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What Trumps China Visit Actually Achieved. · Economy & Finance

• 0:00
  Speaker 1: So, Donald Trump and Xi Jinping are meeting in Beijing
• 0:04
  Speaker 1: this week, and if the footage is anything like prior summits,
• 0:07
  Speaker 1: we'll be treated to two men in suits walking very
• 0:10
  Speaker 1: slowly through a building, shaking hands at a slightly uncomfortable distance,
• 0:15
  Speaker 1: and staring at each other like two people who've been
• 0:18
  Speaker 1: set up on a blind date by a mutual friend
• 0:21
  Speaker 1: who has since left the country. Now, to recap how
• 0:25
  Speaker 1: we got here, because it has been quite a journey.
• 0:28
  Speaker 1: Last year tariffs between the United States and China hit
• 0:31
  Speaker 1: levels that hadn't been seen since the 1930s. The US
• 0:36
  Speaker 1: put tariffs of up to 145% on Chinese goods, China
• 0:41
  Speaker 1: retaliated with tariffs of 125% on American goods, and then,
• 0:46
  Speaker 1: just to keep things interesting, restricted exports of rare earth minerals,
• 0:51
  Speaker 1: which are used in basically everything from vacuum cleaners to
• 0:55
  Speaker 1: fighter jets, but mostly vacuum cleaners. This went on for
• 0:59
  Speaker 1: a while, and then both sides appeared to quietly realise
• 1:03
  Speaker 1: that they were running out of things to put tariffs on,
• 1:06
  Speaker 1: so they agreed to a 90-day truce, which is the
• 1:10
  Speaker 1: one currently in effect, and which expires in November. Now,
• 1:14
  Speaker 1: expectations for this summit are, to put it generously, modest.
• 1:19
  Speaker 1: The press have taken to calling it the Beans and
• 1:22
  Speaker 1: Boeing Summit, which tells you something about the level of ambition.
• 1:26
  Speaker 1: Both leaders arrive at this summit under considerable domestic stress,
• 1:31
  Speaker 1: but for very different reasons. China is dealing with a
• 1:35
  Speaker 1: property sector that has been falling for years and shows
• 1:38
  Speaker 1: no real signs of stopping, youth unemployment that the government
• 1:42
  Speaker 1: briefly dealt with by not publishing the numbers anymore, and
• 1:46
  Speaker 1: a demographic decline that no amount of government encouragement seems
• 1:50
  Speaker 1: to be fixing. The US president is dealing with the
• 1:54
  Speaker 1: inflationary consequences of his own policies, falling approval ratings, and
• 1:58
  Speaker 1: a military situation in the Middle East that's not going
• 2:02
  Speaker 1: particularly well. So, this is the backdrop. Two economies under strain,
• 2:08
  Speaker 1: a temporary truce that expires in a few months, and
• 2:11
  Speaker 1: a summit that will be mostly remembered for the photographs.
• 2:14
  Speaker 1: But the thing that almost nobody on the news will explain,
• 2:18
  Speaker 1: because it requires about ten minutes of patience, and some
• 2:21
  Speaker 1: basic accounting, is that the problem these two leaders are
• 2:25
  Speaker 1: trying to solve is not really a political problem at all.
• 2:28
  Speaker 1: It's an accounting problem and the reason it never gets
• 2:32
  Speaker 1: fixed is not that politicians are unwilling to fix it,
• 2:35
  Speaker 1: it's that most of them don't appear to understand what's
• 2:38
  Speaker 1: actually causing it. And that's what this video is about.
• 2:43
  Speaker 1: To understand the current trade dispute, we need to look
• 2:46
  Speaker 1: at what trade is actually supposed to be. About six
• 2:50
  Speaker 1: months ago, Robin Harding wrote a piece in the Financial
• 2:53
  Speaker 1: Times about a trip he took to China, where he
• 2:56
  Speaker 1: posed the same question again and again to the economists,
• 3:00
  Speaker 1: technologists and business leaders he met with. His question was simple.
• 3:04
  Speaker 1: Trade is an exchange where you provide something of value
• 3:08
  Speaker 1: to me and in return I offer something of value
• 3:11
  Speaker 1: to you. So what exactly does China want to buy
• 3:15
  Speaker 1: from the rest of the world? But before we dig
• 3:17
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• 3:20
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  Speaker 1: using the link in the description. The answer, consistently, was nothing.
• 4:39
  Speaker 1: Harding came away with the understanding there is nothing China
• 4:43
  Speaker 1: believes it cannot make better and cheaper domestically, and nothing
• 4:48
  Speaker 1: for which it wants to rely on foreigners for a
• 4:51
  Speaker 1: single day longer than it has to. A few of
• 4:54
  Speaker 1: the economists he spoke to, who had perhaps pondered the
• 4:57
  Speaker 1: issue already, jumped ahead to a different point altogether. Their
• 5:02
  Speaker 1: answer to the question of what China would like to
• 5:04
  Speaker 1: buy from the rest of the world was, you should
• 5:07
  Speaker 1: let Chinese companies set up factories in Europe. which is
• 5:11
  Speaker 1: not really an answer to the question, but it does
• 5:14
  Speaker 1: tell you quite a lot about how they see the problem. Now,
• 5:17
  Speaker 1: to a certain type of politician, this might sound like
• 5:20
  Speaker 1: a triumph of nationalist strategy, until you remember how trade
• 5:25
  Speaker 1: actually works. The basic idea, going all the way back
• 5:28
  Speaker 1: to David Ricardo, is that trade is supposed to be
• 5:32
  Speaker 1: mutually beneficial. The entire purpose of selling your goods abroad
• 5:36
  Speaker 1: is to acquire foreign currency so that you can buy
• 5:39
  Speaker 1: the foreign goods that you need. If you accumulate foreign
• 5:43
  Speaker 1: exchange that you never intend to spend, you're not running
• 5:46
  Speaker 1: a brilliant economic strategy. You're just collecting pieces of paper.
• 5:51
  Speaker 1: And if your goal is to systematically put the rest
• 5:54
  Speaker 1: of the world's manufacturing out of business, you eventually run
• 5:58
  Speaker 1: into a problem. Your customers won't have any money left
• 6:01
  Speaker 1: to buy all of the goods that you're hoping to
• 6:03
  Speaker 1: sell them. This makes no sense. It's the equivalent of
• 6:07
  Speaker 1: a town's baker aggressively pricing the butcher, the brewer, and
• 6:11
  Speaker 1: the candle maker into bankruptcy and then looking around a
• 6:14
  Speaker 1: few years later wondering why nobody in town can afford bread.
• 6:19
  Speaker 1: During the first China shock in the early 2000s, China's
• 6:23
  Speaker 1: exports surged, but so did their imports. They were buying
• 6:27
  Speaker 1: up the sophisticated equipment needed to build their factories. Today,
• 6:32
  Speaker 1: as Samira Keynes pointed out in the FT, China's import
• 6:36
  Speaker 1: volumes are comparatively anemic. They are selling, but they are
• 6:40
  Speaker 1: not buying, which raises a fairly obvious question. If the
• 6:44
  Speaker 1: strategy eventually makes everyone poorer, including yourself, why would you
• 6:49
  Speaker 1: do it? To understand why a country would do this,
• 6:53
  Speaker 1: it helps to look at the work of Michael Pettis,
• 6:56
  Speaker 1: a finance professor at Peking University and a senior fellow
• 6:59
  Speaker 1: at the Carnegie Endowment. Pettis has been writing about this
• 7:03
  Speaker 1: for years, and his core argument is that trade surpluses
• 7:07
  Speaker 1: and deficits are not really caused by trade policy. They're
• 7:11
  Speaker 1: the automatic consequence of domestic savings and investment decisions. Here's
• 7:17
  Speaker 1: what he means by that. When a government suppresses household
• 7:21
  Speaker 1: income through low interest rates on savings and undervalued currency,
• 7:25
  Speaker 1: weak labour protections and other policies that effectively transfer wealth
• 7:30
  Speaker 1: from ordinary people to the state and to manufacturers, it
• 7:34
  Speaker 1: forces up the national savings rate. Households earn less than
• 7:39
  Speaker 1: they produce, so they can't consume enough to absorb everything
• 7:43
  Speaker 1: the economy makes. This is what economists call financial repression,
• 7:48
  Speaker 1: and it's the mechanism by which countries like China and
• 7:51
  Speaker 1: before it Japan and Germany subsidized their industrial growth at
• 7:55
  Speaker 1: the expense of their own consumers. Now, all of that
• 7:59
  Speaker 1: excess saving has to go somewhere. It goes into investment.
• 8:04
  Speaker 1: And building infrastructure that you actually need does generate real
• 8:08
  Speaker 1: economic growth. But once your investment exceeds your productive needs,
• 8:13
  Speaker 1: once you've built enough high-speed rail and enough apartment blocks,
• 8:17
  Speaker 1: continuing to invest doesn't create economic value. It destroys it.
• 8:23
  Speaker 1: The money is spent. The GDP figures look impressive. but
• 8:27
  Speaker 1: the underlying projects generate less value than they cost to build.
• 8:31
  Speaker 1: The difference shows up as debt. President Xi has reportedly
• 8:36
  Speaker 1: spent a good portion of his career studying Japan's lost decades. Apparently,
• 8:41
  Speaker 1: he found them inspiring. In the 1980s, Japan suppressed consumption
• 8:47
  Speaker 1: to fund investment-led growth, built spectacular infrastructure, achieved extraordinary technological advances,
• 8:55
  Speaker 1: was widely expected to overtake the United States. Then the
• 9:00
  Speaker 1: debt caught up with them and they spent the next
• 9:03
  Speaker 1: thirty years dealing with the consequences. Pettis argues that the
• 9:08
  Speaker 1: only way out of this is to shift from investment-led
• 9:11
  Speaker 1: growth to consumption-led growth. You have to stop subsidising factories
• 9:16
  Speaker 1: and start giving money to households so that your own
• 9:19
  Speaker 1: citizens can actually afford to buy the things your economy produces.
• 9:24
  Speaker 1: But politicians generally hate doing this because shifting wealth to
• 9:29
  Speaker 1: households means that the state has to give up control
• 9:32
  Speaker 1: over where capital gets allocated. So rather than making that
• 9:36
  Speaker 1: difficult choice, they keep subsidising production. The domestic consumers can't
• 9:42
  Speaker 1: absorb the output and the excess has to go somewhere.
• 9:46
  Speaker 1: It goes abroad as a trade surplus, not because anyone
• 9:49
  Speaker 1: planned it that way, but because the accounting leaves no
• 9:53
  Speaker 1: other options. So, if China is producing vastly more than
• 9:57
  Speaker 1: it can consume and doesn't want to buy anything from
• 10:01
  Speaker 1: the rest of the world, who is absorbing all of
• 10:03
  Speaker 1: this excess output? Well, let's look at who else is
• 10:07
  Speaker 1: at the table. Europe is running a trade deficit with
• 10:10
  Speaker 1: China of roughly 1 billion euros per day, which is
• 10:14
  Speaker 1: a number that sounds made up but isn't. is driven
• 10:17
  Speaker 1: by a massive imbalance in manufactured goods, particularly electric vehicles
• 10:23
  Speaker 1: and electronics. The EU is simultaneously trying to deregulate its
• 10:28
  Speaker 1: own economy. A recent survey found that German firms alone
• 10:33
  Speaker 1: had hired an additional 325,000 people over three years whose
• 10:38
  Speaker 1: entire job was to tick regulatory boxes. Europe is also
• 10:43
  Speaker 1: preparing legislation would force Chinese companies to hire European workers,
• 10:48
  Speaker 1: buy European components, and transfer their technology as the price
• 10:53
  Speaker 1: of market access. This is of course exactly what China
• 10:57
  Speaker 1: did to Western multinationals a generation ago, and Chinese officials
• 11:01
  Speaker 1: have apparently noticed the similarity. They are not finding the
• 11:05
  Speaker 1: imitation flattering. But Europe is not absorbing all of this happily.
• 11:11
  Speaker 1: The EU's trade commissioners compared Europe's dependency on Chinese minerals
• 11:16
  Speaker 1: to its former reliance on Russian energy, and has warned
• 11:20
  Speaker 1: that without action Europe risks losing whole sectors of industry
• 11:24
  Speaker 1: within a couple of years. The IMF estimates that selling
• 11:28
  Speaker 1: goods across EU borders costs firms the equivalent of a
• 11:33
  Speaker 1: 44% tariff on goods and a 110% tariff on services.
• 11:39
  Speaker 1: These are not tariffs imposed by a foreign adversary, these
• 11:43
  Speaker 1: are tariffs the EU has imposed on itself through paperwork.
• 11:48
  Speaker 1: The EU has essentially conducted a trade war against its
• 11:52
  Speaker 1: own economy and impressively appears to be winning. So, Europe
• 11:57
  Speaker 1: is already uncompetitive and it's now being flooded with cheap
• 12:01
  Speaker 1: Chinese goods on top of that. This is not a
• 12:04
  Speaker 1: combination that ends well for European manufacturing. That leaves the
• 12:09
  Speaker 1: United States. The US has the deepest, most liquid and
• 12:13
  Speaker 1: historically best governed financial markets in the world. When surplus
• 12:18
  Speaker 1: countries like China and Germany suppress domestic consumption and generate
• 12:23
  Speaker 1: excess savings, those savings have to go somewhere. And roughly
• 12:27
  Speaker 1: half of the world's excess savings end up in American
• 12:30
  Speaker 1: financial markets, not because Americans invited them, but because there's
• 12:35
  Speaker 1: nowhere else for that volume of capital to go. Here
• 12:39
  Speaker 1: is where the accounting gets important. When foreign capital flows
• 12:43
  Speaker 1: into the United States, the US must, by definition, run
• 12:47
  Speaker 1: a corresponding trade deficit. This is not a choice, it
• 12:51
  Speaker 1: is a balance of payments identity. The foreign money is
• 12:55
  Speaker 1: being used to buy bonds and financial assets, not goods.
• 12:59
  Speaker 1: The US becomes the consumer of last resort for the
• 13:02
  Speaker 1: global economy, not because it wants to, but because the
• 13:06
  Speaker 1: accounting leaves no alternative. As Pettis puts it, the US
• 13:11
  Speaker 1: doesn't fund its trade deficit, surplus countries force it to
• 13:15
  Speaker 1: run one. Now, you might think that all of this
• 13:18
  Speaker 1: foreign capital pouring into America would be good for the
• 13:21
  Speaker 1: economy and that it would fund new factories and lower
• 13:25
  Speaker 1: interest rates, and that might be true if American businesses
• 13:29
  Speaker 1: were desperate for capital, but they're not. US corporations are
• 13:33
  Speaker 1: sitting on trillions of dollars in cash. They don't lack
• 13:37
  Speaker 1: access to funding. They lack customers who can afford to
• 13:41
  Speaker 1: buy more of what they already produce. So, the foreign
• 13:44
  Speaker 1: capital doesn't flow into productive investment. Instead, the economy has
• 13:48
  Speaker 1: to absorb it some other way. As Pettis points out,
• 13:53
  Speaker 1: there are really only three options. The excess capital can
• 13:56
  Speaker 1: push up unemployment as cheaper imports put American factories out
• 14:00
  Speaker 1: of business. It can push up household debt as consumers
• 14:04
  Speaker 1: borrow to maintain their spending, or it can push up
• 14:07
  Speaker 1: the fiscal deficit as the government borrows to keep the
• 14:10
  Speaker 1: economy from contracting. Since no politician wants the first option,
• 14:16
  Speaker 1: the US has historically chosen some combination of the second
• 14:19
  Speaker 1: and third. And here's the part that almost nobody in
• 14:23
  Speaker 1: Washington seems to understand. Running a massive fiscal deficit doesn't
• 14:28
  Speaker 1: fix the problem. It feeds the monster. The bigger the deficit,
• 14:32
  Speaker 1: the more treasury bonds you issue. The more bonds that
• 14:35
  Speaker 1: you issue, the more attractive your debt markets look to
• 14:38
  Speaker 1: surplus countries with excess savings to park. The more capital
• 14:43
  Speaker 1: flows in, the stronger the dollar gets, the less competitive
• 14:47
  Speaker 1: American exports become, and the wider the trade deficit grows.
• 14:51
  Speaker 1: And of course, all of that government spending is stimulative,
• 14:55
  Speaker 1: which means it's inflationary which pushes up interest rates, which
• 14:59
  Speaker 1: makes the debt even more expensive to service, which requires
• 15:04
  Speaker 1: yet more borrowing. It's a feedback loop and it's one
• 15:07
  Speaker 1: that no amount of summitry in Beijing is going to break. Now,
• 15:12
  Speaker 1: being the consumer of last resort has not been entirely unpleasant.
• 15:17
  Speaker 1: The US economy is remarkably productive. Labour productivity has been
• 15:22
  Speaker 1: growing at about 2% a year over the last five years.
• 15:26
  Speaker 1: fastest rate in two decades. Cheap domestic energy means Americans
• 15:31
  Speaker 1: pay about half what Europeans pay for electricity. The US
• 15:35
  Speaker 1: economy is flexible, dynamic, and has been absorbing these imbalances
• 15:40
  Speaker 1: for decades without anything obviously breaking. But the bill has
• 15:45
  Speaker 1: been accumulating. A few days ago, the FT reported that
• 15:49
  Speaker 1: the US government sold 30-year debt a 5% yield for
• 15:54
  Speaker 1: the first time since 2007. Financing the growing national debt
• 15:59
  Speaker 1: is getting meaningfully more expensive. In a video a couple
• 16:03
  Speaker 1: of weeks ago on inflation, I discussed how the US Treasury,
• 16:07
  Speaker 1: under Scott Besant, has been funding long-term obligations with short-term borrowing,
• 16:13
  Speaker 1: a strategy that the economists Stephen Moran and Nouriel Roubini
• 16:17
  Speaker 1: described as activist Treasury issuance. compared to stealth quantitative easing. Besant,
• 16:24
  Speaker 1: as it happens, criticised Janet Yellen for doing exactly the
• 16:28
  Speaker 1: same thing before he took office and then adopted the
• 16:32
  Speaker 1: strategy himself, which is the Treasury Secretary equivalent of mocking
• 16:37
  Speaker 1: someone's cooking and quietly asking for the recipe. This is
• 16:41
  Speaker 1: essentially a massive bet that long-term interest rates are going
• 16:45
  Speaker 1: to come down. which seems like a rather aggressive gamble
• 16:49
  Speaker 1: when you consider that the US government is simultaneously pursuing tariffs,
• 16:54
  Speaker 1: running a massive fiscal deficit, reducing the labour supply through deportations,
• 16:59
  Speaker 1: pressuring the Federal Reserve to cut rates, and fighting a
• 17:03
  Speaker 1: war in the Middle East that has driven up the
• 17:05
  Speaker 1: price of fuel and fertiliser. It is not entirely obvious
• 17:10
  Speaker 1: why long-term interest rates would fall while the government is
• 17:13
  Speaker 1: actively engineering inflation. Betting that rates will come down while
• 17:18
  Speaker 1: you borrow a trillion dollars a quarter to fund a
• 17:21
  Speaker 1: trade war is a strategy that relies heavily on optimism.
• 17:26
  Speaker 1: None of this is a new problem. As Martin Wolf
• 17:29
  Speaker 1: pointed out in the FT this week, clashes over how
• 17:32
  Speaker 1: to adjust these imbalances have reoccurred roughly every two decades–
• 17:37
  Speaker 1: the 1920s, the 1960s, the 1980s, 2008 and now. The
• 17:44
  Speaker 1: 1920s version ended with a global depression and a world war.
• 17:48
  Speaker 1: The 1980s version was resolved through the Plaza Accord, where
• 17:52
  Speaker 1: the major economies agreed to coordinate their exchange rates. The
• 17:56
  Speaker 1: 2008 version was resolved by, well, a global financial crisis. So,
• 18:02
  Speaker 1: the two available options appear to be international cooperation and
• 18:07
  Speaker 1: economic catastrophe, and historically we've tended to go with the
• 18:11
  Speaker 1: second one. Economists have understood the structural problem since at
• 18:16
  Speaker 1: least the 1940s. As Darren McFadden outlined in the FT
• 18:21
  Speaker 1: last week, when the global financial architecture was being designed
• 18:25
  Speaker 1: at Bretton Woods, Keynes proposed a system built around a
• 18:29
  Speaker 1: neutral international currency that he called Bancor. The key innovation
• 18:34
  Speaker 1: was that it would penalize countries for running either persistent
• 18:39
  Speaker 1: surpluses or persistent deficits. forcing both sides to adjust. As
• 18:44
  Speaker 1: the economist Robert Triffin later pointed out, any country that
• 18:49
  Speaker 1: supplies the world's reserve currency is essentially trapped. It must
• 18:53
  Speaker 1: run persistent deficits to meet global demand for safe assets.
• 18:58
  Speaker 1: Keynes saw this coming and designed a system to prevent it.
• 19:03
  Speaker 1: The United States rejected that proposal at the time. The
• 19:07
  Speaker 1: US was the world's largest creditor then, its dominant manufacturer,
• 19:12
  Speaker 1: it was basically the China of that era, and it
• 19:15
  Speaker 1: had no interest in signing up to a system that
• 19:18
  Speaker 1: would penalise its surplus. In doing so, it consolidated the
• 19:22
  Speaker 1: dollar as the anchor of the international monetary system, which
• 19:26
  Speaker 1: is the very thing that now forces it to run
• 19:29
  Speaker 1: the deficits it is complaining about. So, that worked out well.
• 19:34
  Speaker 1: Wolff also makes a point that surplus countries tend to overlook.
• 19:40
  Speaker 1: they are not in as strong a position as they think.
• 19:43
  Speaker 1: Japan ran enormous surpluses in the 1980s and the pressure
• 19:47
  Speaker 1: to boost domestic demand led to a property bubble that
• 19:51
  Speaker 1: when it burst produced three decades of stagnation. China ran
• 19:56
  Speaker 1: huge surpluses after 2008 and the pressure to reinvest them
• 20:00
  Speaker 1: domestically produced a property bubble. Germany ran persistent surpluses within
• 20:06
  Speaker 1: the Eurozone and when the deficit countries hit crisis, Germany
• 20:10
  Speaker 1: had to choose between financing them or watching the Euro collapse.
• 20:15
  Speaker 1: They chose to finance them, but they did want everyone
• 20:18
  Speaker 1: to know that they were not happy about it. The
• 20:21
  Speaker 1: pattern is fairly consistent. Surplus countries build their economies around
• 20:26
  Speaker 1: selling to others, and when the music stops, they discover
• 20:30
  Speaker 1: that they needed those deficit countries more than they thought. So,
• 20:34
  Speaker 1: what happens when the global consumer of last resort, the
• 20:37
  Speaker 1: United States, is running 5% cost of capital and starts
• 20:42
  Speaker 1: looking for ways to stop absorbing everyone else's excess production. Well,
• 20:47
  Speaker 1: historically it ends in either one of two ways. Either
• 20:51
  Speaker 1: the major economies sit down and negotiate a coordinated adjustment,
• 20:55
  Speaker 1: which requires a level of international cooperation that is, to
• 20:58
  Speaker 1: put it politely, not obviously forthcoming at the moment, or
• 21:03
  Speaker 1: the adjustment happens through crisis. If the US stops buying,
• 21:07
  Speaker 1: American consumers will face higher prices and fewer cheap goods.
• 21:12
  Speaker 1: That will be unpleasant, but for the surplus economies, countries
• 21:16
  Speaker 1: that have built their entire economic model on the assumption
• 21:19
  Speaker 1: that foreigners will endlessly borrow money to buy what their
• 21:22
  Speaker 1: factories produce, it will be significantly worse. A consumer can
• 21:28
  Speaker 1: find a more expensive substitute or do with less. A
• 21:31
  Speaker 1: factory with no customers has a much bigger problem. This
• 21:36
  Speaker 1: brings us back to the handshakes in Beijing this week.
• 21:40
  Speaker 1: Expectations for this summit are, to put it generously, modest.
• 21:44
  Speaker 1: Both sides appear to be looking for just enough progress
• 21:48
  Speaker 1: to justify the photographs. The US wants China to commit
• 21:52
  Speaker 1: to buying those Beans and Bowings. To oversee these purchases,
• 21:57
  Speaker 1: the two sides are expected to announce a Board of Trade,
• 22:00
  Speaker 1: a committee of senior officials from both countries whose job
• 22:04
  Speaker 1: will be to make sure that China actually follows through
• 22:07
  Speaker 1: this time. This is necessary because China made similar purchase
• 22:12
  Speaker 1: commitments in the phase one trade deal in 2020 and
• 22:16
  Speaker 1: then didn't follow through. So the solution to China not
• 22:20
  Speaker 1: honoring its commitments is a new committee to monitor whether
• 22:25
  Speaker 1: China honors its commitments. I'm sure that this time it'll
• 22:28
  Speaker 1: be different. Now the Board of Trade will sit alongside
• 22:32
  Speaker 1: the already existing Board of Peace which was established earlier
• 22:36
  Speaker 1: this year to promote peace building which Trump will chair
• 22:39
  Speaker 1: for life. So we now have a Board of Peace
• 22:42
  Speaker 1: and a Board of Trade and all we really need
• 22:45
  Speaker 1: next is a Board of Good Intentions and we'll have
• 22:47
  Speaker 1: the complete set. There's also the small matter that Trump
• 22:52
  Speaker 1: arrives in Beijing having largely been disarmed by his own courts.
• 22:56
  Speaker 1: In February the Supreme Court struck down his IEPA tariffs
• 23:01
  Speaker 1: ones he had been raising and lowering on a near
• 23:03
  Speaker 1: daily basis last year. He immediately pivoted to a different
• 23:07
  Speaker 1: legal authority, Section 122 of the Trade Act, which allows
• 23:11
  Speaker 1: temporary tariffs to address balance of payments crises. Last week
• 23:16
  Speaker 1: a Federal Trade Court ruled those ones illegal too, on
• 23:20
  Speaker 1: the grounds that the US is not actually experiencing the
• 23:24
  Speaker 1: kind of balance of payments crisis the law was designed for.
• 23:28
  Speaker 1: The administration is appealing, the tariffs expire in July regardless.
• 23:33
  Speaker 1: A third set of tariffs under Section 301 is being prepared,
• 23:37
  Speaker 1: but those investigations won't be complete until the summer. So,
• 23:42
  Speaker 1: the US President is sitting across from Xi Jinping at
• 23:45
  Speaker 1: a negotiating table and his most prominent negotiating tool has
• 23:50
  Speaker 1: been taken away from him by his own judiciary twice.
• 23:54
  Speaker 1: His domestic position isn't helping either. Approvals ratings are at 34%,
• 23:59
  Speaker 1: the lowest of his second term, and with midterm elections
• 24:04
  Speaker 1: in November, Republican members of Congress are not exactly lining
• 24:09
  Speaker 1: up to support inflationary trade policies in an election year.
• 24:14
  Speaker 1: Several were reported to have quietly celebrated when the Supreme
• 24:17
  Speaker 1: Court struck down the tariffs. Xi Jinping will be aware
• 24:22
  Speaker 1: of all of this. When your negotiating counterpart's own party
• 24:26
  Speaker 1: is relieved your signature policy has been overturned by the courts,
• 24:31
  Speaker 1: it does somewhat reduce the credibility of the threat to
• 24:34
  Speaker 1: bring it back. Both sides are really just trying to
• 24:38
  Speaker 1: buy time. The US wants breathing room to build domestic
• 24:42
  Speaker 1: rare earth processing capacity because China currently controls those supply
• 24:47
  Speaker 1: chains and used them as devastating leverage during the tariff war.
• 24:51
  Speaker 1: China wants time to develop its semiconductor industry and reduce
• 24:56
  Speaker 1: its dependence on Western technology. And Xi has his own
• 25:00
  Speaker 1: grievances to raise too. China imports roughly 40% of its
• 25:05
  Speaker 1: oil through the Strait of Hormuz. So the American military
• 25:09
  Speaker 1: situation in the Middle East is not just a US
• 25:12
  Speaker 1: political problem, it's costing China money. And Xi will want
• 25:16
  Speaker 1: to make sure Trump knows it. As Eli Ratner, who
• 25:20
  Speaker 1: served as the US Assistant Secretary of Defense for Indo-Pacific
• 25:24
  Speaker 1: Affairs until last year, pointed out in the FT, the
• 25:28
  Speaker 1: US has made this mistake before. The pattern is consistent.
• 25:32
  Speaker 1: When Washington backs off, Beijing doesn't reciprocate. It consolidates its gains.
• 25:39
  Speaker 1: When the Obama administration declined to challenge China's island building
• 25:43
  Speaker 1: in the South China Sea, artificial reefs became military installations.
• 25:48
  Speaker 1: When Trump paused tariffs in his first term in exchange
• 25:51
  Speaker 1: for the phase one trade deal, China missed its purchase
• 25:55
  Speaker 1: commitments and the structural reforms were deferred to a phase
• 25:59
  Speaker 1: two that never came. Ratner argues that the time being
• 26:03
  Speaker 1: bought isn't being used to strengthen America's position, particularly given
• 26:09
  Speaker 1: that the war in Iran has drained military readiness for
• 26:12
  Speaker 1: any potential crisis in the Pacific. And all of this
• 26:16
  Speaker 1: will happen while the much larger geopolitical issue, the future
• 26:20
  Speaker 1: of Taiwan, hovers in the background. A senior Taiwanese official
• 26:25
  Speaker 1: told Bloomberg last month that what they fear most is
• 26:29
  Speaker 1: being put on the menu at a Trump-Xi summit. China
• 26:33
  Speaker 1: would very much like rhetorical concessions on Taiwan in exchange
• 26:38
  Speaker 1: for those beans and bowings. Whether they get them is
• 26:41
  Speaker 1: another question. So, the two leaders will shake hands, make
• 26:45
  Speaker 1: announcements and fly home. The photographs will look very serious,
• 26:50
  Speaker 1: but the underlying problem, the one we have spent this
• 26:52
  Speaker 1: entire video explaining, will not have changed. Trade imbalances are
• 26:57
  Speaker 1: not caused by a lack of summits, they are caused
• 27:00
  Speaker 1: by domestic policy choices that neither side appears willing to change.
• 27:05
  Speaker 1: China will continue to suppress household consumption. The US will
• 27:10
  Speaker 1: continue to absorb the resulting surplus. the accounting will continue
• 27:15
  Speaker 1: to do what accounting does, regardless of what anyone announces
• 27:19
  Speaker 1: at a podium in Beijing. If you found this video interesting,
• 27:23
  Speaker 1: you should watch my video on China's rarer chokehold next.
• 27:27
  Speaker 1: Don't forget to check out our sponsor, Mamat AI, there
• 27:30
  Speaker 1: is a link in the description. Have a great day
• 27:33
  Speaker 1: and see you in the next video. Bye.