powerhouses that are creating anxiety for legacy industrial
powerhouses in the US and Europe. And we could say
that clearly when it comes to ev first legacy automakers,
we can look at, you know, the rising number of
conversations like Oboeing is faltering, will Comac and the CM
(03:57):
whe nine eventually takes significant market share in commercial aerospace.
We did an episode, I think near the end of
last year that actually, despite all of the restrictions on
equipment imports into China for semiconductors, that the domestic semiconductor
industry is making gains. So like in the GDP sense
of the word like clearly China is struggling, but on
(04:20):
these sort of like key industrial strategic areas of the economy,
there is the word things still seem to be working out.
Speaker 1 (04:27):
No, absolutely, And I think there is this overall angst
in the US with this idea that China is somehow
better at doing this kind of targeted industrial policy. We
used to talk about the Chinese command economy. They have
experience with pouring lots and lots of money into areas
that they identify as strategically important. That doesn't mean they
(04:47):
do it perfectly every time. I mean, we basically saw
that with some of the consumer tech companies, where there
was a reversal of the government stance towards them, lots
of talk of disorderly capital flowing into that space. But
then what we saw is, you know, they said that
they cracked down on the sector, and then they said,
what we really want you to invest in is things
(05:09):
like solar panels and electric vehicles and semiconductors, And so
we saw those areas start to boom. So I think
there is a real sense of concern in the US
that maybe China, if they're not better at it, they
certainly have done it for a longer time on a
more consistent basis.
Speaker 4 (05:27):
Right, And so it feels like now the debate in
the US is like, Okay, everyone is sort of accepted
that the tariffs that Trump introduced, that the idea that
the US in various ways tries to constrain Chinese exports
or constrain Chinese industry. It feels like that's become conventional
wisdom now, or that everyone sort of agrees we do
that in Washington, and now the question is how much.
(05:47):
And of course recently we heard Trump say that were
he to be elected president, he would ratch up the
tariffs even more. I think he put the number like
sixty percent, which I have to imagine would like totally clobber.
Speaker 1 (05:58):
He did say sixty but then I saw right before
we came on, let's see, we're recording this on February eighth.
I think there was an interview from like February six
where he basically said that the tariffs could be even
bigger than sixty percent. So I don't know where he's
quite getting those round numbers from, but maybe more than
sixty percent right now.
Speaker 4 (06:19):
So as much as Biden has been a continuation and
extension and an expansion of Trump policies, maybe Trump, if
you were to win the presidency in November, would be
a continuation and expansion even further. Anyway, we should talk
about what a Trump victory, which is of course certainly possible,
what it would mean for the US China relationship, and
(06:41):
what it might look like, what the direction all this
is heading. Let's do it all right, Well, we have
two absolutely perfect guests today. We're going to be speaking
to Tom Orlick, previous Odd Lots guest, multiple times, chief
economist for Bloomberg Economics and Mackenzie Hawkins, she's the US
Industrial policy reporter for Bloomberg in DC. Both of them
worked on a big new reports sort of examining this question,
(07:03):
which everyone should go and read. But thankfully they are
taking the time to speak with us. So Tom and McKenzie,
thank you so much for joining us.
Speaker 3 (07:10):
Great to be here. Thanks Jo, Thanks Tracy, thanks.
Speaker 5 (07:12):
For having us on.
Speaker 4 (07:13):
Actually, Tom, let me just start with you with like
the most vague theoretical question there is, from a purely
economist standpoint, what do tariffs do?
Speaker 3 (07:23):
So tariffs increase the cost of imports, and when the
cost goes up, the demand goes down. So in the
first Trump administration, we saw twenty five percent tariffs on
a swathe of Chinese exports to the United States, and
(07:45):
we've got a bunch of data on the impact that
those tariffs had, so we can kind of say what
the impact was. And we're seeing Chinese sales to the
US in the categories of goods that face the tariffs
down more than one hundred billion dollars relative to where
they would have been if no tariffs have been put
(08:06):
in place. Now Here we are at the start of
twenty twenty four, still a few months to the election,
but Donald Trump clearly in the lead for the Republican nomination,
running ahead of Joe Biden in the polls in some
key swing states, and talking about a sixty percent tariff
on all Chinese imports. Well, if twenty five percent tariffs
(08:31):
put a bit of a hole in revenue for Chinese factories,
sixty percent tariffs, I think would turn that hole into
more like a crater.
Speaker 1 (08:40):
So Joe asked a very theoretical question, and I guess
I'm going to ask something a little bit more specific,
but talk to us about how targeted or I guess
customized the tariffs are that we've seen from the Trump
administration and then the Biden administration, Because of course Trump's
export curbs did involve semi conductors when he was president,
(09:01):
but then Biden came in, and I believe he targeted,
you know, advanced semiconductor technology and China's access to it,
and in some ways he was even more strategic in
the things that he was limiting.
Speaker 5 (09:14):
So in the Trump administration you saw this sweeping terror
review that affected a wide range of Chinese industries, and
the Biden administration has held those tariffs in place. There's
been sort of a quote unquote imminent tariff review for
months now, and a big question in Washington is whether
the administration will stay the course with the sectors that
Trump targeted or have a more refined approach that might
(09:38):
focus on key strategic sectors for the US, like evs
and other clean energy products, which of course the Biden
administration is trying to subsidize at home. But then you
saw Biden look at a whole suite of other tools
of economic statecraft that have actually become his favorite mechanisms
to get at the Beijing question. One of those, as
you said, Tracy, is export controls on A and semiconductors.
(10:01):
These are the critical electronic components that power everything from
your phone to your car to nuclear missiles. And there's
a big fear in Washington that if China catches up
with US technology that they could use AI to power
weapons systems, that it could pose a significant military threat
to the US. And so you saw in October twenty
(10:21):
twenty two sweeping controls on the ability of US companies
to export the most advanced semiconductor technology and ship making
equipment to any Chinese company.
Speaker 4 (10:32):
McKenzie just as a follow up on that specifically and
talking about politically, like as we said in the introduction,
and as Tracy just mentioned, you know, Biden continued with
a lot of these terrify views. They're ongoing, they've become
even more targeted. How did this become the consensus that
the idea of just dropping tariffs and sort of returning
to the pre Trump status quo with regards to trade
(10:54):
now doesn't even seem on the table anymore, and it
doesn't seem like anyone advocates for that. How did this
just become like the bipartisan consensus that setting aside the
degree of restrictions, that some restrictions must be applied.
Speaker 5 (11:08):
It's a great question. You know, when you talk to
folks on both sides of the aisle on the hill,
they say, the one thing that everyone agrees on is China,
and the question is not what, but how much? And
you know, you really saw the Trump administration, you know,
early on introduce this tariff's question, and then later on
towards the latter years, start to target specific Chinese firms.
(11:28):
Like a great example is Huawei, the Chinese telecommunications giant,
which you saw Trump sanction in twenty nineteen over concerns
about the security of their telecommunication systems that are all
over the US. And then once that sort of entered
the Washington think tank sphere and people really started seeing
Huawei as a security threat, it became Okay, what else
(11:51):
is Huawei doing that's a security threat? And you know,
the initial sanction sort of crippled their telecommunications business and
their smartphone business for quite some time time. But we
saw Juawe debut a smartphone in August that's powered by
its ship that's far more advanced than where the US
was hoping to hamstring China's rise. And so as we've
seen China sort of make incremental technological progress in these
(12:14):
areas that Washington has decided it's quite concerned about, there
doesn't really seem to be a big debate over whether
should we really be doing expert controls in the first place.
It's we've been on this path, we've seen China continue
to make progress. What are additional measures that we can
take with our allies to prevent any further progress from
these firms that now for five years have been thought
(12:37):
of as a significant security threat in DC.
Speaker 3 (12:39):
I just build on that briefly and point to three
big factors which I think have changed the dynamic here
in Washington, DC and made anti China into a sort
of broad and firm consensus. I think the first thing
driving it has been China's sudden rise. Right when everyone
was agreeing that China could join the Double Wuto back
(13:01):
in nineteen ninety nine two thousand, China's GDP was a
fraction of US GDP. China's military capabilities were nowhere near
US military capabilities, and so China really wasn't regarded as
a threat, and it was still possible to regard China
as a kind of almost like a disciple. That's now
clearly changed. I think the second thing, which is important
(13:24):
is the kind of the peculiarities of the US election system,
which gives a disproportionate amount of power to the votes
and the voices of a constituency in a few swing states,
places like Pennsylvania, which are in the US rust Belt
and which have suffered disproportionately from China's rise as a
(13:44):
manufacturing power, and so where tough on China is a
very popular vote winner. And then I think the third factor,
which we have to acknowledge is the kind of the
strange genius of Donald Trump, right, who kind of revealed
in his campaign in twenty sixteen that being really tough
on China was a powerful motivating factor for the voters
in those swing space.
Speaker 1 (14:20):
Whatever happened to the sort of old simplistic argument for protectionism,
which was what we want to know, reshore manufacturing, create
more jobs in the US. It feels like it's sort
of evolved into this very specific anti China action and
we haven't seen correct me if I'm wrong, but we
(14:42):
certainly haven't seen as stringent actions on other countries and
other manufacturing threats. I mean, we know Mexico is exporting
tons to the US now, sort of filling some of
the gap that China has left. But what happened to
that argument? That feels like it's lost a little bit
of popularity in DC. Everything feels very strategic, very security focused.
Speaker 3 (15:06):
So I think when it comes to China, these two
things come together from a US policy perspective rather nicely. Right,
Here's China, a single party state, a state dominated economy,
rising quickly one point three billion people. It's easy to
see why this is regarded as a national security threat,
(15:29):
and so why it's easy to win the argument in
DC for things like banning sales of leading edge semiconductors
because potentially they could fuel China's military capabilities. At the
same time, China's enormous success in grabbing global market share
in the manufacturing sector and the consequences of that for
(15:52):
US manufacturing, where factory towns have been hollowed out and
people have lost their jobs, makes the case that this
is really important, not just from a national security perspective,
but also from a kind of social well being allowing
everyone to benefit from the growth of the US economy perspective.
So it's a complicated picture now when it comes to China,
(16:14):
those national security arguments and those concerns about the hollowing
out of the manufacturing sector come together very nicely. The
messiness of it, which I think you're sort of alluding to, Tracy,
is that near assuring and friendsuring. That addresses the national
security piece of it, but it certainly doesn't help people
(16:35):
who lost their manufacturing jobs here in the United States.
They're not going to be super delighted to see those
jobs coming back to Mexico or Vietnam or other places,
which don't really help them.
Speaker 5 (16:46):
Out, and the manufacturing argument still has a lot of
salience in DC and on the campaign trail. You know,
you can think of one tranch of Biden's China policy
as sanctioned controls on outbound investment, export controls on semiconductor ships,
and the continuation of Trump tariffs. But you can think
of the other side of the coin as the massive
industrial policy effort that the US has embarked on over
(17:07):
the past couple of years. The Chips and Science Act,
the Inflation Reduction Act, which is democrats signature climate Law,
and the bipart is In Infrastructure Law have poured well
over a trillion dollars of federal funding into revitalizing these
domestic manufacturing bases in areas that lost a lot of
jobs to the so called China shock.
Speaker 1 (17:28):
It is true also that I think Trump has talked
about doing a blanket ten percent tariff on all imports
to the US, so basically ring fencing the entire economy.
Speaker 4 (17:38):
Well, this is dovetails with what I was about to
ask next time, and it's sort of another theoretical economics question,
kind of like when I asked what tariffs do, but
why didn't we have inflation? Why don't they. Why weren't
the inflationary in the Trump period? And how do economists
think about the inflation risks associated with aggressive tariffs either
on one country or blanket tariffs on it.
Speaker 3 (18:01):
So it's a really good question if we think about
the kind of the big picture over the last thirty years,
globalization and the ability of consumers in the United States
to tap cheap goods made in China has been one
of the factors that was pretty helpful in keeping inflation
(18:22):
around the FEDS two percent target, at least until the
post pandemic inflation surge. Now, why didn't the Trump tariffs
have a more significant impact on that dynamic? I think
the reason is there's a few factors at work. The
first factor is goods inflation is important in the US,
but it's not as important as services inflation, and services
(18:45):
inflation doesn't really get impacted by tariffs that you put
on goods. The second factor is, yes, China is a
really important supplier of goods to the United States, but
it's not the only supplier. And then the third factor
at work is tariffs aren't the only thing going on. Yes,
the Trump administration put twenty five percent tariffs on but
(19:08):
over the same period we saw a significant depreciation of
China's yuan. China's factories were able to absorb some of
the shock by taking lower profit margins, and that provided
a little bit of an officer.
Speaker 1 (19:20):
So, just on this note, have you done any number
crunching on what Trump's proposal would mean for inflation?
Speaker 5 (19:27):
Now?
Speaker 1 (19:28):
Do you have specific numbers?
Speaker 3 (19:30):
So we have actually been crunching the numbers, Tracy, And
here I want to give a shout out to Eleanora
Mavrodi in our modeling team in Paris. She's taken a
big model of the global economy and she's plugged in
that Trump proposal for a sixty percent increase in tariff's
on US imports from China. And what the model is
(19:52):
telling us is that that has a pretty catastrophic impact
on trade. In fact, if the US goes ahead with
sixty percent tariffs and China reciprocates with sixty percent tariffs,
matching the pattern of kind of tit for tat retaliation
we saw during the first Trump term, that pretty much
turns off trade between the world's two biggest economies. The
(20:15):
impact on inflation, well, it's there. If import costs go up,
then that's a positive impact on inflation, but it's not
particularly marked. That's partly for the reasons I was just
sharing services inflation is more important than goods inflation. It's
also because there's an offsetting drag. Import prices go up,
(20:35):
and that directly affects the CPI. But tariffs also have
a depressing effect on growth, and that means the economy
is weaker, and that's an offset on inflation.
Speaker 4 (20:45):
If the US and China, there's two huge trading partners
suddenly stop trading, what other knock on effects do we
see from there?
Speaker 3 (20:51):
So I can speak to the economics of that, and
maybe Mackenzie has some thoughts on the sort of broader
policy implications. So on the economics, I think, I think
it's interesting to think about this not just at the
aggregate level, but also at the sector level, and not
just about the impact on the US and China, but
also about the impact on other economies around the world.
(21:12):
So at the sector level, in the United States, it's
kind of a policy to support the industries of the past, right, mining,
production of steel. These are industries which are crucially important
to the United States in an earlier stage of its development.
Not so important. Now those would be the industries which
would be the main beneficiary of a sixty percent tariff.
(21:36):
Who loses out, Well, it's kind of the industries of
the future, right, it's the people making the semiconductors, is
the people making the advanced electronics, the people with the
exposure to that East Asian electronics supply chain. And thinking
about the global impact, Well, if we break the trade
relationship between China and the United States, that's bad for
(21:59):
those two countries. But there are some other countries that
could well gain thinking about those connect to economies, places
like Vietnam, places like Mexico that have a strong manufacturing base,
that have low costs, and that have pretty good trade
relationships with those two economies.
Speaker 5 (22:17):
And when you think about the bilateral relationship between Washington
and Beijing. At the same time as Biden has become
increasingly hawkish on China, employing sort of novel tools of
economic statecraft to get at advanced industries in the country,
there's also been this significant back channel effort to improve
direct diplomatic tize military to military communications, culminating in a
(22:42):
meeting between the two leaders on the sidelines of the
Apex Summit. In San Francisco, And so you can imagine,
you know, after establishing formal communication networks between the Treasury
Department and their counterparts in China, formal communications networks between
the Commerce Department here and MOFCOMM and China, this sort
of deterioration of a lot of this sort of day
(23:03):
to day's slow working diplomatic effort that's been happening under
President Biden, if the US were to sort of blow
up the trade relationship between the two countries under a
potential Trump administration.
Speaker 1 (23:29):
Mackenzie, you mentioned earlier the Infrastructure Investment Act, and the
other big set piece from the Biden administration has been
the clean energy transition and the money that is pouring
in there. And this is a question that I've asked
a couple people on this podcast at this point, But
it seems like the US has a desire to shift
(23:51):
away from fossil fuels, maybe build up home capacity of
clean energy technology like solar panels. But at the same time,
it is also very true that China is good at
producing lots of cheap solar panels and things like that.
So I guess I'm curious what you're hearing from the
administration in terms of I guess the need to build
(24:14):
up or increase some of that capability at home and
make it more efficient versus the lower cost and sheer
volume of production that you would get from Chinese made
renewable technology or even semiconductors.
Speaker 5 (24:29):
It's a great question. The solar panel question is kind
of the most often cited explanation of the danger that
China poses to these sort of more nascent industries in
the US on hydrogen, on wind, and also on electric
vehicles and semiconductor ships, where the US was long the
technological leader and then seated a lot of that production
(24:51):
capability to East Asia. And so when we think about
the sort of critical industries that the US is investing
in right now, you identified them right off the bed.
It's semiconductor ships, it's electric vehicles, it's solar, wind, hydro,
a bunch of types of clean energy through the Chips
and Science Act and the Inflation Reduction Act. And the
worry is that the US could pour significant amounts of
(25:11):
government capital trying to crowd in private capital to build
up these industries. But if Chinese firms are not operating
in the same market environment, there could be a significant
dumping risk. The fear on chips, for example, is that
China's been building up capacity in the sort of mature,
older generation semiconductors that still power the entire global economy,
(25:33):
even if they're not the cutting edge. Those are not
the ones that the US is trying to deal with
with export controls. And that's why the Biden administration is
talking about tariffs. They say, we see this following this
same trajectory that we saw with solar panels and on
electric vehicles as well. The US is pouring billions of
dollars and trying to get American auto giants to build
(25:57):
cleaner cars in the US, but Chinese models are on
offer for less than half the cost, and the only
reason they haven't entered US markets yet, or the primary reason,
is that there's a twenty seven point five percent tariff
imposed under Donald Trump, and you're hearing a lot of
concern in Washington. Maybe we might need to increase that
number to protect these industries that we're investing in so
(26:17):
much at home.
Speaker 4 (26:17):
I'm glad you went there. There's literally going to be
what I ask because when you talk about the Chinese
EV boom, most of the people talk about the European
market specifically, and how it's a threat to BMW and
the various legacy automakers. But in theory, right, like if
the quality continues to improve, if they continue to go down,
(26:39):
like the sort of learning cost curve of costs, like
is it only a matter of time at current rates
before we start seeing bid cars in the US competing
against you know, obviously Tesla, but also the EV efforts
of the Detroit three and others that so far haven't
gone all that great as far as I can tell.
Speaker 5 (26:57):
So that is one of the central question I think
the policymakers in the administration are thinking about right now.
You know, the EV question in the US is manifold one.
There is concern that Chinese EV supply chain companies will
try to take advantage of the tax credits offered for
US production. There's been a lot of focus, for example,
on this forward facility in Michigan, which has a licensing
(27:20):
agreement with Cattle, which is the preeminent global battery maker,
and a lot of China hawks on the hill, you know,
in some cases on both sides of the aisle are
saying we should really keep a close eye on that.
Is this sort of an attempt by China to work
around restrictions that say you can't take advantage of the
tax credits if you have a certain threshold of Chinese
(27:40):
investment in your supply chain to sort of tap into
this inflation Reduction Act fueled EV boom in the United States.
Then there's the question of will Bid and other Chinese
companies try to invest in Mexico. You know, you saw
Treasury Secretary Janet Yellen in December on a trip to
Mexico City saying we want to help Mexico fortify against
(28:02):
you know, foreign investment threats, including specifically China, and Commerce
Secretary Gina Raimondo last week sort of opened the door
to a little bit of a novel take on Chinese
EV's coming from the administration citing data security risks. So
not even just talking about the market dynamics and the
trade threat, which was the logic behind the Trump tariffs
(28:24):
to begin with, and this sort of long going conversation
among Biden officials about whether to adjust or potentially increase
those tariffs, but also the question of you know, these
cars are equipped with thousands of sensors, and she asked
the question, do we really want all of that data
going to Beijing, and so that was almost seating the
floor a little bit to maybe this quote unquote small
(28:47):
yard high fence approach that the Biden administration has touted
for years is becoming or could become a slightly larger
yard and higher fence. Looking at other forms of critical
technologies that compare to sort of the market risks that
Tom was talking about earlier that fueled sort of the
traditional US China trade battle. Now we're thinking about information
(29:08):
technology that lends a national security argument to some of
these same products.
Speaker 1 (29:13):
So just thinking about things that have changed since the
Trump years twenty sixteen to twenty twenty. One of the
big things has to be Russia's invasion of Ukraine, and
I guess the sort of economic alliance that we've seen
between China and Russia emerged since then. And I'm wondering
We've obviously been focused a lot on the US China
(29:34):
relationships specifically, but could we potentially see the emergence of,
for lack of a better term, East West trade blocks.
Speaker 3 (29:43):
I think that's a really interesting question, Tracy, and it
reminds me of the kind of the miscalculation that many
here in the United States made about the impact of
US sanctions and European sanctions on Russia in the days
after Putin's tanks rolled across the border into Ukraine. You
(30:04):
remember back two years ago, there was sweeping sanctions, right,
Russia essentially locked out of the dollar financial market, Russian firms,
with some exceptions in energy, essentially locked out of trade
with the US and Europe. And at that moment there
was a rush to sort of call the collapse of
(30:24):
the Russian economy. Right, the US is sanctioning them, Europe
is sanctioning them, They can't participate in the global financial system.
This must be the first moment of a crisis. And
in fact, two years on we can see that these
sanctions and these controls have certainly had a negative impact
on Russia, but it's certainly not tipped them into crisis.
(30:46):
Why is that Well, I think the unfortunate reality for
policymakers here in DC and in Brussels is that they
no longer have the same impact that they once did.
And the reason for that is because of China and
to a lesser extent, India, which has also maintained more
or less normal trading relations with Russia. And so what
(31:07):
that suggests is that as China rises, and as India rises,
and other major emerging markets which don't necessarily fall into
line with DC start playing a bigger role in the
global economy, the capacity of the United States and its
allies to shape outcomes for particular countries by imposing sanctions
(31:29):
or tariffs becomes that much less. And to your question, Tracy, yes,
that possibility of an East West trade block is very
much there. Bad for global growth, but a buffer for
countries that find themselves at the wrong end of US
economic statecraft.
Speaker 5 (31:47):
And China's alignment with Russia has actually lent a lot
more credence to US arguments about the national security risks
that a lot of European allies have been lukewarm on
for some time. So, you know, they've seen China as
a market opportunity, not necessarily the geopolitical threat that Washington sees,
but they've started to pay more attention to US warnings,
(32:10):
particularly about the risk of invasion of Taiwan, since they've
felt this pressure from Russia and then the alignment between
those two powers. And you know, one of the best
examples of this is in order for the US to
restrict China's access to advanced semiconductors, they had to get
key allies with key companies in the supply chain on board.
(32:30):
One of the best examples is ASML, the leading maker
of chip making equipment, which is based in the Netherlands.
And if the US is going to prevent China from
developing advanced chips, they have to convince the Dutch government
to block ASML from sending the most high tech machines
over to China. And so this sort of increasing threat
from Russia, where a company like ASML might say, we
(32:53):
want to trade China's a fantastic customer. China just became
sort of proportionally the largest share of ASMA sales just
a month or two ago. The alignment between China and
Russia has sort of helped bring European powers around to
the idea that no, China does pose a significant risk
if they invade Taiwan, which houses the world pre eminent
chip maker where we get all of the most advanced
(33:16):
chips that power all of our most advanced technology. That
is a threat that we need your alignment on.
Speaker 2 (33:21):
Tom.
Speaker 4 (33:21):
I know when trade deals are crafted, when people think
about tariffs, the actual country of origin for a given
good is always people try to figure that out essentially,
so that you know, if we want to restrict Chinese
exports to the US, that they can't just like land
in Mexico first and then across the border and say
it's some Mexican good. But we do know that imports
(33:42):
into the US from Mexico have been surging, and as
you mentioned, Mexico could be a beneficiary if they were
cut off. Like, how leaky is that? And to what
degree can other countries other destinations be de facto yes,
we're importing from Mexico, but really this is a continuation
of importing from China.
Speaker 3 (33:59):
Yeah, really good question, Joe. It reminds me of a
funny moment in a Chinese novel I read a few
years ago, Shandi or Brothers, And there's a moment in
the novel where there's a kind of rise in anti
Japanese sentiment in China and there's a violent mob that
goes out and tries to smash Japanese products, and they're
on the cusp of smashing what they think is a
(34:20):
Japanese car, and one of the characters says, wait, this
car was made of the joint venture enterprise in China,
and then another protagonist says, Okay, let's just smash half
of it. And I think that's kind of like that's
the reality of global trade, right, I mean, the sort
of the classic example is the iPhone technology and branding
(34:41):
here in the United States, semiconductors from Taiwan snaps together
in mainland China. If there's going to be a trade war,
which bit of it are you going to impact?
Speaker 6 (34:51):
Right?
Speaker 3 (34:52):
Well, the reality is that you can't impact one bit
of it without impacting another. We're seeing some of that
complexity playing out in different ways in the years since
the Trump tariffs came into place. We're seeing Chinese companies
setting up shop in Vietnam, Chinese companies attempting to set
up shop in Mexico, so they'd be exporting from those
(35:14):
countries to the United States, dodging the Trump tariffs. But
where does the revenue go, in many cases still going
to those Chinese firms. It's a complex system, and that
makes it that much harder to wield these tools of
economic state craft without creating some unintended collateral damage.
Speaker 5 (35:32):
And there's always the question of how deep in the
supply chain are you going to go when you think
about chips or you think about evs down to the
raw components, the minerals. I mean, China has been snapping
up mines across the world. And if you say we
don't want any Chinese investment anywhere in the supply chain
for any of the goods that we're going to subsidize
or even allow to be impoured into the US, you
(35:52):
could end up with zero goods at all.
Speaker 1 (35:55):
So, on the one hand, we have Trump running on
this idea of sixty percent tariffs on China, maybe more,
plus perhaps a ten percent ring fence on all imports
into America. On the other hand, you have the Biden administration,
which is already in office and has already continued some
(36:15):
quite stringent restrictions on China. When you talk to policymakers
in China, or when you look at surveys of the
domestic Chinese population, what do they say about their preferred candidate?
Do they express a preference?
Speaker 5 (36:31):
So we cite a survey in our story and online
survey figured out trying to figure out how the Chinese
public feels about the upcoming US vote, and about sixty
percent of the respondent's preferred Trump. But it wasn't that.
You know, his China plans stack up better for them
against Biden's, but they thought that he would ease the
(36:52):
pressure on China by bringing chaos to America.
Speaker 4 (36:58):
Well, we'll see what happen. Mackenzie and Tom, thank you
so much for coming on. Fascinating work. Everyone should go
read your Big Take article out on the Bloomberg now
and we'll have to have you both back on odd
Lots maybe after the November election. We'll see what happening.
Speaker 5 (37:13):
Thanks so much for having us.
Speaker 6 (37:14):
Thanks Jay, Thanks Tracy, Tracy.
Speaker 4 (37:28):
I thought that was great. There was a lot interesting
in there. One thing that I'll pick out that was
sort of something McKenzie said about even as these economic
constraints have grown, there has been some other progress, like
military to military communication, treasury to treasury communication. It reminds
me of something, you know, we talked to Adam Posen
generation and that was one of his concerns about trade wars,
(37:50):
which is that trade freedom doesn't necessarily lead to peace,
but trade constraints can create geopolitical.
Speaker 1 (37:57):
Problems, right, which makes a lot of sense.
Speaker 2 (37:59):
Yeah.
Speaker 1 (37:59):
Well, on that note, the other thing that both of
them really emphasized was this idea of China sort of
in a sweet spot for this kind of trade restriction,
where you do have concerns over the loss of jobs
and manufacturing that have been going on for decades, but
then on the other hand, you do have the strategic
concerns strategically important industries. Is the US going to be
(38:20):
able to compete on semiconductors or clean energy tech? And
also that military aspect of it. So it sort of
makes sense why the US would focus on China and
why it's politically appealing totally.
Speaker 4 (38:34):
Can I express an unpopular opinion? I don't know if
it's unpopular. I just don't hear many people say it.
I really believe that if there's you know, if there's
one country in the world that could do true like
add tarchy, like it's obviously the US, right, Like it
would probably be very economically harmful to literally no longer
trade with the world.
Speaker 1 (38:51):
Just to be clear, you are not recommended, but as
a thought expert.
Speaker 4 (38:55):
A thought experiment, if there's one place that is all
the food, all of the minerals, all of the oil,
all the natural gas, all the talented companies, all of
the high tech, Like, if there's one place that I
think could possibly pull it off. It's clearly the US,
So like, again, this is not me making a policy recommendation.
I just think, like, I think we could. It would
be very disruptive, and I'm not in favorite, but I
(39:17):
think we could survive.
Speaker 1 (39:18):
Someone is going to take that quote completely out of
context and tweet it.
Speaker 5 (39:23):
Well.
Speaker 1 (39:23):
The one other thing I was thinking, and it's a
shame we didn't get into this, but maybe we should
do an episode more related to this down the road.
But I never quite figured out Trump's policy on currency,
because he seemed to switch or vary between wanting a
strong dollar because it sounds good to have a strong dollar,
but then also wanting a week dollar to be because it's
(39:44):
good fort for it.
Speaker 4 (39:45):
You know, that's very funny because right like strong dollar,
it sounds very trumpy, right, But he also had some
like intuitions that it wasn't quite right, and even I
remember once on the campaign trail he said something to
the effect of like, yeah, I'd like want a week dollar.
It's good for borrowing, it's good for exports. It's one
of those things where like it's counterintuitive but also makes sense. Yeah,
it's not retorted. No one rhetorically wants to come on
(40:07):
for a week dollar, but it's.
Speaker 1 (40:10):
You never quite made up his mind. Well, maybe someone
will ask him about that on the campaign trail.
Speaker 4 (40:15):
Maybe he'll come on Oddlocks talk about his currency policy.
Speaker 5 (40:17):
All right.
Speaker 1 (40:18):
In the meantime, shall we leave it there.
Speaker 4 (40:20):
Let's leave it there.
Speaker 1 (40:21):
This has been another episode of the Authots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (40:27):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guest McKenzie Hawkins. She's at Matt Hawk. Follow
tom Orlick at tom Orlick. Follow our producers Carman Rodriguez
at Carman Erman, dash Oll, Bennett at Dashbot and cal
Brooks at cal Brooks. Thank you to our producer Moses Onam.
For more Oddlots content, go to Bloomberg dot com slash Odlots,
(40:48):
where we have a blog, transcripts and a newsletter. And
check out the discord Discord dot gg slash odd Lots
where you can chat with fellow listeners.
Speaker 1 (40:56):
Twenty four seven And if you enjoy Oddlots, if you
like it when we examine the Trump and Biden tariffs,
then please leave us a positive review on your favorite
podcast platform. And don't forget, if you are a Bloomberg subscriber,
you can listen to all of our episodes absolutely ad free.
Just connect your Bloomberg subscription to Apple Podcasts. Thanks for listening.
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