Andy Rothman, Founder & CEO of Sinology LLC - Expert Insights on the China-US Tariff Dispute, with Some Surprising Conclusions.

Episode Transcript

Speaker 1 (00:05):
The pain for American consumers and companies will be
a lot deeper than the pain feltin China.

Speaker 2 (00:15):
Hello friends, old and new, and welcome to Drinks
with Caroline.
I'm so happy you've joined mefor what I believe will be
another stimulating conversationwith an industry expert,
founder or otherwise fabulousperson in the consumer industry.
Well, andy Rothman, thank youso much for joining me for

(00:36):
Drinks with Caroline For mylisteners.
I've known Andy for many, manyyears.
We worked together at CLSA,which was a Hong Kong-based
research firm, and Andy was ourvoice in China.
The firm was known for itsresearch in China and for being
really well out ahead of thecurve in understanding what was
going on with the Chineseeconomy, which was incredibly

(00:59):
valuable to me as a consumeranalyst, covering names like
Pepsi and Coke and looking attheir businesses there, and
Estee Lauder being another onewhere the China consumer, both
domestic and international,became incredibly important.
He now has his own companycalled Synology, and let me turn
it over to Andy to tell you alittle bit about his background.

Speaker 1 (01:18):
Thanks, caroline, great to be with you, Great to
catch up again.
It's been a while.
Should I open my drink now,since we're having drinks?

Speaker 2 (01:26):
Yes, I keep forgetting to ask my guests to
do that, so thank you forreminding me.
What are you drinking, andy?
Oh, that sounds good.

Speaker 1 (01:35):
Can you hear that?

Speaker 2 (01:36):
I heard that it was amazing.

Speaker 1 (01:38):
I am drinking an athletic in your honor.
A extra dark.

Speaker 2 (01:44):
Yum, does it taste good.

Speaker 1 (01:46):
I'm still pouring it right now.

Speaker 2 (01:48):
While you're doing that, I poured myself a Libby
non-alcoholic white sparklingwine and I have to say it is
delicious.
It's my new favorite go-todrink for something a little
sophisticated but non-alcoholic.

Speaker 1 (02:02):
All right, the athletic is quite tasty, thank
you.
But non-alcoholic All right,the athletic is quite tasty,
thank you.
So just a little bit ofbackground for your listeners.
I have been focused on Chinafor a long time, so I first went
to China as a student in 1980.
And that was just a few yearsafter Mao's death and the end of
the cultural revolution, sothings were really chaotic and

(02:22):
quite backward at that time.
I went back to work there in1984 as a very junior American
diplomat in Guangzhou in theSouth, not far from Hong Kong,
and even at that point it wouldhave been impossible to predict
that China would be the world'ssecond largest consumer market,
the world's fastest growingconsumer market today, and

(02:43):
something that everyone's payingattention to.
I want to emphasize this,because you're going to hear
from me today is probably alittle bit more optimistic about
the Chinese economy than a lotof people hear or read about,
and I think one of the reasonsfor that is that I've seen China
through some of its worst times.
For example, when I firstworked in China, the per capita

(03:06):
GDP level was below that ofHaiti, bangladesh, afghanistan.
So this has led me to a coupleof fundamental views.
One is that the Chinese peopleare really resilient, and the
second is that the Chinesegovernment has been pretty
pragmatic when it comes toeconomic policy.
They make a lot of mistakes,but they generally course

(03:28):
correct, and that's why China isnow a fairly wealthy place, and
so that's probably why I'm alittle bit more optimistic that
China can get through problemsover time.

Speaker 2 (03:37):
That's an astounding background, Andy.
Just four decades on the ground, or if not their full-time,
their part-time.

Speaker 1 (03:45):
Yeah, so I spent 17 years with the State Department
as a diplomat.
My last job was running themacroeconomics office at the
American Embassy in Beijing inthe late 90s, when I worked on
China's WTO negotiations.
And then, in 2000, I left thegovernment and joined CLSA and
that's where we met and for 14years I was the Shanghai-based

(04:07):
China macro strategist for CLSA,an investment bank sell-side
brokerage firm.
And then, in 2014, after morethan 20 years living and working
in China, I moved back to theUS and joined Matthews Asia, one
of the largest Asia-focusedactive equity investors in the
US.
And then, at the beginning ofthis year, I started my own

(04:28):
company, synology LLC, to advisecorporate directors and
institutional investors on risksand opportunities in the
Chinese economy and how tonavigate US-China relations.

Speaker 2 (04:39):
Well, no one better qualified to be here today to
talk to us about how you couldsee the next year and three
years playing out, maybe evenlonger.
These are very confusing times,I think, for a lot of investors
and young businesses and maybeeven not maybe definitely more
established businesses.
Everybody is struggling to keepup with the latest news.
You just got back from China.

(05:01):
Your view on what you've seenso far and where we stand today
Great.
So yes, I just came back fromChina your view on what you've
seen so far and where we standtoday.

Speaker 1 (05:05):
Great.
So, yes, I just came back fromtwo weeks traveling around China
Hong Kong, shanghai, xiamen,which is a city that maybe most
of your listeners haven't heardof, but it's got a population
bigger than LA.
It's on the coast of Fujianprovince, right across from
Taiwan, and then sometime inBeijing talking to people in the
government and advisors to thegovernment as well.

(05:26):
I think there's two importantthings for companies and
investors to think about aboutChina right now.
One is that, while the Chineseeconomy is growing more slowly,
it's still growing faster thanpretty much every economy in the
world, with the exception ofIndia.
China is still accounting forabout 20% of global economic

(05:50):
growth.

Speaker 2 (05:51):
When you say is still growing.
What's the latest data pointyou have?

Speaker 1 (05:55):
Well, the GDP official GDP growth rate is
about 5%, but I wouldn't suggestthat people focus on that
because we know that's the leastaccurate statistic in China.
But what is more accurate isthat China is and despite the
tariffs chaos will continue tobe, I think, the world's second
largest consumer market afterthe United States.

(06:16):
It is the fastest growingconsumer market, growing faster
than the US and Europe and Japanand, as I said, also than the
US and Europe and Japan and, asI said, also the main driver of
global economic growth.
So the IMF just put out anupdated forecast to take into
account what's happening withthe tariff chaos and they are
still predicting that this yearand next year, china will

(06:37):
account for 20% of global growth.
That's more global growth thanfrom the US and the rest of the
G7 combined.
So, regardless of what happenswith the tariffs, china is going
to continue to be important forcompanies and for investors for
four reasons.
One is it's going to continueto drive global growth, as I
said.
Second, it is going to continueto be the second largest and

(07:00):
fastest growing consumer market.
It's going to continue to bethe driver of competition
globally for many companiesaround the world.
We're all aware of DeepSeek,for example, surprising a lot of
people back in January with itssuccesses in AI.
But maybe not so many peoplehave heard of Mishwe, which is a

(07:21):
consumer company that wentpublic in the Hong Kong market
about a month and a half ago.
They sell drinks and ice cream.
They have, caroline, moreglobal franchise outlets than
Starbucks.

Speaker 2 (07:33):
Astounding.
I keep being astounded.

Speaker 1 (07:36):
Andy.
And then the fourth point isthat China is still going to be
a really important part of manycompanies' global supply chains.
So we're having drinks here.
I just poured myself anon-alcoholic beer in your honor
from Athletic, and it comes outof an aluminum can and there
are probably vitamins in therethat come from China.

(07:59):
China's going to remainimportant for all of those
reasons.

Speaker 2 (08:03):
Where do you think we are right now with reaching
some sort of agreement betweenthe United States and China on
tariffs?

Speaker 1 (08:12):
Well, you know, the news flow on this is almost
every few hours, so we run therisk of everything that we talk
about today is going to be outof date by the time your
listeners put their headphoneson.
But there's a few things that Iwant to emphasize about the
negotiations.
One is from my discussions withofficials in Beijing just about
10 days ago, it was clear to methat they really want to

(08:34):
resolve this problem.
They want to solve this tariffdispute and get back to a normal
trading relationship.
That doesn't mean they're notgoing to continue to fight back
with tariffs in response totariffs from Trump.
That doesn't mean they're notgoing to continue to fight back
with tariffs in response totariffs from Trump.
It doesn't mean that they'regoing to occasionally put out
public statements that aresomewhat strong, but they want
to resolve this.

(08:55):
The problem for them is twofold.
One is Chinese officials saythey don't know who to talk to.
They told me they have triedmultiple channels to get someone
in the White House to representDonald Trump and start
negotiations, but there is nopoint person.
I would assume that TreasurySecretary Besant, for example,

(09:16):
would be the key player, but ifyou listen to his public
comments, he clearly hasn't beentalking to the Chinese, and I
think that might be becauseDonald Trump really wants Xi
Jinping to call him directly.
But there's no way that's goingto happen.
First of all, no country likesto negotiate that way, including

(09:36):
the US, prior to the Trumpadministration.
First you'd have some progressmade at working level or senior
level discussions before it wentup to the two countries'
leaders.
Second, Chinese officials saythey just don't know what Donald
Trump wants from them.
They also don't know what he'swilling to give them in return,
because obviously in anegotiation usually both sides

(09:57):
compromise a bit.
So they're saying, for examplewell, sometimes President Trump
says he's focused on fentanyl,but then often he doesn't talk
about that again.
So, for example, on April 2ndwhen he spoke, President Trump
spoke for an hour in the RoseGarden about tariffs he didn't
mention fentanyl once.
So sometimes he talks about thebilateral trade deficit.

(10:18):
The Chinese are asking does hewant us to buy more LNG, more
soybeans from America?
We can talk about that, but hehasn't told us.
Does he want, as he sayssometimes, BYD, the electric
vehicle manufacturer, to set upa plant in the US?
We can talk about that.
So they can't engage innegotiations until they know
what it is President Trump wants.

Speaker 2 (10:39):
How long do you think the Chinese economy can go in
this state without them feelingvery anxious to get a deal done?
Because it seems to me that'sprobably what Trump is going for
.

Speaker 1 (10:51):
Yeah, and I think Trump and his team are making a
big miscalculation here.
The tariff conflict, if itkicks into full gear soon, is
going to cause pain in both theChinese and American economies.
But my view is that the painfor American consumers and
companies will be a lot deeperthan the pain felt in China.

(11:13):
Let me explain that for aminute.
From the Chinese side, exportsto the United States only
account for 15% of China's totalexports.
Last year that's equal to 2.8%of China's GDP.
So it's not trivial but it'snot dramatic.
And that 15% share of Chineseexports going to the United

(11:34):
States that's down from over 20%several years ago.
From the first Trumpadministration, chinese
companies have been diversifyingaway from the US because they
could see that this was possiblygoing to come back.
Also important to recognize thatthe Chinese economy is not
driven primarily by exports.
If you go back to the fiveyears before COVID, on average

(11:56):
in each of those years, netexports that's the value of a
country's exports minus theirimports On average each year,
net exports only contributed 1%of China's GDP growth.
Now that contribution to growthwent up dramatically last year
because the domestic slowdown inChina.
Net exports were 30% of growth.
So Xi Jinping is trying, Ithink, to get the structure of

(12:18):
his economic growth back towhere it was before COVID, where
trade is just not thatimportant compared to domestic
demand.
Also, if you look at what Chinaimports from the United States a
lot of that stuff.
There are multiple otherproviders Soybeans, for example.
China has been importing morefrom South America Airplanes.

(12:39):
They can import more fromEurope from Airbus LNG.
They've diversified to othersuppliers.
But the reason I think thatthere's going to be more
problems in the United States,more pain in the United States,
is that in many cases the USdoes not have alternatives.
There's a lot of goods likemicrowave ovens or Christmas

(13:04):
decorations or toys wherethere's really no other supplier
.
We're coming up on the 4th ofJuly soon.
We get all our fireworks fromChina Now.
More importantly, things likecritical minerals, especially
for things like EVs and solarand batteries most of those
things we get the majority ofour supplies from China and in

(13:24):
many of those things Chinadominates the global supply
chain.
So I don't think this wascarefully thought through.
And even if you look at thingslike vitamins, a lot of them
come from China.
A lot of pharmaceuticalsingredients, active
pharmaceutical ingredients Chinais the biggest producer,
exporter of those things and soCan't they go through other

(13:46):
countries and get into the USthat way?
It's possible, but it dependswhat Trump wants to do.
So, for example, when I was inChina a couple of weeks ago, I
met with a small company thatmakes LEDs and the guy who runs
that company pointed out to methat almost all the light bulbs
sold in the United States areeither made in China or they're

(14:07):
made in Mexico with Chinesecomponents.
So he said that Americans willeither have to pay the tariff of
over 100 percent because he'snot going to absorb it, because
his margins are low, singledigits, or Americans will have
to sit in the dark.
Now can Americans buy thoselight bulbs through Cambodia or
Vietnam?
Well, donald Trump's talkingabout a 40% tariff on those

(14:30):
countries.
Plus, under the customsregulations, unless the product
is primarily value-added inthose countries, it'd be
considered a Chinese product.
So it's not going to be easy.

Speaker 2 (14:43):
You're really saying that there aren't going to be a
lot of creative workarounds thatcompanies are already figuring
out.
You don't see that happening.

Speaker 1 (14:51):
I think it's going to be, in most cases, really
difficult.
Look at Apple, for example.
They're talking about Tim Cookjust said a couple of days ago
that very soon he's going toimport a larger share of iPhones
from India and Vietnam ratherthan from China, but all the
components that go into thoseiPhones, I assume, are going to

(15:15):
continue to be sourced fromChina.
So is the Trump administrationgoing to consider those iPhones,
which are simply assembled inIndia, as an Indian product?
Or are they going to say mostof the value in that iPhone is
still coming from China andwe're going to tax you like it's
a Chinese good?
Unclear.

Speaker 2 (15:32):
Well, if they did the latter, they can stay away from
the negotiating table longer.
I guess they could pretend thatit wasn't happening.
On the component parts.

Speaker 1 (15:42):
They could.
Iphones will still be moreexpensive because assembling
them in India with Chinese partsdoes cost more maybe 10%, 15%
more.
So Americans will have to paythat.
But then you have to ask what'sthe point of all that?

Speaker 2 (15:57):
Right.
I'm just wondering how longthis is going to take.
There seems to be a consensusview the market is going up
substantially from its lows.
There seems to be a view thisis all going to get sorted out
soon, or that, if it isn't, itdoesn't matter, and I'm
wondering about your opinion.

Speaker 1 (16:13):
I disagree with both of those.
It clearly does matter.
The market is seeing what itwants to see.
For example, yesterday themarket went up because people
interpreted a statement fromChina's Ministry of Commerce as
saying we're ready to talk now.
Well, I read the statement andI didn't see anything new in
there at all.

(16:33):
It said we've always been opento talking.
Anything new in there at all.
It said we've always been opento talking, but the Trump
administration started thisconflict and they need to
deescalate.
I think the Chinese, as I saidearlier, are just waiting for
someone to come and say here'sour point person, you can talk
to him.
He has authorization from thepresident to speak to you and
here's what we want toaccomplish.
The idea that 100% plus tariffsare not going to matter to

(16:57):
American consumers and companiesis just all off base.
Think about it this waySomewhere around half to 60% of
what we import from China areintermediate goods pieces either

(17:19):
metal, let's say, or smallmotors that American companies
import mostly small businessesand they use them to make an
American product to sell toAmericans or to export to
another market.
They're going to have to paythe tariff on the imported
components, which means thattheir prices are going to go up
and they're going to beuncompetitive outside the rest
of the world.
They're going to beuncompetitive, possibly, with a
machinery maker in Europe thatdoesn't have to pay the high

(17:42):
taxes and has a lower tax ratehere compared to China.
We've already seen Mack Trucklayoff workers at several of its
factories around the UnitedStates.
I think we're going to see morelayoffs.
I think we're going to see morelayoffs.
I think we're going to seeempty shelves and higher prices
for the things that are on theshelves.
Walmart has been cutting backon its orders from China.

(18:05):
We just haven't seen it yet.
So I think it's going to takesome time for this to show up,
not only in the data, but alsoin terms of political pressure.
So one of the things I wouldadvise people to look at is the
monthly Michigan Universitysurvey of consumer sentiment.
They break down the responsesby political affiliation and

(18:26):
honestly, carolyn, this issomething I wasn't aware of
until just last month.
What this shows is thatDemocrats have really high
expectations for inflationshort-term, long-term.
Republicans, however, aretelling University of Michigan
I'm starting to get worriedabout short-term inflation, but
I have no worries at all aboutlong-term inflation because I
believe Donald Trump will makeeverything great again a year

(18:49):
from now.
At some point, though, if thisdeal isn't done, those
Republican voters are going togo.
Wait a minute.
I have to pay double the priceof a year ago to buy shoes for
my kids to go back to school inthe fall.
For a computer, I have to paydouble or I can't get one.
At some point, they're going tostart rebelling and putting

(19:11):
pressure on their members ofCongress, and that's going to
put pressure on the president.
It just may take a while.

Speaker 2 (19:18):
Everything you're saying makes sense to me, and so
I'm wondering what I'm missingin the market's reaction, which
seems to be gaining confidencethat we're close to an outcome
that is not going to be bad.
And how could we avoid arecession and high inflation if
tariffs go up?
Even 50%, 10%, 15%, that'sinflationary, I imagine.

(19:42):
What am I missing?

Speaker 1 (19:44):
Well, if you want to be an optimist, there are a few
things to cheer you up.
Maybe we should get out thedrinks with alcohol for this
part.
One is it does seem likePresident Trump is increasingly
becoming aware of the downsidesof his tariff campaign.
I'm sure many of your listenerssaw the clip of him at a

(20:06):
cabinet meeting the other daysay well, yeah, maybe Americans
are going to no longer buy 30dolls for their children.
They'll only buy two dolls andthey'll have to pay more for
those two dolls.
So that was one of the firstoccasions where we've seen the
president actually acknowledgethat his tariffs are going to

(20:27):
raise prices for consumers.
We've seen him put exemptionsin place for certain electronics
.
We've seen him put exemptionsin place for automobiles.
To a certain extent he'stalking, apparently, to the
pharmaceutical companies.
So maybe he's beginning tounderstand how bad this is going
to be for American companiesand consumers, and then, when

(20:51):
the tariffs do go into effect,the impact will be felt more
widely.
So maybe that will give him anopportunity.
The other thing that'sinteresting is that his team has
been saying lately well, maybewe won't really conclude a
detailed trade agreement withcountries in the next three
months, but we'll have theframework for talking long-term

(21:13):
about better deals.
So he seems to be creating somewiggle room for himself to say
OK, it won't be a traditionaltrade deal with India or Japan
or China, but it will be enoughthat I can remove the tariffs
and declare victory and we canmove on.

Speaker 2 (21:26):
So if we take a look at this from China's perspective
, if they did get to negotiate,what level of tariff do you
think they might find acceptableand you kind of get on with
business as usual at a 15% or20%, or is it a 50% higher rate?
What's a best case outcome,andy?

Speaker 1 (21:47):
That's an interesting question.
The Chinese government mightnot look at it that way.
They have already said thatanything over 100% is
effectively an embargo onshipping anything from China to
the United States.
So if it's 100 or 200 or 300,they don't care From their
perspective, since the tariffs,whether they're 10 or 20%, are
going to be paid by Americans.

(22:08):
That's really.
They would turn that around andsay how much pain do you want
to accept for your companies andconsumers?
What they will want to know iswhat does Donald Trump want them
to do differently than they'redoing today?
Does Donald Trump want them toreally do a lot more to crack
down on the illegal productionof precursor chemicals for

(22:31):
fentanyl?
These are chemicals that aremade illegally in China and then
shipped illegally to drugcartels in Mexico who create the
fentanyl and send it across theborder.
They have cracked down on theproduction of fentanyl, which
was always illegal on thechemicals.
But their feeling is, whenwe've done this for Trump in the
first term for Biden, we nevergot anything back in return.

(22:53):
They didn't lower the tariffs.
They didn't do other thingsthat we expected, like on export
controls on semiconductors.
So, yeah, we can do more, butwhat are you going to do for us,
and is this really what you'refocused on?
Do you really want us to buymore LNG and soybeans?
Okay, just make it clear to us.
So I think there are a lot ofthings that China is willing to

(23:13):
do, but they need to know whatthe Trump administration is
going to do in return, and theyneed to have some confidence
that this isn't going to be aprotection racket.
I do one thing and then youcome back for more.

Speaker 2 (23:27):
That's a really interesting point.
What do you think a worst caseis, Andy?

Speaker 1 (23:32):
Worst case is that President Trump feels
embarrassed or humiliated bysomething that the Chinese
government does or says possiblyinadvertently, not a deliberate
attempt to embarrass him, buthe feels that way and then he
lashes out and he keeps the hightariffs in place.

(23:55):
That will be difficult for China, but manageable, I think.
But he might also do otherthings.
For example, he signed off on amemo called the America First
Investment Policy back inFebruary.
That memo is basically alaundry list of retaliatory
steps he might take, includingdelisting from New York
exchanges all of the Chinesecompanies that trade in the US,

(24:19):
like Alibaba, pdd, a lot ofconsumer names, vip shop.
That, I think, would have animpact on some Chinese companies
not Alibaba per se, becausethey already have a dual listing
in Hong Kong, but PDD isprobably the biggest consumer
brand listed in New York thatdoesn't have that dual listing

(24:42):
already, but they'll get a duallisting in Hong Kong.
I think long-term the biggernegative consequence will be on
the US Foreign companies andinvestors will just lose faith
in US capital markets.
But we should be aware that hemight do those kinds of things
if he feels embarrassed.

Speaker 2 (24:59):
As I see it, we've got two sides that need to save
face Very, very important onboth sides.

Speaker 1 (25:05):
Yeah, that's always the case when you're talking
about two governments, but Ithink both sides have the
capacity to find a way throughthis that doesn't require them
losing face.
I think the Chinese areperfectly happy to do something
like that.
Is Donald Trump?
Does he see this negotiationwith China as a typical

(25:30):
negotiation between twogovernments, two governments of
the two largest economies in theworld, where you have to keep
doing business with each otherin perpetuity and so you don't
want to make the other side feellike they lost it all, like
they've been humiliated?
That doesn't work well.
Or is he going to view this asa real estate transaction where

(25:53):
it's a one-off and I don't careif the other party in this
negotiation hates me and feelsembarrassed and humiliated
because I'm never going to seethem again?

Speaker 2 (26:02):
Wow, I hope it's not the latter.

Speaker 1 (26:04):
Yeah, and I am also hopeful.
Odds are that eventually thiswill get sorted, because the
pressure on the president fromunhappy Republican voter
consumers and small businesseswill rise as the tariff impacts
bite and that will lead him tosearch for a compromise.

(26:26):
But there is a not zero riskthat things blow up and the
president reacts in a way whichisn't actually good for the
American economy but makes himfeel good for the moment.

Speaker 2 (26:42):
Right.
Can we switch to talking aboutChinese consumers, to the extent
that you have spent timelearning about that recently?
Is there any anti-Americansentiment one would imagine
there would be and any change inthe demand for American brands
within China?

Speaker 1 (27:02):
Great question that was actually the thing that
surprised me the most on my triplast month is that I did not
encounter any anti-Americansentiment from consumers, from
small businesses, evenbusinesses that are afraid
they're going to lose out a lotbecause they sell to the United
States.
I didn't hear it from Chinesegovernment officials either None

(27:23):
, and I was worried that whenthe tariff announcement was made
ahead of my trip, that maybepeople in the government
wouldn't want to talk to mebecause I'm an American.
That happened in the aftermathof the balloon and spy balloon
incident a couple of years ago,but that wasn't the case.
In fact, I think, if anything,people were more interested to
talk to me, just hoping to getsome perspective from an

(27:45):
American as to what's going onin Washington and how should
they deal with it.
I spent two days in Shaman, thecity I mentioned before, talking
to entrepreneurs, and theyweren't angry at America.
They weren't angry at DonaldTrump.
In fact, a lot of themexpressed empathy for what he's

(28:05):
trying to achieve in terms ofbringing back high-end,
high-tech manufacturing to theUnited States.
They were just bewildered atthe strategy and tactics, saying
things like I saw the video ofSecretary Lutnick talking about
wanting an army of millions ofAmericans screwing tiny little

(28:26):
screws into iPhones and thesepeople said to me nobody in
China wants that job.
Do Americans really want thatjob?

Speaker 2 (28:35):
It's so hard to believe that sentiment hasn't
shifted negatively believe thatsentiment hasn't shifted
negatively.

Speaker 1 (28:45):
One of the things that isn't well known here is
that there's a deep reservoir ofgoodwill and respect of America
among most Chinese people,including in the government.
For example, the Chinesegovernment structure has been
restructured dramatically overthe last several decades.
This was really getting startedin the 90s.
The way the central bank wasreorganized or created really

(29:08):
the way the Ministry ofAgriculture was reorganized A
lot of this reorganization isbased on our model, and one of
the things I heard from peoplethat I spoke to when I visited
factories or had meals withentrepreneurs and bankers and
shaman was we grew up looking upto and admiring the United
States and hoping that over timeChina would be more like the

(29:31):
United States.
So we're kind of bewildered anda little bit sad about what's
happening in the US,particularly with respect to
cuts to the education system,about what's happening in the US
, particularly with respect tocuts to the education system,
difficulties that foreignstudents are having cuts to R&D
and they're like what's going onin your country now.

Speaker 2 (29:51):
If I look at Estee Lauder, for example, a consumer
company that had a very bigbusiness in China that has
shrunk for a number of reasons.
Part was that a lot of it wasin travel retail to Chinese
consumers.
But my understanding is thereare a lot of local brands that
are growing up in the consumerspace.
I don't know how much ishappening in beverage.

(30:12):
I know a lot in coffee.
I don't know if that'shappening in the world of soft
drinks and other drinks, but mysuspicion is that it is, and I
just heard the phrase brandnationalism being something Gen
Zs feel quite passionate about.
Are you expecting that toincrease or you're really saying

(30:35):
that there's no bad feelingsthat would affect global brands
in China?

Speaker 1 (30:40):
Right now.
My view is that brandnationalism is not one of the
most important elements in theChinese consumer market,
especially with respect toAmerican brands.
You might find thatoccasionally with Japanese
brands, but not recently.
I think American brands inconsumer goods and from

(31:00):
cosmetics to drinks havesuffered more from competitive
problems A lot of.
If you go back to the heyday,for American brands there really
weren't serious competitorsamong Chinese companies.
The competitors were oftenEuropean or Japanese companies,
not Chinese, and that's not thecase anymore.

(31:20):
Companies, not Chinese, andthat's not the case anymore.
Chinese entrepreneurs havegrown up so rapidly and they've
learned and they've adaptedreally really quickly.
So take coffee, for example.
I'm a big coffee drinker.
Most of the time that I livedin China, for more than 20 years
, coffee was really hard to find.
People just didn't drink itvery much, or if you did find it

(31:42):
, it was horrible.
So I used to traveldomestically in China carrying
my own freshly ground coffee anda French press.
But then over time I didn'thave to do that anymore because
there was good coffee to befound everywhere.
In my neighborhood in Shanghai,where I lived, there were no
coffee shops within walkingdistance of my house.

(32:02):
I was back in my oldneighborhood a couple of months
ago and now I stopped countingit.
A dozen coffee shops near myold house and two of them were
Starbucks, but the rest of themwere all tiny little local
people with just one littlecoffee shop where they were
making craft coffee with anelaborate machine or pour over.

(32:23):
And you've got chains that makebetter coffee for a fraction of
the price all over China, andpart of it is that people have
learned from the US model.
Part of it is that peopleworked for American companies
and then left and started uptheir own business.
Part of it is that if you're abig American brand or European
brand, your headquarters isthousands of miles away and

(32:46):
maybe China's not their mainfocus.
And when you go to them and say, hey, chinese consumers really
like coffee with some weirdflavor in it that you've never
heard of before, and theheadquarters goes.
I don't want to spend time onthat.

Speaker 2 (33:01):
Yes, you make such a good point.
I think initially a lot ofcompanies were caught unaware.
I'm sure now the multinationalsare very aware of how strong
domestic competition can be andis.
So, Andy, in wrapping this up,best guess at how likely it is
that three months from now, ifit could be a loose trade

(33:22):
agreement but some sort of tradeagreement that's allowing port
traffic to go back to strongactivity, how likely do you
think that is in the next threemonths?

Speaker 1 (33:32):
It's so hard for me to answer that question because
it's so difficult for me tounderstand the strategy in the
White House right now, whatthey're really trying to achieve
.
Is there some substance to thistrade war?
Is this really a long, windyway to get China to buy more

(33:53):
stuff from America, in whichcase I think that China will be
willing to do that, especiallywith stuff that the government
can influence, like LNG orsoybeans?
Or is this just a way forDonald Trump to say I want every
world leader to line up infront of the White House and
come and kiss my ring, in whichcase it's going to be more
complicated?
Is this a desire to decouplefrom China, like the Biden

(34:15):
administration was pursuing?
Really really hard to know.
So I'm going to take kind of awimpy way out to answering your
question and say you know, maybeit's a toss up right now, but
three months sounds optimisticto me.
It could turn quickly, but wejust don't know.
Or because maybe PresidentTrump himself isn't sure what he

(34:41):
wants out of all of this, andthis is why I'm providing
advisory service to companydirectors and institutional
investors, to kind of talkthrough these issues on a
regular basis to help peopleplan a little bit more, but it's
so hard to predict right nowand on that topic, andy, because
I'm sure you're in high demandright now do you think that

(35:05):
going via other countries is atleast a part solution?

Speaker 2 (35:10):
Can you at least lower the cost of tariffs by
doing that Going to a Vietnam oranywhere else in the world that
maybe there are some Chinesecomponents, but that we could
get supply and product on theshelf at, yes, a higher price,
but nowhere near as high a priceas if we're getting directly
from China?

Speaker 1 (35:27):
Maybe I know that's an unsatisfactory answer, but,
for example, I saw a friend inShanghai when I was there a
couple of weeks ago.
He produces for export fromChina.
Walmart, target are among hisbiggest customers and they
encouraged him back during thefirst Trump administration to

(35:48):
diversify his production.
So he built factories inCambodia and India.
But now Trump has putprohibitively high tariffs on
those countries as well.
So he's now feeling like he'smade a huge mistake because he
spent a lot of money gettingthose factories ramped up.
So we just don't know how.

(36:09):
Again I have to keep repeatingmyself.
Sorry.
What does Trump really want outof this?
If he really believes that he'sgoing to make so much money
from tariffs that he cansubstantially reduce or
eliminate personal income taxfor every American making less
than $200,000 a year somethinghe said recently If he really
believes that and mathematicallythat's impossible, but if he

(36:31):
really believes it then maybehe's going to keep high tariffs
on everybody.

Speaker 2 (36:36):
Right and Andy, I'll give you full credit for even
attempting to tackle thesequestions and certainly for
laying out how you think aboutthem.
I think that's incrediblyvaluable.
I find it incredibly valuable.
I really appreciate yourinsights and thoughtfulness and
the experience that you bring tothis topic, and I want to give
you the opportunity again to letpeople know how to reach you

(36:57):
should they need advice.

Speaker 1 (36:59):
Sure, thank you, carolyn.
So it's andyrothman atsinologyllccom, and you can also
go to my LinkedIn account,where I'm publishing pretty
regular commentary, and connectwith me there.

Speaker 2 (37:12):
Thank you, Andy.
Enjoy your athletic brews.
I hope they're as delicious asI think they are.

Speaker 1 (37:18):
Thank you, I'm enjoying it and really enjoyed
the conversation with you,caroline.

Speaker 2 (37:22):
Happy weekend, thanks .
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