WEBVTT - How China Might Actually Handle a US Trade War 0:00:02.720 --> 0:00:14.120 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.520 --> 0:00:21.640 Hello and welcome to another episode of the All Thoughts podcast. 0:00:21.760 --> 0:00:23.160 I'm Tracy Alloway. 0:00:22.840 --> 0:00:25.360 And I'm Joe. Why isn't thal so, Joe? 0:00:25.880 --> 0:00:29.920 One thing I find interesting about China, or maybe I 0:00:29.960 --> 0:00:32.440 should say one thing I find interesting about how the 0:00:32.440 --> 0:00:36.080 world views China is it seems to be this economy 0:00:36.159 --> 0:00:41.000 that is always simultaneously a massive competitive threat, especially to 0:00:41.040 --> 0:00:44.159 the US, and then simultaneously it always seems to be 0:00:44.159 --> 0:00:47.159 on the verge of some big disaster caused by too 0:00:47.200 --> 0:00:50.239 much debt or bad demographics or the collapse of the 0:00:50.240 --> 0:00:53.639 housing market and so on. So for as long as 0:00:53.640 --> 0:00:57.200 I can remember, China has been a bundle of contradictions. 0:00:57.800 --> 0:00:58.480 No, totally. 0:00:58.560 --> 0:01:02.120 And look, they're very good reporters on China, and they're 0:01:02.280 --> 0:01:03.680 very good analysts on China. 0:01:03.840 --> 0:01:04.759 But throughout my. 0:01:05.120 --> 0:01:09.080 Entire career I completely agree with you. There has always 0:01:09.160 --> 0:01:13.280 been that narrative of the imminent disaster that is the 0:01:13.400 --> 0:01:17.600 Chinese economy, whether it's the housing bubble is going to collapse, 0:01:17.600 --> 0:01:19.920 which it kind of did, and maybe we'll talk about that, 0:01:20.360 --> 0:01:24.120 or you mentioned demographics or you know, all this over 0:01:24.160 --> 0:01:26.959 capacity that if there's a little bit of reduction demand, 0:01:26.959 --> 0:01:31.720 they'll have mass unemployment, et cetera. And again, by and large, 0:01:32.200 --> 0:01:35.280 the Chinese economy, from my outside perspective and I've never 0:01:35.319 --> 0:01:38.360 been there, continues to grow more robust. 0:01:38.520 --> 0:01:42.479 You know, there have been obvious hiccups, yes, for sure. 0:01:42.600 --> 0:01:45.640 Okay, So speaking of hiccups, now that we have this 0:01:45.760 --> 0:01:49.840 new tariff regime from the Trump administration, I think we're 0:01:49.840 --> 0:01:53.200 getting even more contradictions. Right, So we hear that tariffs 0:01:53.200 --> 0:01:56.480 are going to be disastrous for the Chinese economy. Sometimes 0:01:56.480 --> 0:01:58.680 we hear that they could be a good thing if 0:01:58.720 --> 0:02:02.559 they encourage Chinese citizens to actually consume more than they save. 0:02:02.920 --> 0:02:07.080 So maybe this is the impetus for actually finally restructuring 0:02:07.320 --> 0:02:10.720 the Chinese economy. We hear stuff like export controls are 0:02:10.720 --> 0:02:14.920 going to impede China's technological development. But then you also 0:02:15.000 --> 0:02:18.440 hear that the export controls are speeding it up because 0:02:18.520 --> 0:02:21.960 China now is forced to build domestic capacity. So there 0:02:21.960 --> 0:02:25.280 are all these competing narratives. We should definitely talk about 0:02:25.320 --> 0:02:28.520 all of them. And I realize we haven't actually done 0:02:28.560 --> 0:02:31.880 a China centric tariff episode anyway. That's right. 0:02:32.120 --> 0:02:36.639 We talk a lot about the US economy and potential 0:02:36.680 --> 0:02:39.200 of empty shelves and market reactions. But we have not 0:02:39.240 --> 0:02:42.080 talked about this story from the perspective of the Chinese 0:02:42.080 --> 0:02:43.359 economy right now, right. 0:02:43.240 --> 0:02:46.040 And obviously this is important because we're talking about a 0:02:46.080 --> 0:02:50.200 potential trade war between the world's two biggest economies. But 0:02:50.639 --> 0:02:53.840 I think it's also important because China so far is 0:02:53.840 --> 0:02:57.760 the only big country that seems to really have retaliated 0:02:57.960 --> 0:03:01.880 against the US. And just to make things even more complicated, 0:03:02.160 --> 0:03:06.480 we've also seen Treasury Secretary Scott Besson basically offering reduced 0:03:06.480 --> 0:03:10.600 tariffs to countries that agree to implement tougher trade restrictions 0:03:10.639 --> 0:03:13.760 on China. So it seems to be a special case 0:03:13.800 --> 0:03:17.280 in the overall trade crackdown for sure, and we should 0:03:17.280 --> 0:03:19.680 talk about it. And I am very very happy to 0:03:19.720 --> 0:03:22.320 say that we do, in fact have the perfect guest. 0:03:22.520 --> 0:03:25.079 We're going to be speaking with, Arthur Kroeber. He is 0:03:25.160 --> 0:03:28.760 the founding partner and head of research at Gavcal Dragonomics. 0:03:28.800 --> 0:03:31.520 So Arthur, thank you so much for coming on all thoughts. 0:03:31.400 --> 0:03:32.560 Hi there, It's great to be here. 0:03:33.280 --> 0:03:36.240 So I guess my first question is if we assume 0:03:36.280 --> 0:03:38.840 that China does have a lot to lose in a 0:03:38.920 --> 0:03:41.360 trade war with America, which I think is a widely 0:03:41.440 --> 0:03:46.960 held assumption. Why did it choose to retaliate against the US. 0:03:47.760 --> 0:03:50.040 Yeah, that's a great question for a couple of reasons. 0:03:50.080 --> 0:03:52.720 First of all, you know, as you both know, China 0:03:52.800 --> 0:03:56.120 is a very heavily export dependent economy. The pattern of 0:03:56.160 --> 0:03:59.000 exports has changed a little bit since the first trade 0:03:59.040 --> 0:04:00.880 war with Trump, but they still depend a lot on 0:04:00.920 --> 0:04:03.600 the US market directly and indirectly, so there's a clear 0:04:03.640 --> 0:04:08.320 direct cost there. And also, the government has been struggling 0:04:08.640 --> 0:04:13.240 for the last year and a half to revive growth 0:04:13.280 --> 0:04:15.920 that by their standards was very sluggish. So why would 0:04:15.960 --> 0:04:20.359 you take on an additional, not necessarily required hit to 0:04:20.400 --> 0:04:23.120 the economy at this time when you're struggling. So it's 0:04:23.200 --> 0:04:27.520 very good question. I think the basic answer is number one, 0:04:28.480 --> 0:04:30.960 because of the first trade war in the first Trump 0:04:31.000 --> 0:04:35.760 administration and the subsequent campaign of export controls and technology 0:04:35.760 --> 0:04:39.440 constraints by the Biden administration, they've been kind of girding 0:04:39.480 --> 0:04:43.279 themselves for a long time for more self sufficiency, to 0:04:43.400 --> 0:04:47.120 insulate themselves against external shocks. So there's a kind of 0:04:47.160 --> 0:04:51.160 a baseline of confidence that they can take a lot 0:04:51.200 --> 0:04:54.240 of pounding and they'll still be okay. But then I 0:04:54.279 --> 0:04:57.839 think the specific reason why they alone, basically of all 0:04:57.839 --> 0:05:02.840 countries in the world, chose to retaliate against the Liberation 0:05:02.960 --> 0:05:07.440 Day tariffs was they were really mad. This is very 0:05:07.480 --> 0:05:09.599 visible to me. When I was in last and Bidjing 0:05:09.640 --> 0:05:14.160 in late March, I got a lot of comments from 0:05:14.200 --> 0:05:18.400 people about basically how the Chinese had been trying since 0:05:18.440 --> 0:05:21.480 the beginning of the year before Trump was inaugurated to 0:05:21.480 --> 0:05:25.159 get messages to him to kind of lay out, you know, 0:05:25.200 --> 0:05:27.479 make it clear that they were interested in talking and 0:05:27.520 --> 0:05:29.719 suggest some things that could be on the agenda, etc. 0:05:30.640 --> 0:05:32.719 Asking for who's the person that we should talk to, 0:05:33.080 --> 0:05:35.200 and they just hit a stone wall. Basically, they were 0:05:35.279 --> 0:05:38.839 unable to establish contact with anyone in the Trump administration 0:05:38.880 --> 0:05:41.680 who would tell them anything, and instead what they got 0:05:41.839 --> 0:05:45.240 was twenty percent tariffs, remember, in February and January, on 0:05:45.320 --> 0:05:48.679 the grounds that they hadn't done enough to control fentanyl flows, 0:05:49.279 --> 0:05:51.240 which they were also mad about, because they'd spend a 0:05:51.279 --> 0:05:54.279 lot of time in last year negotiating an agreement with 0:05:54.320 --> 0:05:58.039 the Biden administration, which they complied with, which made a 0:05:58.080 --> 0:06:01.800 real dent in the export of fentanyl precursors out of China. 0:06:01.839 --> 0:06:03.919 It was not complete but they had really made a 0:06:04.000 --> 0:06:08.680 serious effort. So from their standpoint, they'd been trying to 0:06:08.800 --> 0:06:11.680 open a conversation and the door had been shut in 0:06:11.720 --> 0:06:14.480 their face time and time again, and they'd just been 0:06:14.560 --> 0:06:18.479 whacked with stuff that they thought was completely unfair. So 0:06:18.680 --> 0:06:22.680 I think they were just kind of fed up. They 0:06:22.720 --> 0:06:25.200 had a baseline sense of security that if we hit back, 0:06:25.360 --> 0:06:27.279 we know it's going to be bad, but we'll be 0:06:27.320 --> 0:06:30.040 able to take it. Then. I think the other consideration 0:06:30.160 --> 0:06:34.320 was essentially political, which is that, you know, even if 0:06:34.320 --> 0:06:36.960 they hadn't retaliated, they were still facing tariffs of over 0:06:37.000 --> 0:06:39.840 sixty percent, so no matter what they did, it was 0:06:39.880 --> 0:06:42.280 going to be bad. So they had to have a 0:06:42.320 --> 0:06:45.280 story to tell their people, what are we doing about 0:06:45.279 --> 0:06:49.480 this bad thing? And it's a lot easier to mobilize 0:06:49.480 --> 0:06:53.920 domestic support if you're standing tall and pushing back, which 0:06:54.080 --> 0:06:56.160 actually is you know, it's like what Mark Karney did 0:06:56.160 --> 0:06:58.479 in Canada. It's how he won that election was by 0:06:58.880 --> 0:07:01.200 being the guy who pushed back against the so called 0:07:01.240 --> 0:07:04.479 bolay So I think it was a combination of frustration, 0:07:05.040 --> 0:07:07.479 a sense of security that they could outlast the US, 0:07:07.480 --> 0:07:09.520 and war of economictrician and in a sense that this 0:07:09.640 --> 0:07:12.640 was the best way to get people in China on 0:07:12.680 --> 0:07:14.120 board for what was going to be a tough time 0:07:14.160 --> 0:07:14.640 no matter what. 0:07:15.320 --> 0:07:19.400 Right, So, even in a one party state, there's politics, 0:07:19.480 --> 0:07:24.360 and there's the requirement to maintain domestic credibility and so forth. 0:07:24.600 --> 0:07:27.360 You know, this actually gets to something I've wondered about 0:07:27.440 --> 0:07:31.320 for a long time. Rhetoric that you hear from Chinese 0:07:31.320 --> 0:07:34.480 officials will often talk about their very long history, going 0:07:34.520 --> 0:07:37.760 back thousands of years, and then Americans will parrot that 0:07:37.840 --> 0:07:40.240 and sometimes say it's like, well, you know, they have 0:07:40.360 --> 0:07:42.320 history going back a long time and they suffered a 0:07:42.360 --> 0:07:46.200 century of humiliation and etc. How real is that in 0:07:46.280 --> 0:07:49.000 the sense of like, it's a government that doesn't want 0:07:49.040 --> 0:07:51.360 to see unemployment go up in the short term, et cetera. 0:07:51.920 --> 0:07:55.440 I think many Americans have really internalized this idea of 0:07:55.760 --> 0:07:58.000 they think really long term, they think in century, if 0:07:58.000 --> 0:08:00.240 they think in millennia. 0:08:00.000 --> 0:08:00.360 That's true. 0:08:00.400 --> 0:08:02.080 How should we think about some of this, Righttoray? Yeah, 0:08:02.080 --> 0:08:03.840 it's sort of half true and half not true. So 0:08:03.920 --> 0:08:06.560 you know, I've been looking at the Chinese economy for 0:08:06.560 --> 0:08:10.360 the last thirty five years, basically, and I can tell 0:08:10.400 --> 0:08:13.880 you there's plenty of short termism and emergency thinking and 0:08:13.920 --> 0:08:17.520 ignoring problems until they catastrophically become too bad, and then 0:08:17.520 --> 0:08:22.000 scrambling to come with solutions. So underneath this veneer, there's 0:08:22.120 --> 0:08:26.560 plenty of chaos, but there are I think a few 0:08:26.560 --> 0:08:28.160 things that are true about that. So, first of all, 0:08:28.160 --> 0:08:31.640 this century of humiliation idea that is number one. It's 0:08:31.680 --> 0:08:34.080 something that is played up by the Chinese educational systems, 0:08:34.120 --> 0:08:38.520 has drummed into people starting an elementary school. That's part 0:08:38.559 --> 0:08:42.480 of the nationalist narrative that the CCP has used for. 0:08:42.440 --> 0:08:45.000 A long time. But I think it's important to recognize 0:08:45.040 --> 0:08:46.960 that this is not just a communist party thing. This 0:08:47.040 --> 0:08:51.319 is basically Chinese elites of whatever stripe since the mid 0:08:51.400 --> 0:08:55.080 nineteenth century have been really distressed at the loss of 0:08:55.160 --> 0:08:57.880 standing that China has achieved in the world. I mean, 0:08:57.960 --> 0:09:00.400 you know, up until the early nineteenth century, it was 0:09:00.480 --> 0:09:04.080 undisputedly this great empire, and people within China had the 0:09:04.120 --> 0:09:07.240 sense of being part of a great global power, and 0:09:07.280 --> 0:09:09.120 then that was all taken away and they had a 0:09:09.160 --> 0:09:13.560 pretty catastrophic hundred years of civil war and famine and 0:09:13.640 --> 0:09:16.400 all kinds of stuff. So it has been a theme 0:09:16.559 --> 0:09:21.040 of Chinese elite since the eighteen forties, that they have 0:09:21.160 --> 0:09:26.439 to rebuild the nation, acquire the technological means to stand 0:09:26.480 --> 0:09:28.520 on an even footing with the West, and so forth. 0:09:29.120 --> 0:09:31.560 And the current regime is just the one that has 0:09:31.559 --> 0:09:35.520 been most effective at sort of realizing that vision. But 0:09:35.559 --> 0:09:39.080 if you changed the regime tomorrow, whatever came in its 0:09:39.080 --> 0:09:43.280 place would have the same I think underlying ambitions. So that, 0:09:43.440 --> 0:09:45.920 I would say, is a common theme. I think. The 0:09:46.000 --> 0:09:48.400 other thing that is, I don't I'm not a real 0:09:48.559 --> 0:09:51.560 buyer in the super long term thinking thing. But you know, 0:09:51.559 --> 0:09:54.080 if you look at Chijinping's utterances, he took over in 0:09:54.160 --> 0:09:58.200 twenty twelve, and he started laying out some pretty long 0:09:58.280 --> 0:10:02.600 term stuff right away. He had these various goals that 0:10:02.679 --> 0:10:05.840 stretched out to twenty thirty five and twenty forty nine, 0:10:05.880 --> 0:10:07.960 which is one hundredth anniversary of the Communist Party, and 0:10:07.960 --> 0:10:11.360 so forth. And so there is an ability of the 0:10:11.520 --> 0:10:15.000 Chinese state, because they don't have to face elections to 0:10:15.280 --> 0:10:19.280 organize kind of strategic plans that last a little bit 0:10:19.320 --> 0:10:20.679 longer than would typically be. 0:10:21.080 --> 0:10:23.239 The case, longer than four years, certainly. 0:10:23.160 --> 0:10:24.839 Longer than four years. So a good example it's made 0:10:24.840 --> 0:10:28.240 in China twenty twenty five which is their Industrial Policy Idea, 0:10:28.679 --> 0:10:31.520 which was released in twenty fifteen. It builds on previous 0:10:31.559 --> 0:10:34.280 policies that they had. It was not some completely new thing, 0:10:34.760 --> 0:10:36.760 but they set out some ten year goals for how 0:10:36.800 --> 0:10:38.600 where we want to be roughly in a whole bunch 0:10:38.600 --> 0:10:41.680 of technologies, and the reality is they did a pretty 0:10:41.679 --> 0:10:44.720 good job on a lot of them. So the planning 0:10:44.920 --> 0:10:47.480 is not I think there's often a mystique about it, 0:10:47.920 --> 0:10:53.719 but they are able sometimes to sort of point the 0:10:53.760 --> 0:10:57.440 ship in a particular direction and then get a lot 0:10:57.440 --> 0:11:00.920 of people in society on board with steering that ship 0:11:00.920 --> 0:11:01.640 where they want to go. 0:11:02.280 --> 0:11:05.560 So speaking of long term strategies, one thing that is 0:11:05.640 --> 0:11:09.200 different in this current bout of trade tension. We could 0:11:09.200 --> 0:11:11.080 probably call it a trade war at this point. 0:11:11.120 --> 0:11:13.520 I think that's always it's a complete embargo except for 0:11:13.960 --> 0:11:15.760 a few things that we've you know, each side is 0:11:15.840 --> 0:11:18.439 exempted about twenty twenty five percent of what the import. 0:11:18.440 --> 0:11:20.920 But yeah, otherwise, effectively it's an embargo. 0:11:21.160 --> 0:11:23.440 I definitely want to ask you about those exemptions too. 0:11:23.480 --> 0:11:26.040 But one thing that's different about this trade war to 0:11:26.520 --> 0:11:29.200 the tensions that we saw in the first Trump administration 0:11:29.960 --> 0:11:34.840 is that China has basically had some practice with increased tariffs, 0:11:35.000 --> 0:11:38.240 and so what we saw in sort of twenty sixteen 0:11:38.320 --> 0:11:41.600 twenty eighteen was China just moved a bunch of production 0:11:41.840 --> 0:11:45.120 over the border to places like Vietnam, basically re routed 0:11:45.160 --> 0:11:47.920 a bunch of things to get around the tariffs. Is 0:11:47.920 --> 0:11:52.400 that an option this time around, given that Trump seems 0:11:52.400 --> 0:11:55.559 to be cracking down on pretty much all of America's 0:11:55.559 --> 0:11:57.200 trading partners all at the same time. 0:11:57.360 --> 0:11:59.360 Oh, it's totally an option, and I think it will 0:11:59.400 --> 0:12:03.080 definitely have And so a couple things here. So, first 0:12:03.080 --> 0:12:05.680 of all, you can describe that as kind of a 0:12:05.720 --> 0:12:09.360 government strategy, but actually it was largely just companies on 0:12:09.400 --> 0:12:11.839 their own deciding. So, like the first companies that did 0:12:11.840 --> 0:12:14.640 this were the solar panel makers who got whacked by 0:12:14.640 --> 0:12:18.520 tariffs in the Obama administration twenty twelve, very high ones, 0:12:19.200 --> 0:12:21.960 and so they immediately moved a lot of their production 0:12:22.040 --> 0:12:24.280 to Southeast Asia. It wasn't the government saying please do this. 0:12:24.320 --> 0:12:26.240 It was just they said, well, we want to sell 0:12:26.280 --> 0:12:28.360 to the US. We can't do it from here. Where 0:12:28.360 --> 0:12:30.280 do we go? Oh, we can go across the border 0:12:30.320 --> 0:12:34.120 and it'll be fine. And it was now they've diversified 0:12:35.040 --> 0:12:36.600 they used to be just in a couple of countries, 0:12:36.600 --> 0:12:38.959 and now they're in a larger number of countries. It's 0:12:39.080 --> 0:12:42.160 if you try to go after this stuff, it's like 0:12:42.200 --> 0:12:45.240 playing a game of whack themole. The other thing I 0:12:45.280 --> 0:12:48.040 would observe on that, just beyond the solar people, is 0:12:48.840 --> 0:12:50.880 China is now at a stage of development where they 0:12:50.880 --> 0:12:52.800 have very sophisticated companies that are very good at what 0:12:52.800 --> 0:12:56.320 they're doing, increasingly have markets in a wide range of 0:12:56.360 --> 0:12:59.800 places around the world. And what do companies do when 0:12:59.840 --> 0:13:02.760 they are in that situation, be they from China or Japan, 0:13:02.880 --> 0:13:07.280 or the United States or Germany, They invest abroad, They internationalized. 0:13:07.320 --> 0:13:10.800 And so what we're in right now is kind of 0:13:10.840 --> 0:13:14.240 act one, I would say, of what is clearly going 0:13:14.320 --> 0:13:16.880 to be a very long process of Chinese companies turning 0:13:16.880 --> 0:13:20.880 themselves into multinationals, just like the companies of every other 0:13:20.920 --> 0:13:23.600 industrialized country have done. And so they don't need the 0:13:23.600 --> 0:13:27.959 government to tell them do this. They have their own reasons, 0:13:28.160 --> 0:13:31.480 not just teriff avoidance, but to be closer to different markets, 0:13:31.480 --> 0:13:35.280 et cetera. So that process, I think is just going 0:13:35.320 --> 0:13:38.040 to continue because it has many many drivers, not just 0:13:38.880 --> 0:13:40.320 teriff avoidance. 0:13:40.720 --> 0:13:44.040 Right and you know, we've certainly talked about bid setting 0:13:44.160 --> 0:13:46.679 up auto facilities all over the world. They're in Brazil, 0:13:46.760 --> 0:13:49.839 they're in Hungary, right, they're elsewhere. But it also, like, 0:13:50.040 --> 0:13:52.800 I mean, this is one of the things that I 0:13:52.840 --> 0:13:56.280 guess confuses me about the US administration policy, you know, 0:13:56.320 --> 0:13:58.240 all these other It's like, oh, we're going to like 0:13:58.280 --> 0:14:01.640 split off Vietnam or gonna make it like it's hard 0:14:01.679 --> 0:14:04.520 for me to imagine that given the amount of cross 0:14:04.520 --> 0:14:07.520 border investment that we've seen over the last years and years. 0:14:07.600 --> 0:14:10.920 Right, well, okay, yeah, basically I would describe it. There's 0:14:10.960 --> 0:14:14.160 an economics term of art for that strategy. It's looney. 0:14:15.240 --> 0:14:17.680 So but this gives me an opportunity, I guess to 0:14:17.679 --> 0:14:19.520 make a little bit of a comment on what I 0:14:19.560 --> 0:14:22.960 see about what's coming out of the Trump administration, Okay, 0:14:22.960 --> 0:14:27.320 which is basically chaos. Right. There is not a clear strategy, 0:14:27.320 --> 0:14:29.760 There is not a clear policy. What you have basically 0:14:29.840 --> 0:14:33.720 is Trump's impulses, which are number one, I want to 0:14:33.760 --> 0:14:37.160 sort of demonstrate dominance over everyone and I want them 0:14:37.160 --> 0:14:40.920 to exhibit difference. And number two, I really like tariffs 0:14:40.960 --> 0:14:43.600 for some strange reason that I don't think any of 0:14:43.680 --> 0:14:45.760 us understand but he really likes them. But he also 0:14:45.880 --> 0:14:48.880 likes them specifically because they are a tool that as 0:14:48.880 --> 0:14:50.560 the president of the United States, he is the legal 0:14:50.560 --> 0:14:54.640 authority to use without restraint. So if he wants to 0:14:54.720 --> 0:14:56.480 hurt people, he doesn't have to go to Congress, he 0:14:56.480 --> 0:14:58.680 doesn't have to ask anyone in Congress. He just does it. 0:14:59.320 --> 0:15:02.000 So it's very usef for him. And I've found a 0:15:02.000 --> 0:15:04.240 lot of the commentary over the last couple of months 0:15:04.280 --> 0:15:08.560 trying to explain the rational strategy behind this to be 0:15:08.600 --> 0:15:13.120 completely off target because it isn't. And various people in 0:15:13.160 --> 0:15:16.440 the administration, like Scott Bessant, would like there to be 0:15:16.520 --> 0:15:20.360 a strategy, and they are desperately trying to corral the 0:15:20.440 --> 0:15:23.120 stuff into the semblance of a strategy, but they have 0:15:23.200 --> 0:15:27.160 to improvise. So that's sort of my general comment on that. 0:15:27.280 --> 0:15:30.920 And then specifically in the question is does it work. No, 0:15:31.240 --> 0:15:34.480 The reality is there are now I believe one hundred 0:15:34.560 --> 0:15:37.640 and forty countries in the world that trade more with 0:15:37.960 --> 0:15:41.720 China than with the United States. China is now the 0:15:41.800 --> 0:15:45.240 number two source in the world, behind the United States 0:15:45.360 --> 0:15:50.960 of direct investment, and it's growing its economic relationships with 0:15:51.000 --> 0:15:54.680 many countries, including in the Latin America are much deeper 0:15:54.720 --> 0:15:57.720 than those of the United States, let alone Southeast Asia, 0:15:57.720 --> 0:16:01.400 where their economies are completely tied to China. So there's 0:16:01.520 --> 0:16:04.480 no way, no way that any sane leader of any 0:16:04.520 --> 0:16:06.880 of these countries would sign on to a deal where 0:16:06.880 --> 0:16:09.120 they would say, oh, we'll get our teriffs on the 0:16:09.200 --> 0:16:13.080 US lowered from ten percent to five percent in exchange 0:16:13.080 --> 0:16:15.960 for which we have to sacrifice our principal economic relationship. 0:16:16.000 --> 0:16:16.760 It's not going to happen. 0:16:32.400 --> 0:16:35.960 So you mentioned the exemptions earlier, and we've also seen 0:16:36.040 --> 0:16:40.680 some carve outs for specific things like electronics imports, and 0:16:40.920 --> 0:16:43.320 at this point, I'm actually finding it kind of difficult 0:16:43.400 --> 0:16:46.640 to keep track of what's delayed and what's exempt just 0:16:46.680 --> 0:16:49.960 because it changes so often. But my question is how 0:16:50.040 --> 0:16:53.520 much signal should we take away from all those exemptions. 0:16:53.560 --> 0:16:56.960 Do they show that there's potentially a path forward to 0:16:57.000 --> 0:16:59.920 a US China deal or is it just Trump trying 0:16:59.920 --> 0:17:04.040 to retroactively protect some pretty important industries. 0:17:04.480 --> 0:17:06.919 Yeah, it's more of the latter, you know. And remember 0:17:07.040 --> 0:17:11.560 there's exemptions on both sides. So Trump exempted cell phones 0:17:11.640 --> 0:17:15.240 and most consumer electronics basically because he was told that 0:17:15.359 --> 0:17:19.040 you cannot allow the prices of iPhones to double, people 0:17:19.080 --> 0:17:23.040 will revolt, and he took that seriously. So that was 0:17:23.119 --> 0:17:27.720 clearly a political move, just to alleviate the domestic political 0:17:27.840 --> 0:17:31.280 cost of this action. And similarly, if you look at 0:17:31.280 --> 0:17:34.320 what the Chinese did, they exempted a lot of imports 0:17:34.440 --> 0:17:38.040 like semiconductors and some key technology inputs. Despite all of 0:17:38.080 --> 0:17:41.600 their progress, they're still pretty dependent on global supply chains 0:17:41.600 --> 0:17:43.720 outside of China for a lot of stuff that goes 0:17:43.720 --> 0:17:46.879 into their tech ecosystem, and they could not afford to 0:17:46.920 --> 0:17:51.000 have this stuff cost a lot more. So I think 0:17:51.040 --> 0:17:55.080 in both cases it's roughly twenty percent or a bit 0:17:55.119 --> 0:17:58.719 more that has been exempted. As you said, it's very 0:17:58.720 --> 0:18:02.600 hard to know exactly when this is going into effect, 0:18:02.640 --> 0:18:04.800 and blah blah blah. But both sides have sort of 0:18:04.800 --> 0:18:07.800 picked out the parts of their economies which are most 0:18:07.920 --> 0:18:10.840 vulnerable and said, okay, you don't have to take the pain. 0:18:11.240 --> 0:18:13.840 But it doesn't tell us anything about It's not like 0:18:13.920 --> 0:18:16.040 both sides are signaling to each other, hey, if you 0:18:16.080 --> 0:18:18.240 lower your tariffs, all lower mine, and then maybe we 0:18:18.240 --> 0:18:20.720 can get somewhere. They're just doing what they need to 0:18:20.720 --> 0:18:21.840 do to protect themselves. 0:18:22.400 --> 0:18:26.600 So Trump recently said that for gifts that kids could 0:18:26.600 --> 0:18:29.320 maybe have two dolls instead of thirty dollars. And I 0:18:29.400 --> 0:18:34.479 completely agree. I spent this weekend taking out a bunch 0:18:34.600 --> 0:18:39.840 of random plastic garbage, broken toys, etc. For my children's room, 0:18:40.280 --> 0:18:43.280 five trash bags, and I've barely made a dent in 0:18:43.359 --> 0:18:46.480 what they have. So I'm completely in agreement on that point. 0:18:46.800 --> 0:18:50.080 All that being said, two questions about that. So let's 0:18:50.080 --> 0:18:56.399 say there's a major reduction in buying plastic stuff from China, 0:18:56.560 --> 0:19:00.439 low end stuff. A. Are we already seeing real in 0:19:00.520 --> 0:19:03.040 China un parts of the economy from these tariffs that's 0:19:03.240 --> 0:19:06.560 visible from what you're looking at. And B how much 0:19:06.560 --> 0:19:09.399 of that stuff is still in China as opposed to 0:19:09.600 --> 0:19:12.439 that's the low margin stuff that you probably quickly have 0:19:12.560 --> 0:19:17.400 it some cheaper destination. How important is stuff, the cheap 0:19:17.400 --> 0:19:19.680 stuff to China's economy these days? 0:19:20.040 --> 0:19:23.480 You know, it's somewhat important, you know, for employment purposes, 0:19:23.480 --> 0:19:25.560 because a lot of that stuff is fairly labor intensive 0:19:26.240 --> 0:19:29.600 Tho's lower end exports, but it certainly is not very 0:19:29.600 --> 0:19:32.800 relevant from the standpoint of Jinping's grand strategic vision as 0:19:32.920 --> 0:19:36.800 China's technology superpower. So and if you look in terms 0:19:36.840 --> 0:19:40.200 of like total value of what they export. The stuff 0:19:40.200 --> 0:19:44.000 that goes into Walmart is significant, but a shrinking portion 0:19:44.119 --> 0:19:47.040 of the total. They're moving up the value chain pretty fast. 0:19:47.119 --> 0:19:50.040 So you are starting to see some softness in the 0:19:50.480 --> 0:19:54.159 industrial and manufacturing indicators. I mean, you've had an employment 0:19:54.200 --> 0:19:57.880 a pretty weak employment market since the end of COVID 0:19:57.960 --> 0:20:01.280 basically that they've been struggling to address. So this is 0:20:01.359 --> 0:20:03.359 going to have some impact. You know, the Chinese export 0:20:03.440 --> 0:20:06.520 numbers have still been quite strong. Most people think that's 0:20:06.560 --> 0:20:09.960 because there's been some front loading, because people are anticipating tariffs, 0:20:10.480 --> 0:20:14.159 and we're expecting significant weakness, you know, in the coming months. 0:20:14.200 --> 0:20:17.480 I think that will happen. It will hurt, but I 0:20:17.560 --> 0:20:20.119 don't think any of that is going to hurt enough 0:20:20.320 --> 0:20:22.520 for China to feel like it has to make a move. 0:20:22.680 --> 0:20:26.000 They've clearly signaled Trump wants to have a deal. He 0:20:26.040 --> 0:20:28.200 has to make the first move. He has to initiate 0:20:28.320 --> 0:20:31.760 show some good faith. They've laid out their position, they're 0:20:31.800 --> 0:20:34.320 waiting for him to pick up the phone and call basically. 0:20:34.880 --> 0:20:38.159 So yeah, this is going to cause some real difficulties, 0:20:38.200 --> 0:20:39.879 and I think they're going to have a real challenge 0:20:39.920 --> 0:20:42.239 meeting their growth target this year. If this goes on 0:20:42.280 --> 0:20:45.520 for much longer, but I think they're willing to wait 0:20:45.560 --> 0:20:45.880 it out. 0:20:46.200 --> 0:20:49.720 So speaking of economic transformation, in addition to being a 0:20:49.760 --> 0:20:53.600 bundle of contradictions, the other thing that has existed for 0:20:53.720 --> 0:20:56.680 as long as I've been I guess covering China from 0:20:56.720 --> 0:21:01.200 an economic perspective is this idea that the economy needs 0:21:01.200 --> 0:21:06.200 to rebalance towards consumption. So Chinese people save too much 0:21:06.359 --> 0:21:08.680 and we really need to get them to spend on 0:21:08.880 --> 0:21:13.400 our own domestically manufactured goods, and that will help resolve 0:21:13.480 --> 0:21:16.960 some of the tensions in the economy. What's your sense 0:21:17.160 --> 0:21:20.600 of how much Chinese people might actually be able to 0:21:20.680 --> 0:21:24.760 boost their own consumption right now to offset the trade war. 0:21:25.359 --> 0:21:29.840 Oh, there's some, not a lot. So just to back 0:21:29.920 --> 0:21:32.000 up a little bit on that. So, I think it's 0:21:32.040 --> 0:21:35.119 important to clarify that when people talk about this project 0:21:35.320 --> 0:21:39.800 of rebalancing the economy from investment consumption, this has been 0:21:39.800 --> 0:21:44.840 a project of economists, mostly outside China. It has never 0:21:44.880 --> 0:21:48.119 been a project of the Chinese government itself. They have 0:21:48.280 --> 0:21:53.440 never really forcefully and clearly stated that it is their 0:21:53.440 --> 0:21:57.840 objective to do that. They've put out various policies where 0:21:57.840 --> 0:22:01.040 they say, yeah, we want incomes to rise fast. We 0:22:01.080 --> 0:22:04.639 would like there to be a stronger services consumption and 0:22:04.680 --> 0:22:08.520 so forth, But they have never said that, we think 0:22:08.560 --> 0:22:11.240 we should fundamental out in the shop. Well, they haven't 0:22:11.240 --> 0:22:12.800 said that. But the other thing is, I think it's 0:22:12.840 --> 0:22:15.760