Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
Speaker 1: along with my co host Lisa Brahma wits. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penil podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Taking a look at Netflix here
Speaker 1: to date the stocks up only eleven percent, lagging the market.
Speaker 1: We had a downgrade today Laura Martin need Um Company
Speaker 1: downgrading the stock to equivalent of a cell stocks off
Speaker 1: about one point four percent today two dollars. Again, only
Speaker 1: up about year to date. So we are fortunate to
Speaker 1: have the one and only Laura Martin in our Bloomberg
Speaker 1: and an Actor Broker studio. She's a senior annalyst for
Speaker 1: Needham and Company. Laura, thanks so much for being here.
Speaker 1: Um why the downgrade? So what we're saying is that um,
Speaker 1: Netflix must have a second tier that is in the
Speaker 1: five to seven dollar price point, not not just it's
Speaker 1: nine six dollar premium tier. Now that Disney and Apple
Speaker 1: haves five and seven dollar tears and that's where Peacock
Speaker 1: is rumored to come as well when it launches in May.
Speaker 1: And we think the best way to do that is
Speaker 1: not to lower their core price, but to add add advertisements.
Speaker 1: And we calculate that if they added six minute ad load,
Speaker 1: they could generate six dollars per sub per month, so
Speaker 1: that way new people could be attracted to this service.
Speaker 1: A lot of people steal the signal. Now they borrow
Speaker 1: their parents passwords and they borrow their friends passwords. They
Speaker 1: could start paying directly, but it wouldn't hurt the average
Speaker 1: out of Netflix. We could could stay at thirteen dollars
Speaker 1: a share um because and we calculate that if they
Speaker 1: don't have a price point commensurate with other streaming options,
Speaker 1: they will lose four million U S subscribers, which are
Speaker 1: three times as profitable as international subscribers. So you said
Speaker 1: sell uh and and you point to some fundamental problems
Speaker 1: with its capital structure. I'm wondering what you think the
Speaker 1: trigger would be for the significant decline in prices too.
Speaker 1: I think your target is two hundred and sixty dollars
Speaker 1: to share two d sixty yep, So what's the catalyst?
Speaker 1: So our our concern is that if Netflix begins losing
Speaker 1: US US subscribers, given that it lost a hundred and
Speaker 1: twenty six thousand subs in Q two and it was
Speaker 1: down ten percent and twenty four hours, is that the
Speaker 1: stock would be revalued. It would lose its growth stock
Speaker 1: credentials and become traded on e V to ebit DA.
Speaker 1: So the closest company, and we cover all the fangs,
Speaker 1: the closest company to them is a fifteen times e
Speaker 1: V to EBITDA, which is a two sixty dollar price.
Speaker 1: There you go. Alright, so talk to us about it's
Speaker 1: really really early days of this increased competitive environment for streaming.
Speaker 1: Disney just launched. You mentioned Peacock from Comcast coming next year.
Speaker 1: Any early sense of how this might shake out in
Speaker 1: the streaming wars? Yeah, I think we do have a
Speaker 1: sense because Disney is already at Disney has announced it
Speaker 1: added ten million subscribers in the first twenty four hours.
Speaker 1: We have app um Nextus saying it's added sixteen million
Speaker 1: subs um adding a million subs a day. So our
Speaker 1: point of view is that some of those subs will
Speaker 1: churn out of Netflix for some period, and all you
Speaker 1: need is fort of you Netflix subs to churn out
Speaker 1: for an extra three months and Voi LA four million
Speaker 1: subs times twelve months a year at thirteen dollars each
Speaker 1: leave your revenue. So that's and that's really harsh. And
Speaker 1: a company that's trading at seven point two times revenue,
Speaker 1: which is where Netflix trades. All right, I'd love to
Speaker 1: take a bigger picture look at this field as we
Speaker 1: do get the advent of all of these new streaming services.
Speaker 1: How many do you think each household can legitimately pay for?
Speaker 1: What's the threshold? I mean, are there just going to
Speaker 1: be three big survivors that everge from this? Yes, So
Speaker 1: the average household today it takes three point two. And
Speaker 1: when you ask them, they don't put Amazon Prime in
Speaker 1: there because they think they're paying for Prime subscription, not
Speaker 1: at Prime TV subscription. So it's three point to excluding
Speaker 1: Amazon Prime TV. Okay, so three point two. So then
Speaker 1: I think if you are one of the fort of
Speaker 1: American consumers that owns an iPhone, which is the wealth
Speaker 1: is you're going to add a service or two, no problem.
Speaker 1: The problem is the other and that six of homes
Speaker 1: either A doesn't pay for TV at all because they're
Speaker 1: not they can't afford any TV, or they're gonna churn
Speaker 1: faster out of Netflix to substitute Disney this year, or Disney,
Speaker 1: like The Mandalorian is a huge show right now, Disney
Speaker 1: for three months, they're gonna watch The Mandalorian then go
Speaker 1: back to Netflix. They're going to be more cautious with
Speaker 1: their money and not just add an ad an ad.
Speaker 1: And that adds to Netflix churn, which is horrible at
Speaker 1: a seven multiple of revenue for Netflix all let's which
Speaker 1: scares a little bit. Viacom and CBS UH just close
Speaker 1: their deal to this week now trading on their simple
Speaker 1: V I A C. I think you've covered both companies
Speaker 1: for a long time. You were there when they were together,
Speaker 1: when they were split, now they're back together. What's your
Speaker 1: view of this recombined viacom so, I think people are
Speaker 1: underestimating the margin expansion potential here. I think there's a
Speaker 1: lot of costs they can take out. Obviously they understate
Speaker 1: that for employee benefits, but I think you'll see them
Speaker 1: take out third percent more costs than they've admitted to
Speaker 1: the street, which means that they're going to be able
Speaker 1: to grow the Ibada and EPs line. And I do
Speaker 1: think it's a stock that trades on EPs UM. I'll
Speaker 1: be very interested. I think they're going to have a
Speaker 1: stronger streaming service together than they did a part, and
Speaker 1: I think they're going to basically dominate the TV if
Speaker 1: you like Fox, which is dependent on the linear TV ecosystem.
Speaker 1: I mean it trades are a huge higher premium to
Speaker 1: these two stocks. But these two, these two companies together
Speaker 1: have a much bigger portion of Comcast and Charter and
Speaker 1: Altiice's bundle. Just real, quick ten seconds. Do you think
Speaker 1: that Netflix has a chance of going out of business
Speaker 1: if it does not adapt to the modern environment. I
Speaker 1: think more likely as they start losing US subs, which
Speaker 1: are three times as profitable, and then they have trouble
Speaker 1: growing international subs fast enough that are profitable because their
Speaker 1: international subs they're adding today are three dollar subs in India,
Speaker 1: so they can grow the revenue. But if they get
Speaker 1: marked down to not be a a stock um, bankruptcy
Speaker 1: is a long way. But I do think that the
Speaker 1: US profits are really buying the business helping the business today.
Speaker 1: A very uh thoughtful answer, analytical and thoughtful and insightful,
Speaker 1: Laura Martin, Thank you so much for being with us.
Speaker 1: Laura Martin is senior analyst at Native and Company. Joining
Speaker 1: us here in our interactive broker studios. Well underneath the
Speaker 1: market calm is a growing concern that the repo market,
Speaker 1: the sort of plumbing of the financial system, has not
Speaker 1: been fixed by the FEDS temporary repo facility, and that
Speaker 1: going into year end we will see a lot more tumult.
Speaker 1: Joining us here in our interactive broker studios David Kotalk
Speaker 1: He's chairman and chief investment Officer at Cumberland Advisors, and
Speaker 1: I was struck by this note that Sultan Posar of
Speaker 1: Credit Sweez put out where he was saying he thinks
Speaker 1: that people are underpricing the risk of a severe liquidity
Speaker 1: shortage that ends up driving the FED to have to
Speaker 1: buy coupon treasuries in another QUEWI four type move. Well,
Speaker 1: I think he's right. Um Zoltan does marvelous work. Number one.
Speaker 1: He may not be known to all listeners, but he
Speaker 1: is highly skilled technical. He has huge capacity to understand
Speaker 1: the flows worldwide in this particular front end high grade
Speaker 1: market number one. Number two is it a very complex issue,
Speaker 1: so maybe we can simplify the issue and think of
Speaker 1: it in the following are we're used to banking systems,
Speaker 1: bank deposits, bank reserves, banks making loans. That's how we
Speaker 1: think about the banks. There's a whole parallel system of
Speaker 1: liquidity management, and it's in repo or reverse repo, and
Speaker 1: it's an alternate form of cash management or financing or borrowing,
Speaker 1: and that's outside the bank channel, but it's linked to
Speaker 1: the bank channel, so it's intricate. Now we've got a
Speaker 1: set of rules that govern the banks, and they are
Speaker 1: creating a constraint for the banks to take all this
Speaker 1: excess liquidity and use it in the repo market. And
Speaker 1: we saw that in September because the repo market had
Speaker 1: a problem at ACUP, so an interest rate on a
Speaker 1: riskless overnight security went to from to in a quarter.
Speaker 1: Think about that. It's not supposed to happen. Why didn't
Speaker 1: it happen? Why didn't the banks intervene? And we now
Speaker 1: have some understanding of why, but we haven't fixed the
Speaker 1: why all right, So without getting into the nitty gritty,
Speaker 1: I highly recommend that you seek out this credit sweeze
Speaker 1: and pose our note. It's fantastic. There's a great story
Speaker 1: on the Bloomberg about it as well. I'm wondering what
Speaker 1: the consequence is as an investor in risk assets heading
Speaker 1: into your end. Do you think that people are not
Speaker 1: prepared for a sell off and risk assets that could
Speaker 1: ensue from this type of disruption. I don't know how
Speaker 1: prepared people are, at least what I do know is
Speaker 1: in the technical money management analytical community, there's a lot
Speaker 1: of conversation about it. In the general press, in the
Speaker 1: general investment community, it's ignored because we're being inundated with
Speaker 1: impeachment and trade war and all the headlines. So you
Speaker 1: have you have two discussions going on at once. The
Speaker 1: narrow one is the unknown. It has risk of a shock.
Speaker 1: What do you do if you have a fail you
Speaker 1: have a collateral that doesn't deliver, You overstep some limit,
Speaker 1: some threshold, and then you have a default, You have
Speaker 1: a k And therein lies a risk if the system
Speaker 1: is if the system fails, And the question and is
Speaker 1: how much will the central banks intervene in advance prospectively
Speaker 1: to avoid that. They'll intervene at once after the fact,
Speaker 1: but what do they do to avoid the shock? And
Speaker 1: how well, by the way, are we going to learn
Speaker 1: from this FED meeting? Are they prepared for it? What
Speaker 1: are they gonna say? So? What do we know about
Speaker 1: I guess our listeners are probably saying, I'm just trying
Speaker 1: to frame the risk here. Is this a December nineteen
Speaker 1: kind of risk to the financial markets? Or is this
Speaker 1: is kind of what we saw in September of this year,
Speaker 1: which was it's kind of a short term thing, and
Speaker 1: and the FED kind of calm the markets and I'm
Speaker 1: not gonna worry about it too much. I think market
Speaker 1: agents who are pricing securities are looking at this and say,
Speaker 1: at worst it will be a repeated September Paul one
Speaker 1: or two days. Everybody will get excited and then we'll
Speaker 1: go on to something else. And probably that's accurate. The
Speaker 1: FED was caught flat footed in September. They've been warned. Now,
Speaker 1: if we get a spike in repo again, way above
Speaker 1: what market rates should be, and that's only a few
Speaker 1: basis points movement, what would it say says the FED failed,
Speaker 1: they had warning, they had a shock, and they didn't
Speaker 1: fix the problem. That would be more serious in my opinion.
Speaker 1: All right, let's shift geared a little bit to the outlooks.
Speaker 1: Let's uh pass over the December potential turmoil or any
Speaker 1: other disruption, and when are you actually congratulations, got it
Speaker 1: totally right? Said that you went all in on markets.
Speaker 1: The market rallied quite a bit. Where are you now
Speaker 1: in terms of the cautious versus risk on spectrum heading
Speaker 1: into we raise some cash in the quantitative strategies, were
Speaker 1: back in cash. In the regular managed et F accounts,
Speaker 1: we have cash reserved, and in the fixed income accounts
Speaker 1: we have a barbell and we are happy with some
Speaker 1: of the short end because we think we're going to
Speaker 1: be able to deploy it at higher interest rates. You
Speaker 1: had a little no doubt or tweet on how tight
Speaker 1: the triple spread was okay, and it went everywhere, So
Speaker 1: you were vibral viral with a triple B. So you
Speaker 1: think about viral dn quote unless you've been sick. Yeah,
Speaker 1: but we don't want we don't want anybody sick. So
Speaker 1: you think about what your note said. What it said
Speaker 1: is we've got such a flood of liquidity worldwide, these
Speaker 1: spreads are not reflecting credit risk. Someday, sometime before the year,
Speaker 1: there's going to be credit risk repriced in the market,
Speaker 1: and we want to be in a place to take
Speaker 1: advantage of it. So do you have any kind of
Speaker 1: recession outlooking one kind of outlook? Here, we're starting to
Speaker 1: get some signs maybe that's some stabilization in some of
Speaker 1: the European economies, but I'm just not sure if it's
Speaker 1: a green shoot or not. Now, well, we're in no recession,
Speaker 1: slow growth camp Paul. We've been there for a while
Speaker 1: and there's no reason to change that. We think that
Speaker 1: there are enough shoots, whether you want to call him
Speaker 1: green or something else, to see rising labor income taking
Speaker 1: away from return on capital in the US saw a
Speaker 1: little and you did a deep dive in the productivity numbers,
Speaker 1: they reveal it. You look at the employment report that
Speaker 1: there are a number of signs that this labor market
Speaker 1: is finally tightening enough to begin to get upward costs
Speaker 1: of labor, and labor costs long time coming. But if
Speaker 1: it's coming, that means capital profits get the pressures. All right,
Speaker 1: So David, real quick here thirty seconds, and then we'll
Speaker 1: let you go. What's gonna be the best performing as
Speaker 1: at Class I Like the US healthcare sector, it's terrific
Speaker 1: risk aside, policy risk aside, insulated from the trade war,
Speaker 1: and the sleeper might be in the energy patch, which
Speaker 1: is so beaten down and killed that it's got no
Speaker 1: room to go down anymore. It's on the floor, he plays.
Speaker 1: David Kotak, thank you so much for joining us. David's
Speaker 1: chairman and chief investment officer of Coumbling Advisors, coming all
Speaker 1: the way up from Sara Sota, Florida, going against the
Speaker 1: migration that happens this time of a year. But he
Speaker 1: joins us here in a Bloomberg Interactive broker studio, and
Speaker 1: we appreciate that. Not a lot of action in markets today. However,
Speaker 1: if you do look at an index, the main index
Speaker 1: of Mexican stocks, you could see that they are up
Speaker 1: one point three percent. This comes on the heels of
Speaker 1: an announcement of a U S m C, a agreement
Speaker 1: that Mexico, Canada, the US are all planning to sign today.
Speaker 1: The U S. House of Representatives is expected to take
Speaker 1: it up next week and pass it. Joining us now
Speaker 1: to understand the significance of this deal is Christopher Wilson,
Speaker 1: Deputy director of the Mexico Institute for the Wilson Center
Speaker 1: based in Washington, d C. Christopher, thank you for being
Speaker 1: with us. Let's just get started in terms of who
Speaker 1: are the big winners from this deal and who are
Speaker 1: the big losers. Yes, thanks very much for having me.
Speaker 1: I mean, i'd say the business community in general is
Speaker 1: a winner. I mean, the American people and the people
Speaker 1: across North America are winners in a certain sense. And
Speaker 1: that big sense there is that having a deal now
Speaker 1: restores certainty to an area in which we've had so
Speaker 1: much uncertainty over the last couple of years. Trade policy
Speaker 1: has been you know, a big focus point for markets
Speaker 1: for the last couple of years, and it will remain
Speaker 1: to be given everything that's going on with China. But
Speaker 1: this little piece of it across North America is basically
Speaker 1: wrapped up now. It means that all of the companies
Speaker 1: who have built up a continental system of production across
Speaker 1: North America with parts and materials going back and forth
Speaker 1: across borders, so auto parts that you know, move across
Speaker 1: the border to then be put into a you know,
Speaker 1: fully assembled into a vehicle. Hundreds of billions of dollars
Speaker 1: of investments have been made to create that system, and
Speaker 1: the competitive it's the north of North America that comes
Speaker 1: along with that system are now safe again. So that's
Speaker 1: the most important thing. Now some there are some more
Speaker 1: specific winners and losers. So the one of the bigger
Speaker 1: changes was again on autos in terms of an increase
Speaker 1: in rules for regional content. So you have to have
Speaker 1: a greater portion of an automobile made within North America
Speaker 1: and specifically made within the United States or Canada in
Speaker 1: order to comply with usmc A rules. So that will
Speaker 1: create some a few new jobs in the US auto
Speaker 1: sector and potentially the Canadian auto sector as well, but
Speaker 1: it will make cars more expensive as a result. It
Speaker 1: will be a drag on the overall economy at the
Speaker 1: gain of sort of a much narrower sector. You know,
Speaker 1: we can look at agricultural sector as well. The United
Speaker 1: States will get a little bit more access to the
Speaker 1: Canada's dairy market, for example, So there's a in there.
Speaker 1: There's also a modernization that's happening with the agreement. So
Speaker 1: it's a lot of little changes to update NAFTA for
Speaker 1: the twenty feet century. Is their provisions on data storage,
Speaker 1: e commerce, things like that. I mean, products now are
Speaker 1: increasingly being delivered as much via email as they are
Speaker 1: via truck, and we needed rules to govern that across
Speaker 1: North America. Things that just didn't exist in the original
Speaker 1: NAFTA twenty five years ago. You know, it's interesting, Chris,
Speaker 1: since President Trump, you know, essentially scrapped NAFTA, calling it
Speaker 1: the worst deal of all time, We've had three years
Speaker 1: of uncertainty, three years of negotiations. This deal doesn't look
Speaker 1: that much different than NAFTA. It's NAFTA. I mean, this
Speaker 1: is you know, and that's why I say the most
Speaker 1: important thing that's happening here is just removing some of
Speaker 1: that uncertainty. You know, there are important differences between NAFTA
Speaker 1: and U s m c A, but we have to
Speaker 1: start from a baseline that this is basically just the
Speaker 1: restoration of the certainty surrounding NAFTA itself. We still have
Speaker 1: free trade across North America. We will have protections for
Speaker 1: investors that are investing across the borders in North America,
Speaker 1: and that, you know, is way bigger than any of
Speaker 1: the specific changes that are made now. It's it's absolutely
Speaker 1: important that Mexico had to undertake a labor reform, you know,
Speaker 1: for example, in order to comply with usmc A rules.
Speaker 1: That's going to be good for workers in Mexico. It
Speaker 1: may increase costs of productions lightly in Mexico. But you know,
Speaker 1: the bigger thing here is absolutely what's staying the same,
Speaker 1: much more than what's changing. All Right. I get the
Speaker 1: point that everybody wins in the business community community kumbaya,
Speaker 1: hold hands, sing songs. But we are is hearing a
Speaker 1: bit of pushback from specific slices of different industries, in
Speaker 1: particular the U S and Canadian Aluminum group saying that
Speaker 1: Mexico is looking after its own interests with some of
Speaker 1: the requirements within US m c A. Is there anything
Speaker 1: legitimate here? Are there any industries where there is going
Speaker 1: to be a lot of back and forth and dissonance
Speaker 1: in terms of the winners and losers. Yeah, Well, there
Speaker 1: was a you know, sort of last hour proposal to
Speaker 1: try to strengthen some of the rules around aluminum production
Speaker 1: that would have favored US aluminum producers, and Mexico was
Speaker 1: successful and sort of stopping that from moving forward. And
Speaker 1: so that's you know, what that specifically is about. There
Speaker 1: was another sort of ultimate our proposal regarding steel, and
Speaker 1: that one does stay in the agreement with the transition period.
Speaker 1: But you know, there was basically concerns that you'd have
Speaker 1: partially finished steel and aluminum coming into Mexico from other countries.
Speaker 1: They would do just a tiny bit of work on
Speaker 1: it and then call that Mexican aluminum and steel on steel. Uh,
Speaker 1: Mexico you know was less successful, the US was more successful,
Speaker 1: and vice versa on aluminum. So absolutely there, you know,
Speaker 1: there are winners and losers in this, but it comes
Speaker 1: down to those you know, sort of very specific sectors
Speaker 1: that you're bringing up there, Chris, what we have you
Speaker 1: want to get maybe your broader take on just how
Speaker 1: things are going in Mexico. You know, all we see,
Speaker 1: or a lot of what we see in the States
Speaker 1: is just you know, the stories about the extreme violence
Speaker 1: there and the government doesn't seem to be able to
Speaker 1: had a handle on it. How how does that impact
Speaker 1: the economy of Mexico. Just the uncertainty and the violence
Speaker 1: and the you know, all the government issues. What's the
Speaker 1: real bottom line that you're seeing. Yeah, So, I mean,
Speaker 1: Mexico is just completing the first year with its new president,
Speaker 1: Andres Lopez over or president from the left, after many
Speaker 1: years of sort of center or center right rule in Mexico,
Speaker 1: and so there's a lot of changes under way in
Speaker 1: the country and a lot of you know, additional uncertainty
Speaker 1: related to that. That's one of the reasons why U
Speaker 1: S m c A and having this wrapped up was
Speaker 1: so important for Mexico. Is you know, in the context
Speaker 1: of so much uncertainty, here's a little piece that's coming back.
Speaker 1: But yeah, Mexico. You know, twenty nineteen is going down
Speaker 1: on record as one of the most violent years historically
Speaker 1: in Mexico, and it's going down as a year with
Speaker 1: you know, almost zero growth in terms of GDP in Mexico.
Speaker 1: So this is a very challenging year from Mexico. I
Speaker 1: think we should expect the government to be able to
Speaker 1: mobilize a little bit more in terms of investment in
Speaker 1: the coming year. Transitions are always tough in Mexico in
Speaker 1: terms of keeping government investor moving. Uh So that's a
Speaker 1: positive thing to look forward to. But this, you know,
Speaker 1: the bigger question is just the governing style of the
Speaker 1: current president and I think the a lot of the
Speaker 1: private sector in Mexico is very concerned about the future
Speaker 1: of Mexico, in the Mexican economy. But you know, there's
Speaker 1: still a compelling case to be made that production in
Speaker 1: Mexico is you know, one of the most important ways
Speaker 1: for companies across North America to cut their costs and
Speaker 1: be more competitive. So that's that you know continental system
Speaker 1: of production that I was talking about, that's you know,
Speaker 1: that value proposition is still out there and it's still
Speaker 1: bringing investment into Mexico. So it's it's a mixed story. Absolutely,
Speaker 1: there are big challenges domestically in Mexico, but there's also
Speaker 1: a strong logic to continuing to invest there, and we'll see.
Speaker 1: I think the companies who are already in Mexico who
Speaker 1: know how to operate in that complex business environment staying there,
Speaker 1: reinvesting their profits, growing their business in Mexico, while we
Speaker 1: see others maybe stay on the sidelines and wait and see.
Speaker 1: Christopher Wilson, thank you so much for your commentary there.
Speaker 1: Christopher Wilson, Deputy Director of the Wilson Centers Mexico Institute.
Speaker 1: Time to check in with Bloomberg Opinion. We're joined by
Speaker 1: opinion calumnist Andy Brown. He's editorial director for the Bloomberg
Speaker 1: New Economy. Just held a big conference in China recently
Speaker 1: joins us here in a Bloomberg Interactive Broker studio. So Andy,
Speaker 1: it's a trade day here. Today, we have some movement
Speaker 1: on the U S m c A. We've got some
Speaker 1: positive commentary coming out about the December fifteen China tariffs.
Speaker 1: But let's focus on something different as it relates to trade,
Speaker 1: maybe the trade in the past, which is the World
Speaker 1: Trade Organization. Tell us just summarize what the w t
Speaker 1: O is and what's happening to it right now sets
Speaker 1: the rules for global trade and provides the referees and umpires.
Speaker 1: And what's happening today is that two of the three
Speaker 1: remaining judges on the appellate board, which is the w
Speaker 1: t O S Supreme Court, are going to retire and
Speaker 1: the US has frozen their replacements. And so without an
Speaker 1: appellate board, the work, the substance, the real arbitration work
Speaker 1: of the w t O stops. Although in many ways,
Speaker 1: the w t O had been defanged a long time ago, right,
Speaker 1: I mean basically it had been losing importance over the
Speaker 1: past few years, correct, right, And so losing relevance in
Speaker 1: the sense that whole areas of global trade for instance
Speaker 1: e commerce, and not covered under w t O rules
Speaker 1: because the w t O came into came into being
Speaker 1: before all that. That's the problem. It's also ossified in
Speaker 1: the sense that it can only proceed change the rules
Speaker 1: through consensus, unanimous decisions among all the members, and it's
Speaker 1: almost impossible to get that to to to work. The
Speaker 1: big problem really is the arrival of China, and China
Speaker 1: is quite simply playing by a different set of rules,
Speaker 1: and the w t O was not set up to
Speaker 1: to accommodate an economy of the size of China, which
Speaker 1: is not a liberal, free market, capitalist driven economy. It
Speaker 1: is in many respects they call it. We call it
Speaker 1: a state capitalist system. Exactly what that is is not clear,
Speaker 1: but it's not free market. So give us a little
Speaker 1: bit of history about when China came into the w
Speaker 1: t O. What happened. So the Chinese economy starts opening
Speaker 1: up in in the nineteen seventy eight with dnshell Ping's reforms,
Speaker 1: and it's doing pretty well. The reforms unleshal animal spirits
Speaker 1: in China. The economies keeps growing, uh, and then you
Speaker 1: get to two thousand and one where China joins the
Speaker 1: World Trade Organization and it just gets its growth is supercharged. Right,
Speaker 1: So you now remove a lot of uncertainty from China's
Speaker 1: trade and investment, and you get this wave of in
Speaker 1: esmen from the U S. So, you know, factories dismantle
Speaker 1: in in places like you know, the US Northeast and
Speaker 1: reassemble in places like Donguan in southern China, in Guangdong,
Speaker 1: and Guangdong becomes the factory floor of the world. That's
Speaker 1: the w t O. China has got more out of
Speaker 1: global trade than almost any other country. That of course
Speaker 1: is the beginning of all the beginning of the new
Speaker 1: era of globalization, where you have global supply change which
Speaker 1: now start which now overwhelmingly go through China. All right, Andy,
Speaker 1: when you came into the studio here, I ask you,
Speaker 1: how big of a deal is this really? Because the
Speaker 1: w g O has been dead for a while, or
Speaker 1: not dead, but dying and sort of losing relevancy. And
Speaker 1: you said, this is a big deal, And it's because
Speaker 1: it comes at a time when you're having difficulty coming
Speaker 1: to just simple trade agreements. But now you don't have
Speaker 1: the overseer to immediate any arguments. Can you explain what
Speaker 1: the potential consequences could be? Okay? So you know this
Speaker 1: is this is what we the the w t O
Speaker 1: and the Appellate Court is the heart of what we
Speaker 1: call the rules based global trading order, and we do
Speaker 1: not now have a global set of rules that are enforceable.
Speaker 1: So we say, of course, we've just said that. You know,
Speaker 1: in many respects, this was coming for a long time.
Speaker 1: But in the absence of global rules, what you have
Speaker 1: essentially is law of the jungle. Might equals rights. So
Speaker 1: you're going to have the US, China, the big players
Speaker 1: will essentially dictate the terms of trade increasingly through bilateral
Speaker 1: trade agreements, which is going to disadvantage smaller economies. Is
Speaker 1: there talk within the global trade community of any type
Speaker 1: of replacement body that could function, as you know, kind
Speaker 1: of an arbiter, right, So the the EU would like
Speaker 1: to keep this arbitration mechanism going, and so they're they're
Speaker 1: putting in place a sort of a temporary patch or
Speaker 1: work around at in in Europe. Uh And we've just
Speaker 1: heard that the Chinese may be interested in signing up
Speaker 1: to that. Andy Brown, thank you so much for being
Speaker 1: with us. It's really interesting to see how much change
Speaker 1: there is happening on the international trade front. And thanks
Speaker 1: for listening to the Bloomberg P and L podcast. You
Speaker 1: can subscribe and listen to interviews at Apple Podcasts or
Speaker 1: whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter
Speaker 1: at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter
Speaker 1: at Lisa A. Bram wits one. Before the podcast, you
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio