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How the US-China Rivalry Is Reshaping the Global Economy with Neil Shearing · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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  Speaker 2: Welcome to Merrin Talks Money, the podcast in which the
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  Speaker 2: people who know the markets explain the markets. I'm Merin
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  Speaker 2: sums at Web. This week I'm speaking with Neil Shearing,
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  Speaker 2: Group chief economist at Capital Economics and author of The
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  Speaker 2: Fractured Age, How the Return of Geopolitics will Splinter the
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  Speaker 2: Global economy. Neil's book argues that the era of hyperglobalization,
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  Speaker 2: marked by relatively free movement goods, capital and ideas and
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  Speaker 2: people as well from the nineteen nineties through the two
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  Speaker 2: thousands is over. Now we are entering something he refers
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  Speaker 2: to as a fractured age by geopolitics, national security, and
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  Speaker 2: strategic rivalries increasingly shape global economic outcomes. So we're going
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  Speaker 2: to unpack that argument, and we're going to talk about
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  Speaker 2: why this book is particularly timely in our conversation, and
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  Speaker 2: we'll also get Neil to explain to us how as
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  Speaker 2: searching this book has help him to understand the global
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  Speaker 2: economic picture at the moment, and how that can help
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  Speaker 2: you with your portfolio. I hope you are going to
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  Speaker 2: tell us that, Neil. By the way, Neil, Welcome to
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  Speaker 2: Merrin Talks Money.
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  Speaker 3: Thanks for having me great to be here.
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  Speaker 2: Thank you. Now listen, I tell you what I think
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  Speaker 2: we should start off, just by setting the scene and
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  Speaker 2: talking a little bit more, not a great length, because
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  Speaker 2: I think most people are relatively familiar with this discussion.
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  Speaker 2: But this era of hyperglobalization, where did it come from?
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  Speaker 2: How long did it last?
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  Speaker 3: There's various points which you could date the start of
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  Speaker 3: the kind of globalization period. I think, by the way,
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  Speaker 3: it's nothing new. You've had waves of globalization in the past,
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  Speaker 3: the late nineteenth century. You could argue that there was
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  Speaker 3: a period of integration after the Second World War. But
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  Speaker 3: in the book, I date the most recent wave of
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  Speaker 3: globalization as having started at the fall of the Burning Wall,
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  Speaker 3: so nineteen eighty nine. And the idea behind it that
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  Speaker 3: this wave of globalization was that not only would economic
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  Speaker 3: integration bring prosperity to all economies, but it would also
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  Speaker 3: be a means of spreading common values and therefore peace
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  Speaker 3: as well. The idea being that if you bought Russia,
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  Speaker 3: if you bought China, if you bought the economies of
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  Speaker 3: Latin America into the global economy, into the global fold,
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  Speaker 3: they would probably become a bit more Western. But also
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  Speaker 3: there would be economic gains for the West as well.
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  Speaker 3: Of course we've had a low inflation as partly as
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  Speaker 3: a result of globalization and gains from trade. And there's
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  Speaker 3: lots of quotes that have in the book from Clinton
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  Speaker 3: and Barack Obama and Kofe and on the kind of
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  Speaker 3: virtues of globalization. So nineteen eighty nine is where I
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  Speaker 3: date the start of this period of globalization. It starts
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  Speaker 3: to fragment, I think, actually not with Trump in twenty sixteen,
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  Speaker 3: but actually I go back a bit before that in
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  Speaker 3: the book and say it's partly the global financial crisis,
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  Speaker 3: where I think some of the vulnerabilities that were a
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  Speaker 3: function of this globalized world were starting to be exposed.
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  Speaker 3: But then really in twenty twelve when she became leader
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  Speaker 3: of China and really set China about a very different
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  Speaker 3: course of development, challenge in US A, Germany abroad, and
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  Speaker 3: reasserting the primacy of the party at home.
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  Speaker 2: Yeah, and that's where we got that Made in China
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  Speaker 2: twenty twenty five project, right, which was a bit of
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  Speaker 2: a turning point. And so up until then, there'd been
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  Speaker 2: this general belief that if you make the economy more
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  Speaker 2: global and everyone becomes a bit of a capitalist capitalism
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  Speaker 2: automatically leads somehow to democracy and to the shared values
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  Speaker 2: that the West thought everyone began to join in. And
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  Speaker 2: it became increasingly clear into the twenty tens that that
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  Speaker 2: wasn't the case, and also increasingly clear that there were
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  Speaker 2: quite a lot of downsides to globalization that we had
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  Speaker 2: sort of refused to discuss in the run up to
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  Speaker 2: it exactly.
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  Speaker 3: And I think there's a sense in which globalization also
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  Speaker 3: became a convenient scapegoat for a lot of the problems
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  Speaker 3: that the West was facing. Globalization is not the only reason, indeed,
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  Speaker 3: it's not even the most important reason why there's been
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  Speaker 3: the loss of manufacturing jobs in the US and in
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  Speaker 3: the UK, for example. In my view, there is mainly
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  Speaker 3: that's mainly about technological change. But it became a convenient
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  Speaker 3: scapegoat for some of the particularly kind of right wing
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  Speaker 3: populist Trump and so on and so forth. It became
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  Speaker 3: easy to kind of bash globalization. But there were genuine
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  Speaker 3: kind of costs to globalization too that they were also
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  Speaker 3: not part of the discourse. In the two thousands, I
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  Speaker 3: came came up through the Treasury in the kind of
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  Speaker 3: late nineties early two thousands and then it was really
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  Speaker 3: about kind of integration, is a kind of one way back.
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  Speaker 3: Everyone would be better off as a result of global integration,
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  Speaker 3: and clearly that has not been the case.
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  Speaker 2: Yeah, it's interesting. One of the things that you noted
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  Speaker 2: that in the beginning of your book is to fall
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  Speaker 2: off in global tariff levels. In nineteen ninety four, you
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  Speaker 2: have global tariffs aid about eight point six percent, then
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  Speaker 2: coming down five percent in two thousand and then down
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  Speaker 2: to three percent in two thousand and six. So you
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  Speaker 2: can kind of track the whole thing by tariff rays,
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  Speaker 2: which of course have now turned back up again.
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  Speaker 3: Exactly turned back up for the US, but not necessarily
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  Speaker 3: turn back up for other countries as well. So we've
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  Speaker 3: got to some pushback on the trade front, particularly from
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  Speaker 3: the US, but not from other countries. And of course,
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  Speaker 3: the big sea change in the two thousands was Chinese
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  Speaker 3: entry to the WTO, and that was really the moment
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  Speaker 3: kind of heralded to China's and particularly the integration of
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  Speaker 3: Chinese producers into the global economy. And since then, of
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  Speaker 3: course China's share of global exports, it has only got a
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  Speaker 3: one direction. Despite pushback from the US through Trump's first administration,
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  Speaker 3: then Biden, and now today with extremely high levels of tarists,
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  Speaker 3: china share of global exports has continued to go in
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  Speaker 3: one direction, which is up.
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  Speaker 2: Yeah, And would you look back on that and say
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  Speaker 2: that it was a mistake to let China into the
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  Speaker 2: WTO or a mistake to let them in on the
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  Speaker 2: terms that they came in. What I mean that does
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  Speaker 2: seem to be that one of the flash points.
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  Speaker 3: Well, Hindsight's a wonderful thing, isn't it. And I think
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  Speaker 3: that with the benefit of hindsight we can see that
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  Speaker 3: really China, but particularly under she I think I think
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  Speaker 3: twenty twelve was the moment where things changed, because that
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  Speaker 3: was the moment I think where China signaled really that
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  Speaker 3: it was not going to use openness to trade and
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  Speaker 3: open us to technology to really integrate within the within
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  Speaker 3: the global economy, but just kind of harnessed those as
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  Speaker 3: means to really challenge US agemony. So it was kind
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  Speaker 3: of in the club and it wasn't necessarily going to
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  Speaker 3: play by the rules. So yeah, I think clearly with
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  Speaker 3: hindsight you can say that the mistakes were made, but
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  Speaker 3: I think they were made with the best of intentions.
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  Speaker 3: In the early two thousands.
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  Speaker 2: Okay, so here we are in a much more adversarial
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  Speaker 2: position and a lot of chat about how globalization is
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  Speaker 2: over and we're turning to a much more nationalistic era.
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  Speaker 2: But one of the things you point out that there
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  Speaker 2: is no sign in the data and the trade data
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  Speaker 2: that globalization is retruating at all. It is pretty much
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  Speaker 2: as it was, so that bit isn't true exactly.
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  Speaker 3: The genesis of the book really was in some thinking
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  Speaker 3: that we started a capsule economics probably five or six
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  Speaker 3: years ago in the first Trump administration, where there's lots
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  Speaker 3: of headlines about the US imposing tariffs on the rest
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  Speaker 3: of the world, in China in particular, other countries pushing back,
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  Speaker 3: countries turning inwards. We obviously had the Brexit vote in
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  Speaker 3: twenty sixteen here in the UK in a sense that
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  Speaker 3: the country returning in would they were pushing back against globalization.
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  Speaker 3: Lots of kind of images of the nineteen thirties being
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  Speaker 3: in vote, and this idea that the world was deglobalizing.
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  Speaker 3: The rhetoric was everywhere, but we saw no evidence of
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  Speaker 3: this in the data. To like all good ideas, really,
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  Speaker 3: it started by challenging the consensus. So we asked ourselves, well,
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  Speaker 3: what has changed, because clearly something was changing, And when
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  Speaker 3: we started to unpack what was going on, came clear
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  Speaker 3: to me that the key change shift in the global
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  Speaker 3: economy over the past ten years has been the emergency
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  Speaker 3: of China as a strategic rival to the US rather
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  Speaker 3: than a strategic partners as Clinton and others had thought
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  Speaker 3: it might be. And this deepening superpower rivalry between the
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  Speaker 3: US and China, and that has cut through the actions
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  Speaker 3: of the first Trump administration, but then also the Biden administration,
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  Speaker 3: which of course kept Trump's tariffs from the first administration
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  Speaker 3: in place, even expanded them and augmented them with technology controls.
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  Speaker 3: And now, of course we have Trump's second of tariffs.
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  Speaker 3: And it's not just one ways traffic, right, It's not
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  Speaker 3: just the US imposing tariffs on China. China is pushing
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  Speaker 3: back against the US too. So just this year, we've
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  Speaker 3: had controls on outflows of FDI from China to the US,
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  Speaker 3: for example, And in the last couple of weeks we've
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  Speaker 3: had the US finally saying to Nvidia, you can sell
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  Speaker 3: some of your advanced chips to China, not the most
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  Speaker 3: advanced ones, but some of the some of the kind
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  Speaker 3: of second tier, if you like, and China's saying, well,
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  Speaker 3: thanks very much, but we're not interested. We want we
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  Speaker 3: want domestic producers to use domestically produced chips because we
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  Speaker 3: want to develop some self sufficiency and we see some
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  Speaker 3: vulnerabilities in becoming too a meshed in the US technological ecosystem.
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  Speaker 3: I think it's a danger that we view this through
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  Speaker 3: a Western lens, that it's all Trump and it's all
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  Speaker 3: US pushback. But this is happening in China too.
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  Speaker 2: Okay, So we now have this situation where you've effectively
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  Speaker 2: got China and the US as the two economic greats
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  Speaker 2: in the world. They're not cooperating anymore in the way
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  Speaker 2: that we had hoped that they might separate. So what
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  Speaker 2: you call fracturing is the next bit where the world
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  Speaker 2: effectively divides into two blocks, one circling around the US
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  Speaker 2: and one circling around China.
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  Speaker 3: Exactly. So the idea, the thesis, if you like, is
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  Speaker 3: not that the world turns inwards, not every country kind
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  Speaker 3: of rex trade barriers and indeed for that amount of
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  Speaker 3: capital controls, because capital flows are still extremely high by
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  Speaker 3: the historic standards too, as our people flows. But rather
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  Speaker 3: that the world breaks into two blocks, one that is
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  Speaker 3: broadly aligned with the US is centered on the US,
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  Speaker 3: and another that is centered upon China. So these blocks
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  Speaker 3: centered upon the two great economic superpowers within the world. Now,
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  Speaker 3: the key point I make in the book is the
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  Speaker 3: exact shape of this fracturing, the form it takes, is
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  Speaker 3: yet to be decided, and the economic consequences will be
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  Speaker 3: determined by both how deep the split between these two
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  Speaker 3: blocks becomes. Can we confine it two areas that are
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  Speaker 3: of strategic importance and let the rest of kind of
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  Speaker 3: global trade kind of get on with it and leave
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  Speaker 3: it relatively untouched, or is it a much broader split?
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  Speaker 3: And the second factor that's really going to determine the
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  Speaker 3: economic consequences of this fracturing will be how other countries align.
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  Speaker 3: Alliances are going to really matter in this fractured world.
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  Speaker 3: And of course there's a big danger to the US
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  Speaker 3: is that through Trumb's actions, they're pushing away allies rather
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  Speaker 3: than pulling them closer towards the US.
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  Speaker 2: Yeah, well, let's talk about the alliances first and then
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  Speaker 2: talk about the depth. It's quite interesting to think about
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  Speaker 2: who might go where. Obviously, there are sort of natural
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  Speaker 2: partners for each country, and then there are floating areas
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  Speaker 2: where you can't be absolutely sure which way they're going
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  Speaker 2: to jump. So who do you think would definitely be
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  Speaker 2: on the US side and definitely on the Chinese side,
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  Speaker 2: and who's floating.
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  Speaker 3: If you look at this kind of shape at the
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  Speaker 3: fractured world at the start of this year, about half
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  Speaker 3: of the world in my estimation, kind of fell into
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  Speaker 3: the China Block and about half of the world fell
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  Speaker 3: into the US Block by population. And this is based
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  Speaker 3: on some work that we've done at Caps of Economics
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  Speaker 3: that looks at trade flows, capital flows, defenses, security alliances.
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  Speaker 3: How different countries vote at the UN, for example, is
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  Speaker 3: a kind of sense of political alliance alliance. So about
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  Speaker 3: half of the world's population in the China Block, half
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  Speaker 3: the world's population in the US Bloc. But if you
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  Speaker 3: look by GDP, about two thirds of the world the
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  Speaker 3: world's GDP is in the US Bloc and only about
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  Speaker 3: twenty five percent of the world's GDP is in the
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  Speaker 3: China Bloc. And the remainder is kind of in these
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  Speaker 3: a handful of underligned countries. So who's in the US
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  Speaker 3: Bloc at the start of this year, Well, Europe, Japan, Korea, Taiwan, Mexico, Canada, Australia.
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  Speaker 3: India leans towards the US in our estimation. Indeed, it
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  Speaker 3: is potentially one of the biggest beneficiaries of fracturing because
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  Speaker 3: to the extent that manufacturing has moved out of China
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  Speaker 3: moves to another low cost producer like India, Vietnam, the
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  Speaker 3: Philippines and so on and so forth.
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  Speaker 2: So is India is Indian given?
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  Speaker 3: Well, no, exactly, So this is this is a key point, right.
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  Speaker 3: So that's the US block and then the China Block.
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  Speaker 3: You have the usual such Russia and Venezuela are are
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  Speaker 3: in North Korea, a lot of Sub Saharan Africa is
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  Speaker 3: in the China Block. And then there's a handful of
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  Speaker 3: countries like Brazil, Indonesia that I think kind of float
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  Speaker 3: between the two blocks and try to remain unligned. And
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  Speaker 3: then India is the key question here now. I think
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  Speaker 3: if you'd wind the clock back three months and said, well,
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  Speaker 3: what does Trump's return to the White House mean for
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  Speaker 3: US India relations, I think we would have all said, well,
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  Speaker 3: it strengthens them, right, two strong men, they're kind of
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  Speaker 3: nationalistic in their views. They get on personally, so we're told,
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  Speaker 3: and there's a whole load of economic reasons why India
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  Speaker 3: will seek stronger ties with the US. They're deeply skeptical
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  Speaker 3: of Chinese technology, they're concerned about Chinese competition, they have
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  Speaker 3: a long running board of dispute with China that's as
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  Speaker 3: yet unresolved. And of course India potentially is, as just saying,
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  Speaker 3: stands to be one of the economic beneficiaries of this fracturing.
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  Speaker 3: And yet we have a situation where because of this,
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  Speaker 3: supposedly because of India's purchases of Russian oil, these enormous
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  Speaker 3: tariffs slapped on India by Trump, and the siring of
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  Speaker 3: the relationship between Dery and Washington. Now, it remains to
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  Speaker 3: be seen exactly how that plays out, but I think
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  Speaker 3: a reasonable base case might be that India obviously has
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  Speaker 3: a tradition of being underligned through the Cold War. Maybe
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  Speaker 3: it doesn't lean towards the US, maybe it starts to
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  Speaker 3: try to to the extent that is possible, breach these
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  Speaker 3: two blocks is equally possible, I think, such as the
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  Speaker 3: kind of volatile and unpredictable nature of US foreign policy
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  Speaker 3: at the moment, it's possible that we get it some
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  Speaker 3: kind of deal and aprosh mode between Derli and Washington
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  Speaker 3: over the next six months, and all of this kind
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  Speaker 3: of quickly becomes water under the bridge.
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  Speaker 2: Okay, so there's a there's a bit of weight and
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  Speaker 2: sea to come on. Who goes where. But let's then
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  Speaker 2: talk about the depth of the fracturing, because the hope,
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  Speaker 2: I think, or your hope looking at this, would be
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  Speaker 2: that an awful lot of the global economy continues as was.
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  Speaker 2: Everything from you know, clothing to telephone laptops to fridges, etc.
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  Speaker 2: Continues to be traded in exactly the same way, and
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  Speaker 2: it's only relatively small percent of the global economy things
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  Speaker 2: that the American block on the Chinese block would consider
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  Speaker 2: to be of strategic importance that would be affected. So well,
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  Speaker 2: that's a big deal. It wouldn't make that much difference
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  Speaker 2: to global trade exactly.
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  Speaker 3: That's the kind of central thesis that I set out
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  Speaker 3: in the book, and it's consistent with the idea that
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  Speaker 3: ran through the Biden administration of there being a kind
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  Speaker 3: of small yard, high fence approach to trade. So otherwis
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  Speaker 3: the small yard being the areas of goods and services,
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  Speaker 3: and frankly capital flows too that you decide that are
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  Speaker 3: so strategically important that you want to hem off from China,
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  Speaker 3: and you build a high fence around that so small
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  Speaker 3: yard high fence, And in the book, I essentially sketch
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  Speaker 3: out three areas where I think will comprise that yard,
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  Speaker 3: if you like, is anything that compromises supply chain security,
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  Speaker 3: anything that compromises national security, and anything that compromises global
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  Speaker 3: technological leadership. So semiconductors, battery technology, need pharmaceuticals, biotech, jaw
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  Speaker 3: use goods, smartphones, the jewel use goods, the jewel use
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  Speaker 3: goods being goods that have applications in both civilian and
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  Speaker 3: military life, so turbine engines, drones being an obvious one.
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  Speaker 3: These are the areas where I think we can be
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  Speaker 3: reasonably sure that over the next decade there's going to
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  Speaker 3: be a pulling a part of supply chains and de
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  Speaker 3: risk in the supply chains in the Western in China
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  Speaker 3: are pushed to self sufficiency in those areas by China,
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  Speaker 3: and are de risking in the West from china reorientation
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  Speaker 3: of supply chains. The question becomes, really, I think, is
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  Speaker 3: can we limit it to those just those areas, And
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  Speaker 3: clearly Trump's tariffs indiscriminate across the board. That raises the
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  Speaker 3: specter of a much wider split. And this really matters.
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  Speaker 3: So the estimates I have in the book are that
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  Speaker 3: if we can contain it's fracturing two areas of strategic importance,
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  Speaker 3: so there's three areas that I just set out, then
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  Speaker 3: there will be an economic cost. There will be about
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  Speaker 3: one percent of global GDP if that happens over a
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  Speaker 3: relatively long period of time. It happens in the gradual
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  Speaker 3: and managed way, it's about one percent of global GDP,
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  Speaker 3: So it's not nothing, but it's manageable.
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  Speaker 2: But does it not become more than that over time?
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  Speaker 2: If it affects productivity growth and affects technological exchange and advancement,
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  Speaker 2: et cetera. If you have the two major blocks operating
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  Speaker 2: separately on high tech areas, there's got to be a
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  Speaker 2: long term effect that goes beyond the initials. Always that's
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  Speaker 2: really hard to quantify.
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  Speaker 3: But it's difficult to quantify, and it's difficult to know
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  Speaker 3: what the counterfactual is as well. Right, but it fracturing
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  Speaker 3: has contained to those areas, then it only affects about
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  Speaker 3: ten to fifteen percent of global trades and of course,
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  Speaker 3: most global technological development is happening within blocks rather than
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  Speaker 3: the exchange of ideas between blocks. So at a global
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  Speaker 3: level it could be more limited than many people might suppose,
• 17:03
  Speaker 3: but there will be an asymmetry in terms of who's affected.
• 17:08
  Speaker 3: So I think if the US can keep its blocked together,
• 17:11
  Speaker 3: doesn't push India away, can keep the EU on side,
• 17:14
  Speaker 3: then most of the costs are going to be borne
• 17:16
  Speaker 3: by China because the economic diversity of its block is
• 17:20
  Speaker 3: pretty limited. It's a smaller block. It dominates its block
• 17:23
  Speaker 3: to a much greater extent than the US does its block.
• 17:26
  Speaker 3: But coming back to your point about can we contain
• 17:29
  Speaker 3: it to these areas. If we can't and it's a
• 17:32
  Speaker 3: much broader split between the two blocks, then the economic
• 17:36
  Speaker 3: costs become much greater. It may be something in the
• 17:39
  Speaker 3: order of two to four percent of global GDP, which
• 17:43
  Speaker 3: again might not sound very much, but that's about the
• 17:46
  Speaker 3: losses that were imposed by the global financial crisis. We
• 17:49
  Speaker 3: now think the globe global GDP is about two to
• 17:52
  Speaker 3: four percent below is pre GFC trend, So that's the
• 17:56
  Speaker 3: essentially the permanent hip from the GFC. So we're looking
• 17:58
  Speaker 3: at potentially, if you get a much wider split another
• 18:01
  Speaker 3: global financial crisis, albeit clearly spread over a number of years,
• 18:06
  Speaker 3: rather than a happening at once. So the form that
• 18:08
  Speaker 3: fracturing takes will really determine the economic consequences.
• 18:12
  Speaker 2: Okay, well, let's stick with the optimistic view that it
• 18:16
  Speaker 2: only affects the ten to fifteen percent of global trade
• 18:18
  Speaker 2: one percent of global GDP. If that were to happen,
• 18:22
  Speaker 2: how does that affect, say, inflation? Everything feeds into inflation,
• 18:27
  Speaker 2: But things, say, for example, energy prices, rare earth prices
• 18:30
  Speaker 2: that we know we're already seeing the beginning of a
• 18:32
  Speaker 2: new commodity super psycle, right, and that could be massively
• 18:35
  Speaker 2: exacerbated by, for example, more restrictions are already quite a
• 18:38
  Speaker 2: lot of restrictions, but restrictions on processed rare eers from China,
• 18:41
  Speaker 2: or restrictions on the West stability to get raw rare
• 18:45
  Speaker 2: eerths from Sub Saharan Africa, etcetera, ecceter There's all sorts
• 18:47
  Speaker 2: of things here that could feed into a very volatile
• 18:51
  Speaker 2: inflation environment.
• 18:52
  Speaker 3: Indeed, and I think volatility is the key point here.
• 18:55
  Speaker 3: If you said to most economists we're going to roll
• 18:57
  Speaker 3: back some elements of globalization, what's the impact on inflation.
• 19:02
  Speaker 3: I think the response would be while there's going to
• 19:04
  Speaker 3: be inflationary clearly, and I think a bit of context
• 19:07
  Speaker 3: is important here. Globalization was only one element that pulled
• 19:11
  Speaker 3: down inflation through the eighties and nineties and two thousands,
• 19:16
  Speaker 3: and I suspect it probably wasn't the most important either.
• 19:18
  Speaker 3: The most important was reform of labor markets, product markets,
• 19:22
  Speaker 3: independent central banks, inflation targeting all of that stuff, running
• 19:25
  Speaker 3: fiscal policy more responsibly they had. That had by far
• 19:28
  Speaker 3: the bigger impact in my judgment, on bringing down inflation
• 19:32
  Speaker 3: than globalization. Globalization, if you like, was the icing on
• 19:35
  Speaker 3: the cake, the cherry on the top. So if a
• 19:38
  Speaker 3: bit of that globalization gets rolled back and some trade
• 19:40
  Speaker 3: barriers go up and only affects fifteen percent of global trade,
• 19:44
  Speaker 3: and to the extent that in the West we're moving
• 19:47
  Speaker 3: production out of China and we're putting it in Vietnam
• 19:51
  Speaker 3: and India and Mexico for these strategically important goods, then
• 19:55
  Speaker 3: it's going to another low cost producer. And if it
• 19:58
  Speaker 3: happens gradually, we know from other firms that have shifted
• 20:01
  Speaker 3: supply chains to de risk them. So if you look
• 20:04
  Speaker 3: at Toyota after the twenty eleven Fukashima disaster. It rejigits
• 20:08
  Speaker 3: supply chains to de risk them, have removed single points
• 20:11
  Speaker 3: of failure, didn't contribute much to overall costs, So I
• 20:15
  Speaker 3: think the inflationary consequences might be more limited than one supposed.
• 20:19
  Speaker 3: I think volatility, though, is the key point. So I
• 20:22
  Speaker 3: think we're going to head into a world where inflation
• 20:24
  Speaker 3: is more volatile. And you mentioned rare earths in critical
• 20:27
  Speaker 3: minerals more generally, but if you think about how that's
• 20:29
  Speaker 3: playing out, what's happening is China's putting on export controls,
• 20:34
  Speaker 3: and what that's doing effectively is restricting the global supply
• 20:37
  Speaker 3: of these minerals. The price therefore goes up, and as
• 20:41
  Speaker 3: the price goes up, that's then incentivizing the production and
• 20:44
  Speaker 3: then the exportation of other sources. So we're seeing rare
• 20:48
  Speaker 3: earth minds reopen in California, in Arkansas, in Romania, and
• 20:53
  Speaker 3: so on and so forth, and so the global supply
• 20:54
  Speaker 3: will go up and that will then bring the price
• 20:57
  Speaker 3: back down.
• 20:58
  Speaker 2: Back to the old The solution to high prices, as
• 21:00
  Speaker 2: high prisis.
• 21:01
  Speaker 3: Exactly so the consequence there is that you end up
• 21:04
  Speaker 3: with more volatile inflation a period of high inflation that
• 21:07
  Speaker 3: essentially is cure cures itself by allowing supplier to respond.
• 21:11
  Speaker 3: So my subposition is that we've been through this kind
• 21:13
  Speaker 3: of nice period where non inflationary, constant expansion, et cetera,
• 21:18
  Speaker 3: et cetera, low inflation, staple inflation. I think we're going
• 21:20
  Speaker 3: not necessarily to a world where inflation is structurally higher
• 21:24
  Speaker 3: three or four percent, but just that it's more volatile.
• 21:27
  Speaker 3: Three percent one year, one and a half percent the
• 21:29
  Speaker 3: next year, et cetera, et cetera.
• 21:32
  Speaker 2: I want to move on to talking about how this
• 21:34
  Speaker 2: might affect asset classes and ordinary investors in a minute.
• 21:37
  Speaker 2: But we're talking very much as though this is a
• 21:41
  Speaker 2: bit like an economic Cold war for a small part
• 21:45
  Speaker 2: of the global economy. But obviously we're now talking about
• 21:49
  Speaker 2: a world in which geopolitics have a much bigger influence
• 21:53
  Speaker 2: than previously, not just on resources, but also on the
• 21:56
  Speaker 2: way politicians interact. Is there a danger do you think
• 22:00
  Speaker 2: of geopolitical situation getting worse and worse and this economic
• 22:04
  Speaker 2: division becoming not just an economic division, but a risk
• 22:08
  Speaker 2: of further conflicts, the risk of war.
• 22:10
  Speaker 3: Exactly. Yeah, And if you're of a particularly cheerful disposition,
• 22:14
  Speaker 3: and you need being down to earth. Then there's a
• 22:16
  Speaker 3: whole chapter in the book, chapter eight that talks about
• 22:18
  Speaker 3: how could it all go wrong? And there's lots of
• 22:21
  Speaker 3: different ways in which you can visit that this fractured
• 22:23
  Speaker 3: world could evolve in a much warm, aligned way, which
• 22:26
  Speaker 3: talks about some of them that there's a deeper slit
• 22:28
  Speaker 3: between the two blocks. The big risk for America is
• 22:30
  Speaker 3: that it turns inwards pushes away its allies. In that sense,
• 22:34
  Speaker 3: America first would really be America loss, because it would
• 22:37
  Speaker 3: be the biggest loser. But the one that should keep
• 22:39
  Speaker 3: us all awake at night is the risk of conflict
• 22:42
  Speaker 3: between the two blocks, and that can emerge from the
• 22:45
  Speaker 3: several flashpoints. Clearly that the South China Sea in China's
• 22:49
  Speaker 3: presence there, and disputed islands and lands and so on,
• 22:53
  Speaker 3: but in Taiwan the other obvious flashpoints. Now I'm a
• 22:57
  Speaker 3: lonely macroeconomist, I'm not necessarily going to tell the possibility
• 23:02
  Speaker 3: or probability of the two sides come into conflict. I
• 23:05
  Speaker 3: do know that if the two sides do come into conflict,
• 23:07
  Speaker 3: then the least of our concerns is going to be
• 23:09
  Speaker 3: what the impact is going to be on global GDP.
• 23:11
  Speaker 3: But there are some estimates in the book. Some people
• 23:14
  Speaker 3: have done some work looking at this, maybe including your
• 23:17
  Speaker 3: colleagues at Bloomberg. Actually possibly, you know, Knox ten percent
• 23:21
  Speaker 3: off of global GDP if the US and China come
• 23:24
  Speaker 3: to blows over Taiwan, primarily through repercussions through the global
• 23:28
  Speaker 3: chip industry. But of course it doesn't necessarily need to
• 23:30
  Speaker 3: be a full blown war. It could be a blockade
• 23:32
  Speaker 3: that the restricts the flow of these semiconductors, and that
• 23:34
  Speaker 3: would having a knock on impact to to kind of
• 23:37
  Speaker 3: risk appetite and markets and et cetera, et cetera.
• 23:40
  Speaker 2: Yeah, or a cyber war.
• 23:42
  Speaker 3: Exactly, it's a cyber water again, particularly when it comes
• 23:44
  Speaker 3: to Taiwan. Images of conflict over Taiwan conjure up this.
• 23:49
  Speaker 3: This kind of image of the kind of amphibious land
• 23:52
  Speaker 3: is kind of a D Day type conflict from China,
• 23:55
  Speaker 3: the pla storming the beaches. I don't think that's probably how,
• 23:59
  Speaker 3: in all, like me, how things would play out. It
• 24:01
  Speaker 3: was much more likely to be blockade, cyber war, et cetera,
• 24:05
  Speaker 3: et cetera, et cetera.
• 24:07
  Speaker 2: Well, none of this is pleasant. Let me ask you
• 24:09
  Speaker 2: one thing we haven't talked about again is capital flows.
• 24:11
  Speaker 2: So we've talked about physical goods and the end of
• 24:14
  Speaker 2: cutting back of trade in those areas, but what about
• 24:16
  Speaker 2: the way that capital moves around the world in a
• 24:18
  Speaker 2: fractured system.
• 24:20
  Speaker 3: Well, a couple of really important points to make from
• 24:23
  Speaker 3: the start here. If you think about things through the
• 24:25
  Speaker 3: lens of macro rather than the markets, then really global
• 24:29
  Speaker 3: capital flows are just the flip side of global trade flows.
• 24:33
  Speaker 3: And so if China is running these large trade surplaces,
• 24:36
  Speaker 3: which is the kind of fundamental source of tension between
• 24:40
  Speaker 3: the US and China and a driver of this fracturing,
• 24:43
  Speaker 3: then it must also be amassing large amounts of external assets.
• 24:47
  Speaker 3: That's just the logic of running a trade surpas, and
• 24:49
  Speaker 3: those assets have to go somewhere. And the sheer size
• 24:53
  Speaker 3: of the accumulation of China's external assets are now close
• 24:57
  Speaker 3: to nine trillion dollars on some estimates, a bit opaque,
• 25:00
  Speaker 3: but about nine trillion dollars means that dollar markets are
• 25:03
  Speaker 3: the only place that they could they can really go.
• 25:06
  Speaker 3: So I suspect that there's going to be greater friction
• 25:08
  Speaker 3: in global capital flows in future. I think there's now
• 25:12
  Speaker 3: a widespread acceptance amongst policymakers, even the IMF, saying that
• 25:16
  Speaker 3: unfettered free flows of capital is not necessarily a good thing.
• 25:20
  Speaker 3: But I'm deeply skeptical of the idea that we're going
• 25:24
  Speaker 3: again back to the kind of nineteen thirties where the
• 25:26
  Speaker 3: kind of big restrictions on global capital flow is a
• 25:29
  Speaker 3: big dropping global capital flows in total. And also that
• 25:32
  Speaker 3: China can disentangle itself from US dollar markets. I don't
• 25:36
  Speaker 3: think it can, just because of the sheer size of
• 25:38
  Speaker 3: its external assets.
• 25:40
  Speaker 2: Okay, so we can put that aside as a big worry.
• 25:42
  Speaker 2: That's going to be all right.
• 25:43
  Speaker 3: I think so. I mean, I think to the extent
• 25:45
  Speaker 3: the global capital flows in future are going to be
• 25:48
  Speaker 3: smaller as a share of global GDP. I think it's
• 25:51
  Speaker 3: more likely to be because policymakers come to the conclusion
• 25:54
  Speaker 3: that actually some of the kind of frothy hot maney
• 25:57
  Speaker 3: is not necessarily a good thing. It creates a financial
• 26:00
  Speaker 3: honorabilities embedded in the system, And there's a bit of
• 26:03
  Speaker 3: a that there's a pushback against some of the kind
• 26:05
  Speaker 3: of Washington consensus idea of unfettered free capital flows being
• 26:09
  Speaker 3: an unalloyed positive rather than it being China in the
• 26:13
  Speaker 3: US pulling apart and erecting a big kind of capital
• 26:16
  Speaker 3: wall between these two blocks. I think that would happen
• 26:19
  Speaker 3: in some areas. So I think particularly in private markets
• 26:22
  Speaker 3: where rules around foreign investment are a bit more opaque,
• 26:25
  Speaker 3: I think there's going to be much greater reticence on
• 26:27
  Speaker 3: behalf of Western investors in getting involved in China and
• 26:31
  Speaker 3: investing in China. And we see some of that already
• 26:34
  Speaker 3: in the data. But I think generally at a global level,
• 26:37
  Speaker 3: capital flows remaining relatively high would be would be my
• 26:39
  Speaker 3: base case.
• 26:41
  Speaker 2: Okay, so under the key point for this podcast anyway,
• 26:45
  Speaker 2: what does all this mean for our portfolios? What does
• 26:47
  Speaker 2: it mean for the future of investment? We have been taught,
• 26:50
  Speaker 2: haven't we relentlessly over the last over many years, that
• 26:52
  Speaker 2: a globalized portfolio is the best portfolio, and that our
• 26:55
  Speaker 2: pension money and our is money can float all over
• 26:58
  Speaker 2: the world. In fact, everywhere is better than the UK.
• 27:01
  Speaker 2: So that's been the last couple of decades. What now,
• 27:04
  Speaker 2: what does this mean for the ordinary person looking at
• 27:08
  Speaker 2: their SIP and their ISA and saying, Okay, we're not
• 27:11
  Speaker 2: globalized anymore, We're fractured. Where do I move my money.
• 27:15
  Speaker 3: Well, you're right that a key aspect of the latest
• 27:19
  Speaker 3: wave of globalization, the most recent wave of globalization has
• 27:22
  Speaker 3: been massive financial integration, and that was something that was
• 27:25
  Speaker 3: not necessarily present in previous waves of globalization. And part
• 27:30
  Speaker 3: of that was this idea that we should all be
• 27:32
  Speaker 3: investing our and SIPs et cetera, et cetera across the
• 27:36
  Speaker 3: world in the fast growing emerging economies too. My suspicion
• 27:40
  Speaker 3: is that some of the glosses come off of that already,
• 27:42
  Speaker 3: not at least because returns in some emerging economies have
• 27:45
  Speaker 3: been pretty weak. But that's the direction of travel, and
• 27:48
  Speaker 3: it's the direction of travel that we're heading towards now.
• 27:51
  Speaker 3: A lot will depend upon the form that fracturing takes.
• 27:54
  Speaker 3: As I've said in terms of the macro consequences, if
• 27:58
  Speaker 3: we get a more limited contained form of fracturing, then
• 28:01
  Speaker 3: I suspect what it means in practice is that you
• 28:04
  Speaker 3: and I were thinking twice before we invest significant portions
• 28:07
  Speaker 3: of our sip and is in Chinese equities, but it
• 28:11
  Speaker 3: doesn't really affect the extent to which we put our
• 28:13
  Speaker 3: money in the S and P or for that matter,
• 28:15
  Speaker 3: European stocks. And I think when it comes to private flows,
• 28:20
  Speaker 3: cups economist. We're speaking to clients all the time in
• 28:23
  Speaker 3: private markets. There's already some reticence about investing in China
• 28:28
  Speaker 3: and China's allies sanctions risk as much as anything else,
• 28:32
  Speaker 3: and I think that that continues to intensify too, so
• 28:36
  Speaker 3: much greater reticence reluctance to invest in China itself, I suspect.
• 28:41
  Speaker 3: But it doesn't mean that we stop investing globally, no,
• 28:45
  Speaker 3: I don't think so.
• 28:47
  Speaker 2: Does it mean that we should allocate more to commodities
• 28:50
  Speaker 2: and gold for example.
• 28:52
  Speaker 3: Well, I think that's happened already to some extent with gold.
• 28:55
  Speaker 3: So gold is seen by some emerging market central banks,
• 28:58
  Speaker 3: particularly the Chinese Bank, is a way of kind of
• 29:01
  Speaker 3: mitigating some risk of exposure to the to the dollar
• 29:04
  Speaker 3: and limited sanctions risks, and that's been a key factor
• 29:07
  Speaker 3: behind the rise in the price of gold over the
• 29:10
  Speaker 3: past eighteen months two years in my view. So some
• 29:14
  Speaker 3: of that is already in the market, clearly, if you're
• 29:17
  Speaker 3: a savvy investor that can identify those particular critical minerals
• 29:21
  Speaker 3: that China has a chokehold over, and there's humpty in
• 29:24
  Speaker 3: different rare earths. The names of which we've never heard of.
• 29:27
  Speaker 3: Germanium and gallium were two big ones last year I'd
• 29:32
  Speaker 3: never heard of. But turns out China has a stranglehold
• 29:34
  Speaker 3: over these rare earths and they're now a scrambled to
• 29:38
  Speaker 3: develop alternative sources.
• 29:40
  Speaker 2: It's the processing they have a stranglehold of, exactly, rather
• 29:44
  Speaker 2: than the mining.
• 29:45
  Speaker 3: Rather than the deposits of them exactly. So the key
• 29:48
  Speaker 3: point about rare earth is that they're not that rare,
• 29:50
  Speaker 3: they're pretty prevalent. Is that is that the mining and
• 29:53
  Speaker 3: the processing, particularly the processing the processing is really dirty work,
• 29:56
  Speaker 3: which is essentially we'd euxhource that to China for environmental
• 29:59
  Speaker 3: reasons and now so you know, if you can work
• 30:01
  Speaker 3: out where those chope points lie and develop domestic sources
• 30:04
  Speaker 3: off them, then there's clearly opportunities or opportunities there too.
• 30:09
  Speaker 2: It sounded so wrong that sentence, by the way, Now
• 30:12
  Speaker 2: it's dirty works, so we've outsourced it to China for
• 30:15
  Speaker 2: environmental reasons. The environmental impact is exactly the same. It's
• 30:19
  Speaker 2: just happening somewhere else, I mean.
• 30:21
  Speaker 3: Exactly the same. At a global level, the environmental impact
• 30:23
  Speaker 3: is exactly the same. But for domestic political reasons, we've
• 30:27
  Speaker 3: decided that we took a decision kind of fifteen twenty
• 30:29
  Speaker 3: years ago that someone else could do that.
• 30:31
  Speaker 2: Thanks very much, and not just on that interesting Okay,
• 30:35
  Speaker 2: Can I just argue briefly then about the US market,
• 30:37
  Speaker 2: partly in connection to your ideas about the fractured age,
• 30:40
  Speaker 2: but also in general. A lot of our listeners will
• 30:43
  Speaker 2: be holding global track of farms globally, yes, whatever else
• 30:46
  Speaker 2: will be very very exposed to the US and still
• 30:49
  Speaker 2: very exposed to big tech companies. Is that a reasonable
• 30:53
  Speaker 2: place to be?
• 30:55
  Speaker 3: Well, I think it's a reasonable place to be in
• 30:56
  Speaker 3: terms of future growth when it comes to kind of
• 31:00
  Speaker 3: big tech and AI in particular, I'm pretty bullish, I
• 31:03
  Speaker 3: have to say, in terms of the kind of productivity
• 31:05
  Speaker 3: benefits that that's going to eventually deliver. It's not delivering
• 31:08
  Speaker 3: them right now, but I think if we wind the
• 31:10
  Speaker 3: clock forward five ten years then it will start to
• 31:13
  Speaker 3: have delivered them. Clearly, some of that's reflected the price
• 31:15
  Speaker 3: of these hyperscalies and big tech stocks already.
• 31:19
  Speaker 1: Now.
• 31:20
  Speaker 3: The question we always get is is this a bubble?
• 31:22
  Speaker 3: And it does look pretty frothy, doesn't it when you
• 31:24
  Speaker 3: look at some of the kind of valuations that these
• 31:27
  Speaker 3: firms are trading on. And then the question becomes for investors,
• 31:30
  Speaker 3: if you're already invested, do you hang on? If you're
• 31:32
  Speaker 3: not invested, do you try and ride the coattails of
• 31:34
  Speaker 3: the kind of this bubble? And when do you get out?
• 31:38
  Speaker 3: And that that's an incredibly difficult question to answer and
• 31:42
  Speaker 3: one that will depend upon individual's preferences and risk appetites
• 31:46
  Speaker 3: and particular circumstances. My sense would be that we've been
• 31:51
  Speaker 3: through a period where returns on US equities have outperformed
• 31:54
  Speaker 3: those comfortably that those of other develop markets, particularly here
• 31:58
  Speaker 3: in the UK. I suspect that that performance will narrow
• 32:02
  Speaker 3: over the coming years, just because a lot of that
• 32:05
  Speaker 3: valuations are extremely high. I don't see that there's the
• 32:08
  Speaker 3: same scope for price gains. So I suspect that it's
• 32:11
  Speaker 3: going to be impossible to ignore some exposure to the
• 32:14
  Speaker 3: US just because of the scale. But the relative act
• 32:17
  Speaker 3: performance of the US compared to the European markets and
• 32:20
  Speaker 3: markets in the UK will start to diminish.
• 32:22
  Speaker 2: Okay, so expected a little mean reversion in relative terms
• 32:25
  Speaker 2: at least.
• 32:26
  Speaker 3: Yeah.
• 32:26
  Speaker 2: Indeed, brilliant, Neil, thank you, thank you so much. Can
• 32:30
  Speaker 2: I just ask you one last question. Obviously, we are
• 32:33
  Speaker 2: recommending that everybody buys this book and reads it immediately
• 32:37
  Speaker 2: the fractured agent body go out by it.
• 32:39
  Speaker 3: Read I'm losing my star review as well, leave.
• 32:42
  Speaker 2: Five star reviews, and then once you've done that, don't
• 32:44
  Speaker 2: forget to leave your five star review for the podcast,
• 32:46
  Speaker 2: because that matters too. Indeed, Neil, you've written this, what
• 32:50
  Speaker 2: are you reading.
• 32:51
  Speaker 3: I'm halfway through Dan Wang's book break Neck on China,
• 32:54
  Speaker 3: which is really good choke point again on the global
• 32:59
  Speaker 3: economy and strangleholding. Certain parts of it's really really good too.
• 33:03
  Speaker 3: I'd recommend both of those books to listeners again about
• 33:07
  Speaker 3: the feature the global economy and the relationship with the
• 33:09
  Speaker 3: US and China within it.
• 33:11
  Speaker 2: Okay, excellent, Thank you, though we must remember by the
• 33:13
  Speaker 2: way that books aren't was right. I was telling I
• 33:15
  Speaker 2: think John on podcast the other day about going through
• 33:17
  Speaker 2: my bookshelves to deliver some books to the Library of Mistakes,
• 33:21
  Speaker 2: and there's quite a lot called things like the end
• 33:23
  Speaker 2: of China and that kind of thing.
• 33:27
  Speaker 3: Yeah, maybe version two, the second edition of this will
• 33:30
  Speaker 3: be the kind of unfractured age.
• 33:32
  Speaker 2: Maybe, who knows. Anyway, thank you so much for joining
• 33:35
  Speaker 2: us today that was absolutely fascinating.
• 33:37
  Speaker 3: Thanks for having me.
• 33:42
  Speaker 2: Thanks for listening to this week's Merrin Talks Money. If
• 33:44
  Speaker 2: you like us, show, rate, review, and subscribe wherever you
• 33:47
  Speaker 2: listen to podcasts, and keep sending questions or comments to
• 33:49
  Speaker 2: Merror Money at Bloomberg dot net. You can also follow
• 33:52
  Speaker 2: me in John on Twitter or x I'm at marinas
• 33:54
  Speaker 2: w and John is John Underscore Stepic. This episode was
• 33:57
  Speaker 2: hosted by me Marrin's unsep Web was produced by some
• 34:00
  Speaker 2: Assadiant Moses and sound designed by Blake Maples, Kelly Gary
• 34:04
  Speaker 2: and Aaron Kaspers. That's, of course to Neil Shearing.