Latest / Trumponomics / How Trade War is Reshaping China

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How Trade War is Reshaping China · Trumponomics

• 0:02
  Speaker 1: There's little sign of a sweeping deal to resolve the
• 0:05
  Speaker 1: US China trade conflict. Even a quick fix to some
• 0:09
  Speaker 1: of the issues is eluding officials, and hoping for that
• 0:13
  Speaker 1: fix probably misses the broader point that China's economy is
• 0:18
  Speaker 1: undergoing profound internal change. If anything, tariff battles will only
• 0:24
  Speaker 1: accelerate that change. Welcome to Benchmark, A show about the bloody.
• 0:39
  Speaker 1: I'm Daniel Moss, columnist at Bloomberg Indion in New York.
• 0:45
  Speaker 1: Beneath the headlines, what's happening on the ground in China
• 0:50
  Speaker 1: and what are executives that have to make decisions doing
• 0:54
  Speaker 1: about it? In the era of trade slings and arrows?
• 0:58
  Speaker 1: Should we even be talking about globalization at least as
• 1:03
  Speaker 1: far as we've come to understand the term. Francis Slim
• 1:07
  Speaker 1: from Colberg Cravis Roberts spent some time in China recently
• 1:12
  Speaker 1: and his co author of a penetrating report called China
• 1:16
  Speaker 1: a Visit to the Epicenter. She joins us from Sydney,
• 1:20
  Speaker 1: where she's head of the Asia Pacific Macro Research Team.
• 1:25
  Speaker 1: Francis welcome. Thank you very much. Dan. I'm very happy
• 1:29
  Speaker 1: to be here and so thank you for the induct
• 1:31
  Speaker 1: What was unique about this trip to China. It's been
• 1:34
  Speaker 1: the epicenter of a lot for quite a while, or
• 1:38
  Speaker 1: at least some of the seismic points. What's going on
• 1:41
  Speaker 1: there right now? Oh, I think you're very right. China
• 1:44
  Speaker 1: has been the epicenter for a very long time. We
• 1:48
  Speaker 1: have been meet Henry mcbeh and myself have been traveling
• 1:50
  Speaker 1: to China for many years now, and I think what's
• 1:53
  Speaker 1: different now is this intense focus on trade and the
• 1:57
  Speaker 1: tensions going on there where US is imposing tariffs on
• 2:02
  Speaker 1: China and China is imposing terroffs on the US. So
• 2:06
  Speaker 1: we took a visit to Shanhai um and we're heading
• 2:09
  Speaker 1: to Beijing next to find out what's really happening on
• 2:12
  Speaker 1: the ground, what's the view from China, because a lot
• 2:15
  Speaker 1: of the rhetoric we here is from the US and
• 2:18
  Speaker 1: less from China. So we went there to learn more
• 2:21
  Speaker 1: about how Chinese authorities are thinking about the trade issues.
• 2:27
  Speaker 1: But not just Chinese authorities, you also talk to executives
• 2:31
  Speaker 1: making daily decisions about how to deal with the headlines. Absolutely,
• 2:36
  Speaker 1: and to me, that's the that's the key way that
• 2:39
  Speaker 1: you understand what's actually going on when you speak to
• 2:42
  Speaker 1: business leaders in China, they tell you what they're feeling
• 2:45
  Speaker 1: on the ground, and that was what was different this
• 2:47
  Speaker 1: time around. Previously, you'd always hear the policies that are
• 2:52
  Speaker 1: being rolled out from Chinese authorities, and it was very
• 2:56
  Speaker 1: clear the direction they were going as it pertained to trade.
• 3:01
  Speaker 1: There was a vacuum of conversation, so unlike the US,
• 3:05
  Speaker 1: where you're here daily comments coming from d C, you
• 3:09
  Speaker 1: don't hear that coming from China. So when you speak
• 3:13
  Speaker 1: to the business executives, they tell you that things have changed,
• 3:17
  Speaker 1: and that was what was so interesting about this visit,
• 3:20
  Speaker 1: and you were getting that same impression from locals as
• 3:24
  Speaker 1: well as expatriates. Yes, um, the locals. I think the
• 3:29
  Speaker 1: local business folk had a different view of what was happening,
• 3:32
  Speaker 1: and a very big, long term structural view of the
• 3:37
  Speaker 1: tectonic shifts really that are happening in the global economy
• 3:40
  Speaker 1: and how the center of gravity, the center of economic
• 3:44
  Speaker 1: functions are shifting, and they felt that was the core
• 3:48
  Speaker 1: reason why we had these trade tensions today. The foreign
• 3:52
  Speaker 1: nationals that were in China were more reacting to policies
• 3:56
  Speaker 1: that were shifting as a result of these tensions. So
• 3:59
  Speaker 1: You've got a good flay or of what locals were
• 4:01
  Speaker 1: feeling and what foreign companies were feeling. You're asking readers
• 4:05
  Speaker 1: to look beyond the prospect of any short term fix
• 4:11
  Speaker 1: to end the trade dispute between the US and China.
• 4:15
  Speaker 1: What's wrong with looking for a fix. This is our
• 4:18
  Speaker 1: view and it's my view as well. I think the
• 4:21
  Speaker 1: reason why the trade tensions are here today is not
• 4:24
  Speaker 1: so much because of trade as it is about broader issues.
• 4:27
  Speaker 1: And the key issue that's different today is China has
• 4:30
  Speaker 1: come of age. China now can make smartphones. China actually
• 4:35
  Speaker 1: makes more smartphones than some Song and Apple combined. Nobody
• 4:41
  Speaker 1: talks about that. This is what's shifting. China is capable
• 4:46
  Speaker 1: of doing a lot of things the US is doing.
• 4:49
  Speaker 1: The US is trying to slow down in China's progress,
• 4:52
  Speaker 1: and the trade is a tool to make that happen.
• 4:56
  Speaker 1: In my view, a lot of the domestic commentary in
• 4:59
  Speaker 1: the It States does feel like it's in a time warp. Francis.
• 5:05
  Speaker 1: People talk about sweatshops. People bemoaned that factory producing furniture
• 5:11
  Speaker 1: that was once in North Carolina and now it's gone,
• 5:14
  Speaker 1: oh somewhere in China. In reality, that factory has probably
• 5:19
  Speaker 1: moved on somewhere else from China. If I'm understanding you correctly,
• 5:24
  Speaker 1: that's correct. So maybe about ten twenty years ago, China
• 5:28
  Speaker 1: did have a lot of factories manufacturing low end goods.
• 5:31
  Speaker 1: When they first entered the w t O, they were
• 5:34
  Speaker 1: making t shirts and toys, low end goods with massive factories.
• 5:38
  Speaker 1: Today it's very different. What has been amazing is that
• 5:43
  Speaker 1: you know that the US developed a lot of the technology.
• 5:46
  Speaker 1: The US developed the iPhone, the US developed the iPad.
• 5:50
  Speaker 1: But what China has done is they have really mastered
• 5:54
  Speaker 1: the use of technology that has been built by the US.
• 5:58
  Speaker 1: And if you look at the progress they have made
• 6:01
  Speaker 1: in terms of uh Internet penetration, the use of phones,
• 6:06
  Speaker 1: and ride sharing and even e commerce, it has just
• 6:10
  Speaker 1: leaped throut the US. Ten years ago they were at zero.
• 6:14
  Speaker 1: Today their way ahead of the US in terms of
• 6:17
  Speaker 1: the application of new technologies. That's what this trade war
• 6:21
  Speaker 1: is about. We need of the U s fields. They
• 6:23
  Speaker 1: need to slow China down. That's not going to shift
• 6:27
  Speaker 1: and that's why I think the change that's happening UM
• 6:31
  Speaker 1: is more structural in nature. The tensions will be more
• 6:34
  Speaker 1: long tailed than people think because the fundamental reason is
• 6:38
  Speaker 1: that China is now a real competitor to major developed
• 6:44
  Speaker 1: countries like the US, like Europe and Japan. Does that
• 6:49
  Speaker 1: make China more resilient to a trade war than was
• 6:53
  Speaker 1: the case a few years ago. Yes, absolutely. If you
• 6:58
  Speaker 1: look at the amount of exports as a set of GDP,
• 7:00
  Speaker 1: it's fallen from more than hardly eighteen today, which is
• 7:05
  Speaker 1: not too far from where the US is in terms
• 7:07
  Speaker 1: of its trade exposure, So absolutely makes it more resilient.
• 7:12
  Speaker 1: There's also a great resolve to continue moving forward. They
• 7:17
  Speaker 1: are continuing to invest in education, they're continuing to invest
• 7:21
  Speaker 1: in innovation, and in fact, as a result of the
• 7:25
  Speaker 1: trade war and the potential of losing supply of these
• 7:29
  Speaker 1: precious semi conductor ships, which is the core of a
• 7:32
  Speaker 1: lot of the trade tensions, they have actually raised a
• 7:36
  Speaker 1: fund to accelerate progress in manufacturing high end semiconductor technology. Francis,
• 7:45
  Speaker 1: you cast serious doubts in this report over the future
• 7:49
  Speaker 1: of global supply chains. Talk a bit about that place.
• 7:55
  Speaker 1: So if you think about the world twenty years ago,
• 7:58
  Speaker 1: when China first and the World Trade Organization, everyone would
• 8:04
  Speaker 1: grow through expanding their export base, and that was a
• 8:09
  Speaker 1: really good strategy in terms of uh expanding GDP growth
• 8:13
  Speaker 1: and increasing wealth in a lot of emerging countries. That
• 8:17
  Speaker 1: was because the US was a major consuming economy. Today,
• 8:23
  Speaker 1: though the dynamic has shifted. China is a much more
• 8:28
  Speaker 1: wealthy country. Today. GDP per capital is in the ten
• 8:32
  Speaker 1: thousand range, and they have one point four billion people
• 8:36
  Speaker 1: compared to America's three hundred thirty million. So when you
• 8:39
  Speaker 1: do the math, within five years, China's consuming power will
• 8:45
  Speaker 1: be greater than the US. As that consumption market shifts,
• 8:49
  Speaker 1: the epicenter of growth and the dynamics they're shift. And
• 8:54
  Speaker 1: that's where I find it fascinating that even though their
• 8:57
  Speaker 1: trade tensions, there are a lot of things that are
• 8:59
  Speaker 1: moving very um rapidly, which makes me very excited about
• 9:05
  Speaker 1: the prospects on certain fields in China. But China also
• 9:11
  Speaker 1: recognizes that they are reliant on some countries for materials
• 9:17
  Speaker 1: and they're trying to make themselves self sufficient. The trade
• 9:21
  Speaker 1: war accelerates that. As you impose tariffs, you create inefficiencies
• 9:27
  Speaker 1: in the market. Profitabilities hurt in companies, productivity is hurt
• 9:31
  Speaker 1: in countries. If these tensions continue, that the better way
• 9:36
  Speaker 1: would be to insource a lot of the goods right
• 9:39
  Speaker 1: from the manufacturing of things like semiconductor chips right to
• 9:43
  Speaker 1: the end product of the smartphone, and that would all
• 9:46
  Speaker 1: stay within China. That would all stay within China and
• 9:50
  Speaker 1: China's trade partners which are more closely aligned to me.
• 9:55
  Speaker 1: That means that although the US China is West trade
• 9:59
  Speaker 1: may not grow as fast. In fact, we have seen
• 10:03
  Speaker 1: science that it has fallen off quite a bit. We
• 10:06
  Speaker 1: think that the Asia regional trade will actually pick up
• 10:09
  Speaker 1: because that cooperation between Asian countries will pick up. So
• 10:12
  Speaker 1: there are beneficiaries of the trade tensions today, and that
• 10:17
  Speaker 1: insourcing would come from supplies within that Asia regional supply
• 10:23
  Speaker 1: network as well as manufacturing some of these items on
• 10:27
  Speaker 1: shore in China. So let's say I make widgets in Indonesia.
• 10:33
  Speaker 1: My widgets go somewhere in Malaysia, then somewhere in Thailand,
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  Speaker 1: they find their way to Taiwan, then over to the
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  Speaker 1: People's Republic of China where they're assembled and shipped back,
• 10:46
  Speaker 1: and I go to Best Buy in New Jersey and
• 10:48
  Speaker 1: pick up my PC. So how does what you're talking
• 10:51
  Speaker 1: about change that arrangement. The part of the supply chain
• 10:56
  Speaker 1: that shifts is the part that probably goes to the
• 11:01
  Speaker 1: US because that is the trade trade tension that's been
• 11:04
  Speaker 1: discussed today. That to me, the bigger issue in what's
• 11:08
  Speaker 1: happening is what's happening between how China looks at what
• 11:13
  Speaker 1: trade total trade is relative to how the US looks
• 11:17
  Speaker 1: at trade, and what you're identifying today is key. Right.
• 11:21
  Speaker 1: If you think about what President Trump is talking about
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  Speaker 1: in terms of trade, he is only referring to goods
• 11:30
  Speaker 1: sold from China and exported to the US. He's not
• 11:36
  Speaker 1: talking about goods sold to China from US companies that
• 11:42
  Speaker 1: are based in China. And to explain that a little further,
• 11:47
  Speaker 1: take Apple. For example, Apple sold forty billion dollars worth
• 11:53
  Speaker 1: of iPhones in China last year. None of that is
• 11:56
  Speaker 1: considered trade from US to China. Now, if you talk
• 12:00
  Speaker 1: the i R S that and told the arras now
• 12:02
  Speaker 1: to tax that, that wouldn't fly. But this is how
• 12:07
  Speaker 1: President Trump is looking at the trade issue. On the
• 12:10
  Speaker 1: China side, they said, hang on, we bought four million
• 12:13
  Speaker 1: cars from General motors last year. The US only brought
• 12:16
  Speaker 1: three million cars from General motors. You didn't count that
• 12:20
  Speaker 1: in your trade surplus or deficit because you made those
• 12:23
  Speaker 1: onshore in China. So when you think about that supply chain,
• 12:29
  Speaker 1: those dynamics will shift going forward um and to me,
• 12:33
  Speaker 1: those are the areas that are most at risk. So
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  Speaker 1: the parts of the iPhone and the iPhone itself that
• 12:41
  Speaker 1: is to be sold in China is made in China,
• 12:45
  Speaker 1: and the iPhone that's bought in Brooklyn is put together
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  Speaker 1: from a number of places, none of which is China.
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  Speaker 1: Some of it is China, and some of it is
• 12:58
  Speaker 1: the other Asian countries that flow through into China and
• 13:02
  Speaker 1: onto Brooklyn as well. So there there's a lot of
• 13:06
  Speaker 1: supply chain linkages to get to that point right where
• 13:10
  Speaker 1: you have a phone. Like you said, Taiwan, Korea, Japan,
• 13:14
  Speaker 1: they're all part of that supply chain linkage. And if
• 13:17
  Speaker 1: you look at the inter regional trade of Asian electronics
• 13:21
  Speaker 1: in particular, it's massive. Um. For a country like Singapore,
• 13:27
  Speaker 1: almost of the electronic trade is within Asia itself. It's
• 13:31
  Speaker 1: very hard to isolate it um and and tell you
• 13:36
  Speaker 1: specifically how much of it because if I tell you
• 13:39
  Speaker 1: any percent is to Asia, part of it could be
• 13:41
  Speaker 1: going to Hong Kong before it heads to Taiwan, before
• 13:45
  Speaker 1: it heads to China. But you know that it lives.
• 13:48
  Speaker 1: That ecosystem is within Asia, so it's not a value
• 13:53
  Speaker 1: add from China. In fact, I believe China says its
• 13:57
  Speaker 1: value add to UH that I phone is much less
• 14:01
  Speaker 1: than the total value exported because of that supply chain linkage.
• 14:08
  Speaker 1: But that comes with other issues as well. Right, So
• 14:12
  Speaker 1: the Asian country is, because of their interlinkages, are also
• 14:15
  Speaker 1: at risk as a result of these trade tensions. Francis,
• 14:20
  Speaker 1: are we talking about the end of globalization, which in
• 14:25
  Speaker 1: the corporate sphere has had a lifespan of say three decades.
• 14:31
  Speaker 1: Is that now over or is globalization just changing its
• 14:35
  Speaker 1: shape evolving its form. I think globalization is evolving. I
• 14:40
  Speaker 1: think technology is evolving globalization because we're moving towards more
• 14:47
  Speaker 1: of a service based economy globally, and part of that
• 14:51
  Speaker 1: is driven by demographics. The other part is driven by
• 14:54
  Speaker 1: rising incomes globally. As people move up the income chain
• 14:59
  Speaker 1: from low income to higher income, there's less goods consumed
• 15:03
  Speaker 1: and more services consumed. So I do think globalization is shifting,
• 15:07
  Speaker 1: and if you're only focused on goods, you're going to
• 15:10
  Speaker 1: miss the other part of the picture, which is growing.
• 15:15
  Speaker 1: The other point I would make on why globalization is shifting,
• 15:19
  Speaker 1: and why global trade in particular has peaked is because
• 15:23
  Speaker 1: normally trade is driven by massive investment cycles. If you
• 15:28
  Speaker 1: look back in time, we've had three massive investment cycles,
• 15:34
  Speaker 1: the U S industrialization cycle back in the nine era,
• 15:40
  Speaker 1: then when you had Japanese and Korean industrialization cycle in
• 15:44
  Speaker 1: the late sixties seventies to eighties, and then when China
• 15:48
  Speaker 1: industrialized most recently post two thousand. I can't think of
• 15:55
  Speaker 1: another economy that could have as big an impact on
• 15:59
  Speaker 1: industrialized ation that could drive global trade for another cycle
• 16:04
  Speaker 1: in the near future. Not India. I think India has
• 16:09
  Speaker 1: a lot of work to do and it's a very
• 16:12
  Speaker 1: interesting economy. I'm very excited about the potential in India
• 16:15
  Speaker 1: given the changes I've seen in the economy, the reforms
• 16:20
  Speaker 1: that Prime Minister Morey has made. But it does not
• 16:24
  Speaker 1: move as swiftly as China as it is a democracy,
• 16:28
  Speaker 1: Whereas China has moved faster than the US and any
• 16:34
  Speaker 1: other country that I've seen because it's not a democracy.
• 16:38
  Speaker 1: In fact, if to give you an example on the
• 16:40
  Speaker 1: technology side, how fast it's moved, if you take rides sharing.
• 16:45
  Speaker 1: Uber has been around for more than eight years. It
• 16:47
  Speaker 1: has not reached fifty penetration. China has d D, which
• 16:52
  Speaker 1: is equivalent to Uber. In China, within three years they
• 16:56
  Speaker 1: hit fifty penetration rates. This is true of almost any
• 17:01
  Speaker 1: Internet category you can think of. They just move at
• 17:04
  Speaker 1: the speed of light. I find it hard to think
• 17:08
  Speaker 1: that another economy that's big enough can move as swiftly
• 17:13
  Speaker 1: as China has. You devote considerable time in your report
• 17:18
  Speaker 1: Francis to talking about Chinese millennials and their impact over
• 17:23
  Speaker 1: the next few decades. I found that surprising because there's
• 17:27
  Speaker 1: a lot of discussion about a demographic bomb that's going
• 17:31
  Speaker 1: to catch up with China from the twenty thirties onwards.
• 17:35
  Speaker 1: Can you reconcile that absolutely? When you look at the
• 17:39
  Speaker 1: headline numbers, the Chinese population is slowing and is shrinking,
• 17:46
  Speaker 1: particularly the working age population. And we generally focused on
• 17:51
  Speaker 1: the working age population because they're the income earning population
• 17:56
  Speaker 1: and the income spending population. Right, if you think of
• 18:01
  Speaker 1: the population between zero to fifteen who aren't earning an income,
• 18:06
  Speaker 1: they don't really spend the same way. And you think
• 18:09
  Speaker 1: of the population that sixt and above who are retired,
• 18:12
  Speaker 1: they don't spend the same way. So the thrust of
• 18:15
  Speaker 1: your income power and spending power is within the working population.
• 18:19
  Speaker 1: Now that cohort is shrinking. But within any aggregate, there
• 18:23
  Speaker 1: are always different things to look for. And what's different
• 18:27
  Speaker 1: about China is you also have a backdrop of a
• 18:31
  Speaker 1: growing middle class population. Now, if you take a big
• 18:36
  Speaker 1: step back and look at the projections across the different countries,
• 18:39
  Speaker 1: you'll see that the next generation in the US will
• 18:42
  Speaker 1: actually be poorer than their parents and grandparents. That's not
• 18:46
  Speaker 1: the case in Asia because of this rising GDP per
• 18:50
  Speaker 1: capital story, rising income growth, rising UH and growing middle
• 18:55
  Speaker 1: income cohort. And that's what makes me excited about this
• 18:58
  Speaker 1: group of millennials because they're the ones who are coming
• 19:01
  Speaker 1: of age and entering this middle income category. As you
• 19:06
  Speaker 1: enter that middle income category, you're spending patterns change, your
• 19:10
  Speaker 1: incomes grow, and that's what we're excited about. Francis, this
• 19:15
  Speaker 1: is fascinating. We could talk for hours, Unfortunately we can't.
• 19:19
  Speaker 1: I want to close with just one point. You have
• 19:21
  Speaker 1: a fascinating graph in your report which gets at a
• 19:24
  Speaker 1: legacy of two thousand and eight that isn't often discussed
• 19:28
  Speaker 1: in the season of Lehman retrospectives. You're saying global trade
• 19:33
  Speaker 1: peaked in two thousand and eight. That's not something you
• 19:37
  Speaker 1: hear very often. Absolutely, and that was the dynamic I
• 19:41
  Speaker 1: was describing earlier on. There are a number of reasons
• 19:45
  Speaker 1: why trade grows. One is the industrialization cycle. I don't
• 19:49
  Speaker 1: see that happening against sou Um and the just the
• 19:53
  Speaker 1: opening up of economies which happened UM as the CEO
• 19:58
  Speaker 1: got off the ground and China started opening stores. That
• 20:01
  Speaker 1: linkage between trade and China drove global trade to a
• 20:05
  Speaker 1: peak in two thousand and eight. Together a couple together
• 20:09
  Speaker 1: with the investment cycle. That cycle now has passed UM
• 20:13
  Speaker 1: for a number of reasons. One is China is now
• 20:17
  Speaker 1: quite fully developed. In fact, they're one of the more
• 20:20
  Speaker 1: advanced countries in terms of making sure that infrastructure is
• 20:23
  Speaker 1: in place for the next few decades. The second reason
• 20:28
  Speaker 1: is credit was freely available and that drove investment and
• 20:32
  Speaker 1: the demand for goods to be traded. Investments are very
• 20:36
  Speaker 1: trade intensive because you need to buy materials to build things.
• 20:41
  Speaker 1: Now that the cycle is shifting towards more of a
• 20:43
  Speaker 1: consumption based cycle and service based cycle, there's less need
• 20:47
  Speaker 1: for things to be traded. It doesn't mean that there
• 20:50
  Speaker 1: isn't going to be any trade. It just means that
• 20:53
  Speaker 1: the growth will be higher in other sectors which are
• 20:56
  Speaker 1: less trade and commodity intensive. Francis, thanks for sharing this
• 21:02
  Speaker 1: perspective with us, and we'd love to have you back
• 21:04
  Speaker 1: again to talk about what else you find on your
• 21:08
  Speaker 1: travels and in your research. I would love to talk
• 21:11
  Speaker 1: to you again and thank you so much. Dan. Benchmark
• 21:22
  Speaker 1: will be back next week. Until then, you can find
• 21:25
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• 21:30
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  Speaker 1: of Foreheads. The head of Bloomberg Podcasts is Frances Believe.
• 21:54
  Speaker 1: Thanks for listening. See you next time is pastasy Fer
• 22:03
  Speaker 1: four