April 16, 2025 • 25 mins
On this week’s episode of Trumponomics, we speak with economist Nouriel Roubini about the all-out trade war US President Donald Trump has kicked off with China, and why it’s a conflict Chinese leader Xi Jinping might think he can weather—and even win.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. That deal may not
be feasible, and it's not feasible, then there is a
real escalation that leads to an economic war and eventually
can lead to a real war that there is square
facing with China. It's not a willingness to have a call,
(00:22):
but what happens next.
Speaker 2 (00:33):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Welcome to Trumponomics, the podcast that looks at the economic
world of Donald Trump, how he's already shaped the global economy,
and what on earth is going to happen next. Well,
this week we're focusing on the all out trade war
that the Trump administration has kicked off with China, a
trade war that China seems to think it can win.
(00:56):
Just this week, Beijing escalated its class with Washington, ordering
Chinese airlines to halt new Boeing jet deliveries and banning
the export of some rare minerals to the US. That
comes after that mad bidding our tariff rates we've seen
since the start of the month, which saw US tariffs
on some goods go to one hundred and forty five percent.
China in return taking theirs to one hundred and twenty
(01:19):
five percent. Now, Donald Trump and members of the administration
believe they have the upper hand in this fight. China
needs our consumers and our money, as his press secretary
put it this week. If so, someone seems to have
forgotten to tell the Chinese. At every stage of this
tit for tat between the world's two largest economies, the
Chinese have seen confident, cocky even as far as I
(01:41):
can see, they've also been a bit more resolute. No exemptions,
no pauses. So is this all bluff? Chinese, after all,
are all about saving face? Or has Donald Trump picked
a fight here that the US could conceivably lose. Well,
I'm going to go through some of this with Dr
Neurial Ribini. Neuriel is a senior advisor Hudson Bay Capital
(02:04):
Management and Professor Emeritus of Economics at NYU Stern School
of Business. He's also a former advisor to the US treasurer,
where he worked with me, among others, the IMF and
World Bank. Neuriel, thank you very much for joining us.
Speaker 1 (02:18):
Great being review Stephanie today a pleasure.
Speaker 2 (02:25):
Let's start with the basics. We have focused quite a
lot on the cost of the US economy of these
tariffs on China. But putting it simply, what does China
stand to lose in this fight?
Speaker 1 (02:36):
Technically speaking, actually the impact on growth of this trade
war is more serious for China than it is for
the United States on impact before you consider any other
micropolicies that China and US can implement. And the reason
(02:57):
is that Chinese running a trade sort of relatively United
States of about two percent of its GDP, while imports
from China for the United States are about one percent
of the US GDP. So, technically speaking, suppose that this
startive remain at the current level and we are having
(03:17):
a pure authorkey no trade within US and China. In
the extreme, the impact on Chinese growths are going to
be a negative two percent, while the impact on the
United States in principle will be only one percent. Of course,
the shock is also inflationary for the United States and
(03:38):
is deflationary for China. You have to consider that. But
actually the country that is running a trade service with
the United States has a bigger shock to their growth
and demand than the United States. That's true for China,
is true for Europe, for Japan, South Korea, Taiwan and
all other major trading partners that have with the United States.
Speaker 2 (04:02):
That is obviously double Trump's point that they need us
more than we need them, and the fact that Bluebery
Economics has calculated similar kind of numbers to you. Even
at the initial level LITTL where they went to you
have more than two percent of GDP at risk in China.
They pretty much wipe out most of Chinese exports to
the US. But somehow they're still fighting and they seem
(04:25):
to think that actually their ability to withstand this might
be a bit greater than Americas. So I just I
wonder why do they seem to be standing so firm
in this sight?
Speaker 1 (04:36):
The question is what are their policy reactions now to
reduce the impact on growth. China can do massive fiscal
stimulus while the US is in a fiscal contraction. Given
the needs of the best and administration to reduce the
badger devsit, China, because it's the deflationary shock, can do
(04:58):
massive monetary and credit easing instead. In the US, the
FED is going to stay on hold and we're not
going to get credit easy. More importantly, China also doesn't
face elections. She is in power for as long as
he wants to be, while Trump is gonna face Mitrum
election next year, so they can be more patient. China's
had all the philosophy of eating bitterness, meaning suffering for
(05:23):
the sake of the country. China can also retaliate, of course,
if China poses like they have similar tariffs to the
US ones and one hundred and forty five for the
US one hundred and twenty five for China. There's no trade.
But China can do other things. China can restrict that
it started the exports of rare earth that are mostly
produced in China. China can reduce or cut off the
(05:47):
exports of refined metals, especially in dust selling great metals.
Seventy percent of all refinement of copper is done in China.
China can panic Apple, Tesla and other firms that invested
hundreds of billions of dollars from the US into China,
and China could also, potentially they've not done it so far,
(06:09):
they could use the potential nuclear weapon of essentially dumping
their treasury holdings, and they have a bit less than
a trillion of treasury holdings. That could shock, of course,
the bond market in the United States. There would be
subject to losses, but they could try to do that
as well, but then that will be the option of
last resorts. And finally, if this trade war becomes a
(06:33):
full scale economic war and China feels that they're being
contained and the US is trying to prevent the rise
of China economically, and even bastn't spoken about a strategy
of economic encirclement of China, meaning using friends and allies
and negotiation with them to then corner China. China may
(06:54):
even go after Taiwan. You know, the main reason why
China doesn't go after Taiwan right now is because they
know that there'll be massive trade sanction. Letter on the
potential of a war, but the potential of a war
is limited, while the potential of trade sanction is large.
But if US is already imposing such trade sanction that
(07:14):
there is not much ability of China to export, you
might as well go and take over in Taiwan. So
a trade war can escalate in a full scale economic war,
and a full scare economic war can escalate into a
real hot work as well. People don't seem to be
realizing that I.
Speaker 2 (07:32):
Want to go through some of those options in a minute,
but I guess you know. There's also one point that's
worth making, which is China has already learnt from the
first Trump administration and indeed the tariffs that were maintained
and even increased under the Biden administration. They have now
had nearly a decade of recognizing that the US is
in a different place when it comes to China, and
(07:53):
in many ways their economy has also adapted, maybe even
a bit more than the US economy. As we were
looking at how they had managed to diversify it, it's
managed to diversify a little bit more away from the
US as the source of its export. Then the US
has managed to wean itself off China. There's that new
real it's just a stronger position now than it was
(08:14):
a few years ago because it's kind of seen as coming.
Speaker 1 (08:17):
Absolutely they've done that. One capital make is that some
of that diversification export is now China, and not just
Chinese firms, but also American firms and others going for
a strategy of China plus one many not just producing China,
but other parts of Asia. Some of the final assembly
(08:39):
of many of these goods is done in Bangladesh, in Vietnam,
in Pakistan, you name it, and the US right now,
even if it reaches an agreement with Vietnam, Bangladesh, and
you name it on reducing the tariffs, they're going to
make sure that the local content criteria are strictly in forced.
(09:00):
So the China plus one strategy was a way for
both US and other multinacial to diversify the China is
but also for the Chinese to diversify. But now China
plus one doesn't work anymore because there'll be these types
of additional restrictions.
Speaker 2 (09:16):
Yeah, and actually just on that we're recording this on
Wednesday morning, But overnight there was a Wall Street Journal
story that was talking about how the Trump administration is
wanting to make as part of its famous negotiations with
over seventy countries that are looking to do deals with
the US, one of the conditions that they're thinking about
(09:38):
is that they take more steps to separate from China.
When it comes to a lot of those countries in
Asia that are already have a very close trading relationship
and even a dependency relationship economically with China, how realistic
is that you're going to separate some of these economies Vietnam, Malaysia,
or these places from China in any kind of meaningful way.
Speaker 1 (10:00):
Well, what the US can do, and that's legitimate, is
to say, if I do a deal with you, yes Nam,
and your tariffs are not anymore, say forty six percent,
they're going to be ten, fifteen, twenty, whatever the negative
is going to agree, then most of the stuff that
you export the US has to have local content. If
(10:22):
you take Chinese parts and you assemble them in Vietnam
and the value added is only, say twenty percent in
Vietnam and eighty percent China, then those goods are not
going to be subject to the low tarifs. They'll be
subject to higher tariffs. Every trade dealer has this local
content criteria. So that's just something you can do and say,
(10:43):
this is not Vietnam is good. It's mostly Chinese good
that pretends to be vietname is the same way in
which the Chinese exported to Mexico, and try to rerupt
it this way, so that can be enforced. The second
thing can be enforced, in my view, is that the
US can tell friends and allies that you need to
risk your relationship with China on stuff that has to
(11:07):
do with the key strategic technology like you know, things
like AI semiconduct or high tech and so on, and
the way to do it is already been done. When
Biden was living in January, there was an executive order
that essentially says what are the criteria for AI dicusion
And it has three buckets of countries. Here one countries
(11:30):
are friends and allies, and they have accessed to as
many advanced Navidia ships, they can build as many data
centers with advanced ships and use all the ais l
l ms and technology of the US. There are then
Tier three countries that are Russia, China or Korea run
and real rivals, and they cannot have access to any
of those advanced ships. And there are here two countries
(11:52):
that are sort of enemies or friends but not trustworthy,
and say Dubai may not be able to get as
many in Navidio chips because maybe their data centers in
Dubai are not as safe as those say in Canada
or in Europe or whatever. So I think that part
of the strategy is going to be to try to
de risk the relationship with China and force people to
(12:15):
choose you want to be in Tier one or Tier
two or Tier three and If you decide to be
even in tier three, you're going to have less success
to US technology than you do, and then you have
to use Chinese technology. Friends and allies are going to
be in tier one, rivals are going to be in
tier three, and everybody else in the middle left to
decide to go with the Chinese AI or go with
(12:37):
the American AI, because the world will be essentially a
world of either US high tech or Chinese high tech,
and they're not going to be compatible with each other.
That's the world we're moving to.
Speaker 2 (12:47):
I guess one question is whether China has already progressed
so far in some of these technologies that it's whether
it's practical to do that. But that's certainly what you've
described makes a lot of sense, and I would say
is also more consistent with the verse version of Donald
Trump's China policy that the Biden administration pursued. As long
as you can, as long as you can persuade all
(13:09):
these friends, that so called friends and allies that they
are indeed still your friends and allies, after you threatened
all this nasty stuff.
Speaker 1 (13:15):
Well, you know, let's put this way, even after the nasty,
nasti stuff, NATO members, and Europeans and Canadians and Japan,
South Korea, Taiwan, they have no choice, no choice to
rely on the US because if they spend more on
the fence, then the security umbrella is going to remain.
And if the security Rombella remains and there is a
(13:36):
trade deal on reducing the current tariffs to say half
as much, say only ten percent for Europe rather than twenty,
or only ten twelve for Japan rather twenty four, these
countries have no choice but to stay in the sphere
of influence of the United States in terms of security. So,
in spite of the tension with Friends and Allies, my
(13:57):
baseline is one in which you reach a deal on security,
you spend more on defense all over the world Friends
and Allies, you buy more US weapons and US tech goods,
You buy more energy and energy from the United States,
more of there are goods, and you do other things. Therefore,
even technologically, Friends and Allies is going to be under
(14:20):
the technological order of the US, because in technology US
is number one, China is a closed second, but everybody
else is not number three or four. Europe is only
number ten. So they have no choice. They left to
accept to maintain and remain under the US security, trade, military, geopolitical,
(14:40):
and technological influence. I think that's going to be the outcome,
whether you like it or not. The idea the day
Europeans going to now embed themselves with China, I think
is totally ridiculous. It's totally far fetched. It's not gonna happen.
Speaker 2 (14:52):
You're obviously right that the US does have still a
lot of means of persuasion, and it sort of reminds
me one of my colleagues, Josh Green, was saying, you know,
it's like it's the sort of Mara Lago version of
global trade, not Maura Largo, the currency core that we've
talked about on this show, but the cost of joining
the Mari Largo golf club was jacked up the moment
(15:14):
that Donald Trump even became the Republican nominee, that alone
winning the presidency, and there's a sort of pay to
play element to this. He has the same approach people
should have to pay to play in the US market.
So clearly the US has a lot cards, as Donald
Trump would say. But you identified at the beginning that
although the short term economic cost to China of this
(15:36):
war is obviously greater. They also have a greater macroeconomic
room to offset that. So if they have a hit
of two percent GDP, they can stimulate the economy in
other ways. They have room to do that. They don't
have an inflation problem as the US, so they also
have a capacity to sustain a bit of pain in
a way that potentially the US doesn't have. I just
(15:58):
want to test if it's willing to do things that
are not necessarily in its interest but it thinks will
be more likely to push the US to change course.
You know, does that include things like selling those holdings
of US bonds? How far can it go on? Things
like that, which people have often thought of, was the
kind of equivalent of the sort of going nuclear. They're
sitting on these enormous stocks of treasuries. Is it feasible
(16:22):
that they could sell a lot of those without just
inflicting too much pain on themselves.
Speaker 1 (16:26):
It's an option, but in my view, is an option
of last resort after they've used all the other things
we discussed, because there is a meaningful economic cost to them.
The economic costs are the following. If you sell treasuries,
depending on their duration, you have a market to market
loss because bond years will be higher, and then you're
(16:48):
having a loss on the existing stock of your treasury.
Number one. Number two, If you sell treasuries and you
convert those dollars into R and B, the R and
B appreciates, and what you're trying to do in China
is actually having a depreciation of the R and B
as the way of compensating for the trade shop. So
(17:09):
you're hurting yourself if you're selling treasury and you don't
buy RMB, you have to buy other currencies. If you
buy yen, euro s with frengths and you name it,
you are forcing an appreciation of yen and euro relative
to US dollar, and you're going to create trade fiction,
if not a trade war with Japan, with Taiwan, South Korea,
(17:32):
with Europe or whoever. And at the time where you
actually are trying to divide these countries from you because
you're forcing an appreciation of this currency and you're transferring
them the trade tariff risk to them. If instead, the
last thing you can do, probably if you cannot essentially
sell treasury and buy RMB because it appreciates your currency,
(17:55):
or damage your relations with their trading partners like Europe
in Asia, you can sell the treasure is then buy gold,
and that's what China and other strategic rivals of the
US have been doing, and that's why gold has gone higher,
because if you think about it, the only global reserve act,
of course, is the asset. Liquid asset is not a
(18:17):
currency that cannot be seized by the US, is a
liquid bullion because we saw in the case of Russia Ukraine,
not just dollars but euro yenes, it's frank pounds were seized,
and therefore the only one that they cannot seize is
gold bullion. But gold bullion that you keep in the
basement of the PBOC if you're buying GLD, that is
(18:38):
the financial version of gold. Of course, that can even
be seized or controlled or whatever. So that's I think
what's the most likely scenario. If they decide to sell treasury,
they still get the loss marked to market on the
value of those bonds, but maybe the best thing to
do will be gold rather than R and B or
(18:58):
rather the other current. I think that's a possibility. They
already been doing it for a while because if things
escalated in the US and China, one of the things
the US can do, of course, is to seize their
holdings of treasury the same way the holdings of treasuries
of Russia over sees the same way. Similar transaction restriction
occur for North Korea, run and you name it. So
(19:20):
that's a mutual thread. The Chinese can use that nuclear
weapon or nuclear threats, but the US can use the
counter nuclear threat of seizing those assets. The game of
chicken between the two sides.
Speaker 2 (19:32):
On one side doesn't have an election coming up, in fact,
will be around for the foreseeable future.
Speaker 1 (19:38):
That's true on the other side. As I said, a
huge amount of the manufacturing of China two percent of GDP,
but the larger fraction of the manufacturering is thirty percent
of GDP, is expert to the US. Suppose this factory
all have to shut down because you're not going to
be able to reroute those experts to other countries because
(19:59):
other countries will have the same problem access supply. That
access supply implies that part of their industrial base manufacturing
is obsolete, is essentially stranded asset, and that's a huge
cost in terms of capital losses, but the bigger loss
in terms of jobs, massive job losses. Unless against China
does staff to increase domestic consumption and consumption of services,
(20:23):
and those factory workers may become eventually over time service workers.
You can do it over a medium term of a
few years, you cannot do it in twelve months. So
both sides have capability and threats, and both sides have
significant upside costs and risk. It got both ways. But
you're right that's in Pin doesn't face election. But you know,
(20:44):
as we saw during COVID, when people become restless, they
can go in the streets, even in China, and millions
of unemployed the factory workers could be a threat, even
in the case of China. So it's not as if
political pressures are zero in China and are simile in
the United States. It's a bit more complicated than that.
Speaker 2 (21:04):
Final question, Neil. I think some have been surprised in
the last few weeks at China's apparent willingness to dig
in and not blink as perhaps they have in some
past rounds. Even earlier this year, they were responding in
a quite measured way to the initial tariffs that Donald
Trump would put on. Do you think that this will change,
(21:26):
that they will ultimately come to the table as Donald
Trump's people would say, or is there something a bit
different now? Have the state's been just raised too high
in terms of their face apart from anything else.
Speaker 1 (21:37):
Well, you know, there's a game of chicken between Trump
and Shape, and there is a third person in this
game of chicken, is how well as well? As I said,
and I've said for a while, that they strike a
price for a Trump put is a price much higher
for the power put and is also much higher than
for the fishing pin put. Meaning Trump is going to
(21:59):
blink before the Fed and Trump is going to blink
before Jipin. Guess what Trump has been blinking by starting
negotiations with friends, allies and enemies seventy countries. The exception
is China power is not blinked so far, and it's
unlikely to blink. And this game of chicken between Trump
(22:20):
and she Himpin is continuing. But in the short run
the Chinese can be more patient. Trump is saying, is
waiting for a call from Jimpin. Su Jianpin is saying,
you started this tread war. Maybe you should make a call.
The point is not whether you make a call. The
backside channels through which people can organize a phone call
within SI and Trump. That may happen, but even that's
(22:44):
not the issue. There can be a phone call, you
can have the beginning of negotiation to the escalate. But
the problem is that the sets of policies that may
be acceptable to Trump might be empty or a null
set compared to the sets of policy that are acceptable
to shish in Pin. Because like last summer around, it's
(23:05):
not just about tariffs. It's also about non tariff restrictions,
about restriction to SDI, is about joint ventures, it is
about intellectual property rights, It's about government properement. Is about
the fact that China subsidized experts, low wages, the cost
of capital, the cost of energy, the cost of water,
the cost of land, pretty much subsidize everything for the
(23:29):
last decades. Telling China give up on state capitalism and
become a true market economy without any of these policies,
it is something that is not acceptable. The problem is
that the kind of deal that US wants is to
win essentially fully the economic world with China, and Chinese
has got consider that one as a strategy of full
(23:50):
economic containment of the rise of China. So even if
they sit down, I fear that instead of a grand
bargain in which you the risk on technology, but you
don't decouple and everything else. That deal may not be feasible,
and if not feasible, then there is a real escalation
that leads to an economic war and eventually can lead
(24:11):
to a real war. That's there is square facing with China.
It's not a willingness to have a call, but what
happens next.
Speaker 2 (24:19):
Jenny welsh, our chief geoeconomics analyst who was the Taiwan
advisor in President Biden's National Security Council, wrote a piece
with the headline last week, I dealt with China. Here's
why they'll fight. After years of sitting across the table
from Beijing and official negotiations, I've learned this. They guard
their pride, drive a hard bargain, and play the long game.
(24:42):
I guess we're going to find out whether Donald Trump
can do those things. No, Rabini, thank you so much.
Speaker 1 (24:48):
That was great, great being with you, Stephanie.
Speaker 2 (24:51):
That thanks a lot. Thanks for listening to Trump Noomics
from Bloomberg. It was hosted by me, Stephanie Flanders, and
I was joined by Nurial Rubini. Trumpelomics is produced by
Samasadi and Moses and with help from Chris Martin and
Amy Keene. Special thanks to Flora Pine and sound design
(25:14):
has been done by Blake Maples. Brendan Francis Newnham is
our executive producer and please to help others find the show,
please rate and review it wherever you listen to your
podcast
Bloomberg Audio Studios, Podcasts, radio news. That deal may not
be feasible, and it's not feasible, then there is a
real escalation that leads to an economic war and eventually
can lead to a real war that there is square
facing with China. It's not a willingness to have a call,
(00:22):
but what happens next.
Speaker 2 (00:33):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Welcome to Trumponomics, the podcast that looks at the economic
world of Donald Trump, how he's already shaped the global economy,
and what on earth is going to happen next. Well,
this week we're focusing on the all out trade war
that the Trump administration has kicked off with China, a
trade war that China seems to think it can win.
(00:56):
Just this week, Beijing escalated its class with Washington, ordering
Chinese airlines to halt new Boeing jet deliveries and banning
the export of some rare minerals to the US. That
comes after that mad bidding our tariff rates we've seen
since the start of the month, which saw US tariffs
on some goods go to one hundred and forty five percent.
China in return taking theirs to one hundred and twenty
(01:19):
five percent. Now, Donald Trump and members of the administration
believe they have the upper hand in this fight. China
needs our consumers and our money, as his press secretary
put it this week. If so, someone seems to have
forgotten to tell the Chinese. At every stage of this
tit for tat between the world's two largest economies, the
Chinese have seen confident, cocky even as far as I
(01:41):
can see, they've also been a bit more resolute. No exemptions,
no pauses. So is this all bluff? Chinese, after all,
are all about saving face? Or has Donald Trump picked
a fight here that the US could conceivably lose. Well,
I'm going to go through some of this with Dr
Neurial Ribini. Neuriel is a senior advisor Hudson Bay Capital
(02:04):
Management and Professor Emeritus of Economics at NYU Stern School
of Business. He's also a former advisor to the US treasurer,
where he worked with me, among others, the IMF and
World Bank. Neuriel, thank you very much for joining us.
Speaker 1 (02:18):
Great being review Stephanie today a pleasure.
Speaker 2 (02:25):
Let's start with the basics. We have focused quite a
lot on the cost of the US economy of these
tariffs on China. But putting it simply, what does China
stand to lose in this fight?
Speaker 1 (02:36):
Technically speaking, actually the impact on growth of this trade
war is more serious for China than it is for
the United States on impact before you consider any other
micropolicies that China and US can implement. And the reason
(02:57):
is that Chinese running a trade sort of relatively United
States of about two percent of its GDP, while imports
from China for the United States are about one percent
of the US GDP. So, technically speaking, suppose that this
startive remain at the current level and we are having
(03:17):
a pure authorkey no trade within US and China. In
the extreme, the impact on Chinese growths are going to
be a negative two percent, while the impact on the
United States in principle will be only one percent. Of course,
the shock is also inflationary for the United States and
(03:38):
is deflationary for China. You have to consider that. But
actually the country that is running a trade service with
the United States has a bigger shock to their growth
and demand than the United States. That's true for China,
is true for Europe, for Japan, South Korea, Taiwan and
all other major trading partners that have with the United States.
Speaker 2 (04:02):
That is obviously double Trump's point that they need us
more than we need them, and the fact that Bluebery
Economics has calculated similar kind of numbers to you. Even
at the initial level LITTL where they went to you
have more than two percent of GDP at risk in China.
They pretty much wipe out most of Chinese exports to
the US. But somehow they're still fighting and they seem
(04:25):
to think that actually their ability to withstand this might
be a bit greater than Americas. So I just I
wonder why do they seem to be standing so firm
in this sight?
Speaker 1 (04:36):
The question is what are their policy reactions now to
reduce the impact on growth. China can do massive fiscal
stimulus while the US is in a fiscal contraction. Given
the needs of the best and administration to reduce the
badger devsit, China, because it's the deflationary shock, can do
(04:58):
massive monetary and credit easing instead. In the US, the
FED is going to stay on hold and we're not
going to get credit easy. More importantly, China also doesn't
face elections. She is in power for as long as
he wants to be, while Trump is gonna face Mitrum
election next year, so they can be more patient. China's
had all the philosophy of eating bitterness, meaning suffering for
(05:23):
the sake of the country. China can also retaliate, of course,
if China poses like they have similar tariffs to the
US ones and one hundred and forty five for the
US one hundred and twenty five for China. There's no trade.
But China can do other things. China can restrict that
it started the exports of rare earth that are mostly
produced in China. China can reduce or cut off the
(05:47):
exports of refined metals, especially in dust selling great metals.
Seventy percent of all refinement of copper is done in China.
China can panic Apple, Tesla and other firms that invested
hundreds of billions of dollars from the US into China,
and China could also, potentially they've not done it so far,
(06:09):
they could use the potential nuclear weapon of essentially dumping
their treasury holdings, and they have a bit less than
a trillion of treasury holdings. That could shock, of course,
the bond market in the United States. There would be
subject to losses, but they could try to do that
as well, but then that will be the option of
last resorts. And finally, if this trade war becomes a
(06:33):
full scale economic war and China feels that they're being
contained and the US is trying to prevent the rise
of China economically, and even bastn't spoken about a strategy
of economic encirclement of China, meaning using friends and allies
and negotiation with them to then corner China. China may
(06:54):
even go after Taiwan. You know, the main reason why
China doesn't go after Taiwan right now is because they
know that there'll be massive trade sanction. Letter on the
potential of a war, but the potential of a war
is limited, while the potential of trade sanction is large.
But if US is already imposing such trade sanction that
(07:14):
there is not much ability of China to export, you
might as well go and take over in Taiwan. So
a trade war can escalate in a full scale economic war,
and a full scare economic war can escalate into a
real hot work as well. People don't seem to be
realizing that I.
Speaker 2 (07:32):
Want to go through some of those options in a minute,
but I guess you know. There's also one point that's
worth making, which is China has already learnt from the
first Trump administration and indeed the tariffs that were maintained
and even increased under the Biden administration. They have now
had nearly a decade of recognizing that the US is
in a different place when it comes to China, and
(07:53):
in many ways their economy has also adapted, maybe even
a bit more than the US economy. As we were
looking at how they had managed to diversify it, it's
managed to diversify a little bit more away from the
US as the source of its export. Then the US
has managed to wean itself off China. There's that new
real it's just a stronger position now than it was
(08:14):
a few years ago because it's kind of seen as coming.
Speaker 1 (08:17):
Absolutely they've done that. One capital make is that some
of that diversification export is now China, and not just
Chinese firms, but also American firms and others going for
a strategy of China plus one many not just producing China,
but other parts of Asia. Some of the final assembly
(08:39):
of many of these goods is done in Bangladesh, in Vietnam,
in Pakistan, you name it, and the US right now,
even if it reaches an agreement with Vietnam, Bangladesh, and
you name it on reducing the tariffs, they're going to
make sure that the local content criteria are strictly in forced.
(09:00):
So the China plus one strategy was a way for
both US and other multinacial to diversify the China is
but also for the Chinese to diversify. But now China
plus one doesn't work anymore because there'll be these types
of additional restrictions.
Speaker 2 (09:16):
Yeah, and actually just on that we're recording this on
Wednesday morning, But overnight there was a Wall Street Journal
story that was talking about how the Trump administration is
wanting to make as part of its famous negotiations with
over seventy countries that are looking to do deals with
the US, one of the conditions that they're thinking about
(09:38):
is that they take more steps to separate from China.
When it comes to a lot of those countries in
Asia that are already have a very close trading relationship
and even a dependency relationship economically with China, how realistic
is that you're going to separate some of these economies Vietnam, Malaysia,
or these places from China in any kind of meaningful way.
Speaker 1 (10:00):
Well, what the US can do, and that's legitimate, is
to say, if I do a deal with you, yes Nam,
and your tariffs are not anymore, say forty six percent,
they're going to be ten, fifteen, twenty, whatever the negative
is going to agree, then most of the stuff that
you export the US has to have local content. If
(10:22):
you take Chinese parts and you assemble them in Vietnam
and the value added is only, say twenty percent in
Vietnam and eighty percent China, then those goods are not
going to be subject to the low tarifs. They'll be
subject to higher tariffs. Every trade dealer has this local
content criteria. So that's just something you can do and say,
(10:43):
this is not Vietnam is good. It's mostly Chinese good
that pretends to be vietname is the same way in
which the Chinese exported to Mexico, and try to rerupt
it this way, so that can be enforced. The second
thing can be enforced, in my view, is that the
US can tell friends and allies that you need to
risk your relationship with China on stuff that has to
(11:07):
do with the key strategic technology like you know, things
like AI semiconduct or high tech and so on, and
the way to do it is already been done. When
Biden was living in January, there was an executive order
that essentially says what are the criteria for AI dicusion
And it has three buckets of countries. Here one countries
(11:30):
are friends and allies, and they have accessed to as
many advanced Navidia ships, they can build as many data
centers with advanced ships and use all the ais l
l ms and technology of the US. There are then
Tier three countries that are Russia, China or Korea run
and real rivals, and they cannot have access to any
of those advanced ships. And there are here two countries
(11:52):
that are sort of enemies or friends but not trustworthy,
and say Dubai may not be able to get as
many in Navidio chips because maybe their data centers in
Dubai are not as safe as those say in Canada
or in Europe or whatever. So I think that part
of the strategy is going to be to try to
de risk the relationship with China and force people to
(12:15):
choose you want to be in Tier one or Tier
two or Tier three and If you decide to be
even in tier three, you're going to have less success
to US technology than you do, and then you have
to use Chinese technology. Friends and allies are going to
be in tier one, rivals are going to be in
tier three, and everybody else in the middle left to
decide to go with the Chinese AI or go with
(12:37):
the American AI, because the world will be essentially a
world of either US high tech or Chinese high tech,
and they're not going to be compatible with each other.
That's the world we're moving to.
Speaker 2 (12:47):
I guess one question is whether China has already progressed
so far in some of these technologies that it's whether
it's practical to do that. But that's certainly what you've
described makes a lot of sense, and I would say
is also more consistent with the verse version of Donald
Trump's China policy that the Biden administration pursued. As long
as you can, as long as you can persuade all
(13:09):
these friends, that so called friends and allies that they
are indeed still your friends and allies, after you threatened
all this nasty stuff.
Speaker 1 (13:15):
Well, you know, let's put this way, even after the nasty,
nasti stuff, NATO members, and Europeans and Canadians and Japan,
South Korea, Taiwan, they have no choice, no choice to
rely on the US because if they spend more on
the fence, then the security umbrella is going to remain.
And if the security Rombella remains and there is a
(13:36):
trade deal on reducing the current tariffs to say half
as much, say only ten percent for Europe rather than twenty,
or only ten twelve for Japan rather twenty four, these
countries have no choice but to stay in the sphere
of influence of the United States in terms of security. So,
in spite of the tension with Friends and Allies, my
(13:57):
baseline is one in which you reach a deal on security,
you spend more on defense all over the world Friends
and Allies, you buy more US weapons and US tech goods,
You buy more energy and energy from the United States,
more of there are goods, and you do other things. Therefore,
even technologically, Friends and Allies is going to be under
(14:20):
the technological order of the US, because in technology US
is number one, China is a closed second, but everybody
else is not number three or four. Europe is only
number ten. So they have no choice. They left to
accept to maintain and remain under the US security, trade, military, geopolitical,
(14:40):
and technological influence. I think that's going to be the outcome,
whether you like it or not. The idea the day
Europeans going to now embed themselves with China, I think
is totally ridiculous. It's totally far fetched. It's not gonna happen.
Speaker 2 (14:52):
You're obviously right that the US does have still a
lot of means of persuasion, and it sort of reminds
me one of my colleagues, Josh Green, was saying, you know,
it's like it's the sort of Mara Lago version of
global trade, not Maura Largo, the currency core that we've
talked about on this show, but the cost of joining
the Mari Largo golf club was jacked up the moment
(15:14):
that Donald Trump even became the Republican nominee, that alone
winning the presidency, and there's a sort of pay to
play element to this. He has the same approach people
should have to pay to play in the US market.
So clearly the US has a lot cards, as Donald
Trump would say. But you identified at the beginning that
although the short term economic cost to China of this
(15:36):
war is obviously greater. They also have a greater macroeconomic
room to offset that. So if they have a hit
of two percent GDP, they can stimulate the economy in
other ways. They have room to do that. They don't
have an inflation problem as the US, so they also
have a capacity to sustain a bit of pain in
a way that potentially the US doesn't have. I just
(15:58):
want to test if it's willing to do things that
are not necessarily in its interest but it thinks will
be more likely to push the US to change course.
You know, does that include things like selling those holdings
of US bonds? How far can it go on? Things
like that, which people have often thought of, was the
kind of equivalent of the sort of going nuclear. They're
sitting on these enormous stocks of treasuries. Is it feasible
(16:22):
that they could sell a lot of those without just
inflicting too much pain on themselves.
Speaker 1 (16:26):
It's an option, but in my view, is an option
of last resort after they've used all the other things
we discussed, because there is a meaningful economic cost to them.
The economic costs are the following. If you sell treasuries,
depending on their duration, you have a market to market
loss because bond years will be higher, and then you're
(16:48):
having a loss on the existing stock of your treasury.
Number one. Number two, If you sell treasuries and you
convert those dollars into R and B, the R and
B appreciates, and what you're trying to do in China
is actually having a depreciation of the R and B
as the way of compensating for the trade shop. So
(17:09):
you're hurting yourself if you're selling treasury and you don't
buy RMB, you have to buy other currencies. If you
buy yen, euro s with frengths and you name it,
you are forcing an appreciation of yen and euro relative
to US dollar, and you're going to create trade fiction,
if not a trade war with Japan, with Taiwan, South Korea,
(17:32):
with Europe or whoever. And at the time where you
actually are trying to divide these countries from you because
you're forcing an appreciation of this currency and you're transferring
them the trade tariff risk to them. If instead, the
last thing you can do, probably if you cannot essentially
sell treasury and buy RMB because it appreciates your currency,
(17:55):
or damage your relations with their trading partners like Europe
in Asia, you can sell the treasure is then buy gold,
and that's what China and other strategic rivals of the
US have been doing, and that's why gold has gone higher,
because if you think about it, the only global reserve act,
of course, is the asset. Liquid asset is not a
(18:17):
currency that cannot be seized by the US, is a
liquid bullion because we saw in the case of Russia Ukraine,
not just dollars but euro yenes, it's frank pounds were seized,
and therefore the only one that they cannot seize is
gold bullion. But gold bullion that you keep in the
basement of the PBOC if you're buying GLD, that is
(18:38):
the financial version of gold. Of course, that can even
be seized or controlled or whatever. So that's I think
what's the most likely scenario. If they decide to sell treasury,
they still get the loss marked to market on the
value of those bonds, but maybe the best thing to
do will be gold rather than R and B or
(18:58):
rather the other current. I think that's a possibility. They
already been doing it for a while because if things
escalated in the US and China, one of the things
the US can do, of course, is to seize their
holdings of treasury the same way the holdings of treasuries
of Russia over sees the same way. Similar transaction restriction
occur for North Korea, run and you name it. So
(19:20):
that's a mutual thread. The Chinese can use that nuclear
weapon or nuclear threats, but the US can use the
counter nuclear threat of seizing those assets. The game of
chicken between the two sides.
Speaker 2 (19:32):
On one side doesn't have an election coming up, in fact,
will be around for the foreseeable future.
Speaker 1 (19:38):
That's true on the other side. As I said, a
huge amount of the manufacturing of China two percent of GDP,
but the larger fraction of the manufacturering is thirty percent
of GDP, is expert to the US. Suppose this factory
all have to shut down because you're not going to
be able to reroute those experts to other countries because
(19:59):
other countries will have the same problem access supply. That
access supply implies that part of their industrial base manufacturing
is obsolete, is essentially stranded asset, and that's a huge
cost in terms of capital losses, but the bigger loss
in terms of jobs, massive job losses. Unless against China
does staff to increase domestic consumption and consumption of services,
(20:23):
and those factory workers may become eventually over time service workers.
You can do it over a medium term of a
few years, you cannot do it in twelve months. So
both sides have capability and threats, and both sides have
significant upside costs and risk. It got both ways. But
you're right that's in Pin doesn't face election. But you know,
(20:44):
as we saw during COVID, when people become restless, they
can go in the streets, even in China, and millions
of unemployed the factory workers could be a threat, even
in the case of China. So it's not as if
political pressures are zero in China and are simile in
the United States. It's a bit more complicated than that.
Speaker 2 (21:04):
Final question, Neil. I think some have been surprised in
the last few weeks at China's apparent willingness to dig
in and not blink as perhaps they have in some
past rounds. Even earlier this year, they were responding in
a quite measured way to the initial tariffs that Donald
Trump would put on. Do you think that this will change,
(21:26):
that they will ultimately come to the table as Donald
Trump's people would say, or is there something a bit
different now? Have the state's been just raised too high
in terms of their face apart from anything else.
Speaker 1 (21:37):
Well, you know, there's a game of chicken between Trump
and Shape, and there is a third person in this
game of chicken, is how well as well? As I said,
and I've said for a while, that they strike a
price for a Trump put is a price much higher
for the power put and is also much higher than
for the fishing pin put. Meaning Trump is going to
(21:59):
blink before the Fed and Trump is going to blink
before Jipin. Guess what Trump has been blinking by starting
negotiations with friends, allies and enemies seventy countries. The exception
is China power is not blinked so far, and it's
unlikely to blink. And this game of chicken between Trump
(22:20):
and she Himpin is continuing. But in the short run
the Chinese can be more patient. Trump is saying, is
waiting for a call from Jimpin. Su Jianpin is saying,
you started this tread war. Maybe you should make a call.
The point is not whether you make a call. The
backside channels through which people can organize a phone call
within SI and Trump. That may happen, but even that's
(22:44):
not the issue. There can be a phone call, you
can have the beginning of negotiation to the escalate. But
the problem is that the sets of policies that may
be acceptable to Trump might be empty or a null
set compared to the sets of policy that are acceptable
to shish in Pin. Because like last summer around, it's
(23:05):
not just about tariffs. It's also about non tariff restrictions,
about restriction to SDI, is about joint ventures, it is
about intellectual property rights, It's about government properement. Is about
the fact that China subsidized experts, low wages, the cost
of capital, the cost of energy, the cost of water,
the cost of land, pretty much subsidize everything for the
(23:29):
last decades. Telling China give up on state capitalism and
become a true market economy without any of these policies,
it is something that is not acceptable. The problem is
that the kind of deal that US wants is to
win essentially fully the economic world with China, and Chinese
has got consider that one as a strategy of full
(23:50):
economic containment of the rise of China. So even if
they sit down, I fear that instead of a grand
bargain in which you the risk on technology, but you
don't decouple and everything else. That deal may not be feasible,
and if not feasible, then there is a real escalation
that leads to an economic war and eventually can lead
(24:11):
to a real war. That's there is square facing with China.
It's not a willingness to have a call, but what
happens next.
Speaker 2 (24:19):
Jenny welsh, our chief geoeconomics analyst who was the Taiwan
advisor in President Biden's National Security Council, wrote a piece
with the headline last week, I dealt with China. Here's
why they'll fight. After years of sitting across the table
from Beijing and official negotiations, I've learned this. They guard
their pride, drive a hard bargain, and play the long game.
(24:42):
I guess we're going to find out whether Donald Trump
can do those things. No, Rabini, thank you so much.
Speaker 1 (24:48):
That was great, great being with you, Stephanie.
Speaker 2 (24:51):
That thanks a lot. Thanks for listening to Trump Noomics
from Bloomberg. It was hosted by me, Stephanie Flanders, and
I was joined by Nurial Rubini. Trumpelomics is produced by
Samasadi and Moses and with help from Chris Martin and
Amy Keene. Special thanks to Flora Pine and sound design
(25:14):
has been done by Blake Maples. Brendan Francis Newnham is
our executive producer and please to help others find the show,
please rate and review it wherever you listen to your
podcast
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!