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What Business Leaders Need to Know About the Global Trade Shake-Up · C-Suite Perspectives

• 0:00
  Welcome to C-Suite Perspectives, a signature series by The Conference Board.
• 0:04
  I'm Steve Odland from The Conference Board and the host of this podcast series.
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  In today's conversation we're going to talk about geopolitics, trade, industrial
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  policy, and how all of these changing alliances are reshaping trade flows and
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  the old assumptions of globalization.
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  Joining me today is Dr. Maria Demertzis, the Center Leader for our Economy,
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  Strategy & Finance Center in Europe.
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  Maria, welcome.
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  Hi Steve.
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  Nice to see you again.
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  So Maria, you and I did a podcast a few months back and some of
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  our listeners may have heard it.
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  We talked about these trade flows and deficits and so forth, and you made
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  some really important points in that.
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  For those of our listeners who haven't heard it, I think
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  we should start with that.
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  Just explain how trade flows.
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  It's goods only.
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  It flows from one, you get surpluses, you get deficits, but there are
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  reverse currency flows as a result, and pros and cons of all that.
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  It's a very big topic, right?
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  So if I can just begin to unpack it a little bit.
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  Let me start with the most obvious one.
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  And trade is not just about goods; it's also about services.
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  So goods are things that we can touch.
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  Services, we cannot touch them but they exist.
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  If you think about banking services, a bank account, that's also a
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  good, it's just we can't touch it.
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  We can export it.
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  And in fact, there are all these new digital services
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  that are exportable goods.
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  So just to say that trade is not just about goods.
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  It's goods and services.
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  And then about the trade flows.
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  If you are exporting more than you are importing, then you are a net exporter.
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  And, as a result, your trade position has a surplus and the opposite if you
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  are importing more than exporting.
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  Last time we talked a lot about, I remember the topic of this podcast was
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  whether trade deficits are good or bad.
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  And I think that's a very important topic to go back to because there is a
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  little bit of a misunderstanding about this but there are important points.
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  So here, let me start by saying two things.
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  Bilateral positions.
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  So what one country has versus another is simply a reflection
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  of the relative competitiveness.
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  So let's take the EU as a geographical block, trading block versus the US.
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  The US has a trade deficit with the EU when it comes to goods.
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  That means that it imports a lot that it exports but it has got a trade
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  surplus when it comes to services.
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  Because the US exports a lot of services to the EU that the EU doesn't produce.
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  This is just a reflection of the relative competitiveness-- the US is
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  very competitive when it comes to all these new technological issues and
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  the EU is more competitive when it comes to traditional manufacturing.
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  I think that is maybe a summary of the positions.
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  But when it comes to global positions, meaning, the US has a deficit with
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  everyone or has a surplus with everyone, that is a slightly more complicated thing.
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  Let me explain what that means.
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  When a country has a deficit it also means that capital is coming in.
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  And this is not an opinion.
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  This is an identity.
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  It's an accounting identity.
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  If you have a deficit, meaning that you import a lot more than you export, there
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  is money that is coming into the economy.
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  So now your question will be, is this good or bad?
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  It depends on what this money does.
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  If that money that comes into the country finances consumption, then
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  it's not a good thing because it really doesn't get reinvested.
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  And remember, deficits mean lack of competitiveness.
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  But if this money comes into invest, which is very much what happens
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  in the US, then it feeds into productivity, it feeds the growth.
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  That's really the two main things I wanted to say in the global positions.
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  You have to understand the deficit positions come with a
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  lot of money coming into the country, the flowing of the money.
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  These are really important points, Maria, and I appreciate you recapping
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  them because there's a view in the US that a US trade deficit with the EU,
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  for example, is a really bad thing.
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  There are pros and cons.
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  First of all, those trade deficits are measuring goods, only to
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  your point, not the services.
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  And if you took the US trade surplus in services into account
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  it's much closer to balance.
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  Secondly, though, currency flows are an important part of it.
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  So if there's a trade deficit, there's a US dollar surplus.
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  So what's the result of that?
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  You've got dollars then flowing back to Europe because people in the US are
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  buying European goods with dollars.
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  What's the net impact both in Europe and in the US of those dollars?
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  Okay, let's just look in the US for a moment and then I'll look at the EU.
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  Effectively, we're talking about the same flows but what do they mean
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  for each of the two geographies.
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  The US has got a deficit, right?
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  Which means that it imports more than it exports, but that necessarily means that
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  a lot of investments are coming to the US.
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  And I emphasize the word investment because the money that is coming into
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  the US is used for investments, right?
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  The US economy has been the number one destination for
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  investments for a very long time.
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  People just want to invest in the US because the returns are good.
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  So this is where business goes to make money.
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  The returns on investments in the US have always traditionally been much bigger
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  than in any other parts of the world.
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  So that means that the US can afford to buy goods from abroad because there
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  is money coming into finance of that.
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  And that has given a dynamism into the US economy and growth and consumption.
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  If you now look it from the other side, the EU has got a surplus
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  on the trade side but actually it means that money's leaving the EU.
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  Money is invested elsewhere in the world.
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  And that's fine.
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  We are an open economy.
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  We are a competitive economy.
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  We believe in open free markets, so the money will go wherever
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  there is return for them.
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  However, the problem with that is that the EU has got huge investment gaps.
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  We know that we need an X amount of money for the next five years
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  to meet our large objectives.
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  If our businesses are not investing in the EU because they go elsewhere,
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  including the US, then who's going to pay for this investment gap?
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  The same thing goes with the EU's trade flows with China and
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  the US' trade flows with China.
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  China, the EU, and the US are the three big trading blocks in the world today.
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  So those are very material kinds of measures.
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  But it's the same principle between those areas.
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  So now you've got a US trade deficit with China.
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  How about the EU?
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  How are they?
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  Same thing.
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  Same thing.
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  This is the situation.
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  And so therefore, the introduction of tariffs from the EU and
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  from the US are not new.
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  And both regions have them against China because they're trying to thwart dumping
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  and they're trying to protect certain industries and so forth, which are meant
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  to be material to their local economies and also national or regional defense.
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  That's the kind of, the new or the most recent discussion of friction
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  on these trade flows, the tariffs.
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  If I may comment on this, Steve, I just wanted to say I think the
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  important thing between the US and EU's trade position with China is not
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  so much that we have a deficit, is the fact that why we have a deficit.
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  Remember, deficits reflect competitive reposition, trade positions
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  reflect competitiveness position.
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  And the question is, how did China get into this competitiveness position?
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  This is the issue.
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  It's not the fact that we have a deficit; it's the fact that we've gotten
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  there following some practices that are not, let me use the word, illegal.
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  I don't mean illegal in the context of the global world but there is a system of
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  rules that we've all agreed to operate in.
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  And if China doesn't follow those rules because it follows a very
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  different business model, then it gets competitiveness that actually
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  leads to persistent positions that are not fair, are not agreed upon.
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  And hence the tariffs.
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  The World Trade Organization (WTO) is typically the rules-making body and
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  everybody's joined that, all of these trade partners have joined the WTO.
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  And it was set up in order to try to have fair trade.
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  So that's another overlay to all of this.
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  Now, there were some recent trade announcements between the US and
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  China and recent meetings between the presidents of the two countries.
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  Talk about what materially came out of those talks.
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  That's, in fact, just yesterday, right, that this happened?
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  An important development here is, first of all, the US and China are talking.
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  I think that's crucial.
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  Without talking to each other there, there's just not gonna
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  be a resolution to this.
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  And not only they're talking but they have agreed to continue to talk, right?
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  They've planned meetings, visits between the two in the next year.
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  And actually one part of the agreement has been that every
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  year we are going to revisit this.
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  It's just to see progress.
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  So I think that's good news, unequivocally good news.
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  One of the concrete things then that happens is that the US has agreed
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  to reduce the fentanyl-related tariffs on China from 20% to 10%.
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  This is good in terms of allowing trade but I just remind our listeners
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  that still, the average tariff of US on China still is a very big number.
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  It's about 45%, right?
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  So this is not a resolution.
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  It's not going back to free trade.
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  The other thing, and this I think is critical, the other thing that was agreed
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  was that China has agreed to suspend these export controls on rare earths.
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  And in return, Washington is going to allow the export of some
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  of the US tech that China needs.
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  These are critical points for the two geographies.
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  The US depends crucially-- just like the EU, by the way--
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  on rare earths from China.
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  But China needs technology from the US, particularly on the high end.
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  These were used as, kind of, instruments against each other.
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  And one of the good things about the discussions this week was
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  exactly this, that they agreed to relieve that on each other.
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  So for example, NVIDIA will be allowed to export to China except for the very
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  much more advanced macro electronics.
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  I think that's good news, right?
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  We continue to export to each other and therefore the critical dependencies are
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  satisfied, at least for another year.
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  Yeah, it is good.
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  And there's another degree of complexity overlaid on this.
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  The EU and the US are allies, the North Atlantic Treaty Organization
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  (NATO) is the organization.
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  China and the EU and China and the US are, what would we
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  say, geopolitical adversaries.
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  We're not at war but they're adversarial relationships.
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  They're not allied in that regard.
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  So the trade agreements and the trade flows have to be thought of just
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  slightly differently in the context that you don't want to equip China from
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  the EU or from the US with technology or with capability that could then
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  be used in a hostile act against us.
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  So there's this overlay of thinking on all of these trade flows.
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  Absolutely.
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  There was a very recent example, just last week, actually, of exactly this
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  argument that you described, Steve, playing out where a semiconductor firm
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  that is housed in the Netherlands-- it rests in the Netherlands but is
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  Chinese owned-- was identified as stealing, effectively, know-how.
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  This has come out in the news and is a company called
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  Nexperia Semiconductor Company.
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  What happened, which had been unprecedented, is that the Dutch
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  government actually took control of the governance of this firm for a year.
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  So this is not ex appropriation.
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  It took control for a year and actually replaced, through courts
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  order, the CEO of the firm.
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  To do this legally they invoked an act that was a relic of the Second
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  World War and had never been used.
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  So in that respect, it's really unprecedented.
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  But it goes down to this issue that you just described, you know, how to make
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  sure that our technology is protected, particularly in sectors that are of
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  critical importance for the economy.
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  And of course, semiconductors are really at the center of this.
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  So this was an incredible act that has got huge implications for relations.
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  China had retaliated by forbidding the parent company from exporting
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  into the EU all the things that the Dutch subsidiary was sending to China.
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  So all of this is an escalation.
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  Where is this going to end?
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  It's the same story, or similar story, with the US and TikTok
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  and the use of TikTok to spy on industrial operations and so forth.
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  A lot going on here.
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  There are a couple terms that people use when they're describing
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  these shifting sands of trade, and that's friendshoring and de-risking.
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  Because right now we've got too much-- we meaning the West writ
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  large-- have too much dependency on certain regions, China in particular.
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  There is a trend here to de-risk supply chains.
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  Talk about how that is progressing.
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  The US is much more advanced in this thinking.
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  There is a lot more de-risking from China in the US than it is in the
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  EU when it comes to supply chains.
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  And I think the supply chains are perhaps the most important in terms
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  of seeing the effects of all of this.
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  I think when businesses think about how do I secure continuity
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  in my production, they're thinking exactly about the supply chains.
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  Businesses really are thinking, should I just shorten my supply chains
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  by means of ensuring continuity.
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  So it's almost like a resilience versus a profit discussion that is going
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  in the minds of the business people and I think that's very important.
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  But recently we've seen a little bit also on the trade happening.
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  Let me comment on a couple of things.
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  Chinese trade with the US has reduced a lot this year, almost about 30%.
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  Chinese exports to the US have really gone down.
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  That is of course a direct reflection of the tariff.
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  When it comes to the EU, we have seen a little bit of an increase in trade
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  coming from China and that, of course, has raised a few alarm bells here in the
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  EU because it feels very much like what China cannot sell to the US is trying to
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  dump into the EU beyond what the EU needs.
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  Because of course we have a trade partners.
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  We satisfy the demand for Chinese goods and all of a sudden now we also need to
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  absorb what the US is no longer buying.
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  So there is that fear and we have evidence of that.
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  We've seen it also in the car industry where China has been very
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  quick to adapt what it sells to the EU and what it doesn't sell to the
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  EU as a way of getting rid of what we now know is the excess capacity.
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  The other thing that we've seen is that China is really pivoting towards its
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  close neighbors, the Asian countries.
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  So the trade with close Asian countries has increased quite
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  significantly this year.
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  It means that China is finding new markets but another thing that it might mean,
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  and that is less easy to establish but we have ways of doing that, is that China
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  is using its neighbors to reach the US.
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  So it's bypassing the tariffs and it is just using its neighbors for that.
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  And I think the US is trying to tighten up on this.
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  This is why the US also imposed tariffs on neighboring countries to China, simply
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  to try and prevent that from happening.
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  There are real shifts happening in trade now.
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  And the question is, what's the end game?
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  Will that be good for trade?
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  Will that be bad for trade?
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  All of this is currently playing out.
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  We're talking about global trade and the changes going on as we speak.
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  We're going to take a short break and be right back.
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  Welcome back to C-Suite Perspectives.
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  I'm your host Steve Odland from The Conference Board and I'm joined today by
• 14:30
  Dr. Maria Demertzis, the Economy, Strategy & Finance leader in our European center.
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  Maria, we were talking before the break about some of the geopolitical overlays.
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  Another aspect to trade is how it's done, what currencies are used.
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  Today the majority of trade is done in dollars.
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  Given some of the occurrences over the past year and the shifting sands, do you
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  think that will continue going forward?
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  Or do you think other currencies will begin to rise, including cryptocurrencies?
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  I think there are maybe two things to say here.
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  In terms of currency, the dollar is used for two main reasons.
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  One is because it's a good currency.
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  Everybody wants to use it because it is a good store of value.
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  But the other one is a currency as a payment method.
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  I find it very difficult to believe that the first part, the currency as
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  a store of value, the dollar will be replaced anytime soon, for two reasons.
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  It's a good currency will remain a good currency, but there is
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  not another alternative that can actually take that role and replace
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  the dollar as a store of value.
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  So that means to the extent that what you describe will
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  happen, it will happen slowly.
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  But when it comes to payment methods, the dollar is a payment method that,
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  here I need to reply that most of the trade that happens, let's say Brazil
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  and China, they pay in dollars, or Chile and India, when they trade
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  with themselves they pay in dollars.
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  Why do they do that?
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  They do that because they use the infrastructure that the US provides,
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  which is called the settlement.
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  It's a legal infrastructure for settling activities.
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  I think that part, that is changing and it's changing very fast with technology.
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  There are other means that people can use to transfer money from
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  one country to another that can actually bypass the dollar.
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  So I think that part will change.
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  And you see it also now with the new technological means coming out.
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  Originally was the Bitcoin.
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  There are other things that people can use to do that.
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  And now lately we've seen stable coins.
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  If the stablecoins are dollar-pay stablecoins, you won't bypass the dollar.
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  But if the stablecoins are under Euro or other currencies, then
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  they will bypass the dollar.
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  So I think that on the store value, the dollar will continue to be what it is.
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  But when it comes to the means, the currency to trade with, that
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  will change because technology will provide some options.
• 16:45
  Yeah, it's really interesting.
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  And the rise of the stablecoin and particularly dollar-based stablecoin is
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  a really interesting thing because it...
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  Maybe we can talk about this in another podcast!
• 16:54
  Yeah.
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  It just provides the consistency of the dollar but uses a
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  different vehicle, essentially.
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  To your point earlier in our conversation, if you have this surplus of goods
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  coming to the US, then you have a surplus of dollars going to Europe.
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  Those dollars have to go somewhere.
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  You mentioned the European investments back in the US but it also then
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  allows this store value, as you're talking about, and the ability
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  to use it as a reserve currency.
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  All of these subjects are intertwined and fascinating to think about.
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  We've talked about in our last podcast, the global multilateral system.
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  Multilateral just is a fancy word for many countries involved.
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  Bilateral is just trade between two countries, of course.
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  We've been focused on bilateral trade between the US and China, the
• 17:39
  EU and China, and the US and EU.
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  How about the whole multilateral system?
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  Do you see that changing dramatically?
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  I think for the moment it's not functioning very well . It's always
• 17:51
  doom scenarios that we talk about but let's just talk about some things
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  that are actually still functioning and I think continue to function.
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  We have global health systems and monitoring these that are working better.
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  After the pandemic this was necessary.
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  We have still what we call the global financial safety net.
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  Institutions like the IMF, the World Bank, global development banks, and
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  a number of other different banks, they're increasing their mandate
• 18:13
  in terms of investing globally.
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  So there are multilateral actions that are going on that are hopeful.
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  And there's still agreement with those and we are not losing them.
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  Like the G-20, for example.
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  You have the 20 biggest countries in the world come together and they talk
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  that as an institution still functions.
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  Where we see less good news, if I may, is really on peace and what
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  the UN can do to enforce peace.
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  We see pockets of war closer to where I live that are problematic and how the
• 18:39
  global community cannot resolve them fast.
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  So I think that's one issue that requires a little more persistence.
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  And then the other thing is, of course, what you discussed about the
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  World Trade Organization, which is a common rule book for how are we
• 18:53
  going to do business with each other.
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  And that book, because it was written by the US and Europe with one pen,
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  China came in and said, listen guys, you've written a book for yourself
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  so I want to have a different book.
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  And we are in the process now of what will this new book look like?
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  China wants to hold the pen as well and one can understand this
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  given that it's such a big player.
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  But for the moment, the global rule book that the rest of us have put forward is
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  just not suited for a country like China.
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  Because they have a complete different way of thinking about things.
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  They're thinking about competition.
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  And of course, it's not a democracy, and that creates problems by itself,
• 19:27
  which, of course, means that the WTO for the moment is not functioning.
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  And the fact that the US is blocking the appointment of a new
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  judge, it's just a reflection of saying, look, this isn't working.
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  We need to find a different way of doing business with each other.
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  And the question is, how and who's holding the pen?
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  I had no idea that WTO rules were written with one pen.
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  That must have been a pen with a lot of ink in it.
• 19:52
  Yeah.
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  It's a metaphor that you shouldn't want stretch.
• 19:57
  Exactly.
• 19:58
  Exactly.
• 19:59
  If you could wave your magic wand, Harry Potter-ish speak, what are the top three
• 20:05
  things that you would change in the policy world today in any of these regions?
• 20:11
  Between the US and the EU first, I think we have a lot more in common
• 20:15
  than we have in differences, and that's what we need to get to.
• 20:18
  The first thing I would do is I would erase all tariffs so that we have
• 20:22
  no tariffs between the two parts.
• 20:24
  So you would say that both regions should eliminate all tariffs.
• 20:26
  All tariffs, everything.
• 20:27
  It's not just the US eliminated tariffs, the EU has tariffs on the US too.
• 20:31
  All of these need to go.
• 20:32
  Then the question is the rule book and the common standards.
• 20:35
  Can we agree at least on some things?
• 20:36
  So here I'm thinking of the critical technologies which are so critical for
• 20:41
  advancing with the green transition, but also advancing in terms of reducing
• 20:45
  some of the dependencies from China.
• 20:46
  Because both geographies have got uncomfortable dependencies on
• 20:50
  China when it comes to the critical materials, for example, right?
• 20:52
  So we find a common rule book that will recognize each other's
• 20:56
  standards so that we can cut the red tape and businesses can scale up.
• 21:02
  This is what I would do, I would sort concentrate on finding common standards.
• 21:05
  So when it comes to the critical technologies-- and that includes of
• 21:07
  course, all the regulations around it-- such that businesses in the
• 21:11
  two geographies don't have to have compliant costs that are exorbitant.
• 21:16
  This part we do very well in Europe, where we have very complicated
• 21:19
  rule books and that increases the cost of compliance tremendously.
• 21:22
  So that is two things I would certainly do.
• 21:25
  But beyond that, you cannot ignore -- we, the rest of the world-- you can't
• 21:29
  ignore China, particularly if you want to deal with big issues like climate.
• 21:34
  We are not going to-- the US and Europe and, whoever else alone-- solve climate.
• 21:40
  We need to engage with China.
• 21:41
  We need to find a way of talking to China and find common ground.
• 21:45
  What can we do that is common?
• 21:46
  China for all the grievances that we have with it, actually's totally solved
• 21:50
  on the green transition and climate.
• 21:52
  There you will find a credible partner.
• 21:54
  And the question is, can we agree on other things such that when we
• 21:57
  sit around the table we can also advance on climate, the one problem
• 22:01
  that it really is a global problem?
• 22:04
  It's really true.
• 22:05
  And so therefore the multilateral agreements are really super important.
• 22:09
  And we hope we can get back to that.
• 22:11
  The US administration's trying to rejigger the fairness and trade flows and so forth.
• 22:17
  There are reasons for that there.
• 22:18
  There are defense reasons, security reasons, and so forth.
• 22:22
  But at the end of the day, you would hope that you could lower tariffs.
• 22:26
  You made the point before that lower tariffs, freer trade has contributed
• 22:32
  to a great rise in wealth and removed many billions of people from poverty.
• 22:40
  We need at some point to return to that.
• 22:43
  I totally agree with that.
• 22:44
  One thing I'll say about tariffs is it's very difficult to remove them.
• 22:48
  The reason for this is totally political economy and that is
• 22:50
  that they generate revenue.
• 22:52
  If you're going to remove tariffs, you'll stop having that revenue.
• 22:56
  So whatever you were using that revenue for, you need to find
• 22:59
  other income to replace it.
• 23:00
  So that the political economy of tariffs unfortunately has
• 23:03
  what we call locking effects.
• 23:05
  You're locked into spending the money that they generate.
• 23:07
  This is why I hope that these tariffs do not get entrenched, so that we
• 23:11
  can reverse them at some point.
• 23:12
  Go back to freer trade.
• 23:14
  Yeah, exactly.
• 23:15
  Last question if you're in a leadership position in a company, in the private
• 23:18
  sector, watching all of these government actions, regulatory actions, trade
• 23:23
  actions, and so forth, what steps do you recommend that these companies take to
• 23:28
  ensure that they end up in a good place?
• 23:32
  At the Conference Board, we speak a lot to our businesses out here in Europe.
• 23:34
  The one thing that comes back over and over again, it's uncertainty.
• 23:38
  One company was telling us they're having a five-year plan without any numbers.
• 23:42
  How can you do it as a business?
• 23:44
  How can you do a five-year plan without having numbers?
• 23:47
  What about your cashflow?
• 23:48
  How do you pay salaries?
• 23:49
  How do you pay the bills?
• 23:50
  And yet, that is the reality.
• 23:51
  They were telling us that everything is so uncertain and volatile that even if
• 23:54
  they put numbers, they wouldn't carry, they wouldn't have any confidence that
• 23:57
  those numbers are really reliable numbers.
• 24:00
  What do you do then?
• 24:01
  My view on this is that you need to go back to what you know, businesses
• 24:04
  know very well, which is scenarios.
• 24:06
  You need to prepare not just for one thing.
• 24:08
  You need to prepare for many different things.
• 24:09
  Now, here comes an important trade off, and you might have seen this
• 24:12
  piece I wrote during the summer.
• 24:13
  This is the message I was trying to convey with that piece that when you prepare for
• 24:17
  a very wide set of circumstances, you're not very well prepared for either of them.
• 24:21
  But that's the moment where you are in.
• 24:22
  You cannot just prepare perfectly for one set of circumstances
• 24:25
  because they might not materialize.
• 24:27
  You need to be prepared for many different things.
• 24:29
  We could have tariffs or we could not have tariffs.
• 24:31
  The war in Ukraine ends or it doesn't end.
• 24:33
  China does some crazy things in Taiwan.
• 24:36
  All of these things are no longer black swans.
• 24:38
  They're gray swans.
• 24:39
  And you need to decide how many of these do you want to be prepared for?
• 24:43
  You can't prepare for everything so you need to come sit down and decide which
• 24:47
  five, six things you want your business to be able to deal with and survive.
• 24:52
  You're going to prepare for a variety of circumstances and you know you're going
• 24:55
  to care about doing optimal actions of maximizing your profits later on down the
• 25:01
  line when this uncertainty has ceased.
• 25:04
  Now the uncertainty is just unnavigable.
• 25:07
  You just cannot navigate it.
• 25:08
  Make sure you survive.
• 25:10
  Make sure you control, I'm going to use your line here, Steve,
• 25:13
  control what you can control and prepare for the possibility that
• 25:16
  many different things can happen.
• 25:18
  That's what it is, that boils down to, scenario and some choices of what things
• 25:21
  you want to be prepared for and inevitably what things you cannot be prepared for.
• 25:26
  And you can always turn to The Conference Board-- tcb.org-- and use our Gray
• 25:30
  Swans tool to model out what those issues could be for your company and,
• 25:36
  of course, model out contingency plans.
• 25:38
  Okay, we're going to leave it there.
• 25:40
  Dr. Maria Demertzis, thanks for being with us today.
• 25:44
  It's great, a pleasure to be here.
• 25:45
  Thank you for having me.
• 25:46
  And thanks all of you for listening in to C-Suite Perspectives.
• 25:49
  I'm Steve Odland and this series has been brought to you by The Conference Board.