October 22, 2025 • 32 mins
Gavekal Dragonomics’ Arthur Kroeber joins Trumponomics to discuss how the latest tit-for-tat reveals Beijing’s growing leverage in its standoff with Washington.
After a period of quiet, the trade war between the US and China reignited in recent weeks when Washington expanded its export controls and Beijing hit back with restrictions on rare-earth exports. China expert Arthur Kroeber explains that both nations are using their economic networks as instruments of power, but that Beijing appears to be gaining the upper hand.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
I think we're going to be fine with China, but
we have to have a fair deal.
Speaker 1 (00:11):
It's got to be fair.
Speaker 3 (00:22):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is Trumpnomics, 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.
Our focus this week is the big lesson from the
latest rounds of the US China trade wars. The long
(00:45):
term balance of power between the two economies is shifting,
and it's shifting in favor of China. Things had gone
relatively quiet for a few months, but in the past
couple of weeks the US China trade war got noisy again,
with a tit for tat over expanding US export controls
and China's then in position of more sweeping restrictions on
(01:06):
its exports of rare earth magnets. There's been the usual
talk of escalation and de escalation from President Trump. As
I record this on Friday, seventeenth of October, He's just
threatened one hundred percent tariffs on Chinese goods. But in
the same breath, admitted that would be unsustainable. Right now,
the President is still set to meet with his opposite number,
(01:28):
President Chijinping of China at the Asia Pacific Economic Cooperation
Summit in South Korea later this month. Apex, I bet
that meeting will be on and off again many more
times before you hear this, and certainly before they sit down.
But whatever happens around that table, we may already have
seen a permanent shift in the power dynamic between them
(01:49):
due to the simple fact that the Chinese have shown
not only that they have leverage in this trade fight
with the US, but they're prepared to use it. That's
why I very much wanted to talk to this week's guest,
Arthur Kroeber. Arthur co founded the China focused research service
Dragonomics in Beijing in two thousand and two. It's now
(02:10):
called Gavacao Dragonomics, and he's the research director. He's also
the author of China's Economy What Everyone Needs to Know.
I describe him as the China expert other China experts
go to for a deeper take. Arthur, thanks so much
for taking the time for us.
Speaker 1 (02:28):
My pleasure.
Speaker 3 (02:38):
There's, as ever, the noise and the signal, and one
reason you are so widely read on China is you're
very good at telling the difference between the two. But
maybe we should spend a little bit of time on
the noise of the past few weeks for those who
lost track who started it.
Speaker 2 (02:54):
You could go back to the beginning of time in
the you know, who went first kind of thing. I
don't think that's super fruitful, but I think the sequence
of events that we've seen recently is number one. About
a month ago, negotiators meant in Madrid. They had what
seemed to be a pretty productive meeting. They seemed to
come up with a set of ideas for resolving the
ownership of TikTok, which is a big issue, and the
(03:16):
Chinese side seemed to indicate that there was kind of
a wire set of discussions on investment flows more generally,
and we seem to be heading towards a meeting between
Trump and She at the APEC summit at the end
of this month where they would move the ball forward.
Speaker 1 (03:30):
Seemed to be good.
Speaker 2 (03:31):
Then what happened is at the end of September, on
the twenty ninth, the Bureau of Industry and Security at
the US Commerce Department issued a set of rules expanding its.
Speaker 1 (03:42):
So called entity list, which is a list of.
Speaker 2 (03:44):
Foreign companies that if you want to sell stuff to
them you have to get an export license. It's kind
of a blacklist or a gray list or a dark list.
Speaker 1 (03:53):
And this did two things.
Speaker 2 (03:54):
One is it said any company that is at least
fifty percent owned by a named company on the end
list is automatically deemed to be on that list. So
it captures a whole bunch of subsidiaries that previously could
kind of fly under the radar. And you can understand
why they would want to close that loophole. It seems fairly,
fairly sensible, but as a practical matter with China, it
(04:16):
expands the number of companies on the list, perhaps by
as many as ten thousand according to some estimates.
Speaker 1 (04:22):
It's a lot of companies, right.
Speaker 2 (04:24):
Second thing it did is it said, if you are
a US company you want to sell to someone, you
have to verify. You have to do your own due
diligence to verify that they are not at least a
fifty percent subsidiary of some Chinese company, which means, if
you think about it, that requires an awful lot of
forensic due diligence on ownership, which might need to go
(04:44):
through several layers of ownership to get to the truth. Huge,
huge compliance burden on the company. So this was a
very consequential move. And it appears from some things that
I've heard that this move, which has been discussed for
some time within the Commerce apartment, the Chinese brought this
up at the Madrid talks and said, we hope you're
not planning to do this right away, because that would
(05:07):
create a lot of problems for the trade talks and
we would have to retaliate. So it happened, and so
the Chinese said, Okay, we're going to have to retaliate.
And then they came up with something that they also
had on the shelf, which was very detailed regulations on
export controls for rare earths where magnets and some things
in the battery supply chain. And again, if you look
(05:30):
at those rules and imagine that they were enforced fully,
they could give China the ability to really substantially restrict
the production of all kinds of products around the world
that depend even on very small trace amounts of rare
sourced from China. So we had these two different things,
(05:50):
and so basically what has now happened is that I
think both sides have recognized that they kind of went
too far in their efforts to gain leverage over the
other person, and now they have to dial it back.
And it seems like the signaling that we're now getting
from both sides is that they kind of want to
somehow resolve this issue in Tea a meeting between she
(06:13):
and Trump at the end of the month in Korea
that can allow for the trade talks to continue. So
there was a lot of noise, but the signal in
it is that both sides have pretty powerful tools that
they can use against each other. And what's new is
that general this has been one way straight. The US
has a lot of tools, it's counterparties don't have any.
China has a really powerful tool that can cause the
(06:34):
US a lot of problems.
Speaker 3 (06:35):
And I think that's one of the things. Certainly from
talking to colleagues in China, you don't get to see
she maybe necessary enough to talk about a spring in
his step, But there's definitely this sort of feeling of
strength and confidence that's come because a lot of countries
have effectively given in to Donald Trump's tariff demands and
just decided it was easier to go along with a
(06:57):
certain level of tariff and not necessarily try to impose
their own and response. But China has shown that it
can go toe to toe with the US, and the
US has effectively had to back down. So in a
note that you put out, as you said in the
past few weeks, that had shown us that US and
China had now weaponized their interdependence. So just talk us
through what that means.
Speaker 1 (07:18):
Yeah, well, that's not a phrase that I concocted.
Speaker 2 (07:21):
That is a phrase that was coined by two very
astute political scientists, Henry Farrell and Abe Newman, who wrote
a book about this about five or six years ago,
in which they were mainly talking about what the US
was doing in its sanctions regime through financial sanctions and
controls on technology to take advantage of the fact that
(07:41):
other countries relied heavily on certain kinds of inputs and
networks controlled by the United States. In the United States
was weaponizing these in order to achieve certain political goals. Right,
sanctions on Iran, we've seen sanctions on Russia, the trade war,
and the technology restrictions against China, et cetera.
Speaker 1 (08:00):
Et cetera.
Speaker 2 (08:01):
And yeah, I think this is a very important, invalid
concept and a good description of the way that the
world has evolved over the last couple of decades. But
what's now new, and I think has really been reinforced
step by step this year, is that China is also
able to play the weaponized interdependence game because they have
this massive chokehold on the whole rarer is complex and
(08:26):
these elements are very important for a whole bunch of
high tech industries for defense products notably, and they also
have significant controls within the battery supply chain. So China
is able is in principle able to make use of
this to put pressure on people that it has political
problems with, and we've seen this from time to time,
(08:48):
but now it's very visible in terms of its relationship
with the United States, and I think it's very powerful.
And this is something that people don't really talk about
that much. There are a lot of commercial applications for
rare earth that are quite important, but the defense supply
chain depends upon them quite a lot. And I think
what is underneath the US sort of concern on this
(09:08):
is that their defense production supply chain actually is quite
vulnerable to restrictions on these elements by China, so they
have to step pretty carefully.
Speaker 3 (09:19):
And we should say, actually, because you've reminded me. I
mean that that book Underground Empire. We've actually talked about
it in the past. I think it's a really excellent guide,
has stood the test of time in terms of thinking
about the economic dynamics of this time. I recommend it
to people. But people do often say, what's the big
deal about rare earth or rare earth magnets? You know,
the value of the imports that to the US and
(09:39):
other countries is very small, But as you're pulling out,
I mean, it's this, It's like it's the weakest link
in some of these very important global supply chains defense,
consumer electronics, cars.
Speaker 2 (09:53):
Yeah, I think this is worth exploring. So there are
a couple of things that people say.
Speaker 1 (09:56):
One is, you know, the values are very small.
Speaker 2 (09:59):
These are very small proportional inputs into various things, which
is true. And the other thing they say is, you know, famously.
Speaker 1 (10:05):
Rarers are not rare. You can dig them up, you know,
in lots of places around.
Speaker 2 (10:09):
The world, So what's the big deal? And I've had
people who spend a fair amount of time working on
export controls as recently as a year ago, who said, oh, well,
you know, trying to export controls rarest is dumb because
it's just a commodity. And then all you do is
you create incentives for mining. And both of these arguments
are flawed. So the first one is flawed because, as
(10:29):
you say, it's not that these are a huge part
of the value of the finished product.
Speaker 1 (10:35):
It is that they are things that.
Speaker 2 (10:37):
You need, and if you don't have them, you cannot
make the rest of the product. So it might only
be one percent or half a percent of the bill
of materials, but it's the one or half percent without
which you can't make use of the other ninety nine percent.
Speaker 3 (10:50):
But like looking at the utilities value share of GDP, yet,
if you don't have electricity, you can't do.
Speaker 2 (10:55):
Exactly exactly except maybe even more so than that. And
then on the second point, the issue is that it's
not the raw.
Speaker 1 (11:04):
Ores that are an issue.
Speaker 2 (11:06):
Here is the refined ores and products, notably permanent magnets
that are made from them. And these, both the refining
and the products require pretty sophisticated technology processes which now
basically only exist in China. The technologies for refining are
in fact also export controlled by China. So if you
(11:29):
set up a mine elsewhere and you want to refine them,
you have two choices. One is you can send the
ores to China to get refined, which is a lot
of what happens, or you can try and get the
Chinese to issue a license for the technology, or you
can try and recreate the technology on your own.
Speaker 1 (11:45):
It's non trivial.
Speaker 2 (11:47):
And then when you look at the magnets, that has
an additional manufacturing process on top of that which is
distinct from rare. It's refining specifically, also pretty technical, also
something where the Chines have a huge cost advantage. And
so there are many layers here, which means that it
is these are things that are quite important. They are
quite important not only fence industries, but to a lot
(12:07):
of new green technologies that people want to develop.
Speaker 1 (12:11):
And it is very there's a big.
Speaker 2 (12:13):
Technology component, so the export controls have real bite and
there's no quick way to extricate yourself from their vulnerability.
Speaker 3 (12:22):
The more we talk about this, it sounds like those
debates one would have or the sort of theories of
nuclear deterrence from the Cold War days. It's very flawed
the comparison between the Cold War and the situation with
US and China. But this does feel a bit like
the sort of mutually assured destruction that people used to
talk about in that time. Both sides have built up
(12:43):
things that could blow up the other countries supply chains
in one way or another, or at least make things
extremely difficult for them and their companies. It's obviously somewhat
extreme example, But is that sort of a sensible way
of thinking about it?
Speaker 2 (12:57):
Yeah, I think that's kind of the flavor of it.
I wouldn't want to push it too far. I mean,
the metaphor that I've used is I just borrowed a
phrase from Scott Bessen, who rather notoriously said in the
speech a year ago talking about Trump's then prospective tariff
strategy that, as you recall, the idea was to escalate
to de escalate, and his phrase was, the tariff gun
(13:19):
will always be on the table, cocked and loaded, but
it will be rarely fired. And now there are two
guns on the table, right. There's the US tariff and
Export control gun pointed at China, and there's the China
rare earth a control gun that's pointed at the US.
They are both on the table, they are both loaded.
They could be used. But in fact, I think the
(13:40):
Chinese point on this, and I actually take them seriously
on this.
Speaker 1 (13:43):
In their public.
Speaker 2 (13:44):
Statements, they say, yeah, we could do this, but not
only is it not in your interest, it's not in
our interest to do this. Because we're globally integrated economy.
We depend on being able to trade freely. We want
to be able to sell this stuff to people who
are going to use it for non defense purposes that
is actually good for us too. So we don't really
(14:06):
want to use this weapon, but we have to pull
it out because this is the only way to prevent
you from using this other weapon, which is going to
be really bad for us.
Speaker 1 (14:15):
And I think that should be taken very seriously.
Speaker 3 (14:20):
But it sounds like what economists might think of as
a stable equilibrium, right, I mean that is supposed to be.
That was even what the traditional destruction were sold as
a stable equilibrium because both sides were assured of real
harm if anything happened.
Speaker 2 (14:36):
Well, yeah, so economists call it stable equilibrium because they're economists,
and other people call it a balance of terror, right, which.
Speaker 3 (14:43):
Is but there's a balance, right, you know, it sounds
better than imbalance.
Speaker 1 (14:47):
Right, No, no, no, no, it is a balance.
Speaker 2 (14:49):
And I think this is why the US China trade
negotiations have gone on for so long, is the Chines
are very clear that they want to get something out
of these negotiations.
Speaker 1 (14:57):
It's not going to be just a capitulation.
Speaker 2 (14:59):
And they have the tools to force the US to
stay at the table and do something that they might want.
So I think if you look at this from a
broader standpoint, I think the net effect of this for
now is probably beneficial because it is useful for the
world to have some constraints on the ability of the
(15:22):
US unilaterally just to impose whatever conditions it wants and everybody,
you know, just as it's useful to have those constraints
in China. They've done plenty of economic bullying of their
own over the years when they can get away with it,
So having some kind of balance there I think is
potentially helpful. The problem is we also have some fairly
volatile leadership, particularly in the US side, and so you
(15:45):
can imagine things going wrong, and that was always the
worry with the mad during the Cold Wars, yeah, it
was great, but we were one step away from this
really bad.
Speaker 3 (16:10):
Going back a little bit to the sort of real
world implications of the network of different export controls and
potential guns that could be used at various times. I know,
you talk to a lot of multinationals and businesses active
in China but also operating around the world. What's the
implications for a multinational that's actually still got very much
(16:32):
caught up in the US and China both as a
market and as a manufacturing base. It seems like it
may be useful to have a balance of terror, but
in the meantime as a hell of a lot of paperwork, right.
Speaker 2 (16:44):
I think the short answer is that in a minimum,
your compliance burden goes way up, right, because you now
have to satisfy regulators in the US, you have to
satisfy regulators in China, and various things. Just the friction
and the transaction costs of doing things a lot of
cross border activities, they have gone up quite a lot.
So that's your kind of most benign baseline scenario is
(17:07):
that has occurred. And you know, I think the other
thing that people talk about a lot, very hard to quantify,
is the uncertainty premium goes up, You're constantly kept guessing,
you know, will these things be imposed, if so, when,
if so, will I be you know, victimized?
Speaker 1 (17:23):
Or are the ways to work around it?
Speaker 2 (17:25):
So that requires there's sort of an additional cost in
terms of strategy planning, hedging, planning for how.
Speaker 1 (17:32):
You do this.
Speaker 2 (17:32):
I think at the moment, that's where we are. And frankly,
both Trump and She at the leadership level, have in
fact made it pretty clear repeatedly over the course last
year that they want an agreement, they want a deal,
They want to set up some kind of regime under
which people can trade and invest. And the Chinese, i
(17:55):
think fortunately in this case, have leveraged to make sure
that deal is somewhat real rather than.
Speaker 1 (17:59):
Just a fake deal.
Speaker 2 (18:00):
So if we get there, that will be I think
somewhat helpful. But even if we do get a deal,
the reality is that the US and China really have
this extremely adversarial relationship. You can create a deal that
sort of creates a Dayton if you will, to use
another Cold War metaphor, but if you're thinking about the
long run, five, ten, fifteen year timeline investments, you have
(18:22):
to do a lot of hedging, and you have to
figure out ways that you can forestall or live through
situations where there might be a huge escalation in the
tensions between the US and China, and many more decouplex
It makes this strategic planning process a lot more difficult,
more crossly.
Speaker 3 (18:39):
But if you think of the goals that the government,
the Chinese authorities are pursuing in many ways, they are
trying just as they try and advertise and strengthen US
dependence on certain things from China, China is obviously actively
trying to reduce the degree of dependence it has on
the US. And that seems to be going pretty well.
I mean, we're not it's not far. Yeah, it is.
Speaker 2 (19:01):
And so if you look at there's a bunch of
work that you can do looking at sort of the
OECD databases on trade and value added that shows if
you just break down US supply chain supply chains for
physical goods within the US, they are about two to
three times more reliant on inputs from China as the
other way around.
Speaker 1 (19:22):
And this is partly the result.
Speaker 2 (19:24):
Of differential industrial development, but partly the result of deliberate
Chinese efforts to de americanize, specifically there's supply chains, and
they have made good progress there now some areas it's
really tough. So the semiconductor industry good luck trying to
de americanize because the US position at various nodes in
(19:46):
that is extremely extremely strong, and despite huge investments, Chinese
have made some progress there, but not a ton. Frankly,
so again, it's very difficult to build an alternative ar
supply chain, probably even more difficult to build a fully
autonomous semiconductor supply chain. These interdependencies both countries would like
(20:08):
there to be less of them, but in fact it
is very difficult to untangle them, which is why I've
always been skeptical of sort of like the easy decoupling story.
Speaker 1 (20:17):
Oh, the China and the US and decoupling.
Speaker 2 (20:19):
It's like, yeah, you can try, and in individual sectors
you can get reasonably far, but on a macro basis,
untangling the interconnections that have been built up in the
global economy over the last forty five years is extremely difficult.
And the other thing I would say is that as
China has tried to decrease its dependency on the rest
(20:42):
of the world from a supply side, it has increased
its dependency in the rest of the world. On the
demand side, because it's now basically an export driven economy,
they depend very heavily on markets being open to them,
and this dependency has increased substantially over the last five years,
is not decreased, and their own sort of supply side
(21:03):
obsession at home creates a deflationary, weak consumption environment, which
just intensifies this dependency on international markets. And I think
this is something that's not sufficiently appreciated in the world.
Is that, Yeah, on a producer basis, China is kind
of self sufficient, but they have really exposed themselves to
(21:25):
a lot of potential economic downside if export markets close up,
or if just there's a global recession and people can't
buy as much, and that is a real problem for them.
Speaker 1 (21:34):
To which they have no very clear solution.
Speaker 3 (21:38):
I was going to ask you about that. I mean,
we have fact we've calculated down that our economists that
China's manufactured goods trade set plus is the largest now
relative to global GDP of any country since the US
after World War Two. And we've also shown how the
amount of sort of trade diversion that's happened, just the
sort of wave of exports going across Asian economies and
(22:00):
extent to Europe that might otherwise have gone to the
US due to these tariffs. And as you said, you
know that itself produces a vulnerability because we see countries
potentially reacting to that wave of imports. And it's funny
because it's kind of the weakness on the other side
of the strength, right. You know, we tend to say
China politically has an ability to withstand pain that the
(22:21):
US doesn't have, and that means it can sort of
hold its ground against Donald Trump. But to your point,
ignoring quite a lot of domestic economic pain, I mean,
do you see I know, you're not one of those
people who is continually kind of announcing there's going to
be a crisis or you know, an end of China's
growth story. But do you think they are underestimating the
(22:42):
costs of this strategy?
Speaker 1 (22:43):
Yeah, that's a good question.
Speaker 2 (22:45):
It seems to me that the government over the last
several years they've adopted a very very sort of a
techno fetishist supply side growth model, and basically they've said,
all of our problems productivity, income, growth, whatever, they will
be solved by just investing massively in the technologies the
future which will create this productivity miracle, which will then
(23:08):
drive future incomes of growth. It's a little bit like
the people who are now going around saying AI is
going to solve all known economic problems because of these
productivity magic and the Chinese view is that this is
the result of sort of physical technologies at least as much,
if not more so than AI.
Speaker 1 (23:26):
But it's similar kind of thinking.
Speaker 3 (23:27):
They haven't been doing too badly on these technologies. Oh no,
you know, but the thing we've thought that we've think
they've glabal leadership position in five of the thirteen key
technology but touching up in all the others.
Speaker 1 (23:37):
No, for sure.
Speaker 2 (23:38):
So they've done very well on the production side. And meanwhile,
nominal growth in China is less than half of what
it was five years ago. Right, so they used to
very reliably be able to count on nominal growth of
eight nine percent very consistently.
Speaker 1 (23:51):
It's now down to four.
Speaker 2 (23:53):
And these things are linked because they basically say the
supply side will solve all problem is we don't need
to have a demand side strategy. We don't need to
support consumers if they're hammered by a pandemic. We can
impose a gigantic compression of their balance sheets by crushing
the properties five years in a row. And that's fine
(24:15):
because capital will move to the correct places. And that's
a very very one sided and incomplete view of the economy.
So they are paying a price for this that is material,
and I guess the question is are they unaware of
that price. Do they say, well, we know that's the price,
but it's fine, or do they think, actually, you, mister Krober,
(24:36):
you're wrong about the price.
Speaker 1 (24:37):
Actually this is a short term thing.
Speaker 2 (24:39):
That's a harder thing to read, and I think you
can make multiple different interpretations. But what I would say
is they don't look like they are changing their minds
anytime soon. They may be right, they may be wrong,
but they're staying the course.
Speaker 3 (24:52):
And everything we've said, i'm pretty sure is going to
stand the test of time because we're talking fairly long term.
But obviously it is dangerous these days to have a
conversation which you then don't publish for a few days
talking about trade issues. And as I've said at the start,
it's likely that the meeting with she is going to
be on and off and on and off several times
before we get there. But I guess one way of
(25:13):
thinking about this or that people could have in the
back of the minds when, if, and when that meeting happens,
and then they assess the results of that meeting, which
maybe Donald Trump announcing some great deal or maybe not.
Is it at the heart of what you were just saying,
you know, short term, it actually does matter, even though
they're pretending it doesn't matter, and they can put up
with the pain. China's facing a pretty high tariff sort
(25:34):
of forty percent ish. It does actually matter to them
that they bring this down, and it seems to matter
to them a bit more than it matters to Donald Trump.
Speaker 1 (25:43):
Well, this is an interesting question.
Speaker 2 (25:45):
So if I look at the Chinese side on this, yeah,
I think they would like lower tariffs, But actually I
don't think that is the top of their list, frankly,
because the.
Speaker 1 (25:53):
Reality is they are enduring very high.
Speaker 2 (25:55):
Terriffs right now relative to the past and relative to
anyone else in the.
Speaker 1 (25:58):
World and their experts.
Speaker 2 (25:59):
You fine, right, and some of that is front loading,
but I think most of it is not. Some of
it is transhipment. They're routing things through third countries that
wind up in the US. But most of it seems
to be that they've actually been very successful at developing
other export markets Southeast Asia, Europe, Latin America, you name it,
and yeah, there's some protectionist concerns there, but in most cases,
(26:22):
in most product lines, there really aren't great alternatives at
a comparable cost to what you're buying from China, and
most countries don't have the same kind of security concerns
that the US has.
Speaker 1 (26:31):
So they're doing fine.
Speaker 2 (26:33):
So I think they've concluded, yeah, we would like lower tariffs,
but if we have to live with the current tariff level,
we've shown that we can, which also means that they
can walk away if they think if all we're getting
is a few points off tariffs, that's not enough. We
need more in a deal, and if that's all you're
going to give us, sorry, then there's no deal. We'll
(26:55):
just do our thing and we'll see how you like it,
because we think that we can bear more pain.
Speaker 1 (27:00):
I think what they really want is they would really.
Speaker 2 (27:03):
Like to see some scaling back of the US export
controls on technology. That is a number one on their list,
and I think that will be very interesting to see
whether they can dislodge the US on that point, because
historically the US position has been export controls are sacrosanct.
Once we put them on they are tablets from Sinai,
they are the word of God. They cannot be altered
(27:26):
in any way. So that's, you know, that's a big ask.
My view would be, I think the US has overdone
it on export controls, and it would be very possible
to go through and do some culling and say, here
are the things that are important that we really need,
and here's some stuff actually that was overreach, and we
could pull back. But there's a people don't want to
go there because of the principle. I think the other
thing that the Chinese would like is, as we saw
(27:48):
with the TikTok deal, some kind of a pathway that
would make it easier for Chinese tech companies to invest
in the United States because they see this as coming.
They see it's important for their companies to nationalize. As
you grow, you can't do everything through exports. You have
to get closer to your customers, build up distribution networks,
build up.
Speaker 1 (28:07):
Branding, et cetera.
Speaker 2 (28:09):
Every country in the world, once it gets to a
certain point, it's companies start to multi nationalize. China is
the same. The US is the world's biggest single market.
They like to see a pathway there, and I think
they also think that this would be a stabilizer in
the relationship. But obviously there are a lot of political problems
with that.
Speaker 1 (28:27):
On the US side. People are very nervous about that.
Speaker 2 (28:30):
So I think those are the asks on the US side.
I find it very hard to understand what it is
that the US is negotiating for. I'm perplexed. It is
very clear that Trump wants something that he can call
a deal, okay, and because he wants a deal, and
the Chinese feel that they can walk away if they
don't get a satisfactory deal, that gives them a slight
edge in their stations. And it would be interesting to
(28:52):
see if we get something out of this, what the
US obtains other than additional agricultural purchases we started Boeing sales,
et cetera. Is the US after any kind of bigger
game here, It's not at all clear that they are.
It's quite hard to understand what the purpose of the
negotiations is. The purpose of the other US trade negotiations
(29:15):
was basically to demonstrate to other countries how powerful the
US is and how we can push you around. That
was essentially the purpose of negotiations. China has said, we're
strong enough to not play that game.
Speaker 3 (29:28):
So that ship has sailed.
Speaker 1 (29:30):
What's your plan B?
Speaker 2 (29:33):
And it's maybe some things are being talked about there
that we don't know about, but it's a little obscure.
Speaker 3 (29:37):
You've reminded me. I mean, of course, there's the grand
story of why things are happening, and then often with
this administration especially, there's the sort of slightly lower story.
And you talked about the export controls being a really
kind of fawny aspect of this that's causing quite a
lot of problems. The Commas Secretary is obviously the one.
It's his office, the Commerce Department that's responsible for the
export controls, and it's obviously the Treasury set that's been
(30:00):
in leading a lot of these negotiations on the core
trade issues. There is a theory that just says that
I would love I think wants to make things as
hard as possible.
Speaker 1 (30:09):
I've heard that theory.
Speaker 2 (30:10):
You know, all of these stories are slightly unverifiable. What
I think you can say with high confidence is that
the Bureau of Industry and security within Commerce, which supervises
the export controls, has pretty hawkish leadership, and that they
basically feel that it's the right thing for the US
to tighten the screws on export controls. And I think
(30:30):
they have a reasonable point in the sense that if
you have an export control regime and you think it
is valuable.
Speaker 1 (30:37):
You don't want it to do on the table.
Speaker 2 (30:39):
You should not have a lot of loopholes that undermine
what you're trying to do, and that, you know, I
think that was clearly their view on these latest regulations.
But for them to issue these regulations essentially goes against
the policy that Trump had laid down as early as May,
saying Okay, let's not have any more export controls until
our trade negotiations are through. So they violated what everyone
(31:00):
understood to be the president's wishes there.
Speaker 1 (31:03):
And I guess what you could say is.
Speaker 2 (31:04):
That Lutnik, given his well advertised problems with Bess and
he didn't really have much of an incentive to stop
them from going rogue. If that's what they chose to do,
I think that's we can say that.
Speaker 3 (31:17):
Arthur Kroeger, thank you so much for doing my pleasure.
Thanks for listening to Trumpnomics from Bloomberg. It was hosted
by me Stephanie Flanders, and I was joined by the
founder and director of research at Gavical Dragonomics, Arthur Kroeber.
Trumpnomics was produced by Samasadi and Moses and with help
from Amy Key and special thanks this week to Rachel
(31:40):
Lewis Chrisky. Sound design is by Blake Maples and Kelly
Gary and Sage Bowman is Bloomberg's head of podcasts, and
please to help others find us, rate and review it highly.
Wherever you listen to podcasts
Speaker 2 (32:00):
From
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
I think we're going to be fine with China, but
we have to have a fair deal.
Speaker 1 (00:11):
It's got to be fair.
Speaker 3 (00:22):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is Trumpnomics, 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.
Our focus this week is the big lesson from the
latest rounds of the US China trade wars. The long
(00:45):
term balance of power between the two economies is shifting,
and it's shifting in favor of China. Things had gone
relatively quiet for a few months, but in the past
couple of weeks the US China trade war got noisy again,
with a tit for tat over expanding US export controls
and China's then in position of more sweeping restrictions on
(01:06):
its exports of rare earth magnets. There's been the usual
talk of escalation and de escalation from President Trump. As
I record this on Friday, seventeenth of October, He's just
threatened one hundred percent tariffs on Chinese goods. But in
the same breath, admitted that would be unsustainable. Right now,
the President is still set to meet with his opposite number,
(01:28):
President Chijinping of China at the Asia Pacific Economic Cooperation
Summit in South Korea later this month. Apex, I bet
that meeting will be on and off again many more
times before you hear this, and certainly before they sit down.
But whatever happens around that table, we may already have
seen a permanent shift in the power dynamic between them
(01:49):
due to the simple fact that the Chinese have shown
not only that they have leverage in this trade fight
with the US, but they're prepared to use it. That's
why I very much wanted to talk to this week's guest,
Arthur Kroeber. Arthur co founded the China focused research service
Dragonomics in Beijing in two thousand and two. It's now
(02:10):
called Gavacao Dragonomics, and he's the research director. He's also
the author of China's Economy What Everyone Needs to Know.
I describe him as the China expert other China experts
go to for a deeper take. Arthur, thanks so much
for taking the time for us.
Speaker 1 (02:28):
My pleasure.
Speaker 3 (02:38):
There's, as ever, the noise and the signal, and one
reason you are so widely read on China is you're
very good at telling the difference between the two. But
maybe we should spend a little bit of time on
the noise of the past few weeks for those who
lost track who started it.
Speaker 2 (02:54):
You could go back to the beginning of time in
the you know, who went first kind of thing. I
don't think that's super fruitful, but I think the sequence
of events that we've seen recently is number one. About
a month ago, negotiators meant in Madrid. They had what
seemed to be a pretty productive meeting. They seemed to
come up with a set of ideas for resolving the
ownership of TikTok, which is a big issue, and the
(03:16):
Chinese side seemed to indicate that there was kind of
a wire set of discussions on investment flows more generally,
and we seem to be heading towards a meeting between
Trump and She at the APEC summit at the end
of this month where they would move the ball forward.
Speaker 1 (03:30):
Seemed to be good.
Speaker 2 (03:31):
Then what happened is at the end of September, on
the twenty ninth, the Bureau of Industry and Security at
the US Commerce Department issued a set of rules expanding its.
Speaker 1 (03:42):
So called entity list, which is a list of.
Speaker 2 (03:44):
Foreign companies that if you want to sell stuff to
them you have to get an export license. It's kind
of a blacklist or a gray list or a dark list.
Speaker 1 (03:53):
And this did two things.
Speaker 2 (03:54):
One is it said any company that is at least
fifty percent owned by a named company on the end
list is automatically deemed to be on that list. So
it captures a whole bunch of subsidiaries that previously could
kind of fly under the radar. And you can understand
why they would want to close that loophole. It seems fairly,
fairly sensible, but as a practical matter with China, it
(04:16):
expands the number of companies on the list, perhaps by
as many as ten thousand according to some estimates.
Speaker 1 (04:22):
It's a lot of companies, right.
Speaker 2 (04:24):
Second thing it did is it said, if you are
a US company you want to sell to someone, you
have to verify. You have to do your own due
diligence to verify that they are not at least a
fifty percent subsidiary of some Chinese company, which means, if
you think about it, that requires an awful lot of
forensic due diligence on ownership, which might need to go
(04:44):
through several layers of ownership to get to the truth. Huge,
huge compliance burden on the company. So this was a
very consequential move. And it appears from some things that
I've heard that this move, which has been discussed for
some time within the Commerce apartment, the Chinese brought this
up at the Madrid talks and said, we hope you're
not planning to do this right away, because that would
(05:07):
create a lot of problems for the trade talks and
we would have to retaliate. So it happened, and so
the Chinese said, Okay, we're going to have to retaliate.
And then they came up with something that they also
had on the shelf, which was very detailed regulations on
export controls for rare earths where magnets and some things
in the battery supply chain. And again, if you look
(05:30):
at those rules and imagine that they were enforced fully,
they could give China the ability to really substantially restrict
the production of all kinds of products around the world
that depend even on very small trace amounts of rare
sourced from China. So we had these two different things,
(05:50):
and so basically what has now happened is that I
think both sides have recognized that they kind of went
too far in their efforts to gain leverage over the
other person, and now they have to dial it back.
And it seems like the signaling that we're now getting
from both sides is that they kind of want to
somehow resolve this issue in Tea a meeting between she
(06:13):
and Trump at the end of the month in Korea
that can allow for the trade talks to continue. So
there was a lot of noise, but the signal in
it is that both sides have pretty powerful tools that
they can use against each other. And what's new is
that general this has been one way straight. The US
has a lot of tools, it's counterparties don't have any.
China has a really powerful tool that can cause the
(06:34):
US a lot of problems.
Speaker 3 (06:35):
And I think that's one of the things. Certainly from
talking to colleagues in China, you don't get to see
she maybe necessary enough to talk about a spring in
his step, But there's definitely this sort of feeling of
strength and confidence that's come because a lot of countries
have effectively given in to Donald Trump's tariff demands and
just decided it was easier to go along with a
(06:57):
certain level of tariff and not necessarily try to impose
their own and response. But China has shown that it
can go toe to toe with the US, and the
US has effectively had to back down. So in a
note that you put out, as you said in the
past few weeks, that had shown us that US and
China had now weaponized their interdependence. So just talk us
through what that means.
Speaker 1 (07:18):
Yeah, well, that's not a phrase that I concocted.
Speaker 2 (07:21):
That is a phrase that was coined by two very
astute political scientists, Henry Farrell and Abe Newman, who wrote
a book about this about five or six years ago,
in which they were mainly talking about what the US
was doing in its sanctions regime through financial sanctions and
controls on technology to take advantage of the fact that
(07:41):
other countries relied heavily on certain kinds of inputs and
networks controlled by the United States. In the United States
was weaponizing these in order to achieve certain political goals. Right,
sanctions on Iran, we've seen sanctions on Russia, the trade war,
and the technology restrictions against China, et cetera.
Speaker 1 (08:00):
Et cetera.
Speaker 2 (08:01):
And yeah, I think this is a very important, invalid
concept and a good description of the way that the
world has evolved over the last couple of decades. But
what's now new, and I think has really been reinforced
step by step this year, is that China is also
able to play the weaponized interdependence game because they have
this massive chokehold on the whole rarer is complex and
(08:26):
these elements are very important for a whole bunch of
high tech industries for defense products notably, and they also
have significant controls within the battery supply chain. So China
is able is in principle able to make use of
this to put pressure on people that it has political
problems with, and we've seen this from time to time,
(08:48):
but now it's very visible in terms of its relationship
with the United States, and I think it's very powerful.
And this is something that people don't really talk about
that much. There are a lot of commercial applications for
rare earth that are quite important, but the defense supply
chain depends upon them quite a lot. And I think
what is underneath the US sort of concern on this
(09:08):
is that their defense production supply chain actually is quite
vulnerable to restrictions on these elements by China, so they
have to step pretty carefully.
Speaker 3 (09:19):
And we should say, actually, because you've reminded me. I
mean that that book Underground Empire. We've actually talked about
it in the past. I think it's a really excellent guide,
has stood the test of time in terms of thinking
about the economic dynamics of this time. I recommend it
to people. But people do often say, what's the big
deal about rare earth or rare earth magnets? You know,
the value of the imports that to the US and
(09:39):
other countries is very small, But as you're pulling out,
I mean, it's this, It's like it's the weakest link
in some of these very important global supply chains defense,
consumer electronics, cars.
Speaker 2 (09:53):
Yeah, I think this is worth exploring. So there are
a couple of things that people say.
Speaker 1 (09:56):
One is, you know, the values are very small.
Speaker 2 (09:59):
These are very small proportional inputs into various things, which
is true. And the other thing they say is, you know, famously.
Speaker 1 (10:05):
Rarers are not rare. You can dig them up, you know,
in lots of places around.
Speaker 2 (10:09):
The world, So what's the big deal? And I've had
people who spend a fair amount of time working on
export controls as recently as a year ago, who said, oh, well,
you know, trying to export controls rarest is dumb because
it's just a commodity. And then all you do is
you create incentives for mining. And both of these arguments
are flawed. So the first one is flawed because, as
(10:29):
you say, it's not that these are a huge part
of the value of the finished product.
Speaker 1 (10:35):
It is that they are things that.
Speaker 2 (10:37):
You need, and if you don't have them, you cannot
make the rest of the product. So it might only
be one percent or half a percent of the bill
of materials, but it's the one or half percent without
which you can't make use of the other ninety nine percent.
Speaker 3 (10:50):
But like looking at the utilities value share of GDP, yet,
if you don't have electricity, you can't do.
Speaker 2 (10:55):
Exactly exactly except maybe even more so than that. And
then on the second point, the issue is that it's
not the raw.
Speaker 1 (11:04):
Ores that are an issue.
Speaker 2 (11:06):
Here is the refined ores and products, notably permanent magnets
that are made from them. And these, both the refining
and the products require pretty sophisticated technology processes which now
basically only exist in China. The technologies for refining are
in fact also export controlled by China. So if you
(11:29):
set up a mine elsewhere and you want to refine them,
you have two choices. One is you can send the
ores to China to get refined, which is a lot
of what happens, or you can try and get the
Chinese to issue a license for the technology, or you
can try and recreate the technology on your own.
Speaker 1 (11:45):
It's non trivial.
Speaker 2 (11:47):
And then when you look at the magnets, that has
an additional manufacturing process on top of that which is
distinct from rare. It's refining specifically, also pretty technical, also
something where the Chines have a huge cost advantage. And
so there are many layers here, which means that it
is these are things that are quite important. They are
quite important not only fence industries, but to a lot
(12:07):
of new green technologies that people want to develop.
Speaker 1 (12:11):
And it is very there's a big.
Speaker 2 (12:13):
Technology component, so the export controls have real bite and
there's no quick way to extricate yourself from their vulnerability.
Speaker 3 (12:22):
The more we talk about this, it sounds like those
debates one would have or the sort of theories of
nuclear deterrence from the Cold War days. It's very flawed
the comparison between the Cold War and the situation with
US and China. But this does feel a bit like
the sort of mutually assured destruction that people used to
talk about in that time. Both sides have built up
(12:43):
things that could blow up the other countries supply chains
in one way or another, or at least make things
extremely difficult for them and their companies. It's obviously somewhat
extreme example, But is that sort of a sensible way
of thinking about it?
Speaker 2 (12:57):
Yeah, I think that's kind of the flavor of it.
I wouldn't want to push it too far. I mean,
the metaphor that I've used is I just borrowed a
phrase from Scott Bessen, who rather notoriously said in the
speech a year ago talking about Trump's then prospective tariff
strategy that, as you recall, the idea was to escalate
to de escalate, and his phrase was, the tariff gun
(13:19):
will always be on the table, cocked and loaded, but
it will be rarely fired. And now there are two
guns on the table, right. There's the US tariff and
Export control gun pointed at China, and there's the China
rare earth a control gun that's pointed at the US.
They are both on the table, they are both loaded.
They could be used. But in fact, I think the
(13:40):
Chinese point on this, and I actually take them seriously
on this.
Speaker 1 (13:43):
In their public.
Speaker 2 (13:44):
Statements, they say, yeah, we could do this, but not
only is it not in your interest, it's not in
our interest to do this. Because we're globally integrated economy.
We depend on being able to trade freely. We want
to be able to sell this stuff to people who
are going to use it for non defense purposes that
is actually good for us too. So we don't really
(14:06):
want to use this weapon, but we have to pull
it out because this is the only way to prevent
you from using this other weapon, which is going to
be really bad for us.
Speaker 1 (14:15):
And I think that should be taken very seriously.
Speaker 3 (14:20):
But it sounds like what economists might think of as
a stable equilibrium, right, I mean that is supposed to be.
That was even what the traditional destruction were sold as
a stable equilibrium because both sides were assured of real
harm if anything happened.
Speaker 2 (14:36):
Well, yeah, so economists call it stable equilibrium because they're economists,
and other people call it a balance of terror, right, which.
Speaker 3 (14:43):
Is but there's a balance, right, you know, it sounds
better than imbalance.
Speaker 1 (14:47):
Right, No, no, no, no, it is a balance.
Speaker 2 (14:49):
And I think this is why the US China trade
negotiations have gone on for so long, is the Chines
are very clear that they want to get something out
of these negotiations.
Speaker 1 (14:57):
It's not going to be just a capitulation.
Speaker 2 (14:59):
And they have the tools to force the US to
stay at the table and do something that they might want.
So I think if you look at this from a
broader standpoint, I think the net effect of this for
now is probably beneficial because it is useful for the
world to have some constraints on the ability of the
(15:22):
US unilaterally just to impose whatever conditions it wants and everybody,
you know, just as it's useful to have those constraints
in China. They've done plenty of economic bullying of their
own over the years when they can get away with it,
So having some kind of balance there I think is
potentially helpful. The problem is we also have some fairly
volatile leadership, particularly in the US side, and so you
(15:45):
can imagine things going wrong, and that was always the
worry with the mad during the Cold Wars, yeah, it
was great, but we were one step away from this
really bad.
Speaker 3 (16:10):
Going back a little bit to the sort of real
world implications of the network of different export controls and
potential guns that could be used at various times. I know,
you talk to a lot of multinationals and businesses active
in China but also operating around the world. What's the
implications for a multinational that's actually still got very much
(16:32):
caught up in the US and China both as a
market and as a manufacturing base. It seems like it
may be useful to have a balance of terror, but
in the meantime as a hell of a lot of paperwork, right.
Speaker 2 (16:44):
I think the short answer is that in a minimum,
your compliance burden goes way up, right, because you now
have to satisfy regulators in the US, you have to
satisfy regulators in China, and various things. Just the friction
and the transaction costs of doing things a lot of
cross border activities, they have gone up quite a lot.
So that's your kind of most benign baseline scenario is
(17:07):
that has occurred. And you know, I think the other
thing that people talk about a lot, very hard to quantify,
is the uncertainty premium goes up, You're constantly kept guessing,
you know, will these things be imposed, if so, when,
if so, will I be you know, victimized?
Speaker 1 (17:23):
Or are the ways to work around it?
Speaker 2 (17:25):
So that requires there's sort of an additional cost in
terms of strategy planning, hedging, planning for how.
Speaker 1 (17:32):
You do this.
Speaker 2 (17:32):
I think at the moment, that's where we are. And frankly,
both Trump and She at the leadership level, have in
fact made it pretty clear repeatedly over the course last
year that they want an agreement, they want a deal,
They want to set up some kind of regime under
which people can trade and invest. And the Chinese, i
(17:55):
think fortunately in this case, have leveraged to make sure
that deal is somewhat real rather than.
Speaker 1 (17:59):
Just a fake deal.
Speaker 2 (18:00):
So if we get there, that will be I think
somewhat helpful. But even if we do get a deal,
the reality is that the US and China really have
this extremely adversarial relationship. You can create a deal that
sort of creates a Dayton if you will, to use
another Cold War metaphor, but if you're thinking about the
long run, five, ten, fifteen year timeline investments, you have
(18:22):
to do a lot of hedging, and you have to
figure out ways that you can forestall or live through
situations where there might be a huge escalation in the
tensions between the US and China, and many more decouplex
It makes this strategic planning process a lot more difficult,
more crossly.
Speaker 3 (18:39):
But if you think of the goals that the government,
the Chinese authorities are pursuing in many ways, they are
trying just as they try and advertise and strengthen US
dependence on certain things from China, China is obviously actively
trying to reduce the degree of dependence it has on
the US. And that seems to be going pretty well.
I mean, we're not it's not far. Yeah, it is.
Speaker 2 (19:01):
And so if you look at there's a bunch of
work that you can do looking at sort of the
OECD databases on trade and value added that shows if
you just break down US supply chain supply chains for
physical goods within the US, they are about two to
three times more reliant on inputs from China as the
other way around.
Speaker 1 (19:22):
And this is partly the result.
Speaker 2 (19:24):
Of differential industrial development, but partly the result of deliberate
Chinese efforts to de americanize, specifically there's supply chains, and
they have made good progress there now some areas it's
really tough. So the semiconductor industry good luck trying to
de americanize because the US position at various nodes in
(19:46):
that is extremely extremely strong, and despite huge investments, Chinese
have made some progress there, but not a ton. Frankly,
so again, it's very difficult to build an alternative ar
supply chain, probably even more difficult to build a fully
autonomous semiconductor supply chain. These interdependencies both countries would like
(20:08):
there to be less of them, but in fact it
is very difficult to untangle them, which is why I've
always been skeptical of sort of like the easy decoupling story.
Speaker 1 (20:17):
Oh, the China and the US and decoupling.
Speaker 2 (20:19):
It's like, yeah, you can try, and in individual sectors
you can get reasonably far, but on a macro basis,
untangling the interconnections that have been built up in the
global economy over the last forty five years is extremely difficult.
And the other thing I would say is that as
China has tried to decrease its dependency on the rest
(20:42):
of the world from a supply side, it has increased
its dependency in the rest of the world. On the
demand side, because it's now basically an export driven economy,
they depend very heavily on markets being open to them,
and this dependency has increased substantially over the last five years,
is not decreased, and their own sort of supply side
(21:03):
obsession at home creates a deflationary, weak consumption environment, which
just intensifies this dependency on international markets. And I think
this is something that's not sufficiently appreciated in the world.
Is that, Yeah, on a producer basis, China is kind
of self sufficient, but they have really exposed themselves to
(21:25):
a lot of potential economic downside if export markets close up,
or if just there's a global recession and people can't
buy as much, and that is a real problem for them.
Speaker 1 (21:34):
To which they have no very clear solution.
Speaker 3 (21:38):
I was going to ask you about that. I mean,
we have fact we've calculated down that our economists that
China's manufactured goods trade set plus is the largest now
relative to global GDP of any country since the US
after World War Two. And we've also shown how the
amount of sort of trade diversion that's happened, just the
sort of wave of exports going across Asian economies and
(22:00):
extent to Europe that might otherwise have gone to the
US due to these tariffs. And as you said, you
know that itself produces a vulnerability because we see countries
potentially reacting to that wave of imports. And it's funny
because it's kind of the weakness on the other side
of the strength, right. You know, we tend to say
China politically has an ability to withstand pain that the
(22:21):
US doesn't have, and that means it can sort of
hold its ground against Donald Trump. But to your point,
ignoring quite a lot of domestic economic pain, I mean,
do you see I know, you're not one of those
people who is continually kind of announcing there's going to
be a crisis or you know, an end of China's
growth story. But do you think they are underestimating the
(22:42):
costs of this strategy?
Speaker 1 (22:43):
Yeah, that's a good question.
Speaker 2 (22:45):
It seems to me that the government over the last
several years they've adopted a very very sort of a
techno fetishist supply side growth model, and basically they've said,
all of our problems productivity, income, growth, whatever, they will
be solved by just investing massively in the technologies the
future which will create this productivity miracle, which will then
(23:08):
drive future incomes of growth. It's a little bit like
the people who are now going around saying AI is
going to solve all known economic problems because of these
productivity magic and the Chinese view is that this is
the result of sort of physical technologies at least as much,
if not more so than AI.
Speaker 1 (23:26):
But it's similar kind of thinking.
Speaker 3 (23:27):
They haven't been doing too badly on these technologies. Oh no,
you know, but the thing we've thought that we've think
they've glabal leadership position in five of the thirteen key
technology but touching up in all the others.
Speaker 1 (23:37):
No, for sure.
Speaker 2 (23:38):
So they've done very well on the production side. And meanwhile,
nominal growth in China is less than half of what
it was five years ago. Right, so they used to
very reliably be able to count on nominal growth of
eight nine percent very consistently.
Speaker 1 (23:51):
It's now down to four.
Speaker 2 (23:53):
And these things are linked because they basically say the
supply side will solve all problem is we don't need
to have a demand side strategy. We don't need to
support consumers if they're hammered by a pandemic. We can
impose a gigantic compression of their balance sheets by crushing
the properties five years in a row. And that's fine
(24:15):
because capital will move to the correct places. And that's
a very very one sided and incomplete view of the economy.
So they are paying a price for this that is material,
and I guess the question is are they unaware of
that price. Do they say, well, we know that's the price,
but it's fine, or do they think, actually, you, mister Krober,
(24:36):
you're wrong about the price.
Speaker 1 (24:37):
Actually this is a short term thing.
Speaker 2 (24:39):
That's a harder thing to read, and I think you
can make multiple different interpretations. But what I would say
is they don't look like they are changing their minds
anytime soon. They may be right, they may be wrong,
but they're staying the course.
Speaker 3 (24:52):
And everything we've said, i'm pretty sure is going to
stand the test of time because we're talking fairly long term.
But obviously it is dangerous these days to have a
conversation which you then don't publish for a few days
talking about trade issues. And as I've said at the start,
it's likely that the meeting with she is going to
be on and off and on and off several times
before we get there. But I guess one way of
(25:13):
thinking about this or that people could have in the
back of the minds when, if, and when that meeting happens,
and then they assess the results of that meeting, which
maybe Donald Trump announcing some great deal or maybe not.
Is it at the heart of what you were just saying,
you know, short term, it actually does matter, even though
they're pretending it doesn't matter, and they can put up
with the pain. China's facing a pretty high tariff sort
(25:34):
of forty percent ish. It does actually matter to them
that they bring this down, and it seems to matter
to them a bit more than it matters to Donald Trump.
Speaker 1 (25:43):
Well, this is an interesting question.
Speaker 2 (25:45):
So if I look at the Chinese side on this, yeah,
I think they would like lower tariffs, But actually I
don't think that is the top of their list, frankly,
because the.
Speaker 1 (25:53):
Reality is they are enduring very high.
Speaker 2 (25:55):
Terriffs right now relative to the past and relative to
anyone else in the.
Speaker 1 (25:58):
World and their experts.
Speaker 2 (25:59):
You fine, right, and some of that is front loading,
but I think most of it is not. Some of
it is transhipment. They're routing things through third countries that
wind up in the US. But most of it seems
to be that they've actually been very successful at developing
other export markets Southeast Asia, Europe, Latin America, you name it,
and yeah, there's some protectionist concerns there, but in most cases,
(26:22):
in most product lines, there really aren't great alternatives at
a comparable cost to what you're buying from China, and
most countries don't have the same kind of security concerns
that the US has.
Speaker 1 (26:31):
So they're doing fine.
Speaker 2 (26:33):
So I think they've concluded, yeah, we would like lower tariffs,
but if we have to live with the current tariff level,
we've shown that we can, which also means that they
can walk away if they think if all we're getting
is a few points off tariffs, that's not enough. We
need more in a deal, and if that's all you're
going to give us, sorry, then there's no deal. We'll
(26:55):
just do our thing and we'll see how you like it,
because we think that we can bear more pain.
Speaker 1 (27:00):
I think what they really want is they would really.
Speaker 2 (27:03):
Like to see some scaling back of the US export
controls on technology. That is a number one on their list,
and I think that will be very interesting to see
whether they can dislodge the US on that point, because
historically the US position has been export controls are sacrosanct.
Once we put them on they are tablets from Sinai,
they are the word of God. They cannot be altered
(27:26):
in any way. So that's, you know, that's a big ask.
My view would be, I think the US has overdone
it on export controls, and it would be very possible
to go through and do some culling and say, here
are the things that are important that we really need,
and here's some stuff actually that was overreach, and we
could pull back. But there's a people don't want to
go there because of the principle. I think the other
thing that the Chinese would like is, as we saw
(27:48):
with the TikTok deal, some kind of a pathway that
would make it easier for Chinese tech companies to invest
in the United States because they see this as coming.
They see it's important for their companies to nationalize. As
you grow, you can't do everything through exports. You have
to get closer to your customers, build up distribution networks,
build up.
Speaker 1 (28:07):
Branding, et cetera.
Speaker 2 (28:09):
Every country in the world, once it gets to a
certain point, it's companies start to multi nationalize. China is
the same. The US is the world's biggest single market.
They like to see a pathway there, and I think
they also think that this would be a stabilizer in
the relationship. But obviously there are a lot of political problems
with that.
Speaker 1 (28:27):
On the US side. People are very nervous about that.
Speaker 2 (28:30):
So I think those are the asks on the US side.
I find it very hard to understand what it is
that the US is negotiating for. I'm perplexed. It is
very clear that Trump wants something that he can call
a deal, okay, and because he wants a deal, and
the Chinese feel that they can walk away if they
don't get a satisfactory deal, that gives them a slight
edge in their stations. And it would be interesting to
(28:52):
see if we get something out of this, what the
US obtains other than additional agricultural purchases we started Boeing sales,
et cetera. Is the US after any kind of bigger
game here, It's not at all clear that they are.
It's quite hard to understand what the purpose of the
negotiations is. The purpose of the other US trade negotiations
(29:15):
was basically to demonstrate to other countries how powerful the
US is and how we can push you around. That
was essentially the purpose of negotiations. China has said, we're
strong enough to not play that game.
Speaker 3 (29:28):
So that ship has sailed.
Speaker 1 (29:30):
What's your plan B?
Speaker 2 (29:33):
And it's maybe some things are being talked about there
that we don't know about, but it's a little obscure.
Speaker 3 (29:37):
You've reminded me. I mean, of course, there's the grand
story of why things are happening, and then often with
this administration especially, there's the sort of slightly lower story.
And you talked about the export controls being a really
kind of fawny aspect of this that's causing quite a
lot of problems. The Commas Secretary is obviously the one.
It's his office, the Commerce Department that's responsible for the
export controls, and it's obviously the Treasury set that's been
(30:00):
in leading a lot of these negotiations on the core
trade issues. There is a theory that just says that
I would love I think wants to make things as
hard as possible.
Speaker 1 (30:09):
I've heard that theory.
Speaker 2 (30:10):
You know, all of these stories are slightly unverifiable. What
I think you can say with high confidence is that
the Bureau of Industry and security within Commerce, which supervises
the export controls, has pretty hawkish leadership, and that they
basically feel that it's the right thing for the US
to tighten the screws on export controls. And I think
(30:30):
they have a reasonable point in the sense that if
you have an export control regime and you think it
is valuable.
Speaker 1 (30:37):
You don't want it to do on the table.
Speaker 2 (30:39):
You should not have a lot of loopholes that undermine
what you're trying to do, and that, you know, I
think that was clearly their view on these latest regulations.
But for them to issue these regulations essentially goes against
the policy that Trump had laid down as early as May,
saying Okay, let's not have any more export controls until
our trade negotiations are through. So they violated what everyone
(31:00):
understood to be the president's wishes there.
Speaker 1 (31:03):
And I guess what you could say is.
Speaker 2 (31:04):
That Lutnik, given his well advertised problems with Bess and
he didn't really have much of an incentive to stop
them from going rogue. If that's what they chose to do,
I think that's we can say that.
Speaker 3 (31:17):
Arthur Kroeger, thank you so much for doing my pleasure.
Thanks for listening to Trumpnomics from Bloomberg. It was hosted
by me Stephanie Flanders, and I was joined by the
founder and director of research at Gavical Dragonomics, Arthur Kroeber.
Trumpnomics was produced by Samasadi and Moses and with help
from Amy Key and special thanks this week to Rachel
(31:40):
Lewis Chrisky. Sound design is by Blake Maples and Kelly
Gary and Sage Bowman is Bloomberg's head of podcasts, and
please to help others find us, rate and review it highly.
Wherever you listen to podcasts
Speaker 2 (32:00):
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