May 8, 2025 • 52 mins
By now, everyone recognizes that the US and China are in the middle of a trade war, with the Trump administration having imposed tariffs of as much as 125% on Chinese goods. For an export-focused economy like China's, that's a big deal. At the same time, China is pretty much the only major country that's chosen to retaliate against the US with its own set of fresh trade restrictions. So why did it decide to reciprocate? And what's its negotiating position as the US and China head into initial talks? Can the Chinese economy -- and its policymakers -- withstand the pain of a trade war? We speak to Arthur Kroeber, head of research at Gavekal Dragonomics and a long-time China watcher, about how China might actually respond to the new tariff regime.
Read more:
Xi Fortifies China’s Economy Before First Talks on Trade With US
What Years of Practice Tariffs Have Done
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe. Why isn't thal so, Joe?
Speaker 2 (00:25):
One thing I find interesting about China, or maybe I
should say one thing I find interesting about how the
world views China is it seems to be this economy
that is always simultaneously a massive competitive threat, especially to
the US, and then simultaneously it always seems to be
on the verge of some big disaster caused by too
(00:47):
much debt or bad demographics or the collapse of the
housing market and so on. So for as long as
I can remember, China has been a bundle of contradictions.
Speaker 3 (00:57):
No, totally.
Speaker 4 (00:58):
And look, they're very good reporters on China, and they're
very good analysts on China.
Speaker 3 (01:03):
But throughout my.
Speaker 4 (01:05):
Entire career I completely agree with you. There has always
been that narrative of the imminent disaster that is the
Chinese economy, whether it's the housing bubble is going to collapse,
which it kind of did, and maybe we'll talk about that,
or you mentioned demographics or you know, all this over
capacity that if there's a little bit of reduction demand,
(01:26):
they'll have mass unemployment, et cetera. And again, by and large,
the Chinese economy, from my outside perspective and I've never
been there, continues to grow more robust.
Speaker 3 (01:38):
You know, there have been obvious hiccups, yes, for sure.
Speaker 2 (01:42):
Okay, So speaking of hiccups, now that we have this
new tariff regime from the Trump administration, I think we're
getting even more contradictions. Right, So we hear that tariffs
are going to be disastrous for the Chinese economy. Sometimes
we hear that they could be a good thing if
they encourage Chinese citizens to actually consume more than they save.
(02:02):
So maybe this is the impetus for actually finally restructuring
the Chinese economy. We hear stuff like export controls are
going to impede China's technological development. But then you also
hear that the export controls are speeding it up because
China now is forced to build domestic capacity. So there
are all these competing narratives. We should definitely talk about
(02:25):
all of them. And I realize we haven't actually done
a China centric tariff episode anyway. That's right.
Speaker 4 (02:32):
We talk a lot about the US economy and potential
of empty shelves and market reactions. But we have not
talked about this story from the perspective of the Chinese
economy right now, right.
Speaker 2 (02:43):
And obviously this is important because we're talking about a
potential trade war between the world's two biggest economies. But
I think it's also important because China so far is
the only big country that seems to really have retaliated
against the US. And just to make things even more complicated,
we've also seen Treasury Secretary Scott Besson basically offering reduced
(03:06):
tariffs to countries that agree to implement tougher trade restrictions
on China. So it seems to be a special case
in the overall trade crackdown for sure, and we should
talk about it. And I am very very happy to
say that we do, in fact have the perfect guest.
We're going to be speaking with, Arthur Kroeber. He is
the founding partner and head of research at Gavcal Dragonomics.
(03:28):
So Arthur, thank you so much for coming on all thoughts.
Speaker 3 (03:31):
Hi there, It's great to be here.
Speaker 2 (03:33):
So I guess my first question is if we assume
that China does have a lot to lose in a
trade war with America, which I think is a widely
held assumption. Why did it choose to retaliate against the US.
Speaker 3 (03:47):
Yeah, that's a great question for a couple of reasons.
First of all, you know, as you both know, China
is a very heavily export dependent economy. The pattern of
exports has changed a little bit since the first trade
war with Trump, but they still depend a lot on
the US market directly and indirectly, so there's a clear
direct cost there. And also, the government has been struggling
(04:08):
for the last year and a half to revive growth
that by their standards was very sluggish. So why would
you take on an additional, not necessarily required hit to
the economy at this time when you're struggling. So it's
very good question. I think the basic answer is number one,
because of the first trade war in the first Trump
(04:31):
administration and the subsequent campaign of export controls and technology
constraints by the Biden administration, they've been kind of girding
themselves for a long time for more self sufficiency, to
insulate themselves against external shocks. So there's a kind of
a baseline of confidence that they can take a lot
(04:51):
of pounding and they'll still be okay. But then I
think the specific reason why they alone, basically of all
countries in the world, chose to retaliate against the Liberation
Day tariffs was they were really mad. This is very
visible to me. When I was in last and Bidjing
in late March, I got a lot of comments from
(05:14):
people about basically how the Chinese had been trying since
the beginning of the year before Trump was inaugurated to
get messages to him to kind of lay out, you know,
make it clear that they were interested in talking and
suggest some things that could be on the agenda, etc.
Asking for who's the person that we should talk to,
and they just hit a stone wall. Basically, they were
(05:35):
unable to establish contact with anyone in the Trump administration
who would tell them anything, and instead what they got
was twenty percent tariffs, remember, in February and January, on
the grounds that they hadn't done enough to control fentanyl flows,
which they were also mad about, because they'd spend a
lot of time in last year negotiating an agreement with
the Biden administration, which they complied with, which made a
(05:58):
real dent in the export of fentanyl precursors out of China.
It was not complete but they had really made a
serious effort. So from their standpoint, they'd been trying to
open a conversation and the door had been shut in
their face time and time again, and they'd just been
whacked with stuff that they thought was completely unfair. So
(06:18):
I think they were just kind of fed up. They
had a baseline sense of security that if we hit back,
we know it's going to be bad, but we'll be
able to take it. Then. I think the other consideration
was essentially political, which is that, you know, even if
they hadn't retaliated, they were still facing tariffs of over
sixty percent, so no matter what they did, it was
(06:39):
going to be bad. So they had to have a
story to tell their people, what are we doing about
this bad thing? And it's a lot easier to mobilize
domestic support if you're standing tall and pushing back, which
actually is you know, it's like what Mark Karney did
in Canada. It's how he won that election was by
being the guy who pushed back against the so called
(07:01):
bolay So I think it was a combination of frustration,
a sense of security that they could outlast the US,
and war of economictrician and in a sense that this
was the best way to get people in China on
board for what was going to be a tough time
no matter what.
Speaker 4 (07:15):
Right, So, even in a one party state, there's politics,
and there's the requirement to maintain domestic credibility and so forth.
You know, this actually gets to something I've wondered about
for a long time. Rhetoric that you hear from Chinese
officials will often talk about their very long history, going
back thousands of years, and then Americans will parrot that
(07:37):
and sometimes say it's like, well, you know, they have
history going back a long time and they suffered a
century of humiliation and etc. How real is that in
the sense of like, it's a government that doesn't want
to see unemployment go up in the short term, et cetera.
I think many Americans have really internalized this idea of
they think really long term, they think in century, if
(07:58):
they think in millennia.
Speaker 3 (08:00):
That's true.
Speaker 4 (08:00):
How should we think about some of this, Righttoray? Yeah,
it's sort of half true and half not true. So
you know, I've been looking at the Chinese economy for
the last thirty five years, basically, and I can tell
you there's plenty of short termism and emergency thinking and
ignoring problems until they catastrophically become too bad, and then
scrambling to come with solutions. So underneath this veneer, there's
(08:22):
plenty of chaos, but there are I think a few
things that are true about that. So, first of all,
this century of humiliation idea that is number one. It's
something that is played up by the Chinese educational systems,
has drummed into people starting an elementary school. That's part
of the nationalist narrative that the CCP has used for.
Speaker 3 (08:42):
A long time. But I think it's important to recognize
that this is not just a communist party thing. This
is basically Chinese elites of whatever stripe since the mid
nineteenth century have been really distressed at the loss of
standing that China has achieved in the world. I mean,
you know, up until the early nineteenth century, it was
undisputedly this great empire, and people within China had the
(09:04):
sense of being part of a great global power, and
then that was all taken away and they had a
pretty catastrophic hundred years of civil war and famine and
all kinds of stuff. So it has been a theme
of Chinese elite since the eighteen forties, that they have
to rebuild the nation, acquire the technological means to stand
(09:26):
on an even footing with the West, and so forth.
And the current regime is just the one that has
been most effective at sort of realizing that vision. But
if you changed the regime tomorrow, whatever came in its
place would have the same I think underlying ambitions. So that,
I would say, is a common theme. I think. The
other thing that is, I don't I'm not a real
(09:48):
buyer in the super long term thinking thing. But you know,
if you look at Chijinping's utterances, he took over in
twenty twelve, and he started laying out some pretty long
term stuff right away. He had these various goals that
stretched out to twenty thirty five and twenty forty nine,
which is one hundredth anniversary of the Communist Party, and
so forth. And so there is an ability of the
(10:11):
Chinese state, because they don't have to face elections to
organize kind of strategic plans that last a little bit
longer than would typically be.
Speaker 2 (10:21):
The case, longer than four years, certainly.
Speaker 3 (10:23):
Longer than four years. So a good example it's made
in China twenty twenty five which is their Industrial Policy Idea,
which was released in twenty fifteen. It builds on previous
policies that they had. It was not some completely new thing,
but they set out some ten year goals for how
where we want to be roughly in a whole bunch
of technologies, and the reality is they did a pretty
good job on a lot of them. So the planning
(10:44):
is not I think there's often a mystique about it,
but they are able sometimes to sort of point the
ship in a particular direction and then get a lot
of people in society on board with steering that ship
where they want to go.
Speaker 2 (11:02):
So speaking of long term strategies, one thing that is
different in this current bout of trade tension. We could
probably call it a trade war at this point.
Speaker 3 (11:11):
I think that's always it's a complete embargo except for
a few things that we've you know, each side is
exempted about twenty twenty five percent of what the import.
But yeah, otherwise, effectively it's an embargo.
Speaker 2 (11:21):
I definitely want to ask you about those exemptions too.
But one thing that's different about this trade war to
the tensions that we saw in the first Trump administration
is that China has basically had some practice with increased tariffs,
and so what we saw in sort of twenty sixteen
twenty eighteen was China just moved a bunch of production
(11:41):
over the border to places like Vietnam, basically re routed
a bunch of things to get around the tariffs. Is
that an option this time around, given that Trump seems
to be cracking down on pretty much all of America's
trading partners all at the same time.
Speaker 3 (11:57):
Oh, it's totally an option, and I think it will
definitely have And so a couple things here. So, first
of all, you can describe that as kind of a
government strategy, but actually it was largely just companies on
their own deciding. So, like the first companies that did
this were the solar panel makers who got whacked by
tariffs in the Obama administration twenty twelve, very high ones,
(12:19):
and so they immediately moved a lot of their production
to Southeast Asia. It wasn't the government saying please do this.
It was just they said, well, we want to sell
to the US. We can't do it from here. Where
do we go? Oh, we can go across the border
and it'll be fine. And it was now they've diversified
they used to be just in a couple of countries,
and now they're in a larger number of countries. It's
if you try to go after this stuff, it's like
(12:42):
playing a game of whack themole. The other thing I
would observe on that, just beyond the solar people, is
China is now at a stage of development where they
have very sophisticated companies that are very good at what
they're doing, increasingly have markets in a wide range of
places around the world. And what do companies do when
they are in that situation, be they from China or Japan,
(13:02):
or the United States or Germany, They invest abroad, They internationalized.
And so what we're in right now is kind of
act one, I would say, of what is clearly going
to be a very long process of Chinese companies turning
themselves into multinationals, just like the companies of every other
industrialized country have done. And so they don't need the
(13:23):
government to tell them do this. They have their own reasons,
not just teriff avoidance, but to be closer to different markets,
et cetera. So that process, I think is just going
to continue because it has many many drivers, not just
teriff avoidance.
Speaker 4 (13:40):
Right and you know, we've certainly talked about bid setting
up auto facilities all over the world. They're in Brazil,
they're in Hungary, right, they're elsewhere. But it also, like,
I mean, this is one of the things that I
guess confuses me about the US administration policy, you know,
all these other It's like, oh, we're going to like
split off Vietnam or gonna make it like it's hard
(14:01):
for me to imagine that given the amount of cross
border investment that we've seen over the last years and years.
Speaker 3 (14:07):
Right, well, okay, yeah, basically I would describe it. There's
an economics term of art for that strategy. It's looney.
So but this gives me an opportunity, I guess to
make a little bit of a comment on what I
see about what's coming out of the Trump administration, Okay,
which is basically chaos. Right. There is not a clear strategy,
There is not a clear policy. What you have basically
(14:29):
is Trump's impulses, which are number one, I want to
sort of demonstrate dominance over everyone and I want them
to exhibit difference. And number two, I really like tariffs
for some strange reason that I don't think any of
us understand but he really likes them. But he also
likes them specifically because they are a tool that as
the president of the United States, he is the legal
(14:50):
authority to use without restraint. So if he wants to
hurt people, he doesn't have to go to Congress, he
doesn't have to ask anyone in Congress. He just does it.
So it's very usef for him. And I've found a
lot of the commentary over the last couple of months
trying to explain the rational strategy behind this to be
completely off target because it isn't. And various people in
(15:13):
the administration, like Scott Bessant, would like there to be
a strategy, and they are desperately trying to corral the
stuff into the semblance of a strategy, but they have
to improvise. So that's sort of my general comment on that.
And then specifically in the question is does it work. No,
The reality is there are now I believe one hundred
(15:34):
and forty countries in the world that trade more with
China than with the United States. China is now the
number two source in the world, behind the United States
of direct investment, and it's growing its economic relationships with
many countries, including in the Latin America are much deeper
(15:54):
than those of the United States, let alone Southeast Asia,
where their economies are completely tied to China. So there's
no way, no way that any sane leader of any
of these countries would sign on to a deal where
they would say, oh, we'll get our teriffs on the
US lowered from ten percent to five percent in exchange
for which we have to sacrifice our principal economic relationship.
(16:16):
It's not going to happen.
Speaker 2 (16:32):
So you mentioned the exemptions earlier, and we've also seen
some carve outs for specific things like electronics imports, and
at this point, I'm actually finding it kind of difficult
to keep track of what's delayed and what's exempt just
because it changes so often. But my question is how
much signal should we take away from all those exemptions.
(16:53):
Do they show that there's potentially a path forward to
a US China deal or is it just Trump trying
to retroactively protect some pretty important industries.
Speaker 3 (17:04):
Yeah, it's more of the latter, you know. And remember
there's exemptions on both sides. So Trump exempted cell phones
and most consumer electronics basically because he was told that
you cannot allow the prices of iPhones to double, people
will revolt, and he took that seriously. So that was
clearly a political move, just to alleviate the domestic political
(17:27):
cost of this action. And similarly, if you look at
what the Chinese did, they exempted a lot of imports
like semiconductors and some key technology inputs. Despite all of
their progress, they're still pretty dependent on global supply chains
outside of China for a lot of stuff that goes
into their tech ecosystem, and they could not afford to
have this stuff cost a lot more. So I think
(17:51):
in both cases it's roughly twenty percent or a bit
more that has been exempted. As you said, it's very
hard to know exactly when this is going into effect,
and blah blah blah. But both sides have sort of
picked out the parts of their economies which are most
vulnerable and said, okay, you don't have to take the pain.
(18:11):
But it doesn't tell us anything about It's not like
both sides are signaling to each other, hey, if you
lower your tariffs, all lower mine, and then maybe we
can get somewhere. They're just doing what they need to
do to protect themselves.
Speaker 4 (18:22):
So Trump recently said that for gifts that kids could
maybe have two dolls instead of thirty dollars. And I
completely agree. I spent this weekend taking out a bunch
of random plastic garbage, broken toys, etc. For my children's room,
five trash bags, and I've barely made a dent in
(18:43):
what they have. So I'm completely in agreement on that point.
All that being said, two questions about that. So let's
say there's a major reduction in buying plastic stuff from China,
low end stuff. A. Are we already seeing real in
China un parts of the economy from these tariffs that's
visible from what you're looking at. And B how much
(19:06):
of that stuff is still in China as opposed to
that's the low margin stuff that you probably quickly have
it some cheaper destination. How important is stuff, the cheap
stuff to China's economy these days?
Speaker 3 (19:20):
You know, it's somewhat important, you know, for employment purposes,
because a lot of that stuff is fairly labor intensive
Tho's lower end exports, but it certainly is not very
relevant from the standpoint of Jinping's grand strategic vision as
China's technology superpower. So and if you look in terms
of like total value of what they export. The stuff
(19:40):
that goes into Walmart is significant, but a shrinking portion
of the total. They're moving up the value chain pretty fast.
So you are starting to see some softness in the
industrial and manufacturing indicators. I mean, you've had an employment
a pretty weak employment market since the end of COVID
basically that they've been struggling to address. So this is
(20:01):
going to have some impact. You know, the Chinese export
numbers have still been quite strong. Most people think that's
because there's been some front loading, because people are anticipating tariffs,
and we're expecting significant weakness, you know, in the coming months.
I think that will happen. It will hurt, but I
don't think any of that is going to hurt enough
for China to feel like it has to make a move.
(20:22):
They've clearly signaled Trump wants to have a deal. He
has to make the first move. He has to initiate
show some good faith. They've laid out their position, they're
waiting for him to pick up the phone and call basically.
So yeah, this is going to cause some real difficulties,
and I think they're going to have a real challenge
meeting their growth target this year. If this goes on
for much longer, but I think they're willing to wait
(20:45):
it out.
Speaker 2 (20:46):
So speaking of economic transformation, in addition to being a
bundle of contradictions, the other thing that has existed for
as long as I've been I guess covering China from
an economic perspective is this idea that the economy needs
to rebalance towards consumption. So Chinese people save too much
(21:06):
and we really need to get them to spend on
our own domestically manufactured goods, and that will help resolve
some of the tensions in the economy. What's your sense
of how much Chinese people might actually be able to
boost their own consumption right now to offset the trade war.
Speaker 3 (21:25):
Oh, there's some, not a lot. So just to back
up a little bit on that. So, I think it's
important to clarify that when people talk about this project
of rebalancing the economy from investment consumption, this has been
a project of economists, mostly outside China. It has never
been a project of the Chinese government itself. They have
(21:48):
never really forcefully and clearly stated that it is their
objective to do that. They've put out various policies where
they say, yeah, we want incomes to rise fast. We
would like there to be a stronger services consumption and
so forth, But they have never said that, we think
(22:08):
we should fundamental out in the shop. Well, they haven't
said that. But the other thing is, I think it's
really important to understand these people are not They're not Americans,
They're Chinese. They have a different concept of how an
economy grows. So we grew up in this sort of
Canesian world where we believe that demand drives everything, and
Chinese authorities don't believe that. They believe that investment drives everything.
(22:32):
That progress, productivity, future income growth, it all comes from
investing in the right things. So they have been very
clear for as long as I've been studying it, including
the last decade, on saying to secure the growth of
the future that is stable, well balanced, whatever, we need
to invest in the right things. That is the principal
job of government economic policy is to steer investment. So
(22:54):
that's point one. They've never really had an agenda of
substantially balancing. Second is, up until COVID, the fastest growing
consumer economy in the world by an order of magnitude
was China's for twenty years. There is no economy that
comes even close to the rate of consumer spending growth
(23:17):
that Chin enjoyed between twenty twenty twenty. It was I
think the total aggrig growth was more than triple what
you saw in India, for example, and much faster than
you saw in advanced economies that grows lower rates. So
they didn't really have, in my opinion, a consumer spending problem,
and I think they look at that, you know, much
(23:38):
the same way they say, well, you know, we actually
don't need to rebalance. Now I think that's changed a
little bit. I think they really in the last few
months have started to say, oh, actually, we're going to
be facing a lot of head winds in the export economy,
largely from the US, but not just the US. They're
in a tariff battle with the European Union over electric vehicles,
(23:59):
a lot of other kind are beginning to put up barriers,
and I think they are beginning to realize that they
need to both for the short term, you know, trade
war issues, but also for just having a more comfortable
place in the global economy, that they have to do
a little bit more to boost the consumer part of
the economy. But they they're limited in their tools for
being able to do that.
Speaker 4 (24:19):
When I think about consumer comfort, consumer wealth, et cetera.
I'm on social media all day, and so I see
all the videos of like these like amazing futuristic cities
with these incredible plazas and lights and transportation that zips
you from one place to another. And I imagine those
things don't show up in consumption. You know, they're not
(24:42):
retail consumption, right, but as a form of lifestyle consumption,
whether your city just has greater amenities and comforts and
cleanliness and so forth, et cetera, are those all real?
Speaker 3 (24:53):
You know?
Speaker 4 (24:53):
Because like you know, you see like a ninety second video,
like you've been going to You've been living and traveling
to China for decades. How different outside of you know, Okay,
I'm sure you know in multiple cities around the country.
Is the day to day experience of being a citizen
or consumer?
Speaker 3 (25:11):
Yeah, well it's a large question. So if you had
turned this around and you had said, well, you know,
I look at these pictures of what life in Silicon
Valley's life, is that really what it's like in America?
You know your responsibily, Well, America is a big country.
There's a lot of different things. And China is an
even bigger country in terms of the number of people,
so huge variety the stuff that you see there is reel.
You have a lot of first class urban infrastructure in
(25:35):
places like Shanghai, Shunjan, Beijing, and increasingly in a couple
of interior cities like Chungdu and so forth, and things
work quite well. And you have large swaths of the
country where people are still living fairly, you know, modest lives,
one generation removed from the family farm that their parents
(25:57):
still live on, and so forth. There's parts in the
northeast which are a super rust belt of these old
sort of fifties and sixties areas industrial towns built around
industries that really aren't that important anymore, mining or whatever.
So they have an enormous variety of things. But I
would say it is fair if you go around to
sort of random Chinese cities in sort of eastern and
(26:21):
central China, most people now have pretty comfortable lives. They're
not as shiny as you might see in these social
media egos, but things work, their needs are taken care
of pretty well.
Speaker 4 (26:34):
Is that true for healthcare too?
Speaker 3 (26:36):
That is true increasingly true of healthcare and pensions they
went through a period where they basically had abolished the
old planned economy social safety net, and there was nothing,
and it was really bad, and it's still not terrific.
But they have greatly increased the coverage of healthcare. There's universal,
almost universal pensions. Even for farmers in the countryside, they
(26:58):
get something, People have access to facilities. The quality of
care can vary quite a lot. I would say, on average,
the situation there is quite a bit better than it
was ten or fifteen years ago, with a lot of
room for improvement.
Speaker 2 (27:12):
So you briefly mentioned the idea of tools that China
can use to offset some of the impact from the
trade war walk US through the levers that it has available,
and then I guess how policymakers might actually balance the
use of these levers with the message that China is
still a great place to do business and invest and
(27:33):
so on. And I don't mean to single out China
on this issue, because I think the US faces a
very similar balancing act, but arguably the US is much
more developed in its capital markets and has certain advantages
in global markets that China just doesn't.
Speaker 3 (27:47):
Sure. Yeah, well, so I think you can sort of
divide it into two buckets. So there are things that
China is doing to retaliate against the US, and that's
where it really runs the risk of alienating the business community,
because part of your retaliation has to be to make
life difficult for US businesses, either in China or back
(28:07):
in the US. But then there are also response mechanisms,
which are basically things that they can do to make
the economy stronger and able to weather the shock. So
in retaliation, you know, clearly they have the countervailing tariffs.
They have increasingly comprehensive export controls on rare earths and
rare earth based technologies, which are actually not just rare earths,
(28:30):
but a various sort of critical minerals, antimony being sort
of the big example of the moment, and those are
part of that is Yeah, that's actually.
Speaker 2 (28:38):
People don't talk about antimony enough.
Speaker 3 (28:40):
It's a mineral that is used, It has a lot
of applications, many of them in the defense industry. There
basically is no viable source of production in the United States,
and China has i think sixty or seventy percent control
of sort of global refined supplies, and they have basically
banned exports of it to the United States, and this
is starting to create real health headaches in defense and
(29:02):
other kinds of technology related supply chains. So they have
a few things that they can do like that. They've
singled out a few US companies operating you or selling
into China for various kinds of investigations. Those are more
kind of shots across the bow. They're kind of gestures.
I don't think they're really that serious. They don't really
want to make it harder for Nvidia to do business
(29:24):
in China than it is already. But basically what they're
doing is they're picking out companies that may sell a
lot to China but don't have a lot of investment
on the ground in China and saying, if you don't
basically help us get this guy in the White House
to see reason, we might make it a little difficult
for you. And they'll only do that if they think
there are reasonable domestic substitutes. So they're doing a little
(29:46):
bit of that, but they're being very cautious because they
are keenly aware that their economy still needs international businesses
to participate in China at many different levels. They do
not want to scare them away. So what they're mainly
left with is response mechanisms, which is, you know, some
of it is the usual stuff. They can lower interest
rates and they'll probably do a bit more of that
(30:08):
this year. They were already planning a big fiscal expansion
this year, one of the biggest budget deficits in history.
They're probably going to expand that more. To get up consumption,
they have this cash for Clunkers kind of trading program
where you have an old appliance, you can trade it in,
you can get a discount on the new one. That's
for both households and for businesses. They can trade in
(30:30):
old capital equipment and get new stuff at a cheaper price.
And then the other thing that they've been doing actually
is to get more money into consumer pockets. They have
started to expand pension payments, focusing on people lower in
the income spectrum and just putting an extra five or
ten bucks into their accounts every month so that they
(30:53):
have a little bit more cash to spend. And by
focusing on the lower income, those are people who basically
spend most of what they have, so it has a
big impact. But yeah, so they can do all of
these things and they will all work to some degree.
The cash for clunquors thing actually worked a lot better
than I thought it was. I was very skeptical, But
at the end of the day, consumer behavior is pretty
(31:13):
sticky in any country. The job market is still not terrific.
They're going to have a lot of difficulty really really
moving the needle on boosting domestic demand. They can get
it up a little bit, but not a lot in
the short term.
Speaker 2 (31:43):
Joe, I do find it really ironic slash remarkable that
China has a cash for clunkers program, which we all
recognize from the post two thousand and eight era. And meanwhile,
Trump is, you know, going on TV and telling everyone
to stop buying and you only need two Barbie dolls
instead of fifteen.
Speaker 4 (32:04):
No Trump, Trump has producrist impulses on some level. Do
you know, actually, since we're talking about ideology, how much
continuity in your view, has there been in Chinese policy
pre Xjinping to now? Because there's debates about this, and
the party itself always stresses continuity and nothing ever really changes.
But you've seen the country for a long time. How
(32:25):
much of a pivot happened in twenty twelve that continues
to this day.
Speaker 3 (32:29):
That's a really great question. And you know, I hate
to sound like you know, Harry Truman's hated to handed economist,
but there is both continuity and change here, there's no question, right.
So the things I think that are largely unchanged is
I talked earlier about this kind of view of how
(32:51):
economies work, that they are driven by the investment cycle,
and that the government has a important role to play
in kind of identifying the key top areas for investment,
not necessarily spending the money, but say pointing and saying
go there, and then all the entrepreneurs in the country say, oh,
(33:12):
we should go there, We'll go there. That has not
really changed. That is a and you can talk about
people you know before she who were more quote unquote
reformists and so forth, but if you look closely at
what they were doing, they had the same objective. They
wanted to increase state capacity. They wanted to strengthen the
technological foundations of the economy. The first long term Science
(33:34):
and Technology Plan actually came out in two thousand and six,
which was six years before she jent Ping took over.
It had nothing to do with him, and it was
very much the product of everyone else in the government
at that time, so that I think general orientation has
not changed. What she has done is that he has
made the coordination of that strategy much more effective. So
(33:58):
he's increased the capacity the same government to kind of
mobilize and guide resources. He has reined in what he
thought were big excesses, notably in the property market, but
also in the internet sector, where he thought a lot
of investment was going to stuff that was actually not
advancing the ball technologically, and it was also creating significant
(34:18):
social and political risks for the Communist Party, and it
needed to be rained in. But you know, a lot
of the concerns that you see expressed about social media
and the power of internet firms in China totally indistinguishable
from the discourse that we have here in the United
States about the same problems. So part of what they
were doing was try to say, let's have less resources
(34:39):
to that kind of stuff and more to the kind
of stuff that we think that will really generate long
term growth, that is, will enhance productivity and social cohesion.
So he hasn't changed the sort of the basic orientation,
but he's made the execution of that generally much more effective.
And then the other big thing that he did do
(35:00):
that is a major change, is that he overturned the
foreign policy that dung Shaping had laid down, which is,
you know, the idea that you stay quiet and stay
behind and stay quiet and sort of hyde your capabilities
or by your time and whatever. And he pretty aggressively
said no, no, China's great power. Now we have to
(35:22):
act internationally, and so we're going to take a much
more aggressive view. And I think you could argue that
that's a real shift. You could argue that he moved
a little bit too quickly on that and that has
you know, created some unnecessary costs for China. Would have
been wiser to hide and buy for a few years longer.
But anyway, he did it, and that is a that
(35:43):
is a material change, I would say.
Speaker 2 (35:45):
So, I think I just have one more question, and
it's the big one, which is do we have any
idea or sense of what the off ramp for all
of this actually is? And do we have a good
idea of what Trump actually wants China and do we
have a good idea of what is palatable to China?
Speaker 3 (36:04):
Right, Okay, so what's the off ramp? I think the
off ramp is basically that Trump and his people have
to recognize that they've put themselves in an untenable position
and they need to figure out a way to climb
down from it as gracefully as they can. I think
the Chinese have been very clear in their communications that
(36:29):
they are happy to talk, and they keep saying, we
are happy to talk, but we're not going to make
the first move. And if you want to prolong this
trade war, we think that we can sit with art
deflation longer than you United States can stick with your stagflation,
given your political system. So I think the ball is
really in Trump's court to do something to figure out
(36:53):
how to unstick this, and the difficulty is, I think
what does he want. My theory of the case is
that Trump is not really driven by specific policy outcomes.
He is a guy who has very authoritary instincts who
wants to be recognized as the boss. It is basically
all about power and so everything that he does, and
(37:15):
I think this applies to a lot of the domestic
policy too, is to demonstrate that he has power and
that other people have to show submission and deference. So
if you really want to get on Trump's good side,
that's what you do, and the Chinese will not play
that game. They are too big, they are too strong,
they have too much at stake domestically in terms of
their own political credibility to play that. They will not
(37:37):
do that. So that puts Trump in a bind because
what he really wants they will not give him. So
then people on Trump's team need to figure out, Okay,
what is an agenda that we can put together of
actual policy aims that could form the basis of a negotiation,
and then how do we communicate that to China and
(37:57):
how do we get them to start talking to us.
It's not an easy problem to solve, right, So what
it means is that people in the administration who have
actual policy aims somehow need to seize control of that process,
and they haven't done that yet. So a couple other
theories on how this could unwind. So one theory is
that at the end of the day, nothing is going
(38:19):
to happen until Trump and She get together face to face,
because in both systems, no one really has the authority
lower down to make a move, and so then you
have to think about, well, how could that happen. It's
unlikely that you're going to have a trip of one
leader to the other countries. So you have to start
thinking about is there some third country that could be.
Speaker 2 (38:41):
Which country is exactly halfway between the US and China.
Will have to figure that out.
Speaker 4 (38:47):
What's your good what's the third country?
Speaker 3 (38:49):
Well, somewhere in the Middle East. I don't have a
good theory on that. Arduawan and Turkey, they are kind
of halfway between, and he sort of has these fantasies
of being a broker. He tried to do that. I'm
just making that up. I have no information that he
actually has any interest in doing that. So that's one
theory is that you need somehow to get the two
(39:09):
leaders together, and that will probably require a third party.
So that's one way of thinking about it. Another way
of thinking about it is just to say, well, Trump
is driven by markets to some degree, not quite the
same way that he was in his first term, but
right now you have this weird situation where basically, if
you talk to people in the markets, they are convinced
that a deal will happen. I keep telling them on
(39:30):
what basis do you hold this belief? I can see none,
but they are convinced that essentially because it's impossible or
they think it's impossible to maintain these high tariffs for
too long. Therefore something must happen. So markets actually are
doing okay right now because they're essentially pricing in there
will be a deal. And if you look at this
from Trump's standpoint, it's like, oh, markets are happy, I
(39:52):
have no incentive to deal. So the only way he
can have more incentive to deal is if markets are
convinced that there is no deal and the tank and
then he says, oh, I really got to do something.
So that's another theory. Full credit. That was suggested to
be my colleague Andrew Batson, who runs our China team
(40:13):
very effectively, and I thought that was a very good
way of thinking about it. So market pressure in the
US could be a forcing mechanism. You could maybe have
some kind of intermediary, but I think unless you have
some kind of force acting like that, or some kind
of revolution within the White House where actual policy makers
take over and seize command of things somehow and start
(40:36):
to work out how do they get a communications channel
open to the Chinese, communicate some kind of mutual reduction
of tariffs to a lower level as an opening thing,
and then a negotiation but I think we're some ways
away from any of that happening.
Speaker 4 (40:53):
I just have one short comment. One is I've talked
to an investor who literally used that logic. They said,
there is going to be a deal because there must
be a deal, and so therefore there will be one.
Which one last question our colleague got Anna Wong, us
economist here at Bloomberg. She thought, one possibility is maybe
there's a deal that still leaves the sort of like
(41:15):
Vietnam transshipment open that looks like something tough, and that
there is some third party country that could still be
a route for flows, keep high nominal numbers up on China,
et cetera. Could that be a path out where it
looks like you've maintained a hard line, but you allow
an escape valve of some sort.
Speaker 3 (41:33):
You know, I think that's very plausible, because, as I
mentioned before, I don't think it's just not realistic to
think that you're going to be able to close off
the trendshipment channels. So deal or no deal, a lot
of those channels are going to remain open one way
or another. So you might as well take advantage of
that and incorporate it into deal. And one other comment
on that, because you then get into this question of like, Okay,
(41:54):
suppose there is a deal, what's in it? And my
view on this is most of the deal structures that
seem plausible are not very meaningful others from the standpoint
of calming markets down. So you have the situation where
the US and China very adversarial. Most people in Washington
think we are already in another Cold war. And to me,
(42:15):
a substantive deal would be one that makes a significant
change in the quality of the relationship. And so if
you have something that's like a phase one trade deal
plus where the China agrees to buy more stuff and
they make some gestures towards more domestic demand support, and
we cut tariffs a little bit, Okay, that's fine. Markets
(42:35):
will be okay with it, but it doesn't really change
the underlying dynamic, which I think is really bad. And
I think the thing to look for, which is what
China really wants. One of the things that they really
want that could be given to them is the ability
for their companies to invest a lot more in the
United States byd c ATL all of these Chinese hi
(42:56):
tech firms, they would love to be able to invest
in the UN States and tap into this market more directly.
They would be very happy to accept. I think a
lot of different potential structures for that investment, but effectively
Chinese companies are shut out. And Trump on the campaign
trail said that he was open to this. So the
interesting thing there is that basically no one else in
(43:17):
the administration seems very interested in this, but Trump might be.
And if you're serious about reindustrializing the United States, you
cannot do that without significant participation by China. I'm sorry,
China accunts for a third of global manufacturing production now
going to forty They are close to or at the
leading edge of many of the technologies of the future.
(43:38):
It is as absurd for us to think that we
can ramp up our industrialization without China as it was
forty years ago would have been for China to think
that they could ramp up their industrialization without bringing the
leaders then the US, Japan, and Germany. So there is
in principle, it seems to me there is a deal
to be done there where that's what you give to
(43:59):
China and then you might be able to get something
for it that could be quite transformational in terms of
the basic relationship between these two big economies. Am I
betting on that.
Speaker 1 (44:11):
No.
Speaker 3 (44:12):
I think the chances of that actually happening are quite low.
But I think people who are serious about thinking that
there should be a deal and that the deal is
economically meaningful, not just like ASoP to markets, they should
be thinking about that.
Speaker 2 (44:26):
Yeah, are we in a cold war with China? Is
that even useful framing?
Speaker 3 (44:30):
I think it's not. I disagree vigorously with the people
who say that we are already there. I mean, we
could get there. The reason that we're not is a
couple things. Just if you look at the substance of
the economic relationship, China's trade with the US direct trade
with the United States several years ago before Trump's first
term was the same as our trade was with Japan
in the mid nineteen eighties. So it's about I think
(44:52):
seventeen or eighteen percent of our total global trade. Our
trade with the Soviet Union and all of its successor
states after the Soviet Union collapsed was more than about
one or two percent or so. We are linked. We
have thousands of US companies that operate in China and
generate somewhere between five and seven hundred million dollars a
year of annual sales, which is triple or more the
(45:14):
amount of exports that go from the United States to China,
the global supply chains or lengthd I could go on
and on, but the economic linkages are not the linkages
of countries at war. The reason you could call the
Cold War a cold war was because it wasn't direct fighting,
but many of the other conditions, particularly economic, were very,
(45:36):
very similar to wartime conditions. And this just is not
It is a completely different beast than I could go on.
But that's I think the principal thing and the reason
I think that it's really not only not useful framing,
but I think toxic framing, is that we have this
kind of view in the United States that essentially, either
(45:57):
if you're another country, you are or ally or we
are at war with you. Those are the two possible states.
And I think these are conditioned by the fact that
we thought these multiple wars hot and cold in the
twentieth century, and our kind of national foreign policy ethos
was defined by dividing the world into good guys and
(46:17):
bad guys, beating the fascists, beating the communists. China is
not a place that can be beat. It is a
large country. It's not going away. It is very integrated,
not just with the US but with the entire global economy.
They're heavily invested in the global order. So the only solution,
it seems to me, is that you need to figure
out what is a state of coexistence with China that
(46:40):
you don't have to define in these martiall terms. It's like,
and it doesn't have to be we're friends and can
include we have some very serious adversarial components to the
relationship in really deep competition, not just in economics of
geopolitics that can be there. But describing it as war
I think is not only.
Speaker 2 (46:59):
Not useful but dangerous frenemies the US and China, maybe
that maybe we can describe it thus. Okay, Arthur Kroeber,
thank you so much for coming on all thoughts.
Speaker 3 (47:09):
That was great, my pleasure. Thank you, Joe.
Speaker 2 (47:24):
I thought that was a really great state of play conversation,
and also, you know, sort of considering where things might
be headed, I realized we forgot one very important thing,
which is we have to say the day that we're
actually recording this, because you never know what's going to
happen in between now and when we actually publish this episode,
so it is May sixth, two fifty nine.
Speaker 3 (47:48):
I thought it was great.
Speaker 4 (47:49):
I kind of feel stupid for not having had Arthur
on before because I really thought he was excellent and
very clear and clear eyed about Chinese economy our relation.
Speaker 3 (48:00):
You know.
Speaker 4 (48:01):
Just there was a lot in there that was very good.
That last point about like, you know, if we were
actually serious about quote reindustrializing unquote, that we would want
to bring Chinese manufacturers give them mistake in the US economy,
both in terms of selling into the US economy, both
in terms of owning assets or maybe forty nine percent
(48:22):
of assets of various factories. Like that makes a lot
of sense to me. It seems like that's distant politically,
but it's certainly very intuitively logical to me.
Speaker 2 (48:31):
Yeah, and I also thought the point about demand driving
everything in the US and versus investment driving everything in
China to be kind of interesting. Although I would argue
that those two things, like they're starting to get mingled
in both America and China, so you're seeing China kind
of borrow a lot of policies or thoughts that would
(48:53):
be very familiar to anyone who's lived in the US
in recent decades, And meanwhile you're starting to see the
US take gone some Chinese characteristics in various ways.
Speaker 4 (49:04):
Arthur is a good point, and I think you've written
about this as well, and I think others are confused
on this. It's like, from Trump's perspective, what does a
successful outcome look like? We know that he likes the
forms of things. He likes handshakes, he likes the idea
of dealing.
Speaker 2 (49:20):
He hates handshakes, doesn't he Oh, he likes deals, he likes.
Speaker 3 (49:24):
He likes tariffs, et cetera.
Speaker 4 (49:25):
But what does say the US economy look like in
ten years were we to take a correct policy line.
Really hard to still totally understand. But again, like, yeah,
maybe it's a lot more factories, and maybe we should
invite one of the world's you know, some of the
world's most advanced companies to set them up.
Speaker 2 (49:43):
Yeah, And I guess the question is, you know, he's
on TV now saying that we don't need fifteen Barbie
dolls per child. But if we do build that Barbie
factory in the US, then does that kind of consumerism
become Okay?
Speaker 4 (49:58):
Again, well, you know, and this is by the way,
you know, it's like on this point, so I think
a lot of people can make an intelligent rationale for
more US manufacturing in certain areas. It's really unclear, you know,
the White House. I think there was a tweet a
few days ago talking about how much we import in
terms of textiles, which is the vast majority of clothing
(50:20):
et cetera we import. It's really unclear to me why
it's important at all to have significant domestic capacity in
these low value, low margin, low strategic areas and what
that benefits US. I get maybe there's an aesthetic appeal.
Obviously we want to have a lot of jobs. But
(50:43):
this is a really difficult thing to wrap my head around,
which is like you have to make decisions right a
worker on one line as a worker who's not on
another line. And so why you want to have more
clothes manufacturing or more doll manufacturing at a time when
there's an impulse to sort of build up in these
higher value is very unclear to me.
Speaker 2 (51:01):
Yeah, there's definitely a tension there. Yeah, all right, shall
we leave it there.
Speaker 4 (51:04):
Let's leave it there.
Speaker 2 (51:05):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (51:11):
And I'm Joe Wisenthal. You can follow me at The Stalwart.
Follow our guest Arthur Krober. He's at aar Krober. Follow
our producers Carman Rodriguez at Kerman armand Dash, Ob Bennett
at Dashbot and Kele Brooks at Kilbrooks. For more odd
Loots content, go to Bloomberg dot com slash odd Lots,
where we have a daily newsletter and all of our
episodes and you can chat about these topics twenty four
(51:31):
to seven in our discord Discord dot gg slash odd Lots.
Speaker 2 (51:35):
And if you enjoy odd Lots, if you like it
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Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe. Why isn't thal so, Joe?
Speaker 2 (00:25):
One thing I find interesting about China, or maybe I
should say one thing I find interesting about how the
world views China is it seems to be this economy
that is always simultaneously a massive competitive threat, especially to
the US, and then simultaneously it always seems to be
on the verge of some big disaster caused by too
(00:47):
much debt or bad demographics or the collapse of the
housing market and so on. So for as long as
I can remember, China has been a bundle of contradictions.
Speaker 3 (00:57):
No, totally.
Speaker 4 (00:58):
And look, they're very good reporters on China, and they're
very good analysts on China.
Speaker 3 (01:03):
But throughout my.
Speaker 4 (01:05):
Entire career I completely agree with you. There has always
been that narrative of the imminent disaster that is the
Chinese economy, whether it's the housing bubble is going to collapse,
which it kind of did, and maybe we'll talk about that,
or you mentioned demographics or you know, all this over
capacity that if there's a little bit of reduction demand,
(01:26):
they'll have mass unemployment, et cetera. And again, by and large,
the Chinese economy, from my outside perspective and I've never
been there, continues to grow more robust.
Speaker 3 (01:38):
You know, there have been obvious hiccups, yes, for sure.
Speaker 2 (01:42):
Okay, So speaking of hiccups, now that we have this
new tariff regime from the Trump administration, I think we're
getting even more contradictions. Right, So we hear that tariffs
are going to be disastrous for the Chinese economy. Sometimes
we hear that they could be a good thing if
they encourage Chinese citizens to actually consume more than they save.
(02:02):
So maybe this is the impetus for actually finally restructuring
the Chinese economy. We hear stuff like export controls are
going to impede China's technological development. But then you also
hear that the export controls are speeding it up because
China now is forced to build domestic capacity. So there
are all these competing narratives. We should definitely talk about
(02:25):
all of them. And I realize we haven't actually done
a China centric tariff episode anyway. That's right.
Speaker 4 (02:32):
We talk a lot about the US economy and potential
of empty shelves and market reactions. But we have not
talked about this story from the perspective of the Chinese
economy right now, right.
Speaker 2 (02:43):
And obviously this is important because we're talking about a
potential trade war between the world's two biggest economies. But
I think it's also important because China so far is
the only big country that seems to really have retaliated
against the US. And just to make things even more complicated,
we've also seen Treasury Secretary Scott Besson basically offering reduced
(03:06):
tariffs to countries that agree to implement tougher trade restrictions
on China. So it seems to be a special case
in the overall trade crackdown for sure, and we should
talk about it. And I am very very happy to
say that we do, in fact have the perfect guest.
We're going to be speaking with, Arthur Kroeber. He is
the founding partner and head of research at Gavcal Dragonomics.
(03:28):
So Arthur, thank you so much for coming on all thoughts.
Speaker 3 (03:31):
Hi there, It's great to be here.
Speaker 2 (03:33):
So I guess my first question is if we assume
that China does have a lot to lose in a
trade war with America, which I think is a widely
held assumption. Why did it choose to retaliate against the US.
Speaker 3 (03:47):
Yeah, that's a great question for a couple of reasons.
First of all, you know, as you both know, China
is a very heavily export dependent economy. The pattern of
exports has changed a little bit since the first trade
war with Trump, but they still depend a lot on
the US market directly and indirectly, so there's a clear
direct cost there. And also, the government has been struggling
(04:08):
for the last year and a half to revive growth
that by their standards was very sluggish. So why would
you take on an additional, not necessarily required hit to
the economy at this time when you're struggling. So it's
very good question. I think the basic answer is number one,
because of the first trade war in the first Trump
(04:31):
administration and the subsequent campaign of export controls and technology
constraints by the Biden administration, they've been kind of girding
themselves for a long time for more self sufficiency, to
insulate themselves against external shocks. So there's a kind of
a baseline of confidence that they can take a lot
(04:51):
of pounding and they'll still be okay. But then I
think the specific reason why they alone, basically of all
countries in the world, chose to retaliate against the Liberation
Day tariffs was they were really mad. This is very
visible to me. When I was in last and Bidjing
in late March, I got a lot of comments from
(05:14):
people about basically how the Chinese had been trying since
the beginning of the year before Trump was inaugurated to
get messages to him to kind of lay out, you know,
make it clear that they were interested in talking and
suggest some things that could be on the agenda, etc.
Asking for who's the person that we should talk to,
and they just hit a stone wall. Basically, they were
(05:35):
unable to establish contact with anyone in the Trump administration
who would tell them anything, and instead what they got
was twenty percent tariffs, remember, in February and January, on
the grounds that they hadn't done enough to control fentanyl flows,
which they were also mad about, because they'd spend a
lot of time in last year negotiating an agreement with
the Biden administration, which they complied with, which made a
(05:58):
real dent in the export of fentanyl precursors out of China.
It was not complete but they had really made a
serious effort. So from their standpoint, they'd been trying to
open a conversation and the door had been shut in
their face time and time again, and they'd just been
whacked with stuff that they thought was completely unfair. So
(06:18):
I think they were just kind of fed up. They
had a baseline sense of security that if we hit back,
we know it's going to be bad, but we'll be
able to take it. Then. I think the other consideration
was essentially political, which is that, you know, even if
they hadn't retaliated, they were still facing tariffs of over
sixty percent, so no matter what they did, it was
(06:39):
going to be bad. So they had to have a
story to tell their people, what are we doing about
this bad thing? And it's a lot easier to mobilize
domestic support if you're standing tall and pushing back, which
actually is you know, it's like what Mark Karney did
in Canada. It's how he won that election was by
being the guy who pushed back against the so called
(07:01):
bolay So I think it was a combination of frustration,
a sense of security that they could outlast the US,
and war of economictrician and in a sense that this
was the best way to get people in China on
board for what was going to be a tough time
no matter what.
Speaker 4 (07:15):
Right, So, even in a one party state, there's politics,
and there's the requirement to maintain domestic credibility and so forth.
You know, this actually gets to something I've wondered about
for a long time. Rhetoric that you hear from Chinese
officials will often talk about their very long history, going
back thousands of years, and then Americans will parrot that
(07:37):
and sometimes say it's like, well, you know, they have
history going back a long time and they suffered a
century of humiliation and etc. How real is that in
the sense of like, it's a government that doesn't want
to see unemployment go up in the short term, et cetera.
I think many Americans have really internalized this idea of
they think really long term, they think in century, if
(07:58):
they think in millennia.
Speaker 3 (08:00):
That's true.
Speaker 4 (08:00):
How should we think about some of this, Righttoray? Yeah,
it's sort of half true and half not true. So
you know, I've been looking at the Chinese economy for
the last thirty five years, basically, and I can tell
you there's plenty of short termism and emergency thinking and
ignoring problems until they catastrophically become too bad, and then
scrambling to come with solutions. So underneath this veneer, there's
(08:22):
plenty of chaos, but there are I think a few
things that are true about that. So, first of all,
this century of humiliation idea that is number one. It's
something that is played up by the Chinese educational systems,
has drummed into people starting an elementary school. That's part
of the nationalist narrative that the CCP has used for.
Speaker 3 (08:42):
A long time. But I think it's important to recognize
that this is not just a communist party thing. This
is basically Chinese elites of whatever stripe since the mid
nineteenth century have been really distressed at the loss of
standing that China has achieved in the world. I mean,
you know, up until the early nineteenth century, it was
undisputedly this great empire, and people within China had the
(09:04):
sense of being part of a great global power, and
then that was all taken away and they had a
pretty catastrophic hundred years of civil war and famine and
all kinds of stuff. So it has been a theme
of Chinese elite since the eighteen forties, that they have
to rebuild the nation, acquire the technological means to stand
(09:26):
on an even footing with the West, and so forth.
And the current regime is just the one that has
been most effective at sort of realizing that vision. But
if you changed the regime tomorrow, whatever came in its
place would have the same I think underlying ambitions. So that,
I would say, is a common theme. I think. The
other thing that is, I don't I'm not a real
(09:48):
buyer in the super long term thinking thing. But you know,
if you look at Chijinping's utterances, he took over in
twenty twelve, and he started laying out some pretty long
term stuff right away. He had these various goals that
stretched out to twenty thirty five and twenty forty nine,
which is one hundredth anniversary of the Communist Party, and
so forth. And so there is an ability of the
(10:11):
Chinese state, because they don't have to face elections to
organize kind of strategic plans that last a little bit
longer than would typically be.
Speaker 2 (10:21):
The case, longer than four years, certainly.
Speaker 3 (10:23):
Longer than four years. So a good example it's made
in China twenty twenty five which is their Industrial Policy Idea,
which was released in twenty fifteen. It builds on previous
policies that they had. It was not some completely new thing,
but they set out some ten year goals for how
where we want to be roughly in a whole bunch
of technologies, and the reality is they did a pretty
good job on a lot of them. So the planning
(10:44):
is not I think there's often a mystique about it,
but they are able sometimes to sort of point the
ship in a particular direction and then get a lot
of people in society on board with steering that ship
where they want to go.
Speaker 2 (11:02):
So speaking of long term strategies, one thing that is
different in this current bout of trade tension. We could
probably call it a trade war at this point.
Speaker 3 (11:11):
I think that's always it's a complete embargo except for
a few things that we've you know, each side is
exempted about twenty twenty five percent of what the import.
But yeah, otherwise, effectively it's an embargo.
Speaker 2 (11:21):
I definitely want to ask you about those exemptions too.
But one thing that's different about this trade war to
the tensions that we saw in the first Trump administration
is that China has basically had some practice with increased tariffs,
and so what we saw in sort of twenty sixteen
twenty eighteen was China just moved a bunch of production
(11:41):
over the border to places like Vietnam, basically re routed
a bunch of things to get around the tariffs. Is
that an option this time around, given that Trump seems
to be cracking down on pretty much all of America's
trading partners all at the same time.
Speaker 3 (11:57):
Oh, it's totally an option, and I think it will
definitely have And so a couple things here. So, first
of all, you can describe that as kind of a
government strategy, but actually it was largely just companies on
their own deciding. So, like the first companies that did
this were the solar panel makers who got whacked by
tariffs in the Obama administration twenty twelve, very high ones,
(12:19):
and so they immediately moved a lot of their production
to Southeast Asia. It wasn't the government saying please do this.
It was just they said, well, we want to sell
to the US. We can't do it from here. Where
do we go? Oh, we can go across the border
and it'll be fine. And it was now they've diversified
they used to be just in a couple of countries,
and now they're in a larger number of countries. It's
if you try to go after this stuff, it's like
(12:42):
playing a game of whack themole. The other thing I
would observe on that, just beyond the solar people, is
China is now at a stage of development where they
have very sophisticated companies that are very good at what
they're doing, increasingly have markets in a wide range of
places around the world. And what do companies do when
they are in that situation, be they from China or Japan,
(13:02):
or the United States or Germany, They invest abroad, They internationalized.
And so what we're in right now is kind of
act one, I would say, of what is clearly going
to be a very long process of Chinese companies turning
themselves into multinationals, just like the companies of every other
industrialized country have done. And so they don't need the
(13:23):
government to tell them do this. They have their own reasons,
not just teriff avoidance, but to be closer to different markets,
et cetera. So that process, I think is just going
to continue because it has many many drivers, not just
teriff avoidance.
Speaker 4 (13:40):
Right and you know, we've certainly talked about bid setting
up auto facilities all over the world. They're in Brazil,
they're in Hungary, right, they're elsewhere. But it also, like,
I mean, this is one of the things that I
guess confuses me about the US administration policy, you know,
all these other It's like, oh, we're going to like
split off Vietnam or gonna make it like it's hard
(14:01):
for me to imagine that given the amount of cross
border investment that we've seen over the last years and years.
Speaker 3 (14:07):
Right, well, okay, yeah, basically I would describe it. There's
an economics term of art for that strategy. It's looney.
So but this gives me an opportunity, I guess to
make a little bit of a comment on what I
see about what's coming out of the Trump administration, Okay,
which is basically chaos. Right. There is not a clear strategy,
There is not a clear policy. What you have basically
(14:29):
is Trump's impulses, which are number one, I want to
sort of demonstrate dominance over everyone and I want them
to exhibit difference. And number two, I really like tariffs
for some strange reason that I don't think any of
us understand but he really likes them. But he also
likes them specifically because they are a tool that as
the president of the United States, he is the legal
(14:50):
authority to use without restraint. So if he wants to
hurt people, he doesn't have to go to Congress, he
doesn't have to ask anyone in Congress. He just does it.
So it's very usef for him. And I've found a
lot of the commentary over the last couple of months
trying to explain the rational strategy behind this to be
completely off target because it isn't. And various people in
(15:13):
the administration, like Scott Bessant, would like there to be
a strategy, and they are desperately trying to corral the
stuff into the semblance of a strategy, but they have
to improvise. So that's sort of my general comment on that.
And then specifically in the question is does it work. No,
The reality is there are now I believe one hundred
(15:34):
and forty countries in the world that trade more with
China than with the United States. China is now the
number two source in the world, behind the United States
of direct investment, and it's growing its economic relationships with
many countries, including in the Latin America are much deeper
(15:54):
than those of the United States, let alone Southeast Asia,
where their economies are completely tied to China. So there's
no way, no way that any sane leader of any
of these countries would sign on to a deal where
they would say, oh, we'll get our teriffs on the
US lowered from ten percent to five percent in exchange
for which we have to sacrifice our principal economic relationship.
(16:16):
It's not going to happen.
Speaker 2 (16:32):
So you mentioned the exemptions earlier, and we've also seen
some carve outs for specific things like electronics imports, and
at this point, I'm actually finding it kind of difficult
to keep track of what's delayed and what's exempt just
because it changes so often. But my question is how
much signal should we take away from all those exemptions.
(16:53):
Do they show that there's potentially a path forward to
a US China deal or is it just Trump trying
to retroactively protect some pretty important industries.
Speaker 3 (17:04):
Yeah, it's more of the latter, you know. And remember
there's exemptions on both sides. So Trump exempted cell phones
and most consumer electronics basically because he was told that
you cannot allow the prices of iPhones to double, people
will revolt, and he took that seriously. So that was
clearly a political move, just to alleviate the domestic political
(17:27):
cost of this action. And similarly, if you look at
what the Chinese did, they exempted a lot of imports
like semiconductors and some key technology inputs. Despite all of
their progress, they're still pretty dependent on global supply chains
outside of China for a lot of stuff that goes
into their tech ecosystem, and they could not afford to
have this stuff cost a lot more. So I think
(17:51):
in both cases it's roughly twenty percent or a bit
more that has been exempted. As you said, it's very
hard to know exactly when this is going into effect,
and blah blah blah. But both sides have sort of
picked out the parts of their economies which are most
vulnerable and said, okay, you don't have to take the pain.
(18:11):
But it doesn't tell us anything about It's not like
both sides are signaling to each other, hey, if you
lower your tariffs, all lower mine, and then maybe we
can get somewhere. They're just doing what they need to
do to protect themselves.
Speaker 4 (18:22):
So Trump recently said that for gifts that kids could
maybe have two dolls instead of thirty dollars. And I
completely agree. I spent this weekend taking out a bunch
of random plastic garbage, broken toys, etc. For my children's room,
five trash bags, and I've barely made a dent in
(18:43):
what they have. So I'm completely in agreement on that point.
All that being said, two questions about that. So let's
say there's a major reduction in buying plastic stuff from China,
low end stuff. A. Are we already seeing real in
China un parts of the economy from these tariffs that's
visible from what you're looking at. And B how much
(19:06):
of that stuff is still in China as opposed to
that's the low margin stuff that you probably quickly have
it some cheaper destination. How important is stuff, the cheap
stuff to China's economy these days?
Speaker 3 (19:20):
You know, it's somewhat important, you know, for employment purposes,
because a lot of that stuff is fairly labor intensive
Tho's lower end exports, but it certainly is not very
relevant from the standpoint of Jinping's grand strategic vision as
China's technology superpower. So and if you look in terms
of like total value of what they export. The stuff
(19:40):
that goes into Walmart is significant, but a shrinking portion
of the total. They're moving up the value chain pretty fast.
So you are starting to see some softness in the
industrial and manufacturing indicators. I mean, you've had an employment
a pretty weak employment market since the end of COVID
basically that they've been struggling to address. So this is
(20:01):
going to have some impact. You know, the Chinese export
numbers have still been quite strong. Most people think that's
because there's been some front loading, because people are anticipating tariffs,
and we're expecting significant weakness, you know, in the coming months.
I think that will happen. It will hurt, but I
don't think any of that is going to hurt enough
for China to feel like it has to make a move.
(20:22):
They've clearly signaled Trump wants to have a deal. He
has to make the first move. He has to initiate
show some good faith. They've laid out their position, they're
waiting for him to pick up the phone and call basically.
So yeah, this is going to cause some real difficulties,
and I think they're going to have a real challenge
meeting their growth target this year. If this goes on
for much longer, but I think they're willing to wait
(20:45):
it out.
Speaker 2 (20:46):
So speaking of economic transformation, in addition to being a
bundle of contradictions, the other thing that has existed for
as long as I've been I guess covering China from
an economic perspective is this idea that the economy needs
to rebalance towards consumption. So Chinese people save too much
(21:06):
and we really need to get them to spend on
our own domestically manufactured goods, and that will help resolve
some of the tensions in the economy. What's your sense
of how much Chinese people might actually be able to
boost their own consumption right now to offset the trade war.
Speaker 3 (21:25):
Oh, there's some, not a lot. So just to back
up a little bit on that. So, I think it's
important to clarify that when people talk about this project
of rebalancing the economy from investment consumption, this has been
a project of economists, mostly outside China. It has never
been a project of the Chinese government itself. They have
(21:48):
never really forcefully and clearly stated that it is their
objective to do that. They've put out various policies where
they say, yeah, we want incomes to rise fast. We
would like there to be a stronger services consumption and
so forth, But they have never said that, we think
(22:08):
we should fundamental out in the shop. Well, they haven't
said that. But the other thing is, I think it's
really important to understand these people are not They're not Americans,
They're Chinese. They have a different concept of how an
economy grows. So we grew up in this sort of
Canesian world where we believe that demand drives everything, and
Chinese authorities don't believe that. They believe that investment drives everything.
(22:32):
That progress, productivity, future income growth, it all comes from
investing in the right things. So they have been very
clear for as long as I've been studying it, including
the last decade, on saying to secure the growth of
the future that is stable, well balanced, whatever, we need
to invest in the right things. That is the principal
job of government economic policy is to steer investment. So
(22:54):
that's point one. They've never really had an agenda of
substantially balancing. Second is, up until COVID, the fastest growing
consumer economy in the world by an order of magnitude
was China's for twenty years. There is no economy that
comes even close to the rate of consumer spending growth
(23:17):
that Chin enjoyed between twenty twenty twenty. It was I
think the total aggrig growth was more than triple what
you saw in India, for example, and much faster than
you saw in advanced economies that grows lower rates. So
they didn't really have, in my opinion, a consumer spending problem,
and I think they look at that, you know, much
(23:38):
the same way they say, well, you know, we actually
don't need to rebalance. Now I think that's changed a
little bit. I think they really in the last few
months have started to say, oh, actually, we're going to
be facing a lot of head winds in the export economy,
largely from the US, but not just the US. They're
in a tariff battle with the European Union over electric vehicles,
(23:59):
a lot of other kind are beginning to put up barriers,
and I think they are beginning to realize that they
need to both for the short term, you know, trade
war issues, but also for just having a more comfortable
place in the global economy, that they have to do
a little bit more to boost the consumer part of
the economy. But they they're limited in their tools for
being able to do that.
Speaker 4 (24:19):
When I think about consumer comfort, consumer wealth, et cetera.
I'm on social media all day, and so I see
all the videos of like these like amazing futuristic cities
with these incredible plazas and lights and transportation that zips
you from one place to another. And I imagine those
things don't show up in consumption. You know, they're not
(24:42):
retail consumption, right, but as a form of lifestyle consumption,
whether your city just has greater amenities and comforts and
cleanliness and so forth, et cetera, are those all real?
Speaker 3 (24:53):
You know?
Speaker 4 (24:53):
Because like you know, you see like a ninety second video,
like you've been going to You've been living and traveling
to China for decades. How different outside of you know, Okay,
I'm sure you know in multiple cities around the country.
Is the day to day experience of being a citizen
or consumer?
Speaker 3 (25:11):
Yeah, well it's a large question. So if you had
turned this around and you had said, well, you know,
I look at these pictures of what life in Silicon
Valley's life, is that really what it's like in America?
You know your responsibily, Well, America is a big country.
There's a lot of different things. And China is an
even bigger country in terms of the number of people,
so huge variety the stuff that you see there is reel.
You have a lot of first class urban infrastructure in
(25:35):
places like Shanghai, Shunjan, Beijing, and increasingly in a couple
of interior cities like Chungdu and so forth, and things
work quite well. And you have large swaths of the
country where people are still living fairly, you know, modest lives,
one generation removed from the family farm that their parents
(25:57):
still live on, and so forth. There's parts in the
northeast which are a super rust belt of these old
sort of fifties and sixties areas industrial towns built around
industries that really aren't that important anymore, mining or whatever.
So they have an enormous variety of things. But I
would say it is fair if you go around to
sort of random Chinese cities in sort of eastern and
(26:21):
central China, most people now have pretty comfortable lives. They're
not as shiny as you might see in these social
media egos, but things work, their needs are taken care
of pretty well.
Speaker 4 (26:34):
Is that true for healthcare too?
Speaker 3 (26:36):
That is true increasingly true of healthcare and pensions they
went through a period where they basically had abolished the
old planned economy social safety net, and there was nothing,
and it was really bad, and it's still not terrific.
But they have greatly increased the coverage of healthcare. There's universal,
almost universal pensions. Even for farmers in the countryside, they
(26:58):
get something, People have access to facilities. The quality of
care can vary quite a lot. I would say, on average,
the situation there is quite a bit better than it
was ten or fifteen years ago, with a lot of
room for improvement.
Speaker 2 (27:12):
So you briefly mentioned the idea of tools that China
can use to offset some of the impact from the
trade war walk US through the levers that it has available,
and then I guess how policymakers might actually balance the
use of these levers with the message that China is
still a great place to do business and invest and
(27:33):
so on. And I don't mean to single out China
on this issue, because I think the US faces a
very similar balancing act, but arguably the US is much
more developed in its capital markets and has certain advantages
in global markets that China just doesn't.
Speaker 3 (27:47):
Sure. Yeah, well, so I think you can sort of
divide it into two buckets. So there are things that
China is doing to retaliate against the US, and that's
where it really runs the risk of alienating the business community,
because part of your retaliation has to be to make
life difficult for US businesses, either in China or back
(28:07):
in the US. But then there are also response mechanisms,
which are basically things that they can do to make
the economy stronger and able to weather the shock. So
in retaliation, you know, clearly they have the countervailing tariffs.
They have increasingly comprehensive export controls on rare earths and
rare earth based technologies, which are actually not just rare earths,
(28:30):
but a various sort of critical minerals, antimony being sort
of the big example of the moment, and those are
part of that is Yeah, that's actually.
Speaker 2 (28:38):
People don't talk about antimony enough.
Speaker 3 (28:40):
It's a mineral that is used, It has a lot
of applications, many of them in the defense industry. There
basically is no viable source of production in the United States,
and China has i think sixty or seventy percent control
of sort of global refined supplies, and they have basically
banned exports of it to the United States, and this
is starting to create real health headaches in defense and
(29:02):
other kinds of technology related supply chains. So they have
a few things that they can do like that. They've
singled out a few US companies operating you or selling
into China for various kinds of investigations. Those are more
kind of shots across the bow. They're kind of gestures.
I don't think they're really that serious. They don't really
want to make it harder for Nvidia to do business
(29:24):
in China than it is already. But basically what they're
doing is they're picking out companies that may sell a
lot to China but don't have a lot of investment
on the ground in China and saying, if you don't
basically help us get this guy in the White House
to see reason, we might make it a little difficult
for you. And they'll only do that if they think
there are reasonable domestic substitutes. So they're doing a little
(29:46):
bit of that, but they're being very cautious because they
are keenly aware that their economy still needs international businesses
to participate in China at many different levels. They do
not want to scare them away. So what they're mainly
left with is response mechanisms, which is, you know, some
of it is the usual stuff. They can lower interest
rates and they'll probably do a bit more of that
(30:08):
this year. They were already planning a big fiscal expansion
this year, one of the biggest budget deficits in history.
They're probably going to expand that more. To get up consumption,
they have this cash for Clunkers kind of trading program
where you have an old appliance, you can trade it in,
you can get a discount on the new one. That's
for both households and for businesses. They can trade in
(30:30):
old capital equipment and get new stuff at a cheaper price.
And then the other thing that they've been doing actually
is to get more money into consumer pockets. They have
started to expand pension payments, focusing on people lower in
the income spectrum and just putting an extra five or
ten bucks into their accounts every month so that they
(30:53):
have a little bit more cash to spend. And by
focusing on the lower income, those are people who basically
spend most of what they have, so it has a
big impact. But yeah, so they can do all of
these things and they will all work to some degree.
The cash for clunquors thing actually worked a lot better
than I thought it was. I was very skeptical, But
at the end of the day, consumer behavior is pretty
(31:13):
sticky in any country. The job market is still not terrific.
They're going to have a lot of difficulty really really
moving the needle on boosting domestic demand. They can get
it up a little bit, but not a lot in
the short term.
Speaker 2 (31:43):
Joe, I do find it really ironic slash remarkable that
China has a cash for clunkers program, which we all
recognize from the post two thousand and eight era. And meanwhile,
Trump is, you know, going on TV and telling everyone
to stop buying and you only need two Barbie dolls
instead of fifteen.
Speaker 4 (32:04):
No Trump, Trump has producrist impulses on some level. Do
you know, actually, since we're talking about ideology, how much
continuity in your view, has there been in Chinese policy
pre Xjinping to now? Because there's debates about this, and
the party itself always stresses continuity and nothing ever really changes.
But you've seen the country for a long time. How
(32:25):
much of a pivot happened in twenty twelve that continues
to this day.
Speaker 3 (32:29):
That's a really great question. And you know, I hate
to sound like you know, Harry Truman's hated to handed economist,
but there is both continuity and change here, there's no question, right.
So the things I think that are largely unchanged is
I talked earlier about this kind of view of how
(32:51):
economies work, that they are driven by the investment cycle,
and that the government has a important role to play
in kind of identifying the key top areas for investment,
not necessarily spending the money, but say pointing and saying
go there, and then all the entrepreneurs in the country say, oh,
(33:12):
we should go there, We'll go there. That has not
really changed. That is a and you can talk about
people you know before she who were more quote unquote
reformists and so forth, but if you look closely at
what they were doing, they had the same objective. They
wanted to increase state capacity. They wanted to strengthen the
technological foundations of the economy. The first long term Science
(33:34):
and Technology Plan actually came out in two thousand and six,
which was six years before she jent Ping took over.
It had nothing to do with him, and it was
very much the product of everyone else in the government
at that time, so that I think general orientation has
not changed. What she has done is that he has
made the coordination of that strategy much more effective. So
(33:58):
he's increased the capacity the same government to kind of
mobilize and guide resources. He has reined in what he
thought were big excesses, notably in the property market, but
also in the internet sector, where he thought a lot
of investment was going to stuff that was actually not
advancing the ball technologically, and it was also creating significant
(34:18):
social and political risks for the Communist Party, and it
needed to be rained in. But you know, a lot
of the concerns that you see expressed about social media
and the power of internet firms in China totally indistinguishable
from the discourse that we have here in the United
States about the same problems. So part of what they
were doing was try to say, let's have less resources
(34:39):
to that kind of stuff and more to the kind
of stuff that we think that will really generate long
term growth, that is, will enhance productivity and social cohesion.
So he hasn't changed the sort of the basic orientation,
but he's made the execution of that generally much more effective.
And then the other big thing that he did do
(35:00):
that is a major change, is that he overturned the
foreign policy that dung Shaping had laid down, which is,
you know, the idea that you stay quiet and stay
behind and stay quiet and sort of hyde your capabilities
or by your time and whatever. And he pretty aggressively
said no, no, China's great power. Now we have to
(35:22):
act internationally, and so we're going to take a much
more aggressive view. And I think you could argue that
that's a real shift. You could argue that he moved
a little bit too quickly on that and that has
you know, created some unnecessary costs for China. Would have
been wiser to hide and buy for a few years longer.
But anyway, he did it, and that is a that
(35:43):
is a material change, I would say.
Speaker 2 (35:45):
So, I think I just have one more question, and
it's the big one, which is do we have any
idea or sense of what the off ramp for all
of this actually is? And do we have a good
idea of what Trump actually wants China and do we
have a good idea of what is palatable to China?
Speaker 3 (36:04):
Right, Okay, so what's the off ramp? I think the
off ramp is basically that Trump and his people have
to recognize that they've put themselves in an untenable position
and they need to figure out a way to climb
down from it as gracefully as they can. I think
the Chinese have been very clear in their communications that
(36:29):
they are happy to talk, and they keep saying, we
are happy to talk, but we're not going to make
the first move. And if you want to prolong this
trade war, we think that we can sit with art
deflation longer than you United States can stick with your stagflation,
given your political system. So I think the ball is
really in Trump's court to do something to figure out
(36:53):
how to unstick this, and the difficulty is, I think
what does he want. My theory of the case is
that Trump is not really driven by specific policy outcomes.
He is a guy who has very authoritary instincts who
wants to be recognized as the boss. It is basically
all about power and so everything that he does, and
(37:15):
I think this applies to a lot of the domestic
policy too, is to demonstrate that he has power and
that other people have to show submission and deference. So
if you really want to get on Trump's good side,
that's what you do, and the Chinese will not play
that game. They are too big, they are too strong,
they have too much at stake domestically in terms of
their own political credibility to play that. They will not
(37:37):
do that. So that puts Trump in a bind because
what he really wants they will not give him. So
then people on Trump's team need to figure out, Okay,
what is an agenda that we can put together of
actual policy aims that could form the basis of a negotiation,
and then how do we communicate that to China and
(37:57):
how do we get them to start talking to us.
It's not an easy problem to solve, right, So what
it means is that people in the administration who have
actual policy aims somehow need to seize control of that process,
and they haven't done that yet. So a couple other
theories on how this could unwind. So one theory is
that at the end of the day, nothing is going
(38:19):
to happen until Trump and She get together face to face,
because in both systems, no one really has the authority
lower down to make a move, and so then you
have to think about, well, how could that happen. It's
unlikely that you're going to have a trip of one
leader to the other countries. So you have to start
thinking about is there some third country that could be.
Speaker 2 (38:41):
Which country is exactly halfway between the US and China.
Will have to figure that out.
Speaker 4 (38:47):
What's your good what's the third country?
Speaker 3 (38:49):
Well, somewhere in the Middle East. I don't have a
good theory on that. Arduawan and Turkey, they are kind
of halfway between, and he sort of has these fantasies
of being a broker. He tried to do that. I'm
just making that up. I have no information that he
actually has any interest in doing that. So that's one
theory is that you need somehow to get the two
(39:09):
leaders together, and that will probably require a third party.
So that's one way of thinking about it. Another way
of thinking about it is just to say, well, Trump
is driven by markets to some degree, not quite the
same way that he was in his first term, but
right now you have this weird situation where basically, if
you talk to people in the markets, they are convinced
that a deal will happen. I keep telling them on
(39:30):
what basis do you hold this belief? I can see none,
but they are convinced that essentially because it's impossible or
they think it's impossible to maintain these high tariffs for
too long. Therefore something must happen. So markets actually are
doing okay right now because they're essentially pricing in there
will be a deal. And if you look at this
from Trump's standpoint, it's like, oh, markets are happy, I
(39:52):
have no incentive to deal. So the only way he
can have more incentive to deal is if markets are
convinced that there is no deal and the tank and
then he says, oh, I really got to do something.
So that's another theory. Full credit. That was suggested to
be my colleague Andrew Batson, who runs our China team
(40:13):
very effectively, and I thought that was a very good
way of thinking about it. So market pressure in the
US could be a forcing mechanism. You could maybe have
some kind of intermediary, but I think unless you have
some kind of force acting like that, or some kind
of revolution within the White House where actual policy makers
take over and seize command of things somehow and start
(40:36):
to work out how do they get a communications channel
open to the Chinese, communicate some kind of mutual reduction
of tariffs to a lower level as an opening thing,
and then a negotiation but I think we're some ways
away from any of that happening.
Speaker 4 (40:53):
I just have one short comment. One is I've talked
to an investor who literally used that logic. They said,
there is going to be a deal because there must
be a deal, and so therefore there will be one.
Which one last question our colleague got Anna Wong, us
economist here at Bloomberg. She thought, one possibility is maybe
there's a deal that still leaves the sort of like
(41:15):
Vietnam transshipment open that looks like something tough, and that
there is some third party country that could still be
a route for flows, keep high nominal numbers up on China,
et cetera. Could that be a path out where it
looks like you've maintained a hard line, but you allow
an escape valve of some sort.
Speaker 3 (41:33):
You know, I think that's very plausible, because, as I
mentioned before, I don't think it's just not realistic to
think that you're going to be able to close off
the trendshipment channels. So deal or no deal, a lot
of those channels are going to remain open one way
or another. So you might as well take advantage of
that and incorporate it into deal. And one other comment
on that, because you then get into this question of like, Okay,
(41:54):
suppose there is a deal, what's in it? And my
view on this is most of the deal structures that
seem plausible are not very meaningful others from the standpoint
of calming markets down. So you have the situation where
the US and China very adversarial. Most people in Washington
think we are already in another Cold war. And to me,
(42:15):
a substantive deal would be one that makes a significant
change in the quality of the relationship. And so if
you have something that's like a phase one trade deal
plus where the China agrees to buy more stuff and
they make some gestures towards more domestic demand support, and
we cut tariffs a little bit, Okay, that's fine. Markets
(42:35):
will be okay with it, but it doesn't really change
the underlying dynamic, which I think is really bad. And
I think the thing to look for, which is what
China really wants. One of the things that they really
want that could be given to them is the ability
for their companies to invest a lot more in the
United States byd c ATL all of these Chinese hi
(42:56):
tech firms, they would love to be able to invest
in the UN States and tap into this market more directly.
They would be very happy to accept. I think a
lot of different potential structures for that investment, but effectively
Chinese companies are shut out. And Trump on the campaign
trail said that he was open to this. So the
interesting thing there is that basically no one else in
(43:17):
the administration seems very interested in this, but Trump might be.
And if you're serious about reindustrializing the United States, you
cannot do that without significant participation by China. I'm sorry,
China accunts for a third of global manufacturing production now
going to forty They are close to or at the
leading edge of many of the technologies of the future.
(43:38):
It is as absurd for us to think that we
can ramp up our industrialization without China as it was
forty years ago would have been for China to think
that they could ramp up their industrialization without bringing the
leaders then the US, Japan, and Germany. So there is
in principle, it seems to me there is a deal
to be done there where that's what you give to
(43:59):
China and then you might be able to get something
for it that could be quite transformational in terms of
the basic relationship between these two big economies. Am I
betting on that.
Speaker 1 (44:11):
No.
Speaker 3 (44:12):
I think the chances of that actually happening are quite low.
But I think people who are serious about thinking that
there should be a deal and that the deal is
economically meaningful, not just like ASoP to markets, they should
be thinking about that.
Speaker 2 (44:26):
Yeah, are we in a cold war with China? Is
that even useful framing?
Speaker 3 (44:30):
I think it's not. I disagree vigorously with the people
who say that we are already there. I mean, we
could get there. The reason that we're not is a
couple things. Just if you look at the substance of
the economic relationship, China's trade with the US direct trade
with the United States several years ago before Trump's first
term was the same as our trade was with Japan
in the mid nineteen eighties. So it's about I think
(44:52):
seventeen or eighteen percent of our total global trade. Our
trade with the Soviet Union and all of its successor
states after the Soviet Union collapsed was more than about
one or two percent or so. We are linked. We
have thousands of US companies that operate in China and
generate somewhere between five and seven hundred million dollars a
year of annual sales, which is triple or more the
(45:14):
amount of exports that go from the United States to China,
the global supply chains or lengthd I could go on
and on, but the economic linkages are not the linkages
of countries at war. The reason you could call the
Cold War a cold war was because it wasn't direct fighting,
but many of the other conditions, particularly economic, were very,
(45:36):
very similar to wartime conditions. And this just is not
It is a completely different beast than I could go on.
But that's I think the principal thing and the reason
I think that it's really not only not useful framing,
but I think toxic framing, is that we have this
kind of view in the United States that essentially, either
(45:57):
if you're another country, you are or ally or we
are at war with you. Those are the two possible states.
And I think these are conditioned by the fact that
we thought these multiple wars hot and cold in the
twentieth century, and our kind of national foreign policy ethos
was defined by dividing the world into good guys and
(46:17):
bad guys, beating the fascists, beating the communists. China is
not a place that can be beat. It is a
large country. It's not going away. It is very integrated,
not just with the US but with the entire global economy.
They're heavily invested in the global order. So the only solution,
it seems to me, is that you need to figure
out what is a state of coexistence with China that
(46:40):
you don't have to define in these martiall terms. It's like,
and it doesn't have to be we're friends and can
include we have some very serious adversarial components to the
relationship in really deep competition, not just in economics of
geopolitics that can be there. But describing it as war
I think is not only.
Speaker 2 (46:59):
Not useful but dangerous frenemies the US and China, maybe
that maybe we can describe it thus. Okay, Arthur Kroeber,
thank you so much for coming on all thoughts.
Speaker 3 (47:09):
That was great, my pleasure. Thank you, Joe.
Speaker 2 (47:24):
I thought that was a really great state of play conversation,
and also, you know, sort of considering where things might
be headed, I realized we forgot one very important thing,
which is we have to say the day that we're
actually recording this, because you never know what's going to
happen in between now and when we actually publish this episode,
so it is May sixth, two fifty nine.
Speaker 3 (47:48):
I thought it was great.
Speaker 4 (47:49):
I kind of feel stupid for not having had Arthur
on before because I really thought he was excellent and
very clear and clear eyed about Chinese economy our relation.
Speaker 3 (48:00):
You know.
Speaker 4 (48:01):
Just there was a lot in there that was very good.
That last point about like, you know, if we were
actually serious about quote reindustrializing unquote, that we would want
to bring Chinese manufacturers give them mistake in the US economy,
both in terms of selling into the US economy, both
in terms of owning assets or maybe forty nine percent
(48:22):
of assets of various factories. Like that makes a lot
of sense to me. It seems like that's distant politically,
but it's certainly very intuitively logical to me.
Speaker 2 (48:31):
Yeah, and I also thought the point about demand driving
everything in the US and versus investment driving everything in
China to be kind of interesting. Although I would argue
that those two things, like they're starting to get mingled
in both America and China, so you're seeing China kind
of borrow a lot of policies or thoughts that would
(48:53):
be very familiar to anyone who's lived in the US
in recent decades, And meanwhile you're starting to see the
US take gone some Chinese characteristics in various ways.
Speaker 4 (49:04):
Arthur is a good point, and I think you've written
about this as well, and I think others are confused
on this. It's like, from Trump's perspective, what does a
successful outcome look like? We know that he likes the
forms of things. He likes handshakes, he likes the idea
of dealing.
Speaker 2 (49:20):
He hates handshakes, doesn't he Oh, he likes deals, he likes.
Speaker 3 (49:24):
He likes tariffs, et cetera.
Speaker 4 (49:25):
But what does say the US economy look like in
ten years were we to take a correct policy line.
Really hard to still totally understand. But again, like, yeah,
maybe it's a lot more factories, and maybe we should
invite one of the world's you know, some of the
world's most advanced companies to set them up.
Speaker 2 (49:43):
Yeah, And I guess the question is, you know, he's
on TV now saying that we don't need fifteen Barbie
dolls per child. But if we do build that Barbie
factory in the US, then does that kind of consumerism
become Okay?
Speaker 4 (49:58):
Again, well, you know, and this is by the way,
you know, it's like on this point, so I think
a lot of people can make an intelligent rationale for
more US manufacturing in certain areas. It's really unclear, you know,
the White House. I think there was a tweet a
few days ago talking about how much we import in
terms of textiles, which is the vast majority of clothing
(50:20):
et cetera we import. It's really unclear to me why
it's important at all to have significant domestic capacity in
these low value, low margin, low strategic areas and what
that benefits US. I get maybe there's an aesthetic appeal.
Obviously we want to have a lot of jobs. But
(50:43):
this is a really difficult thing to wrap my head around,
which is like you have to make decisions right a
worker on one line as a worker who's not on
another line. And so why you want to have more
clothes manufacturing or more doll manufacturing at a time when
there's an impulse to sort of build up in these
higher value is very unclear to me.
Speaker 2 (51:01):
Yeah, there's definitely a tension there. Yeah, all right, shall
we leave it there.
Speaker 4 (51:04):
Let's leave it there.
Speaker 2 (51:05):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (51:11):
And I'm Joe Wisenthal. You can follow me at The Stalwart.
Follow our guest Arthur Krober. He's at aar Krober. Follow
our producers Carman Rodriguez at Kerman armand Dash, Ob Bennett
at Dashbot and Kele Brooks at Kilbrooks. For more odd
Loots content, go to Bloomberg dot com slash odd Lots,
where we have a daily newsletter and all of our
episodes and you can chat about these topics twenty four
(51:31):
to seven in our discord Discord dot gg slash odd Lots.
Speaker 2 (51:35):
And if you enjoy odd Lots, if you like it
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the trade war, then please leave us a positive review
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