Latest / Trumponomics / Why China Is Gaining the Upper Hand in Trump’s Trade War with Arthur Kroeber

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Why China Is Gaining the Upper Hand in Trump’s Trade War with Arthur Kroeber · Trumponomics

• 0:02
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
• 0:08
  Speaker 2: I think we're going to be fine with China, but
• 0:10
  Speaker 2: we have to have a fair deal.
• 0:11
  Speaker 1: It's got to be fair.
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  Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
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  Speaker 3: and this is Trumpnomics, the podcast that looks at the
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  Speaker 3: economic world of Donald Trump, how he's already shaped the
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  Speaker 3: global economy, and what on earth is going to happen next.
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  Speaker 3: Our focus this week is the big lesson from the
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  Speaker 3: latest rounds of the US China trade wars. The long
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  Speaker 3: term balance of power between the two economies is shifting,
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  Speaker 3: and it's shifting in favor of China. Things had gone
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  Speaker 3: relatively quiet for a few months, but in the past
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  Speaker 3: couple of weeks the US China trade war got noisy again,
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  Speaker 3: with a tit for tat over expanding US export controls
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  Speaker 3: and China's then in position of more sweeping restrictions on
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  Speaker 3: its exports of rare earth magnets. There's been the usual
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  Speaker 3: talk of escalation and de escalation from President Trump. As
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  Speaker 3: I record this on Friday, seventeenth of October, He's just
• 1:17
  Speaker 3: threatened one hundred percent tariffs on Chinese goods. But in
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  Speaker 3: the same breath, admitted that would be unsustainable. Right now,
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  Speaker 3: the President is still set to meet with his opposite number,
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  Speaker 3: President Chijinping of China at the Asia Pacific Economic Cooperation
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  Speaker 3: Summit in South Korea later this month. Apex, I bet
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  Speaker 3: that meeting will be on and off again many more
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  Speaker 3: times before you hear this, and certainly before they sit down.
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  Speaker 3: But whatever happens around that table, we may already have
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  Speaker 3: seen a permanent shift in the power dynamic between them
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  Speaker 3: due to the simple fact that the Chinese have shown
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  Speaker 3: not only that they have leverage in this trade fight
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  Speaker 3: with the US, but they're prepared to use it. That's
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  Speaker 3: why I very much wanted to talk to this week's guest,
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  Speaker 3: Arthur Kroeber. Arthur co founded the China focused research service
• 2:06
  Speaker 3: Dragonomics in Beijing in two thousand and two. It's now
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  Speaker 3: called Gavacao Dragonomics, and he's the research director. He's also
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  Speaker 3: the author of China's Economy What Everyone Needs to Know.
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  Speaker 3: I describe him as the China expert other China experts
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  Speaker 3: go to for a deeper take. Arthur, thanks so much
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  Speaker 3: for taking the time for us.
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  Speaker 1: My pleasure.
• 2:38
  Speaker 3: There's, as ever, the noise and the signal, and one
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  Speaker 3: reason you are so widely read on China is you're
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  Speaker 3: very good at telling the difference between the two. But
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  Speaker 3: maybe we should spend a little bit of time on
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  Speaker 3: the noise of the past few weeks for those who
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  Speaker 3: lost track who started it.
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  Speaker 2: You could go back to the beginning of time in
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  Speaker 2: the you know, who went first kind of thing. I
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  Speaker 2: don't think that's super fruitful, but I think the sequence
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  Speaker 2: of events that we've seen recently is number one. About
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  Speaker 2: a month ago, negotiators meant in Madrid. They had what
• 3:08
  Speaker 2: seemed to be a pretty productive meeting. They seemed to
• 3:10
  Speaker 2: come up with a set of ideas for resolving the
• 3:13
  Speaker 2: ownership of TikTok, which is a big issue, and the
• 3:16
  Speaker 2: Chinese side seemed to indicate that there was kind of
• 3:19
  Speaker 2: a wire set of discussions on investment flows more generally,
• 3:23
  Speaker 2: and we seem to be heading towards a meeting between
• 3:25
  Speaker 2: Trump and She at the APEC summit at the end
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  Speaker 2: of this month where they would move the ball forward.
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  Speaker 1: Seemed to be good.
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  Speaker 2: Then what happened is at the end of September, on
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  Speaker 2: the twenty ninth, the Bureau of Industry and Security at
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  Speaker 2: the US Commerce Department issued a set of rules expanding its.
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  Speaker 1: So called entity list, which is a list of.
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  Speaker 2: Foreign companies that if you want to sell stuff to
• 3:47
  Speaker 2: them you have to get an export license. It's kind
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  Speaker 2: of a blacklist or a gray list or a dark list.
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  Speaker 1: And this did two things.
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  Speaker 2: One is it said any company that is at least
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  Speaker 2: fifty percent owned by a named company on the end
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  Speaker 2: list is automatically deemed to be on that list. So
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  Speaker 2: it captures a whole bunch of subsidiaries that previously could
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  Speaker 2: kind of fly under the radar. And you can understand
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  Speaker 2: why they would want to close that loophole. It seems fairly,
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  Speaker 2: fairly sensible, but as a practical matter with China, it
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  Speaker 2: expands the number of companies on the list, perhaps by
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  Speaker 2: as many as ten thousand according to some estimates.
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  Speaker 1: It's a lot of companies, right.
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  Speaker 2: Second thing it did is it said, if you are
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  Speaker 2: a US company you want to sell to someone, you
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  Speaker 2: have to verify. You have to do your own due
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  Speaker 2: diligence to verify that they are not at least a
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  Speaker 2: fifty percent subsidiary of some Chinese company, which means, if
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  Speaker 2: you think about it, that requires an awful lot of
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  Speaker 2: forensic due diligence on ownership, which might need to go
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  Speaker 2: through several layers of ownership to get to the truth. Huge,
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  Speaker 2: huge compliance burden on the company. So this was a
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  Speaker 2: very consequential move. And it appears from some things that
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  Speaker 2: I've heard that this move, which has been discussed for
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  Speaker 2: some time within the Commerce apartment, the Chinese brought this
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  Speaker 2: up at the Madrid talks and said, we hope you're
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  Speaker 2: not planning to do this right away, because that would
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  Speaker 2: create a lot of problems for the trade talks and
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  Speaker 2: we would have to retaliate. So it happened, and so
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  Speaker 2: the Chinese said, Okay, we're going to have to retaliate.
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  Speaker 2: And then they came up with something that they also
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  Speaker 2: had on the shelf, which was very detailed regulations on
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  Speaker 2: export controls for rare earths where magnets and some things
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  Speaker 2: in the battery supply chain. And again, if you look
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  Speaker 2: at those rules and imagine that they were enforced fully,
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  Speaker 2: they could give China the ability to really substantially restrict
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  Speaker 2: the production of all kinds of products around the world
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  Speaker 2: that depend even on very small trace amounts of rare
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  Speaker 2: sourced from China. So we had these two different things,
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  Speaker 2: and so basically what has now happened is that I
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  Speaker 2: think both sides have recognized that they kind of went
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  Speaker 2: too far in their efforts to gain leverage over the
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  Speaker 2: other person, and now they have to dial it back.
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  Speaker 2: And it seems like the signaling that we're now getting
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  Speaker 2: from both sides is that they kind of want to
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  Speaker 2: somehow resolve this issue in Tea a meeting between she
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  Speaker 2: and Trump at the end of the month in Korea
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  Speaker 2: that can allow for the trade talks to continue. So
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  Speaker 2: there was a lot of noise, but the signal in
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  Speaker 2: it is that both sides have pretty powerful tools that
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  Speaker 2: they can use against each other. And what's new is
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  Speaker 2: that general this has been one way straight. The US
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  Speaker 2: has a lot of tools, it's counterparties don't have any.
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  Speaker 2: China has a really powerful tool that can cause the
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  Speaker 2: US a lot of problems.
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  Speaker 3: And I think that's one of the things. Certainly from
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  Speaker 3: talking to colleagues in China, you don't get to see
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  Speaker 3: she maybe necessary enough to talk about a spring in
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  Speaker 3: his step, But there's definitely this sort of feeling of
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  Speaker 3: strength and confidence that's come because a lot of countries
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  Speaker 3: have effectively given in to Donald Trump's tariff demands and
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  Speaker 3: just decided it was easier to go along with a
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  Speaker 3: certain level of tariff and not necessarily try to impose
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  Speaker 3: their own and response. But China has shown that it
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  Speaker 3: can go toe to toe with the US, and the
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  Speaker 3: US has effectively had to back down. So in a
• 7:08
  Speaker 3: note that you put out, as you said in the
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  Speaker 3: past few weeks, that had shown us that US and
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  Speaker 3: China had now weaponized their interdependence. So just talk us
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  Speaker 3: through what that means.
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  Speaker 1: Yeah, well, that's not a phrase that I concocted.
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  Speaker 2: That is a phrase that was coined by two very
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  Speaker 2: astute political scientists, Henry Farrell and Abe Newman, who wrote
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  Speaker 2: a book about this about five or six years ago,
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  Speaker 2: in which they were mainly talking about what the US
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  Speaker 2: was doing in its sanctions regime through financial sanctions and
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  Speaker 2: controls on technology to take advantage of the fact that
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  Speaker 2: other countries relied heavily on certain kinds of inputs and
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  Speaker 2: networks controlled by the United States. In the United States
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  Speaker 2: was weaponizing these in order to achieve certain political goals. Right,
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  Speaker 2: sanctions on Iran, we've seen sanctions on Russia, the trade war,
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  Speaker 2: and the technology restrictions against China, et cetera.
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  Speaker 1: Et cetera.
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  Speaker 2: And yeah, I think this is a very important, invalid
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  Speaker 2: concept and a good description of the way that the
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  Speaker 2: world has evolved over the last couple of decades. But
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  Speaker 2: what's now new, and I think has really been reinforced
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  Speaker 2: step by step this year, is that China is also
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  Speaker 2: able to play the weaponized interdependence game because they have
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  Speaker 2: this massive chokehold on the whole rarer is complex and
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  Speaker 2: these elements are very important for a whole bunch of
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  Speaker 2: high tech industries for defense products notably, and they also
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  Speaker 2: have significant controls within the battery supply chain. So China
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  Speaker 2: is able is in principle able to make use of
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  Speaker 2: this to put pressure on people that it has political
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  Speaker 2: problems with, and we've seen this from time to time,
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  Speaker 2: but now it's very visible in terms of its relationship
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  Speaker 2: with the United States, and I think it's very powerful.
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  Speaker 2: And this is something that people don't really talk about
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  Speaker 2: that much. There are a lot of commercial applications for
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  Speaker 2: rare earth that are quite important, but the defense supply
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  Speaker 2: chain depends upon them quite a lot. And I think
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  Speaker 2: what is underneath the US sort of concern on this
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  Speaker 2: is that their defense production supply chain actually is quite
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  Speaker 2: vulnerable to restrictions on these elements by China, so they
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  Speaker 2: have to step pretty carefully.
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  Speaker 3: And we should say, actually, because you've reminded me. I
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  Speaker 3: mean that that book Underground Empire. We've actually talked about
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  Speaker 3: it in the past. I think it's a really excellent guide,
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  Speaker 3: has stood the test of time in terms of thinking
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  Speaker 3: about the economic dynamics of this time. I recommend it
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  Speaker 3: to people. But people do often say, what's the big
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  Speaker 3: deal about rare earth or rare earth magnets? You know,
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  Speaker 3: the value of the imports that to the US and
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  Speaker 3: other countries is very small, But as you're pulling out,
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  Speaker 3: I mean, it's this, It's like it's the weakest link
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  Speaker 3: in some of these very important global supply chains defense,
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  Speaker 3: consumer electronics, cars.
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  Speaker 2: Yeah, I think this is worth exploring. So there are
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  Speaker 2: a couple of things that people say.
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  Speaker 1: One is, you know, the values are very small.
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  Speaker 2: These are very small proportional inputs into various things, which
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  Speaker 2: is true. And the other thing they say is, you know, famously.
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  Speaker 1: Rarers are not rare. You can dig them up, you know,
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  Speaker 1: in lots of places around.
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  Speaker 2: The world, So what's the big deal? And I've had
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  Speaker 2: people who spend a fair amount of time working on
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  Speaker 2: export controls as recently as a year ago, who said, oh, well,
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  Speaker 2: you know, trying to export controls rarest is dumb because
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  Speaker 2: it's just a commodity. And then all you do is
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  Speaker 2: you create incentives for mining. And both of these arguments
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  Speaker 2: are flawed. So the first one is flawed because, as
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  Speaker 2: you say, it's not that these are a huge part
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  Speaker 2: of the value of the finished product.
• 10:35
  Speaker 1: It is that they are things that.
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  Speaker 2: You need, and if you don't have them, you cannot
• 10:39
  Speaker 2: make the rest of the product. So it might only
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  Speaker 2: be one percent or half a percent of the bill
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  Speaker 2: of materials, but it's the one or half percent without
• 10:47
  Speaker 2: which you can't make use of the other ninety nine percent.
• 10:50
  Speaker 3: But like looking at the utilities value share of GDP, yet,
• 10:53
  Speaker 3: if you don't have electricity, you can't do.
• 10:55
  Speaker 2: Exactly exactly except maybe even more so than that. And
• 10:59
  Speaker 2: then on the second point, the issue is that it's
• 11:03
  Speaker 2: not the raw.
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  Speaker 1: Ores that are an issue.
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  Speaker 2: Here is the refined ores and products, notably permanent magnets
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  Speaker 2: that are made from them. And these, both the refining
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  Speaker 2: and the products require pretty sophisticated technology processes which now
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  Speaker 2: basically only exist in China. The technologies for refining are
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  Speaker 2: in fact also export controlled by China. So if you
• 11:29
  Speaker 2: set up a mine elsewhere and you want to refine them,
• 11:32
  Speaker 2: you have two choices. One is you can send the
• 11:34
  Speaker 2: ores to China to get refined, which is a lot
• 11:36
  Speaker 2: of what happens, or you can try and get the
• 11:39
  Speaker 2: Chinese to issue a license for the technology, or you
• 11:42
  Speaker 2: can try and recreate the technology on your own.
• 11:45
  Speaker 1: It's non trivial.
• 11:47
  Speaker 2: And then when you look at the magnets, that has
• 11:50
  Speaker 2: an additional manufacturing process on top of that which is
• 11:53
  Speaker 2: distinct from rare. It's refining specifically, also pretty technical, also
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  Speaker 2: something where the Chines have a huge cost advantage. And
• 12:00
  Speaker 2: so there are many layers here, which means that it
• 12:02
  Speaker 2: is these are things that are quite important. They are
• 12:04
  Speaker 2: quite important not only fence industries, but to a lot
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  Speaker 2: of new green technologies that people want to develop.
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  Speaker 1: And it is very there's a big.
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  Speaker 2: Technology component, so the export controls have real bite and
• 12:17
  Speaker 2: there's no quick way to extricate yourself from their vulnerability.
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  Speaker 3: The more we talk about this, it sounds like those
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  Speaker 3: debates one would have or the sort of theories of
• 12:29
  Speaker 3: nuclear deterrence from the Cold War days. It's very flawed
• 12:32
  Speaker 3: the comparison between the Cold War and the situation with
• 12:35
  Speaker 3: US and China. But this does feel a bit like
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  Speaker 3: the sort of mutually assured destruction that people used to
• 12:39
  Speaker 3: talk about in that time. Both sides have built up
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  Speaker 3: things that could blow up the other countries supply chains
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  Speaker 3: in one way or another, or at least make things
• 12:48
  Speaker 3: extremely difficult for them and their companies. It's obviously somewhat
• 12:53
  Speaker 3: extreme example, But is that sort of a sensible way
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  Speaker 3: of thinking about it?
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  Speaker 2: Yeah, I think that's kind of the flavor of it.
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  Speaker 2: I wouldn't want to push it too far. I mean,
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  Speaker 2: the metaphor that I've used is I just borrowed a
• 13:05
  Speaker 2: phrase from Scott Bessen, who rather notoriously said in the
• 13:08
  Speaker 2: speech a year ago talking about Trump's then prospective tariff
• 13:13
  Speaker 2: strategy that, as you recall, the idea was to escalate
• 13:17
  Speaker 2: to de escalate, and his phrase was, the tariff gun
• 13:19
  Speaker 2: will always be on the table, cocked and loaded, but
• 13:23
  Speaker 2: it will be rarely fired. And now there are two
• 13:25
  Speaker 2: guns on the table, right. There's the US tariff and
• 13:28
  Speaker 2: Export control gun pointed at China, and there's the China
• 13:31
  Speaker 2: rare earth a control gun that's pointed at the US.
• 13:34
  Speaker 2: They are both on the table, they are both loaded.
• 13:37
  Speaker 2: They could be used. But in fact, I think the
• 13:40
  Speaker 2: Chinese point on this, and I actually take them seriously
• 13:43
  Speaker 2: on this.
• 13:43
  Speaker 1: In their public.
• 13:44
  Speaker 2: Statements, they say, yeah, we could do this, but not
• 13:47
  Speaker 2: only is it not in your interest, it's not in
• 13:49
  Speaker 2: our interest to do this. Because we're globally integrated economy.
• 13:53
  Speaker 2: We depend on being able to trade freely. We want
• 13:57
  Speaker 2: to be able to sell this stuff to people who
• 14:00
  Speaker 2: are going to use it for non defense purposes that
• 14:03
  Speaker 2: is actually good for us too. So we don't really
• 14:06
  Speaker 2: want to use this weapon, but we have to pull
• 14:09
  Speaker 2: it out because this is the only way to prevent
• 14:12
  Speaker 2: you from using this other weapon, which is going to
• 14:14
  Speaker 2: be really bad for us.
• 14:15
  Speaker 1: And I think that should be taken very seriously.
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  Speaker 3: But it sounds like what economists might think of as
• 14:23
  Speaker 3: a stable equilibrium, right, I mean that is supposed to be.
• 14:26
  Speaker 3: That was even what the traditional destruction were sold as
• 14:30
  Speaker 3: a stable equilibrium because both sides were assured of real
• 14:35
  Speaker 3: harm if anything happened.
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  Speaker 2: Well, yeah, so economists call it stable equilibrium because they're economists,
• 14:40
  Speaker 2: and other people call it a balance of terror, right, which.
• 14:43
  Speaker 3: Is but there's a balance, right, you know, it sounds
• 14:46
  Speaker 3: better than imbalance.
• 14:47
  Speaker 1: Right, No, no, no, no, it is a balance.
• 14:49
  Speaker 2: And I think this is why the US China trade
• 14:51
  Speaker 2: negotiations have gone on for so long, is the Chines
• 14:54
  Speaker 2: are very clear that they want to get something out
• 14:56
  Speaker 2: of these negotiations.
• 14:57
  Speaker 1: It's not going to be just a capitulation.
• 14:59
  Speaker 2: And they have the tools to force the US to
• 15:02
  Speaker 2: stay at the table and do something that they might want.
• 15:07
  Speaker 2: So I think if you look at this from a
• 15:10
  Speaker 2: broader standpoint, I think the net effect of this for
• 15:14
  Speaker 2: now is probably beneficial because it is useful for the
• 15:19
  Speaker 2: world to have some constraints on the ability of the
• 15:22
  Speaker 2: US unilaterally just to impose whatever conditions it wants and everybody,
• 15:27
  Speaker 2: you know, just as it's useful to have those constraints
• 15:30
  Speaker 2: in China. They've done plenty of economic bullying of their
• 15:32
  Speaker 2: own over the years when they can get away with it,
• 15:35
  Speaker 2: So having some kind of balance there I think is
• 15:39
  Speaker 2: potentially helpful. The problem is we also have some fairly
• 15:42
  Speaker 2: volatile leadership, particularly in the US side, and so you
• 15:45
  Speaker 2: can imagine things going wrong, and that was always the
• 15:48
  Speaker 2: worry with the mad during the Cold Wars, yeah, it
• 15:53
  Speaker 2: was great, but we were one step away from this
• 15:56
  Speaker 2: really bad.
• 16:10
  Speaker 3: Going back a little bit to the sort of real
• 16:11
  Speaker 3: world implications of the network of different export controls and
• 16:18
  Speaker 3: potential guns that could be used at various times. I know,
• 16:21
  Speaker 3: you talk to a lot of multinationals and businesses active
• 16:25
  Speaker 3: in China but also operating around the world. What's the
• 16:28
  Speaker 3: implications for a multinational that's actually still got very much
• 16:32
  Speaker 3: caught up in the US and China both as a
• 16:35
  Speaker 3: market and as a manufacturing base. It seems like it
• 16:39
  Speaker 3: may be useful to have a balance of terror, but
• 16:42
  Speaker 3: in the meantime as a hell of a lot of paperwork, right.
• 16:44
  Speaker 2: I think the short answer is that in a minimum,
• 16:47
  Speaker 2: your compliance burden goes way up, right, because you now
• 16:50
  Speaker 2: have to satisfy regulators in the US, you have to
• 16:52
  Speaker 2: satisfy regulators in China, and various things. Just the friction
• 16:56
  Speaker 2: and the transaction costs of doing things a lot of
• 17:00
  Speaker 2: cross border activities, they have gone up quite a lot.
• 17:02
  Speaker 2: So that's your kind of most benign baseline scenario is
• 17:07
  Speaker 2: that has occurred. And you know, I think the other
• 17:09
  Speaker 2: thing that people talk about a lot, very hard to quantify,
• 17:13
  Speaker 2: is the uncertainty premium goes up, You're constantly kept guessing,
• 17:16
  Speaker 2: you know, will these things be imposed, if so, when,
• 17:20
  Speaker 2: if so, will I be you know, victimized?
• 17:23
  Speaker 1: Or are the ways to work around it?
• 17:25
  Speaker 2: So that requires there's sort of an additional cost in
• 17:28
  Speaker 2: terms of strategy planning, hedging, planning for how.
• 17:32
  Speaker 1: You do this.
• 17:32
  Speaker 2: I think at the moment, that's where we are. And frankly,
• 17:37
  Speaker 2: both Trump and She at the leadership level, have in
• 17:40
  Speaker 2: fact made it pretty clear repeatedly over the course last
• 17:43
  Speaker 2: year that they want an agreement, they want a deal,
• 17:45
  Speaker 2: They want to set up some kind of regime under
• 17:50
  Speaker 2: which people can trade and invest. And the Chinese, i
• 17:55
  Speaker 2: think fortunately in this case, have leveraged to make sure
• 17:57
  Speaker 2: that deal is somewhat real rather than.
• 17:59
  Speaker 1: Just a fake deal.
• 18:00
  Speaker 2: So if we get there, that will be I think
• 18:03
  Speaker 2: somewhat helpful. But even if we do get a deal,
• 18:06
  Speaker 2: the reality is that the US and China really have
• 18:09
  Speaker 2: this extremely adversarial relationship. You can create a deal that
• 18:12
  Speaker 2: sort of creates a Dayton if you will, to use
• 18:15
  Speaker 2: another Cold War metaphor, but if you're thinking about the
• 18:18
  Speaker 2: long run, five, ten, fifteen year timeline investments, you have
• 18:22
  Speaker 2: to do a lot of hedging, and you have to
• 18:24
  Speaker 2: figure out ways that you can forestall or live through
• 18:30
  Speaker 2: situations where there might be a huge escalation in the
• 18:32
  Speaker 2: tensions between the US and China, and many more decouplex
• 18:35
  Speaker 2: It makes this strategic planning process a lot more difficult,
• 18:38
  Speaker 2: more crossly.
• 18:39
  Speaker 3: But if you think of the goals that the government,
• 18:40
  Speaker 3: the Chinese authorities are pursuing in many ways, they are
• 18:43
  Speaker 3: trying just as they try and advertise and strengthen US
• 18:49
  Speaker 3: dependence on certain things from China, China is obviously actively
• 18:53
  Speaker 3: trying to reduce the degree of dependence it has on
• 18:56
  Speaker 3: the US. And that seems to be going pretty well.
• 18:58
  Speaker 3: I mean, we're not it's not far. Yeah, it is.
• 19:01
  Speaker 2: And so if you look at there's a bunch of
• 19:03
  Speaker 2: work that you can do looking at sort of the
• 19:06
  Speaker 2: OECD databases on trade and value added that shows if
• 19:09
  Speaker 2: you just break down US supply chain supply chains for
• 19:12
  Speaker 2: physical goods within the US, they are about two to
• 19:16
  Speaker 2: three times more reliant on inputs from China as the
• 19:21
  Speaker 2: other way around.
• 19:22
  Speaker 1: And this is partly the result.
• 19:24
  Speaker 2: Of differential industrial development, but partly the result of deliberate
• 19:28
  Speaker 2: Chinese efforts to de americanize, specifically there's supply chains, and
• 19:33
  Speaker 2: they have made good progress there now some areas it's
• 19:36
  Speaker 2: really tough. So the semiconductor industry good luck trying to
• 19:41
  Speaker 2: de americanize because the US position at various nodes in
• 19:46
  Speaker 2: that is extremely extremely strong, and despite huge investments, Chinese
• 19:51
  Speaker 2: have made some progress there, but not a ton. Frankly,
• 19:57
  Speaker 2: so again, it's very difficult to build an alternative ar
• 20:00
  Speaker 2: supply chain, probably even more difficult to build a fully
• 20:03
  Speaker 2: autonomous semiconductor supply chain. These interdependencies both countries would like
• 20:08
  Speaker 2: there to be less of them, but in fact it
• 20:11
  Speaker 2: is very difficult to untangle them, which is why I've
• 20:14
  Speaker 2: always been skeptical of sort of like the easy decoupling story.
• 20:17
  Speaker 1: Oh, the China and the US and decoupling.
• 20:19
  Speaker 2: It's like, yeah, you can try, and in individual sectors
• 20:23
  Speaker 2: you can get reasonably far, but on a macro basis,
• 20:27
  Speaker 2: untangling the interconnections that have been built up in the
• 20:31
  Speaker 2: global economy over the last forty five years is extremely difficult.
• 20:36
  Speaker 2: And the other thing I would say is that as
• 20:38
  Speaker 2: China has tried to decrease its dependency on the rest
• 20:42
  Speaker 2: of the world from a supply side, it has increased
• 20:45
  Speaker 2: its dependency in the rest of the world. On the
• 20:46
  Speaker 2: demand side, because it's now basically an export driven economy,
• 20:50
  Speaker 2: they depend very heavily on markets being open to them,
• 20:54
  Speaker 2: and this dependency has increased substantially over the last five years,
• 20:58
  Speaker 2: is not decreased, and their own sort of supply side
• 21:03
  Speaker 2: obsession at home creates a deflationary, weak consumption environment, which
• 21:09
  Speaker 2: just intensifies this dependency on international markets. And I think
• 21:14
  Speaker 2: this is something that's not sufficiently appreciated in the world.
• 21:18
  Speaker 2: Is that, Yeah, on a producer basis, China is kind
• 21:21
  Speaker 2: of self sufficient, but they have really exposed themselves to
• 21:25
  Speaker 2: a lot of potential economic downside if export markets close up,
• 21:30
  Speaker 2: or if just there's a global recession and people can't
• 21:32
  Speaker 2: buy as much, and that is a real problem for them.
• 21:34
  Speaker 1: To which they have no very clear solution.
• 21:38
  Speaker 3: I was going to ask you about that. I mean,
• 21:39
  Speaker 3: we have fact we've calculated down that our economists that
• 21:42
  Speaker 3: China's manufactured goods trade set plus is the largest now
• 21:46
  Speaker 3: relative to global GDP of any country since the US
• 21:49
  Speaker 3: after World War Two. And we've also shown how the
• 21:52
  Speaker 3: amount of sort of trade diversion that's happened, just the
• 21:55
  Speaker 3: sort of wave of exports going across Asian economies and
• 22:00
  Speaker 3: extent to Europe that might otherwise have gone to the
• 22:02
  Speaker 3: US due to these tariffs. And as you said, you
• 22:04
  Speaker 3: know that itself produces a vulnerability because we see countries
• 22:07
  Speaker 3: potentially reacting to that wave of imports. And it's funny
• 22:12
  Speaker 3: because it's kind of the weakness on the other side
• 22:14
  Speaker 3: of the strength, right. You know, we tend to say
• 22:17
  Speaker 3: China politically has an ability to withstand pain that the
• 22:21
  Speaker 3: US doesn't have, and that means it can sort of
• 22:23
  Speaker 3: hold its ground against Donald Trump. But to your point,
• 22:27
  Speaker 3: ignoring quite a lot of domestic economic pain, I mean,
• 22:30
  Speaker 3: do you see I know, you're not one of those
• 22:32
  Speaker 3: people who is continually kind of announcing there's going to
• 22:35
  Speaker 3: be a crisis or you know, an end of China's
• 22:38
  Speaker 3: growth story. But do you think they are underestimating the
• 22:42
  Speaker 3: costs of this strategy?
• 22:43
  Speaker 1: Yeah, that's a good question.
• 22:45
  Speaker 2: It seems to me that the government over the last
• 22:48
  Speaker 2: several years they've adopted a very very sort of a
• 22:51
  Speaker 2: techno fetishist supply side growth model, and basically they've said,
• 22:56
  Speaker 2: all of our problems productivity, income, growth, whatever, they will
• 23:00
  Speaker 2: be solved by just investing massively in the technologies the
• 23:05
  Speaker 2: future which will create this productivity miracle, which will then
• 23:08
  Speaker 2: drive future incomes of growth. It's a little bit like
• 23:12
  Speaker 2: the people who are now going around saying AI is
• 23:14
  Speaker 2: going to solve all known economic problems because of these
• 23:18
  Speaker 2: productivity magic and the Chinese view is that this is
• 23:21
  Speaker 2: the result of sort of physical technologies at least as much,
• 23:24
  Speaker 2: if not more so than AI.
• 23:26
  Speaker 1: But it's similar kind of thinking.
• 23:27
  Speaker 3: They haven't been doing too badly on these technologies. Oh no,
• 23:30
  Speaker 3: you know, but the thing we've thought that we've think
• 23:31
  Speaker 3: they've glabal leadership position in five of the thirteen key
• 23:35
  Speaker 3: technology but touching up in all the others.
• 23:37
  Speaker 1: No, for sure.
• 23:38
  Speaker 2: So they've done very well on the production side. And meanwhile,
• 23:41
  Speaker 2: nominal growth in China is less than half of what
• 23:43
  Speaker 2: it was five years ago. Right, so they used to
• 23:46
  Speaker 2: very reliably be able to count on nominal growth of
• 23:49
  Speaker 2: eight nine percent very consistently.
• 23:51
  Speaker 1: It's now down to four.
• 23:53
  Speaker 2: And these things are linked because they basically say the
• 23:58
  Speaker 2: supply side will solve all problem is we don't need
• 24:00
  Speaker 2: to have a demand side strategy. We don't need to
• 24:02
  Speaker 2: support consumers if they're hammered by a pandemic. We can
• 24:05
  Speaker 2: impose a gigantic compression of their balance sheets by crushing
• 24:11
  Speaker 2: the properties five years in a row. And that's fine
• 24:15
  Speaker 2: because capital will move to the correct places. And that's
• 24:19
  Speaker 2: a very very one sided and incomplete view of the economy.
• 24:22
  Speaker 2: So they are paying a price for this that is material,
• 24:26
  Speaker 2: and I guess the question is are they unaware of
• 24:29
  Speaker 2: that price. Do they say, well, we know that's the price,
• 24:33
  Speaker 2: but it's fine, or do they think, actually, you, mister Krober,
• 24:36
  Speaker 2: you're wrong about the price.
• 24:37
  Speaker 1: Actually this is a short term thing.
• 24:39
  Speaker 2: That's a harder thing to read, and I think you
• 24:41
  Speaker 2: can make multiple different interpretations. But what I would say
• 24:44
  Speaker 2: is they don't look like they are changing their minds
• 24:47
  Speaker 2: anytime soon. They may be right, they may be wrong,
• 24:50
  Speaker 2: but they're staying the course.
• 24:52
  Speaker 3: And everything we've said, i'm pretty sure is going to
• 24:54
  Speaker 3: stand the test of time because we're talking fairly long term.
• 24:57
  Speaker 3: But obviously it is dangerous these days to have a
• 24:59
  Speaker 3: conversation which you then don't publish for a few days
• 25:02
  Speaker 3: talking about trade issues. And as I've said at the start,
• 25:06
  Speaker 3: it's likely that the meeting with she is going to
• 25:08
  Speaker 3: be on and off and on and off several times
• 25:10
  Speaker 3: before we get there. But I guess one way of
• 25:13
  Speaker 3: thinking about this or that people could have in the
• 25:15
  Speaker 3: back of the minds when, if, and when that meeting happens,
• 25:18
  Speaker 3: and then they assess the results of that meeting, which
• 25:21
  Speaker 3: maybe Donald Trump announcing some great deal or maybe not.
• 25:25
  Speaker 3: Is it at the heart of what you were just saying,
• 25:26
  Speaker 3: you know, short term, it actually does matter, even though
• 25:29
  Speaker 3: they're pretending it doesn't matter, and they can put up
• 25:31
  Speaker 3: with the pain. China's facing a pretty high tariff sort
• 25:34
  Speaker 3: of forty percent ish. It does actually matter to them
• 25:38
  Speaker 3: that they bring this down, and it seems to matter
• 25:40
  Speaker 3: to them a bit more than it matters to Donald Trump.
• 25:43
  Speaker 1: Well, this is an interesting question.
• 25:45
  Speaker 2: So if I look at the Chinese side on this, yeah,
• 25:48
  Speaker 2: I think they would like lower tariffs, But actually I
• 25:50
  Speaker 2: don't think that is the top of their list, frankly,
• 25:53
  Speaker 2: because the.
• 25:53
  Speaker 1: Reality is they are enduring very high.
• 25:55
  Speaker 2: Terriffs right now relative to the past and relative to
• 25:57
  Speaker 2: anyone else in the.
• 25:58
  Speaker 1: World and their experts.
• 25:59
  Speaker 2: You fine, right, and some of that is front loading,
• 26:03
  Speaker 2: but I think most of it is not. Some of
• 26:04
  Speaker 2: it is transhipment. They're routing things through third countries that
• 26:08
  Speaker 2: wind up in the US. But most of it seems
• 26:11
  Speaker 2: to be that they've actually been very successful at developing
• 26:13
  Speaker 2: other export markets Southeast Asia, Europe, Latin America, you name it,
• 26:18
  Speaker 2: and yeah, there's some protectionist concerns there, but in most cases,
• 26:22
  Speaker 2: in most product lines, there really aren't great alternatives at
• 26:25
  Speaker 2: a comparable cost to what you're buying from China, and
• 26:27
  Speaker 2: most countries don't have the same kind of security concerns
• 26:30
  Speaker 2: that the US has.
• 26:31
  Speaker 1: So they're doing fine.
• 26:33
  Speaker 2: So I think they've concluded, yeah, we would like lower tariffs,
• 26:38
  Speaker 2: but if we have to live with the current tariff level,
• 26:42
  Speaker 2: we've shown that we can, which also means that they
• 26:45
  Speaker 2: can walk away if they think if all we're getting
• 26:48
  Speaker 2: is a few points off tariffs, that's not enough. We
• 26:50
  Speaker 2: need more in a deal, and if that's all you're
• 26:53
  Speaker 2: going to give us, sorry, then there's no deal. We'll
• 26:55
  Speaker 2: just do our thing and we'll see how you like it,
• 26:57
  Speaker 2: because we think that we can bear more pain.
• 27:00
  Speaker 1: I think what they really want is they would really.
• 27:03
  Speaker 2: Like to see some scaling back of the US export
• 27:06
  Speaker 2: controls on technology. That is a number one on their list,
• 27:10
  Speaker 2: and I think that will be very interesting to see
• 27:12
  Speaker 2: whether they can dislodge the US on that point, because
• 27:16
  Speaker 2: historically the US position has been export controls are sacrosanct.
• 27:20
  Speaker 2: Once we put them on they are tablets from Sinai,
• 27:23
  Speaker 2: they are the word of God. They cannot be altered
• 27:26
  Speaker 2: in any way. So that's, you know, that's a big ask.
• 27:29
  Speaker 2: My view would be, I think the US has overdone
• 27:31
  Speaker 2: it on export controls, and it would be very possible
• 27:33
  Speaker 2: to go through and do some culling and say, here
• 27:36
  Speaker 2: are the things that are important that we really need,
• 27:38
  Speaker 2: and here's some stuff actually that was overreach, and we
• 27:41
  Speaker 2: could pull back. But there's a people don't want to
• 27:43
  Speaker 2: go there because of the principle. I think the other
• 27:45
  Speaker 2: thing that the Chinese would like is, as we saw
• 27:48
  Speaker 2: with the TikTok deal, some kind of a pathway that
• 27:50
  Speaker 2: would make it easier for Chinese tech companies to invest
• 27:54
  Speaker 2: in the United States because they see this as coming.
• 27:58
  Speaker 2: They see it's important for their companies to nationalize. As
• 28:01
  Speaker 2: you grow, you can't do everything through exports. You have
• 28:03
  Speaker 2: to get closer to your customers, build up distribution networks,
• 28:07
  Speaker 2: build up.
• 28:07
  Speaker 1: Branding, et cetera.
• 28:09
  Speaker 2: Every country in the world, once it gets to a
• 28:11
  Speaker 2: certain point, it's companies start to multi nationalize. China is
• 28:15
  Speaker 2: the same. The US is the world's biggest single market.
• 28:19
  Speaker 2: They like to see a pathway there, and I think
• 28:21
  Speaker 2: they also think that this would be a stabilizer in
• 28:23
  Speaker 2: the relationship. But obviously there are a lot of political problems
• 28:26
  Speaker 2: with that.
• 28:27
  Speaker 1: On the US side. People are very nervous about that.
• 28:30
  Speaker 2: So I think those are the asks on the US side.
• 28:33
  Speaker 2: I find it very hard to understand what it is
• 28:35
  Speaker 2: that the US is negotiating for. I'm perplexed. It is
• 28:38
  Speaker 2: very clear that Trump wants something that he can call
• 28:40
  Speaker 2: a deal, okay, and because he wants a deal, and
• 28:45
  Speaker 2: the Chinese feel that they can walk away if they
• 28:47
  Speaker 2: don't get a satisfactory deal, that gives them a slight
• 28:49
  Speaker 2: edge in their stations. And it would be interesting to
• 28:52
  Speaker 2: see if we get something out of this, what the
• 28:55
  Speaker 2: US obtains other than additional agricultural purchases we started Boeing sales,
• 29:02
  Speaker 2: et cetera. Is the US after any kind of bigger
• 29:05
  Speaker 2: game here, It's not at all clear that they are.
• 29:08
  Speaker 2: It's quite hard to understand what the purpose of the
• 29:11
  Speaker 2: negotiations is. The purpose of the other US trade negotiations
• 29:15
  Speaker 2: was basically to demonstrate to other countries how powerful the
• 29:17
  Speaker 2: US is and how we can push you around. That
• 29:22
  Speaker 2: was essentially the purpose of negotiations. China has said, we're
• 29:27
  Speaker 2: strong enough to not play that game.
• 29:28
  Speaker 3: So that ship has sailed.
• 29:30
  Speaker 1: What's your plan B?
• 29:33
  Speaker 2: And it's maybe some things are being talked about there
• 29:35
  Speaker 2: that we don't know about, but it's a little obscure.
• 29:37
  Speaker 3: You've reminded me. I mean, of course, there's the grand
• 29:40
  Speaker 3: story of why things are happening, and then often with
• 29:42
  Speaker 3: this administration especially, there's the sort of slightly lower story.
• 29:46
  Speaker 3: And you talked about the export controls being a really
• 29:48
  Speaker 3: kind of fawny aspect of this that's causing quite a
• 29:51
  Speaker 3: lot of problems. The Commas Secretary is obviously the one.
• 29:54
  Speaker 3: It's his office, the Commerce Department that's responsible for the
• 29:57
  Speaker 3: export controls, and it's obviously the Treasury set that's been
• 30:00
  Speaker 3: in leading a lot of these negotiations on the core
• 30:04
  Speaker 3: trade issues. There is a theory that just says that
• 30:06
  Speaker 3: I would love I think wants to make things as
• 30:08
  Speaker 3: hard as possible.
• 30:09
  Speaker 1: I've heard that theory.
• 30:10
  Speaker 2: You know, all of these stories are slightly unverifiable. What
• 30:14
  Speaker 2: I think you can say with high confidence is that
• 30:16
  Speaker 2: the Bureau of Industry and security within Commerce, which supervises
• 30:21
  Speaker 2: the export controls, has pretty hawkish leadership, and that they
• 30:25
  Speaker 2: basically feel that it's the right thing for the US
• 30:27
  Speaker 2: to tighten the screws on export controls. And I think
• 30:30
  Speaker 2: they have a reasonable point in the sense that if
• 30:34
  Speaker 2: you have an export control regime and you think it
• 30:36
  Speaker 2: is valuable.
• 30:37
  Speaker 1: You don't want it to do on the table.
• 30:39
  Speaker 2: You should not have a lot of loopholes that undermine
• 30:41
  Speaker 2: what you're trying to do, and that, you know, I
• 30:43
  Speaker 2: think that was clearly their view on these latest regulations.
• 30:45
  Speaker 2: But for them to issue these regulations essentially goes against
• 30:49
  Speaker 2: the policy that Trump had laid down as early as May,
• 30:53
  Speaker 2: saying Okay, let's not have any more export controls until
• 30:55
  Speaker 2: our trade negotiations are through. So they violated what everyone
• 31:00
  Speaker 2: understood to be the president's wishes there.
• 31:03
  Speaker 1: And I guess what you could say is.
• 31:04
  Speaker 2: That Lutnik, given his well advertised problems with Bess and
• 31:09
  Speaker 2: he didn't really have much of an incentive to stop
• 31:12
  Speaker 2: them from going rogue. If that's what they chose to do,
• 31:16
  Speaker 2: I think that's we can say that.
• 31:17
  Speaker 3: Arthur Kroeger, thank you so much for doing my pleasure.
• 31:24
  Speaker 3: Thanks for listening to Trumpnomics from Bloomberg. It was hosted
• 31:26
  Speaker 3: by me Stephanie Flanders, and I was joined by the
• 31:29
  Speaker 3: founder and director of research at Gavical Dragonomics, Arthur Kroeber.
• 31:33
  Speaker 3: Trumpnomics was produced by Samasadi and Moses and with help
• 31:37
  Speaker 3: from Amy Key and special thanks this week to Rachel
• 31:40
  Speaker 3: Lewis Chrisky. Sound design is by Blake Maples and Kelly
• 31:43
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• 31:47
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• 31:50
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• 32:00
  Speaker 2: From