Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: China's economy is in rough shape.
Speaker 3: China's real estate factor is in a significant correction.
Speaker 1: This inflation number is just crossing the Bloomberg right now.
Speaker 2: Ouch.
Speaker 3: We've seen monthly losses now for six months in a row.
Speaker 2: Six trillion dollars worth of market capitalization wiped out. There's
Speaker 2: a property crisis, exports are down, and the stock market's
Speaker 2: been in a tailspin. Last month, consumer prices fell at
Speaker 2: the quickest pace since the two thousand and eight financial crisis.
Speaker 2: The Chinese government's been under increasing pressure to do something,
Speaker 2: and it has. But there's another threat on the horizon
Speaker 2: when it comes to China's economy, the US election. During
Speaker 2: their presidencies, both Joe Biden and Donald Trump backed policies
Speaker 2: that drove the US and China further apart. That's only
Speaker 2: continued now that the two twenty twenty four campaign is underway.
Speaker 2: In November, Biden doubled down on his statement that China's
Speaker 2: President Shijinping is a dictator, and earlier this month, on
Speaker 2: Fox News's Sunday Morning Futures, Trump said that he might
Speaker 2: raise tariffs on Chinese imports to over sixty percent. This
Speaker 2: wouldn't just hurt China. Ratcheting up tensions between these two
Speaker 2: nations might mean American consumers feel the cost at home,
Speaker 2: like with the prices of everyday goods getting higher and
Speaker 2: the rest of the world. With the world's two largest
Speaker 2: economies fighting, well, they might end up as collateral damage.
Speaker 2: This is the Big Take DC podcast from Bloomberg News.
Speaker 2: I'm Salaia Mosen. Today I'm turning over the mic to
Speaker 2: Joe Weisenthal and Tracy Alloway, co hosts of our sister podcast,
Speaker 2: Odd Lots. They sat down with two colleagues from Bloomberg's
Speaker 2: Washington bureau who measured just what a Trump victory in
Speaker 2: twenty twenty four could mean for China's economy and beyond.
Speaker 4: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 4: Tracy, here's something that I've thought about that's been interesting
Speaker 4: for a few years. The Trump administration obviously sort of
Speaker 4: took this hawkish line on China, introduced the tariffs on
Speaker 4: a lot of Chinese exports to the US, and then
Speaker 4: when the Biden administration took over, it kind of seems
Speaker 4: like we basically got continuity on that front. There was
Speaker 4: no roll back, yeah, anything, Maybe some of the screws
Speaker 4: have been tightened even further.
Speaker 1: I think that's exactly right. And it's kind of funny,
Speaker 1: as you mentioned that it's flown a little bit under
Speaker 1: the radar. And I'm thinking back to Trump's statement trade
Speaker 1: wars are good and easy to yeah, and I mean
Speaker 1: he got a lot of flak for that, probably rightfully so.
Speaker 1: But if you think about what's been happening over the
Speaker 1: past few years, it seems like the US is kind
Speaker 1: of winning the trade war against China in some respects.
Speaker 1: I mean, the US economy outperforming much of the rest
Speaker 1: of the world. I think GDP growth was something like
Speaker 1: three percent in twenty twenty three. China's GDP growth is
Speaker 1: still higher. I believe it was at five percent, but
Speaker 1: it's slowing a lot. And if you look at what's
Speaker 1: going on with the economy right now, it seems like
Speaker 1: it is really struggling in various ways.
Speaker 4: It's interesting that they're winning. I hadn't really winning.
Speaker 1: Might be strong, but like, well.
Speaker 4: Our contry is clearly doing better.
Speaker 5: Yeah.
Speaker 4: Least on the other hand, China clearly has a handful
Speaker 4: of industrial powerhouses that are creating anxiety for legacy industrial
Speaker 4: powerhouses in the US and Europe. And we could say
Speaker 4: that clearly when it comes to ev first legacy automakers,
Speaker 4: we can look at, you know, the rising number of
Speaker 4: conversations like Oboeing is faltering, will Comac and the CM
Speaker 4: whe nine eventually takes significant market share in commercial aerospace.
Speaker 4: We did an episode, I think near the end of
Speaker 4: last year that actually, despite all of the restrictions on
Speaker 4: equipment imports into China for semiconductors, that the domestic semiconductor
Speaker 4: industry is making gains. So like in the GDP sense
Speaker 4: of the word like clearly China is struggling, but on
Speaker 4: these sort of like key industrial strategic areas of the economy,
Speaker 4: there is the word things still seem to be working out.
Speaker 1: No, absolutely, And I think there is this overall angst
Speaker 1: in the US with this idea that China is somehow
Speaker 1: better at doing this kind of targeted industrial policy. We
Speaker 1: used to talk about the Chinese command economy. They have
Speaker 1: experience with pouring lots and lots of money into areas
Speaker 1: that they identify as strategically important. That doesn't mean they
Speaker 1: do it perfectly every time. I mean, we basically saw
Speaker 1: that with some of the consumer tech companies, where there
Speaker 1: was a reversal of the government stance towards them, lots
Speaker 1: of talk of disorderly capital flowing into that space. But
Speaker 1: then what we saw is, you know, they said that
Speaker 1: they cracked down on the sector, and then they said,
Speaker 1: what we really want you to invest in is things
Speaker 1: like solar panels and electric vehicles and semiconductors, And so
Speaker 1: we saw those areas start to boom. So I think
Speaker 1: there is a real sense of concern in the US
Speaker 1: that maybe China, if they're not better at it, they
Speaker 1: certainly have done it for a longer time on a
Speaker 1: more consistent basis.
Speaker 4: Right, And so it feels like now the debate in
Speaker 4: the US is like, Okay, everyone is sort of accepted
Speaker 4: that the tariffs that Trump introduced, that the idea that
Speaker 4: the US in various ways tries to constrain Chinese exports
Speaker 4: or constrain Chinese industry. It feels like that's become conventional
Speaker 4: wisdom now, or that everyone sort of agrees we do
Speaker 4: that in Washington, and now the question is how much.
Speaker 4: And of course recently we heard Trump say that were
Speaker 4: he to be elected president, he would ratch up the
Speaker 4: tariffs even more. I think he put the number like
Speaker 4: sixty percent, which I have to imagine would like totally clobber.
Speaker 1: He did say sixty but then I saw right before
Speaker 1: we came on, let's see, we're recording this on February eighth.
Speaker 1: I think there was an interview from like February six
Speaker 1: where he basically said that the tariffs could be even
Speaker 1: bigger than sixty percent. So I don't know where he's
Speaker 1: quite getting those round numbers from, but maybe more than
Speaker 1: sixty percent right now.
Speaker 4: So as much as Biden has been a continuation and
Speaker 4: extension and an expansion of Trump policies, maybe Trump, if
Speaker 4: you were to win the presidency in November, would be
Speaker 4: a continuation and expansion even further. Anyway, we should talk
Speaker 4: about what a Trump victory, which is of course certainly possible,
Speaker 4: what it would mean for the US China relationship, and
Speaker 4: what it might look like, what the direction all this
Speaker 4: is heading. Let's do it all right, Well, we have
Speaker 4: two absolutely perfect guests today. We're going to be speaking
Speaker 4: to Tom Orlick, previous Odd Lots guest, multiple times, chief
Speaker 4: economist for Bloomberg Economics and Mackenzie Hawkins, she's the US
Speaker 4: Industrial policy reporter for Bloomberg in DC. Both of them
Speaker 4: worked on a big new reports sort of examining this question,
Speaker 4: which everyone should go and read. But thankfully they are
Speaker 4: taking the time to speak with us. So Tom and McKenzie,
Speaker 4: thank you so much for joining us.
Speaker 3: Great to be here. Thanks Jo, Thanks Tracy, thanks.
Speaker 5: For having us on.
Speaker 4: Actually, Tom, let me just start with you with like
Speaker 4: the most vague theoretical question there is, from a purely
Speaker 4: economist standpoint, what do tariffs do?
Speaker 3: So tariffs increase the cost of imports, and when the
Speaker 3: cost goes up, the demand goes down. So in the
Speaker 3: first Trump administration, we saw twenty five percent tariffs on
Speaker 3: a swathe of Chinese exports to the United States, and
Speaker 3: we've got a bunch of data on the impact that
Speaker 3: those tariffs had, so we can kind of say what
Speaker 3: the impact was. And we're seeing Chinese sales to the
Speaker 3: US in the categories of goods that face the tariffs
Speaker 3: down more than one hundred billion dollars relative to where
Speaker 3: they would have been if no tariffs have been put
Speaker 3: in place. Now Here we are at the start of
Speaker 3: twenty twenty four, still a few months to the election,
Speaker 3: but Donald Trump clearly in the lead for the Republican nomination,
Speaker 3: running ahead of Joe Biden in the polls in some
Speaker 3: key swing states, and talking about a sixty percent tariff
Speaker 3: on all Chinese imports. Well, if twenty five percent tariffs
Speaker 3: put a bit of a hole in revenue for Chinese factories,
Speaker 3: sixty percent tariffs, I think would turn that hole into
Speaker 3: more like a crater.
Speaker 1: So Joe asked a very theoretical question, and I guess
Speaker 1: I'm going to ask something a little bit more specific,
Speaker 1: but talk to us about how targeted or I guess
Speaker 1: customized the tariffs are that we've seen from the Trump
Speaker 1: administration and then the Biden administration, Because of course Trump's
Speaker 1: export curbs did involve semi conductors when he was president,
Speaker 1: but then Biden came in, and I believe he targeted,
Speaker 1: you know, advanced semiconductor technology and China's access to it,
Speaker 1: and in some ways he was even more strategic in
Speaker 1: the things that he was limiting.
Speaker 5: So in the Trump administration you saw this sweeping terror
Speaker 5: review that affected a wide range of Chinese industries, and
Speaker 5: the Biden administration has held those tariffs in place. There's
Speaker 5: been sort of a quote unquote imminent tariff review for
Speaker 5: months now, and a big question in Washington is whether
Speaker 5: the administration will stay the course with the sectors that
Speaker 5: Trump targeted or have a more refined approach that might
Speaker 5: focus on key strategic sectors for the US, like evs
Speaker 5: and other clean energy products, which of course the Biden
Speaker 5: administration is trying to subsidize at home. But then you
Speaker 5: saw Biden look at a whole suite of other tools
Speaker 5: of economic statecraft that have actually become his favorite mechanisms
Speaker 5: to get at the Beijing question. One of those, as
Speaker 5: you said, Tracy, is export controls on A and semiconductors.
Speaker 5: These are the critical electronic components that power everything from
Speaker 5: your phone to your car to nuclear missiles. And there's
Speaker 5: a big fear in Washington that if China catches up
Speaker 5: with US technology that they could use AI to power
Speaker 5: weapons systems, that it could pose a significant military threat
Speaker 5: to the US. And so you saw in October twenty
Speaker 5: twenty two sweeping controls on the ability of US companies
Speaker 5: to export the most advanced semiconductor technology and ship making
Speaker 5: equipment to any Chinese company.
Speaker 4: McKenzie just as a follow up on that specifically and
Speaker 4: talking about politically, like as we said in the introduction,
Speaker 4: and as Tracy just mentioned, you know, Biden continued with
Speaker 4: a lot of these terrify views. They're ongoing, they've become
Speaker 4: even more targeted. How did this become the consensus that
Speaker 4: the idea of just dropping tariffs and sort of returning
Speaker 4: to the pre Trump status quo with regards to trade
Speaker 4: now doesn't even seem on the table anymore, and it
Speaker 4: doesn't seem like anyone advocates for that. How did this
Speaker 4: just become like the bipartisan consensus that setting aside the
Speaker 4: degree of restrictions, that some restrictions must be applied.
Speaker 5: It's a great question. You know, when you talk to
Speaker 5: folks on both sides of the aisle on the hill,
Speaker 5: they say, the one thing that everyone agrees on is China,
Speaker 5: and the question is not what, but how much? And
Speaker 5: you know, you really saw the Trump administration, you know,
Speaker 5: early on introduce this tariff's question, and then later on
Speaker 5: towards the latter years, start to target specific Chinese firms.
Speaker 5: Like a great example is Huawei, the Chinese telecommunications giant,
Speaker 5: which you saw Trump sanction in twenty nineteen over concerns
Speaker 5: about the security of their telecommunication systems that are all
Speaker 5: over the US. And then once that sort of entered
Speaker 5: the Washington think tank sphere and people really started seeing
Speaker 5: Huawei as a security threat, it became Okay, what else
Speaker 5: is Huawei doing that's a security threat? And you know,
Speaker 5: the initial sanction sort of crippled their telecommunications business and
Speaker 5: their smartphone business for quite some time time. But we
Speaker 5: saw Juawe debut a smartphone in August that's powered by
Speaker 5: its ship that's far more advanced than where the US
Speaker 5: was hoping to hamstring China's rise. And so as we've
Speaker 5: seen China sort of make incremental technological progress in these
Speaker 5: areas that Washington has decided it's quite concerned about, there
Speaker 5: doesn't really seem to be a big debate over whether
Speaker 5: should we really be doing expert controls in the first place.
Speaker 5: It's we've been on this path, we've seen China continue
Speaker 5: to make progress. What are additional measures that we can
Speaker 5: take with our allies to prevent any further progress from
Speaker 5: these firms that now for five years have been thought
Speaker 5: of as a significant security threat in DC.
Speaker 3: I just build on that briefly and point to three
Speaker 3: big factors which I think have changed the dynamic here
Speaker 3: in Washington, DC and made anti China into a sort
Speaker 3: of broad and firm consensus. I think the first thing
Speaker 3: driving it has been China's sudden rise. Right when everyone
Speaker 3: was agreeing that China could join the Double Wuto back
Speaker 3: in nineteen ninety nine two thousand, China's GDP was a
Speaker 3: fraction of US GDP. China's military capabilities were nowhere near
Speaker 3: US military capabilities, and so China really wasn't regarded as
Speaker 3: a threat, and it was still possible to regard China
Speaker 3: as a kind of almost like a disciple. That's now
Speaker 3: clearly changed. I think the second thing, which is important
Speaker 3: is the kind of the peculiarities of the US election system,
Speaker 3: which gives a disproportionate amount of power to the votes
Speaker 3: and the voices of a constituency in a few swing states,
Speaker 3: places like Pennsylvania, which are in the US rust Belt
Speaker 3: and which have suffered disproportionately from China's rise as a
Speaker 3: manufacturing power, and so where tough on China is a
Speaker 3: very popular vote winner. And then I think the third factor,
Speaker 3: which we have to acknowledge is the kind of the
Speaker 3: strange genius of Donald Trump, right, who kind of revealed
Speaker 3: in his campaign in twenty sixteen that being really tough
Speaker 3: on China was a powerful motivating factor for the voters
Speaker 3: in those swing space.
Speaker 1: Whatever happened to the sort of old simplistic argument for protectionism,
Speaker 1: which was what we want to know, reshore manufacturing, create
Speaker 1: more jobs in the US. It feels like it's sort
Speaker 1: of evolved into this very specific anti China action and
Speaker 1: we haven't seen correct me if I'm wrong, but we
Speaker 1: certainly haven't seen as stringent actions on other countries and
Speaker 1: other manufacturing threats. I mean, we know Mexico is exporting
Speaker 1: tons to the US now, sort of filling some of
Speaker 1: the gap that China has left. But what happened to
Speaker 1: that argument? That feels like it's lost a little bit
Speaker 1: of popularity in DC. Everything feels very strategic, very security focused.
Speaker 3: So I think when it comes to China, these two
Speaker 3: things come together from a US policy perspective rather nicely. Right,
Speaker 3: Here's China, a single party state, a state dominated economy,
Speaker 3: rising quickly one point three billion people. It's easy to
Speaker 3: see why this is regarded as a national security threat,
Speaker 3: and so why it's easy to win the argument in
Speaker 3: DC for things like banning sales of leading edge semiconductors
Speaker 3: because potentially they could fuel China's military capabilities. At the
Speaker 3: same time, China's enormous success in grabbing global market share
Speaker 3: in the manufacturing sector and the consequences of that for
Speaker 3: US manufacturing, where factory towns have been hollowed out and
Speaker 3: people have lost their jobs, makes the case that this
Speaker 3: is really important, not just from a national security perspective,
Speaker 3: but also from a kind of social well being allowing
Speaker 3: everyone to benefit from the growth of the US economy perspective.
Speaker 3: So it's a complicated picture now when it comes to China,
Speaker 3: those national security arguments and those concerns about the hollowing
Speaker 3: out of the manufacturing sector come together very nicely. The
Speaker 3: messiness of it, which I think you're sort of alluding to, Tracy,
Speaker 3: is that near assuring and friendsuring. That addresses the national
Speaker 3: security piece of it, but it certainly doesn't help people
Speaker 3: who lost their manufacturing jobs here in the United States.
Speaker 3: They're not going to be super delighted to see those
Speaker 3: jobs coming back to Mexico or Vietnam or other places,
Speaker 3: which don't really help them.
Speaker 5: Out, and the manufacturing argument still has a lot of
Speaker 5: salience in DC and on the campaign trail. You know,
Speaker 5: you can think of one tranch of Biden's China policy
Speaker 5: as sanctioned controls on outbound investment, export controls on semiconductor ships,
Speaker 5: and the continuation of Trump tariffs. But you can think
Speaker 5: of the other side of the coin as the massive
Speaker 5: industrial policy effort that the US has embarked on over
Speaker 5: the past couple of years. The Chips and Science Act,
Speaker 5: the Inflation Reduction Act, which is democrats signature climate Law,
Speaker 5: and the bipart is In Infrastructure Law have poured well
Speaker 5: over a trillion dollars of federal funding into revitalizing these
Speaker 5: domestic manufacturing bases in areas that lost a lot of
Speaker 5: jobs to the so called China shock.
Speaker 1: It is true also that I think Trump has talked
Speaker 1: about doing a blanket ten percent tariff on all imports
Speaker 1: to the US, so basically ring fencing the entire economy.
Speaker 4: Well, this is dovetails with what I was about to
Speaker 4: ask next time, and it's sort of another theoretical economics question,
Speaker 4: kind of like when I asked what tariffs do, but
Speaker 4: why didn't we have inflation? Why don't they. Why weren't
Speaker 4: the inflationary in the Trump period? And how do economists
Speaker 4: think about the inflation risks associated with aggressive tariffs either
Speaker 4: on one country or blanket tariffs on it.
Speaker 3: So it's a really good question if we think about
Speaker 3: the kind of the big picture over the last thirty years,
Speaker 3: globalization and the ability of consumers in the United States
Speaker 3: to tap cheap goods made in China has been one
Speaker 3: of the factors that was pretty helpful in keeping inflation
Speaker 3: around the FEDS two percent target, at least until the
Speaker 3: post pandemic inflation surge. Now, why didn't the Trump tariffs
Speaker 3: have a more significant impact on that dynamic? I think
Speaker 3: the reason is there's a few factors at work. The
Speaker 3: first factor is goods inflation is important in the US,
Speaker 3: but it's not as important as services inflation, and services
Speaker 3: inflation doesn't really get impacted by tariffs that you put
Speaker 3: on goods. The second factor is, yes, China is a
Speaker 3: really important supplier of goods to the United States, but
Speaker 3: it's not the only supplier. And then the third factor
Speaker 3: at work is tariffs aren't the only thing going on. Yes,
Speaker 3: the Trump administration put twenty five percent tariffs on but
Speaker 3: over the same period we saw a significant depreciation of
Speaker 3: China's yuan. China's factories were able to absorb some of
Speaker 3: the shock by taking lower profit margins, and that provided
Speaker 3: a little bit of an officer.
Speaker 1: So, just on this note, have you done any number
Speaker 1: crunching on what Trump's proposal would mean for inflation?
Speaker 5: Now?
Speaker 1: Do you have specific numbers?
Speaker 3: So we have actually been crunching the numbers, Tracy, And
Speaker 3: here I want to give a shout out to Eleanora
Speaker 3: Mavrodi in our modeling team in Paris. She's taken a
Speaker 3: big model of the global economy and she's plugged in
Speaker 3: that Trump proposal for a sixty percent increase in tariff's
Speaker 3: on US imports from China. And what the model is
Speaker 3: telling us is that that has a pretty catastrophic impact
Speaker 3: on trade. In fact, if the US goes ahead with
Speaker 3: sixty percent tariffs and China reciprocates with sixty percent tariffs,
Speaker 3: matching the pattern of kind of tit for tat retaliation
Speaker 3: we saw during the first Trump term, that pretty much
Speaker 3: turns off trade between the world's two biggest economies. The
Speaker 3: impact on inflation, well, it's there. If import costs go up,
Speaker 3: then that's a positive impact on inflation, but it's not
Speaker 3: particularly marked. That's partly for the reasons I was just
Speaker 3: sharing services inflation is more important than goods inflation. It's
Speaker 3: also because there's an offsetting drag. Import prices go up,
Speaker 3: and that directly affects the CPI. But tariffs also have
Speaker 3: a depressing effect on growth, and that means the economy
Speaker 3: is weaker, and that's an offset on inflation.
Speaker 4: If the US and China, there's two huge trading partners
Speaker 4: suddenly stop trading, what other knock on effects do we
Speaker 4: see from there?
Speaker 3: So I can speak to the economics of that, and
Speaker 3: maybe Mackenzie has some thoughts on the sort of broader
Speaker 3: policy implications. So on the economics, I think, I think
Speaker 3: it's interesting to think about this not just at the
Speaker 3: aggregate level, but also at the sector level, and not
Speaker 3: just about the impact on the US and China, but
Speaker 3: also about the impact on other economies around the world.
Speaker 3: So at the sector level, in the United States, it's
Speaker 3: kind of a policy to support the industries of the past, right, mining,
Speaker 3: production of steel. These are industries which are crucially important
Speaker 3: to the United States in an earlier stage of its development.
Speaker 3: Not so important. Now those would be the industries which
Speaker 3: would be the main beneficiary of a sixty percent tariff.
Speaker 3: Who loses out, Well, it's kind of the industries of
Speaker 3: the future, right, it's the people making the semiconductors, is
Speaker 3: the people making the advanced electronics, the people with the
Speaker 3: exposure to that East Asian electronics supply chain. And thinking
Speaker 3: about the global impact, Well, if we break the trade
Speaker 3: relationship between China and the United States, that's bad for
Speaker 3: those two countries. But there are some other countries that
Speaker 3: could well gain thinking about those connect to economies, places
Speaker 3: like Vietnam, places like Mexico that have a strong manufacturing base,
Speaker 3: that have low costs, and that have pretty good trade
Speaker 3: relationships with those two economies.
Speaker 5: And when you think about the bilateral relationship between Washington
Speaker 5: and Beijing. At the same time as Biden has become
Speaker 5: increasingly hawkish on China, employing sort of novel tools of
Speaker 5: economic statecraft to get at advanced industries in the country,
Speaker 5: there's also been this significant back channel effort to improve
Speaker 5: direct diplomatic tize military to military communications, culminating in a
Speaker 5: meeting between the two leaders on the sidelines of the
Speaker 5: Apex Summit. In San Francisco, And so you can imagine,
Speaker 5: you know, after establishing formal communication networks between the Treasury
Speaker 5: Department and their counterparts in China, formal communications networks between
Speaker 5: the Commerce Department here and MOFCOMM and China, this sort
Speaker 5: of deterioration of a lot of this sort of day
Speaker 5: to day's slow working diplomatic effort that's been happening under
Speaker 5: President Biden, if the US were to sort of blow
Speaker 5: up the trade relationship between the two countries under a
Speaker 5: potential Trump administration.
Speaker 1: Mackenzie, you mentioned earlier the Infrastructure Investment Act, and the
Speaker 1: other big set piece from the Biden administration has been
Speaker 1: the clean energy transition and the money that is pouring
Speaker 1: in there. And this is a question that I've asked
Speaker 1: a couple people on this podcast at this point, But
Speaker 1: it seems like the US has a desire to shift
Speaker 1: away from fossil fuels, maybe build up home capacity of
Speaker 1: clean energy technology like solar panels. But at the same time,
Speaker 1: it is also very true that China is good at
Speaker 1: producing lots of cheap solar panels and things like that.
Speaker 1: So I guess I'm curious what you're hearing from the
Speaker 1: administration in terms of I guess the need to build
Speaker 1: up or increase some of that capability at home and
Speaker 1: make it more efficient versus the lower cost and sheer
Speaker 1: volume of production that you would get from Chinese made
Speaker 1: renewable technology or even semiconductors.
Speaker 5: It's a great question. The solar panel question is kind
Speaker 5: of the most often cited explanation of the danger that
Speaker 5: China poses to these sort of more nascent industries in
Speaker 5: the US on hydrogen, on wind, and also on electric
Speaker 5: vehicles and semiconductor ships, where the US was long the
Speaker 5: technological leader and then seated a lot of that production
Speaker 5: capability to East Asia. And so when we think about
Speaker 5: the sort of critical industries that the US is investing
Speaker 5: in right now, you identified them right off the bed.
Speaker 5: It's semiconductor ships, it's electric vehicles, it's solar, wind, hydro,
Speaker 5: a bunch of types of clean energy through the Chips
Speaker 5: and Science Act and the Inflation Reduction Act. And the
Speaker 5: worry is that the US could pour significant amounts of
Speaker 5: government capital trying to crowd in private capital to build
Speaker 5: up these industries. But if Chinese firms are not operating
Speaker 5: in the same market environment, there could be a significant
Speaker 5: dumping risk. The fear on chips, for example, is that
Speaker 5: China's been building up capacity in the sort of mature,
Speaker 5: older generation semiconductors that still power the entire global economy,
Speaker 5: even if they're not the cutting edge. Those are not
Speaker 5: the ones that the US is trying to deal with
Speaker 5: with export controls. And that's why the Biden administration is
Speaker 5: talking about tariffs. They say, we see this following this
Speaker 5: same trajectory that we saw with solar panels and on
Speaker 5: electric vehicles as well. The US is pouring billions of
Speaker 5: dollars and trying to get American auto giants to build
Speaker 5: cleaner cars in the US, but Chinese models are on
Speaker 5: offer for less than half the cost, and the only
Speaker 5: reason they haven't entered US markets yet, or the primary reason,
Speaker 5: is that there's a twenty seven point five percent tariff
Speaker 5: imposed under Donald Trump, and you're hearing a lot of
Speaker 5: concern in Washington. Maybe we might need to increase that
Speaker 5: number to protect these industries that we're investing in so
Speaker 5: much at home.
Speaker 4: I'm glad you went there. There's literally going to be
Speaker 4: what I ask because when you talk about the Chinese
Speaker 4: EV boom, most of the people talk about the European
Speaker 4: market specifically, and how it's a threat to BMW and
Speaker 4: the various legacy automakers. But in theory, right, like if
Speaker 4: the quality continues to improve, if they continue to go down,
Speaker 4: like the sort of learning cost curve of costs, like
Speaker 4: is it only a matter of time at current rates
Speaker 4: before we start seeing bid cars in the US competing
Speaker 4: against you know, obviously Tesla, but also the EV efforts
Speaker 4: of the Detroit three and others that so far haven't
Speaker 4: gone all that great as far as I can tell.
Speaker 5: So that is one of the central question I think
Speaker 5: the policymakers in the administration are thinking about right now.
Speaker 5: You know, the EV question in the US is manifold one.
Speaker 5: There is concern that Chinese EV supply chain companies will
Speaker 5: try to take advantage of the tax credits offered for
Speaker 5: US production. There's been a lot of focus, for example,
Speaker 5: on this forward facility in Michigan, which has a licensing
Speaker 5: agreement with Cattle, which is the preeminent global battery maker,
Speaker 5: and a lot of China hawks on the hill, you know,
Speaker 5: in some cases on both sides of the aisle are
Speaker 5: saying we should really keep a close eye on that.
Speaker 5: Is this sort of an attempt by China to work
Speaker 5: around restrictions that say you can't take advantage of the
Speaker 5: tax credits if you have a certain threshold of Chinese
Speaker 5: investment in your supply chain to sort of tap into
Speaker 5: this inflation Reduction Act fueled EV boom in the United States.
Speaker 5: Then there's the question of will Bid and other Chinese
Speaker 5: companies try to invest in Mexico. You know, you saw
Speaker 5: Treasury Secretary Janet Yellen in December on a trip to
Speaker 5: Mexico City saying we want to help Mexico fortify against
Speaker 5: you know, foreign investment threats, including specifically China, and Commerce
Speaker 5: Secretary Gina Raimondo last week sort of opened the door
Speaker 5: to a little bit of a novel take on Chinese
Speaker 5: EV's coming from the administration citing data security risks. So
Speaker 5: not even just talking about the market dynamics and the
Speaker 5: trade threat, which was the logic behind the Trump tariffs
Speaker 5: to begin with, and this sort of long going conversation
Speaker 5: among Biden officials about whether to adjust or potentially increase
Speaker 5: those tariffs, but also the question of you know, these
Speaker 5: cars are equipped with thousands of sensors, and she asked
Speaker 5: the question, do we really want all of that data
Speaker 5: going to Beijing, and so that was almost seating the
Speaker 5: floor a little bit to maybe this quote unquote small
Speaker 5: yard high fence approach that the Biden administration has touted
Speaker 5: for years is becoming or could become a slightly larger
Speaker 5: yard and higher fence. Looking at other forms of critical
Speaker 5: technologies that compare to sort of the market risks that
Speaker 5: Tom was talking about earlier that fueled sort of the
Speaker 5: traditional US China trade battle. Now we're thinking about information
Speaker 5: technology that lends a national security argument to some of
Speaker 5: these same products.
Speaker 1: So just thinking about things that have changed since the
Speaker 1: Trump years twenty sixteen to twenty twenty. One of the
Speaker 1: big things has to be Russia's invasion of Ukraine, and
Speaker 1: I guess the sort of economic alliance that we've seen
Speaker 1: between China and Russia emerged since then. And I'm wondering
Speaker 1: We've obviously been focused a lot on the US China
Speaker 1: relationships specifically, but could we potentially see the emergence of,
Speaker 1: for lack of a better term, East West trade blocks.
Speaker 3: I think that's a really interesting question, Tracy, and it
Speaker 3: reminds me of the kind of the miscalculation that many
Speaker 3: here in the United States made about the impact of
Speaker 3: US sanctions and European sanctions on Russia in the days
Speaker 3: after Putin's tanks rolled across the border into Ukraine. You
Speaker 3: remember back two years ago, there was sweeping sanctions, right,
Speaker 3: Russia essentially locked out of the dollar financial market, Russian firms,
Speaker 3: with some exceptions in energy, essentially locked out of trade
Speaker 3: with the US and Europe. And at that moment there
Speaker 3: was a rush to sort of call the collapse of
Speaker 3: the Russian economy. Right, the US is sanctioning them, Europe
Speaker 3: is sanctioning them, They can't participate in the global financial system.
Speaker 3: This must be the first moment of a crisis. And
Speaker 3: in fact, two years on we can see that these
Speaker 3: sanctions and these controls have certainly had a negative impact
Speaker 3: on Russia, but it's certainly not tipped them into crisis.
Speaker 3: Why is that Well, I think the unfortunate reality for
Speaker 3: policymakers here in DC and in Brussels is that they
Speaker 3: no longer have the same impact that they once did.
Speaker 3: And the reason for that is because of China and
Speaker 3: to a lesser extent, India, which has also maintained more
Speaker 3: or less normal trading relations with Russia. And so what
Speaker 3: that suggests is that as China rises, and as India rises,
Speaker 3: and other major emerging markets which don't necessarily fall into
Speaker 3: line with DC start playing a bigger role in the
Speaker 3: global economy, the capacity of the United States and its
Speaker 3: allies to shape outcomes for particular countries by imposing sanctions
Speaker 3: or tariffs becomes that much less. And to your question, Tracy, yes,
Speaker 3: that possibility of an East West trade block is very
Speaker 3: much there. Bad for global growth, but a buffer for
Speaker 3: countries that find themselves at the wrong end of US
Speaker 3: economic statecraft.
Speaker 5: And China's alignment with Russia has actually lent a lot
Speaker 5: more credence to US arguments about the national security risks
Speaker 5: that a lot of European allies have been lukewarm on
Speaker 5: for some time. So, you know, they've seen China as
Speaker 5: a market opportunity, not necessarily the geopolitical threat that Washington sees,
Speaker 5: but they've started to pay more attention to US warnings,
Speaker 5: particularly about the risk of invasion of Taiwan, since they've
Speaker 5: felt this pressure from Russia and then the alignment between
Speaker 5: those two powers. And you know, one of the best
Speaker 5: examples of this is in order for the US to
Speaker 5: restrict China's access to advanced semiconductors, they had to get
Speaker 5: key allies with key companies in the supply chain on board.
Speaker 5: One of the best examples is ASML, the leading maker
Speaker 5: of chip making equipment, which is based in the Netherlands.
Speaker 5: And if the US is going to prevent China from
Speaker 5: developing advanced chips, they have to convince the Dutch government
Speaker 5: to block ASML from sending the most high tech machines
Speaker 5: over to China. And so this sort of increasing threat
Speaker 5: from Russia, where a company like ASML might say, we
Speaker 5: want to trade China's a fantastic customer. China just became
Speaker 5: sort of proportionally the largest share of ASMA sales just
Speaker 5: a month or two ago. The alignment between China and
Speaker 5: Russia has sort of helped bring European powers around to
Speaker 5: the idea that no, China does pose a significant risk
Speaker 5: if they invade Taiwan, which houses the world pre eminent
Speaker 5: chip maker where we get all of the most advanced
Speaker 5: chips that power all of our most advanced technology. That
Speaker 5: is a threat that we need your alignment on.
Speaker 2: Tom.
Speaker 4: I know when trade deals are crafted, when people think
Speaker 4: about tariffs, the actual country of origin for a given
Speaker 4: good is always people try to figure that out essentially,
Speaker 4: so that you know, if we want to restrict Chinese
Speaker 4: exports to the US, that they can't just like land
Speaker 4: in Mexico first and then across the border and say
Speaker 4: it's some Mexican good. But we do know that imports
Speaker 4: into the US from Mexico have been surging, and as
Speaker 4: you mentioned, Mexico could be a beneficiary if they were
Speaker 4: cut off. Like, how leaky is that? And to what
Speaker 4: degree can other countries other destinations be de facto yes,
Speaker 4: we're importing from Mexico, but really this is a continuation
Speaker 4: of importing from China.
Speaker 3: Yeah, really good question, Joe. It reminds me of a
Speaker 3: funny moment in a Chinese novel I read a few
Speaker 3: years ago, Shandi or Brothers, And there's a moment in
Speaker 3: the novel where there's a kind of rise in anti
Speaker 3: Japanese sentiment in China and there's a violent mob that
Speaker 3: goes out and tries to smash Japanese products, and they're
Speaker 3: on the cusp of smashing what they think is a
Speaker 3: Japanese car, and one of the characters says, wait, this
Speaker 3: car was made of the joint venture enterprise in China,
Speaker 3: and then another protagonist says, Okay, let's just smash half
Speaker 3: of it. And I think that's kind of like that's
Speaker 3: the reality of global trade, right, I mean, the sort
Speaker 3: of the classic example is the iPhone technology and branding
Speaker 3: here in the United States, semiconductors from Taiwan snaps together
Speaker 3: in mainland China. If there's going to be a trade war,
Speaker 3: which bit of it are you going to impact?
Speaker 6: Right?
Speaker 3: Well, the reality is that you can't impact one bit
Speaker 3: of it without impacting another. We're seeing some of that
Speaker 3: complexity playing out in different ways in the years since
Speaker 3: the Trump tariffs came into place. We're seeing Chinese companies
Speaker 3: setting up shop in Vietnam, Chinese companies attempting to set
Speaker 3: up shop in Mexico, so they'd be exporting from those
Speaker 3: countries to the United States, dodging the Trump tariffs. But
Speaker 3: where does the revenue go, in many cases still going
Speaker 3: to those Chinese firms. It's a complex system, and that
Speaker 3: makes it that much harder to wield these tools of
Speaker 3: economic state craft without creating some unintended collateral damage.
Speaker 5: And there's always the question of how deep in the
Speaker 5: supply chain are you going to go when you think
Speaker 5: about chips or you think about evs down to the
Speaker 5: raw components, the minerals. I mean, China has been snapping
Speaker 5: up mines across the world. And if you say we
Speaker 5: don't want any Chinese investment anywhere in the supply chain
Speaker 5: for any of the goods that we're going to subsidize
Speaker 5: or even allow to be impoured into the US, you
Speaker 5: could end up with zero goods at all.
Speaker 1: So, on the one hand, we have Trump running on
Speaker 1: this idea of sixty percent tariffs on China, maybe more,
Speaker 1: plus perhaps a ten percent ring fence on all imports
Speaker 1: into America. On the other hand, you have the Biden administration,
Speaker 1: which is already in office and has already continued some
Speaker 1: quite stringent restrictions on China. When you talk to policymakers
Speaker 1: in China, or when you look at surveys of the
Speaker 1: domestic Chinese population, what do they say about their preferred candidate?
Speaker 1: Do they express a preference?
Speaker 5: So we cite a survey in our story and online
Speaker 5: survey figured out trying to figure out how the Chinese
Speaker 5: public feels about the upcoming US vote, and about sixty
Speaker 5: percent of the respondent's preferred Trump. But it wasn't that.
Speaker 5: You know, his China plans stack up better for them
Speaker 5: against Biden's, but they thought that he would ease the
Speaker 5: pressure on China by bringing chaos to America.
Speaker 4: Well, we'll see what happen. Mackenzie and Tom, thank you
Speaker 4: so much for coming on. Fascinating work. Everyone should go
Speaker 4: read your Big Take article out on the Bloomberg now
Speaker 4: and we'll have to have you both back on odd
Speaker 4: Lots maybe after the November election. We'll see what happening.
Speaker 5: Thanks so much for having us.
Speaker 6: Thanks Jay, Thanks Tracy, Tracy.
Speaker 4: I thought that was great. There was a lot interesting
Speaker 4: in there. One thing that I'll pick out that was
Speaker 4: sort of something McKenzie said about even as these economic
Speaker 4: constraints have grown, there has been some other progress, like
Speaker 4: military to military communication, treasury to treasury communication. It reminds
Speaker 4: me of something, you know, we talked to Adam Posen
Speaker 4: generation and that was one of his concerns about trade wars,
Speaker 4: which is that trade freedom doesn't necessarily lead to peace,
Speaker 4: but trade constraints can create geopolitical.
Speaker 1: Problems, right, which makes a lot of sense.
Speaker 2: Yeah.
Speaker 1: Well, on that note, the other thing that both of
Speaker 1: them really emphasized was this idea of China sort of
Speaker 1: in a sweet spot for this kind of trade restriction,
Speaker 1: where you do have concerns over the loss of jobs
Speaker 1: and manufacturing that have been going on for decades, but
Speaker 1: then on the other hand, you do have the strategic
Speaker 1: concerns strategically important industries. Is the US going to be
Speaker 1: able to compete on semiconductors or clean energy tech? And
Speaker 1: also that military aspect of it. So it sort of
Speaker 1: makes sense why the US would focus on China and
Speaker 1: why it's politically appealing totally.
Speaker 4: Can I express an unpopular opinion? I don't know if
Speaker 4: it's unpopular. I just don't hear many people say it.
Speaker 4: I really believe that if there's you know, if there's
Speaker 4: one country in the world that could do true like
Speaker 4: add tarchy, like it's obviously the US, right, Like it
Speaker 4: would probably be very economically harmful to literally no longer
Speaker 4: trade with the world.
Speaker 1: Just to be clear, you are not recommended, but as
Speaker 1: a thought expert.
Speaker 4: A thought experiment, if there's one place that is all
Speaker 4: the food, all of the minerals, all of the oil,
Speaker 4: all the natural gas, all the talented companies, all of
Speaker 4: the high tech, Like, if there's one place that I
Speaker 4: think could possibly pull it off. It's clearly the US,
Speaker 4: So like, again, this is not me making a policy recommendation.
Speaker 4: I just think, like, I think we could. It would
Speaker 4: be very disruptive, and I'm not in favorite, but I
Speaker 4: think we could survive.
Speaker 1: Someone is going to take that quote completely out of
Speaker 1: context and tweet it.
Speaker 5: Well.
Speaker 1: The one other thing I was thinking, and it's a
Speaker 1: shame we didn't get into this, but maybe we should
Speaker 1: do an episode more related to this down the road.
Speaker 1: But I never quite figured out Trump's policy on currency,
Speaker 1: because he seemed to switch or vary between wanting a
Speaker 1: strong dollar because it sounds good to have a strong dollar,
Speaker 1: but then also wanting a week dollar to be because it's
Speaker 1: good fort for it.
Speaker 4: You know, that's very funny because right like strong dollar,
Speaker 4: it sounds very trumpy, right, But he also had some
Speaker 4: like intuitions that it wasn't quite right, and even I
Speaker 4: remember once on the campaign trail he said something to
Speaker 4: the effect of like, yeah, I'd like want a week dollar.
Speaker 4: It's good for borrowing, it's good for exports. It's one
Speaker 4: of those things where like it's counterintuitive but also makes sense. Yeah,
Speaker 4: it's not retorted. No one rhetorically wants to come on
Speaker 4: for a week dollar, but it's.
Speaker 1: You never quite made up his mind. Well, maybe someone
Speaker 1: will ask him about that on the campaign trail.
Speaker 4: Maybe he'll come on Oddlocks talk about his currency policy.
Speaker 5: All right.
Speaker 1: In the meantime, shall we leave it there.
Speaker 4: Let's leave it there.
Speaker 1: This has been another episode of the Authots podcast. I'm
Speaker 1: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 4: Follow our guest McKenzie Hawkins. She's at Matt Hawk. Follow
Speaker 4: tom Orlick at tom Orlick. Follow our producers Carman Rodriguez
Speaker 4: at Carman Erman, dash Oll, Bennett at Dashbot and cal
Speaker 4: Brooks at cal Brooks. Thank you to our producer Moses Onam.
Speaker 4: For more Oddlots content, go to Bloomberg dot com slash Odlots,
Speaker 4: where we have a blog, transcripts and a newsletter. And
Speaker 4: check out the discord Discord dot gg slash odd Lots
Speaker 4: where you can chat with fellow listeners.
Speaker 1: Twenty four seven And if you enjoy Oddlots, if you
Speaker 1: like it when we examine the Trump and Biden tariffs,
Speaker 1: then please leave us a positive review on your favorite
Speaker 1: podcast platform. And don't forget, if you are a Bloomberg subscriber,
Speaker 1: you can listen to all of our episodes absolutely ad free.
Speaker 1: Just connect your Bloomberg subscription to Apple Podcasts. Thanks for listening.