1 00:00:10,400 --> 00:00:13,680 Speaker 1: Hello, and welcome to another episode of the Authoughts Podcast. 2 00:00:13,720 --> 00:00:17,120 Speaker 1: I'm Tracy Alloway and I'm Jill Whysantal. Joe, can you 3 00:00:17,200 --> 00:00:19,720 Speaker 1: remember the last time we had Brad Setser on. 4 00:00:20,560 --> 00:00:22,599 Speaker 2: It's been too long. I don't know the exact time. 5 00:00:22,720 --> 00:00:25,400 Speaker 2: I think we had it on once since the pandemic, 6 00:00:25,480 --> 00:00:29,200 Speaker 2: but obviously he did his stint at the administration, so 7 00:00:29,240 --> 00:00:31,640 Speaker 2: it sort of like disappeared from public view for a while, 8 00:00:32,120 --> 00:00:33,960 Speaker 2: and it's just like, it's been too long without a 9 00:00:34,000 --> 00:00:35,000 Speaker 2: Brad sets Or episode. 10 00:00:35,040 --> 00:00:37,440 Speaker 1: Well, you are absolutely right that it has been too long, 11 00:00:37,960 --> 00:00:39,720 Speaker 1: But the last time we had him on the show 12 00:00:39,840 --> 00:00:42,080 Speaker 1: was it was actually April twenty twenty, so it's sort 13 00:00:42,120 --> 00:00:46,000 Speaker 1: of firmly in the death right there right at the 14 00:00:46,680 --> 00:00:50,080 Speaker 1: start of the pandemic economic experience. 15 00:00:50,120 --> 00:00:51,600 Speaker 2: This over three years ago, now. 16 00:00:51,520 --> 00:00:55,600 Speaker 1: I know, and a lot has happened since then. As 17 00:00:55,640 --> 00:00:59,360 Speaker 1: you mentioned, he did leave the Council on Foreign Relations 18 00:00:59,400 --> 00:01:03,400 Speaker 1: CFR to join the Biden administration as a trade representative. 19 00:01:03,400 --> 00:01:06,319 Speaker 1: He's since come back, which means we get to enjoy 20 00:01:06,480 --> 00:01:11,080 Speaker 1: his blog posts again, his tweeting, but also setting aside 21 00:01:11,200 --> 00:01:15,520 Speaker 1: Brad's personal experience over the past three years, there's just 22 00:01:15,560 --> 00:01:19,240 Speaker 1: a lot that's happened with global trade, with the economy, 23 00:01:20,160 --> 00:01:23,360 Speaker 1: and the weird thing is a lot's happened, but a 24 00:01:23,400 --> 00:01:25,720 Speaker 1: lot has kind of stayed the same as well well. 25 00:01:25,880 --> 00:01:29,440 Speaker 2: So it's really well put because I think that, you know, 26 00:01:29,560 --> 00:01:33,040 Speaker 2: one of the expectations during probably the last time we 27 00:01:33,120 --> 00:01:35,840 Speaker 2: talked in April twenty twenty or middle of twenty twenty 28 00:01:35,920 --> 00:01:38,880 Speaker 2: years like everyone's like, oh, near shoring or you know, 29 00:01:39,040 --> 00:01:42,560 Speaker 2: great separation or and I don't think that really is 30 00:01:42,640 --> 00:01:45,240 Speaker 2: the story. So on some level, I don't, you know, 31 00:01:45,280 --> 00:01:47,720 Speaker 2: I do think maybe at the margins, like we're still 32 00:01:47,760 --> 00:01:50,720 Speaker 2: trading a lot with China, right for all of the clock, 33 00:01:50,760 --> 00:01:53,160 Speaker 2: We're still trading a lot with China's part. But it 34 00:01:53,200 --> 00:01:56,600 Speaker 2: does feel like on the other hand, big things are 35 00:01:56,720 --> 00:02:00,440 Speaker 2: changing with the nature of Chinese exports, the auto industry, 36 00:02:00,480 --> 00:02:03,880 Speaker 2: and then all of these things with like EVS and 37 00:02:04,040 --> 00:02:06,520 Speaker 2: the Inflationial Reduction Act and the Chips Act. So big 38 00:02:06,560 --> 00:02:09,800 Speaker 2: things are happening on the global trade level, tensions between 39 00:02:09,800 --> 00:02:12,040 Speaker 2: the US and the EU. Big things are happening on 40 00:02:12,080 --> 00:02:14,160 Speaker 2: the global trade level, even if some of the immediate 41 00:02:14,240 --> 00:02:18,840 Speaker 2: predictions didn't exactly like unfold yet how people thought back then. 42 00:02:19,000 --> 00:02:21,079 Speaker 1: Yeah, I mean the US is still running a current 43 00:02:21,080 --> 00:02:24,679 Speaker 1: account deficit, China is still running a current account surplus. 44 00:02:24,720 --> 00:02:28,559 Speaker 1: But things are sort of changing within those broad categories. 45 00:02:28,639 --> 00:02:31,320 Speaker 1: So we need to check in with Brad. We need 46 00:02:31,360 --> 00:02:34,480 Speaker 1: to get his take on stuff that has changed or 47 00:02:34,520 --> 00:02:37,120 Speaker 1: hasn't changed over the past three years in the global 48 00:02:37,120 --> 00:02:40,560 Speaker 1: economy and global trade, in the balance of payments. And 49 00:02:40,600 --> 00:02:42,760 Speaker 1: I'm very pleased to say that he's going to join 50 00:02:42,840 --> 00:02:46,120 Speaker 1: us now. Brad Setzer, Senior Fellow at the Council on 51 00:02:46,200 --> 00:02:48,480 Speaker 1: Foreign Relations. It's so good to have you back on 52 00:02:48,520 --> 00:02:48,880 Speaker 1: the show. 53 00:02:49,840 --> 00:02:50,920 Speaker 3: Thanks for bringing me back. 54 00:02:51,240 --> 00:02:55,200 Speaker 1: Setting aside some of the job change that you had, 55 00:02:55,720 --> 00:02:58,480 Speaker 1: what's been your impression of the past three years, Like 56 00:02:58,600 --> 00:03:00,840 Speaker 1: broad stroke has happened? 57 00:03:01,800 --> 00:03:05,440 Speaker 3: Where to begin? I mean, the world economy did didn't 58 00:03:05,440 --> 00:03:08,000 Speaker 3: completely come to a halt in the first few months 59 00:03:08,000 --> 00:03:13,560 Speaker 3: of the pandemic, but it did sort of stall intentionally 60 00:03:14,320 --> 00:03:19,280 Speaker 3: enormous stimulus packages or pat or passed. There was a 61 00:03:19,320 --> 00:03:23,639 Speaker 3: real effort to protect people's income during the pandemic induced 62 00:03:23,840 --> 00:03:26,919 Speaker 3: slow down, and then I think, you know, a series 63 00:03:27,120 --> 00:03:32,720 Speaker 3: of shocks have unfolded after that. I don't think when 64 00:03:32,720 --> 00:03:36,560 Speaker 3: the pandemic initially struck, people realized there was going to 65 00:03:36,600 --> 00:03:39,840 Speaker 3: be this enormous shift in the composition of demand towards 66 00:03:39,880 --> 00:03:44,480 Speaker 3: goods and away from services, which really was quite enormous, 67 00:03:44,520 --> 00:03:48,240 Speaker 3: and it gummed up global trade routes for a while. 68 00:03:48,240 --> 00:03:50,760 Speaker 3: There was just more demand for goods than there was capacity, 69 00:03:51,960 --> 00:03:54,720 Speaker 3: even in places where we thought there was tons of capacity. 70 00:03:56,560 --> 00:03:59,680 Speaker 3: And then you have the shocks from Russia's invasion and 71 00:03:59,680 --> 00:04:04,520 Speaker 3: oil markets, the closing of the pipelines to Europe. So 72 00:04:04,560 --> 00:04:07,880 Speaker 3: you know, there have been enormous shifts. But you know, 73 00:04:07,920 --> 00:04:10,720 Speaker 3: as you as you alluded to the basic some of 74 00:04:10,760 --> 00:04:16,240 Speaker 3: the basic patterns of the global economy didn't immediately change, 75 00:04:16,680 --> 00:04:20,080 Speaker 3: or in some cases they reasserted themselves more strongly. So 76 00:04:20,160 --> 00:04:22,480 Speaker 3: you know, China's trades are plus is way bigger than 77 00:04:22,480 --> 00:04:25,960 Speaker 3: it was before the pandemic. The US trade deficit is 78 00:04:26,200 --> 00:04:32,240 Speaker 3: slightly bigger. Some of the trajectories that were probably emerging 79 00:04:32,920 --> 00:04:37,240 Speaker 3: even before the pandemic China. China is no longer just 80 00:04:38,080 --> 00:04:41,680 Speaker 3: a location of final assembly. China produces a lot of 81 00:04:41,839 --> 00:04:45,720 Speaker 3: key intermediate goods. It now produces a lot of capital goods. 82 00:04:45,720 --> 00:04:49,080 Speaker 3: It's now producing and exporting a ton of electric vehicles. 83 00:04:49,120 --> 00:04:52,000 Speaker 3: I think some of those trends were quite clear before 84 00:04:52,040 --> 00:04:56,080 Speaker 3: the pandemic, they're now more apparent. And it's also fair 85 00:04:56,120 --> 00:05:00,000 Speaker 3: to say that while while it hasn't changed global trade, 86 00:05:00,640 --> 00:05:05,600 Speaker 3: there is a new concern about weaponizing supply chains that's 87 00:05:05,680 --> 00:05:10,159 Speaker 3: leading to policy chefs that you know, maybe or maybe 88 00:05:10,200 --> 00:05:12,400 Speaker 3: won't have a big future impact. 89 00:05:12,839 --> 00:05:15,760 Speaker 2: So what do you know, Let's talk about China or 90 00:05:15,800 --> 00:05:18,960 Speaker 2: the US China trade relationship. You know, people have talked 91 00:05:18,960 --> 00:05:21,440 Speaker 2: about decoupling, but it doesn't really seem like that it's 92 00:05:21,480 --> 00:05:24,760 Speaker 2: happened or it's happening, but there is this impulse, maybe 93 00:05:24,800 --> 00:05:29,039 Speaker 2: partly for national security reasons, maybe partly for just competitive 94 00:05:29,080 --> 00:05:31,880 Speaker 2: reasons other you know, to change the nature of the relationship. 95 00:05:32,160 --> 00:05:34,440 Speaker 2: How is it different you know here in May twenty 96 00:05:34,520 --> 00:05:38,200 Speaker 2: twenty three versus say, if we had been talking about 97 00:05:38,200 --> 00:05:41,560 Speaker 2: this US China relationship in May twenty nineteen. 98 00:05:42,200 --> 00:05:45,560 Speaker 3: Well, May twenty nineteen, we would have been debating whether 99 00:05:45,600 --> 00:05:48,159 Speaker 3: Trump was going to raise tariffs or not raised terrorists. 100 00:05:48,200 --> 00:05:51,640 Speaker 3: Not sure I would have been at the fight over 101 00:05:51,680 --> 00:05:53,200 Speaker 3: tariffs would have been at its peak. I mean, I 102 00:05:53,240 --> 00:05:58,200 Speaker 3: think the biggest difference now is we've largely it's not 103 00:05:58,240 --> 00:06:01,640 Speaker 3: like the tariffs have gone away, but the tariffs didn't 104 00:06:01,760 --> 00:06:05,040 Speaker 3: drive as big as shift in trade as some expected, 105 00:06:07,680 --> 00:06:11,200 Speaker 3: and the tools that are being employed to try to 106 00:06:11,320 --> 00:06:16,839 Speaker 3: change the structure of the relationship have evolved. So, you know, 107 00:06:16,880 --> 00:06:22,480 Speaker 3: the Inflation Reduction Act introduced a set of requirements for 108 00:06:22,520 --> 00:06:26,880 Speaker 3: eligibility for electric vehicle subsidies that have an impact on 109 00:06:27,880 --> 00:06:32,679 Speaker 3: continued use of the Chinese battery critical mineral supply chain. 110 00:06:33,080 --> 00:06:35,159 Speaker 3: None of that would have been on anyone's radar screens 111 00:06:35,200 --> 00:06:38,080 Speaker 3: back in twenty nineteen. You know, evs weren't that big. 112 00:06:38,920 --> 00:06:42,160 Speaker 3: The notion that all critical materials for batteries were processed 113 00:06:42,160 --> 00:06:45,720 Speaker 3: in China wasn't part of common knowledge. Joe Manchin had 114 00:06:45,720 --> 00:06:48,720 Speaker 3: not determined that that was a future national security threat 115 00:06:48,720 --> 00:06:53,320 Speaker 3: for the United States. You know, probably in twenty nineteen, 116 00:06:53,560 --> 00:06:57,200 Speaker 3: it wasn't widely recognized that Intel was falling behind the 117 00:06:57,279 --> 00:07:01,839 Speaker 3: leading edge of semi conductor manufact string technology, and the 118 00:07:01,960 --> 00:07:06,480 Speaker 3: vulnerabilities that were associated with reliance on TSMC weren't kind 119 00:07:06,480 --> 00:07:09,000 Speaker 3: of front and center. Now. I think if you go 120 00:07:09,080 --> 00:07:12,600 Speaker 3: to ask anyone at the NSC, you know, what would 121 00:07:12,640 --> 00:07:18,680 Speaker 3: happen if there were a negative escalation around the Taiwan Straits. 122 00:07:19,760 --> 00:07:22,960 Speaker 3: Their thoughts would go quite quickly, what happens to Semicocter supplies, 123 00:07:23,360 --> 00:07:26,440 Speaker 3: where that would not have been as prominent in people's 124 00:07:26,480 --> 00:07:29,880 Speaker 3: thinking in twenty nineteen about Look, the other thing I 125 00:07:29,960 --> 00:07:33,720 Speaker 3: keep coming back to this, China is exporting a trillion 126 00:07:33,760 --> 00:07:37,360 Speaker 3: dollars more than it was before the pandemic. It's exporting 127 00:07:37,400 --> 00:07:40,720 Speaker 3: a trillion dollars more than it did when Trump started 128 00:07:40,720 --> 00:07:44,880 Speaker 3: his trade war. A whole bunch of large, you know, 129 00:07:44,960 --> 00:07:50,080 Speaker 3: kind of policy measures that were designed to make trade 130 00:07:50,160 --> 00:07:53,560 Speaker 3: less attractive didn't have the effect of making China less 131 00:07:53,600 --> 00:07:58,760 Speaker 3: dependent on trade. Other thing, other forces had a bigger impact, 132 00:07:59,160 --> 00:08:02,400 Speaker 3: the shift towards global demand for good, The fact that 133 00:08:02,400 --> 00:08:05,080 Speaker 3: you know, the Chinese yuan is still basically where it was. 134 00:08:06,520 --> 00:08:07,680 Speaker 3: It depends on what you want to do it, but 135 00:08:07,720 --> 00:08:09,520 Speaker 3: you know, it hasn't had a lot of strength since 136 00:08:09,560 --> 00:08:15,720 Speaker 3: twenty fourteen, the evolution of the competitive of a competitive 137 00:08:15,760 --> 00:08:18,880 Speaker 3: auto industry in China. All these things, in the end 138 00:08:19,040 --> 00:08:23,280 Speaker 3: mattered more whether we were tariffed one third, two thirds, 139 00:08:23,400 --> 00:08:25,880 Speaker 3: or all of our trade with China, which was the 140 00:08:25,920 --> 00:08:26,920 Speaker 3: debate back in twenty. 141 00:08:26,760 --> 00:08:29,120 Speaker 1: Two You know, you mentioned the idea that China is 142 00:08:29,160 --> 00:08:33,280 Speaker 1: still very much dependent on trade, and you see that 143 00:08:33,679 --> 00:08:39,640 Speaker 1: even internally from a policy perspective, we know, for instance, 144 00:08:40,280 --> 00:08:43,280 Speaker 1: the Chinese economy has been a little weaker than it 145 00:08:43,280 --> 00:08:47,839 Speaker 1: has been historically. Recently, they've been experiencing a much lower 146 00:08:47,920 --> 00:08:49,880 Speaker 1: level of inflation than a lot of other places in 147 00:08:49,920 --> 00:08:53,920 Speaker 1: the world, And as part of the policy response, China 148 00:08:54,040 --> 00:09:00,200 Speaker 1: seems to be trying to boost supply side support and capacity, 149 00:09:00,440 --> 00:09:04,880 Speaker 1: which will inevitably just feed into an even bigger trade surplus. 150 00:09:05,400 --> 00:09:09,600 Speaker 1: Despite the stated ambition of trying to build up domestic 151 00:09:09,640 --> 00:09:14,360 Speaker 1: demand shift more to a services led economy, why does 152 00:09:14,400 --> 00:09:18,520 Speaker 1: that transition seem to be so difficult and why does 153 00:09:18,559 --> 00:09:23,800 Speaker 1: it feel like China often falls back on supply side 154 00:09:23,840 --> 00:09:24,880 Speaker 1: support policies. 155 00:09:26,120 --> 00:09:30,920 Speaker 3: Well, at this point, I think my operating hypothesis is 156 00:09:30,920 --> 00:09:35,959 Speaker 3: that President she doesn't really believe in providing direct support 157 00:09:36,000 --> 00:09:41,119 Speaker 3: to households. That would be the simplest, most straightforward explanation 158 00:09:41,280 --> 00:09:44,480 Speaker 3: for why China, in the face of shocks that seem 159 00:09:44,559 --> 00:09:47,559 Speaker 3: to call for direct support for households, has not done 160 00:09:47,559 --> 00:09:51,880 Speaker 3: so the other measure. And people to often talk about 161 00:09:51,960 --> 00:09:55,720 Speaker 3: difficult structural forms, and usually they mean laying people off 162 00:09:55,920 --> 00:10:01,239 Speaker 3: or cutting back on subsidies, But in China, it strangely 163 00:10:01,320 --> 00:10:05,200 Speaker 3: seems to be a very difficult structural reform, to change 164 00:10:05,880 --> 00:10:11,840 Speaker 3: a very regressive system of taxation, move away from very 165 00:10:11,880 --> 00:10:16,640 Speaker 3: hefty contributions organized through the payroll system with a big 166 00:10:16,720 --> 00:10:19,720 Speaker 3: lump sum when you enter the formal labor force, so 167 00:10:19,720 --> 00:10:24,040 Speaker 3: that your marginal tax rate for low income formal work 168 00:10:24,120 --> 00:10:28,160 Speaker 3: is incredibly high, and to shift to a different system 169 00:10:28,200 --> 00:10:32,600 Speaker 3: of tax and a system that provides a better balance 170 00:10:32,640 --> 00:10:35,520 Speaker 3: of revenues between the center and the provinces, and that 171 00:10:36,600 --> 00:10:41,560 Speaker 3: allows more policy support for consumption. You know, demand in 172 00:10:41,640 --> 00:10:44,400 Speaker 3: China was generated through investment, and there's a there's a 173 00:10:44,559 --> 00:10:51,559 Speaker 3: sense in China that handing checks to consumers doesn't generate 174 00:10:51,640 --> 00:10:56,640 Speaker 3: any productive activity, it doesn't generate any any assets, it 175 00:10:56,640 --> 00:11:04,680 Speaker 3: doesn't build anything. Whereas you know, authorizing lending to through 176 00:11:04,679 --> 00:11:08,880 Speaker 3: the state banks to support construction of a lot ice 177 00:11:08,920 --> 00:11:13,959 Speaker 3: of new semiconductor or manufacturing facilities, you're obviously investing. You're 178 00:11:14,000 --> 00:11:19,239 Speaker 3: obviously building things, and even if there's maybe over investment, 179 00:11:19,800 --> 00:11:22,480 Speaker 3: you end up with assets. Whereas what do you end 180 00:11:22,600 --> 00:11:25,000 Speaker 3: up when you write a check to consumers other than 181 00:11:25,040 --> 00:11:28,959 Speaker 3: the debt. So there's there's been a bit of reluctance, 182 00:11:29,160 --> 00:11:33,800 Speaker 3: I would say, to borrow to support household consumption. There 183 00:11:33,840 --> 00:11:36,839 Speaker 3: hasn't been a reluctance to borrow to support infrastructure or 184 00:11:36,840 --> 00:11:40,160 Speaker 3: other investment, and so what China tends to do when 185 00:11:40,760 --> 00:11:45,240 Speaker 3: the economy slows, and sometimes it slows because everyone because 186 00:11:45,320 --> 00:11:48,760 Speaker 3: Chinese policy makers worry that the debt growth has been 187 00:11:48,760 --> 00:11:52,720 Speaker 3: too fast and that there's pockets of excess, and some 188 00:11:52,760 --> 00:11:55,440 Speaker 3: people are borrowing that won't be able to pay the 189 00:11:55,520 --> 00:11:58,680 Speaker 3: money back, and they clamp down, and then they clamp 190 00:11:58,720 --> 00:12:04,000 Speaker 3: down too hard, and then there's pressure to restart the 191 00:12:04,080 --> 00:12:08,880 Speaker 3: investment engine. And then frankly, over the past couple of years, 192 00:12:09,320 --> 00:12:13,600 Speaker 3: there was sort of a complementarity between the US and 193 00:12:13,640 --> 00:12:17,880 Speaker 3: European policy response to the pandemic, which emphasized supporting demands, 194 00:12:17,920 --> 00:12:22,720 Speaker 3: supporting household income, using the government's balance sheet to insulate 195 00:12:22,760 --> 00:12:26,440 Speaker 3: households from the impact of the shock to some degree 196 00:12:26,440 --> 00:12:29,600 Speaker 3: in the process insulating firms, but a great deal of 197 00:12:29,640 --> 00:12:36,680 Speaker 3: emphasis on protecting households, and then China, which emphasized maintaining 198 00:12:36,720 --> 00:12:41,120 Speaker 3: its productive capacity and didn't provide much direct household income support. 199 00:12:41,440 --> 00:12:45,160 Speaker 3: And China's gotten a quite substantial boost to growth over 200 00:12:45,200 --> 00:12:47,920 Speaker 3: the past three or four years from that exports. So 201 00:12:48,000 --> 00:12:51,200 Speaker 3: that's to me, like the irony we talk about deglobalization, 202 00:12:52,000 --> 00:12:57,200 Speaker 3: when on most measures China's economy actually reglobilized. The political 203 00:12:57,240 --> 00:13:03,760 Speaker 3: debate around trade overwhelmed the discourse, but in a quantitative sense, 204 00:13:04,920 --> 00:13:07,280 Speaker 3: exports is a shriff. GDP have gone up in China. 205 00:13:07,520 --> 00:13:10,560 Speaker 3: China's getting as much of a contribution from net exports 206 00:13:10,640 --> 00:13:13,360 Speaker 3: over the past four years as it got during the 207 00:13:13,440 --> 00:13:20,880 Speaker 3: China Shock. Manufacturing, China's manufacturing surplus is back close to 208 00:13:20,920 --> 00:13:23,559 Speaker 3: ten percent of China's GDP after a dipped a bit. 209 00:13:24,120 --> 00:13:26,920 Speaker 3: So there's just all sorts of measures that suggest China 210 00:13:28,480 --> 00:13:33,160 Speaker 3: the overall policy response to the pandemic made the world more, 211 00:13:33,240 --> 00:13:36,760 Speaker 3: not less dependent on Chinese manufacturing. But there clearly is 212 00:13:36,800 --> 00:13:38,680 Speaker 3: a little bit of a reaction to that, a sense 213 00:13:38,679 --> 00:13:43,239 Speaker 3: of vulnerability, and a policy effort in the US, increasingly 214 00:13:43,280 --> 00:13:47,560 Speaker 3: in Europe to make sure that that manufacturing dependence isn't 215 00:13:47,559 --> 00:13:57,959 Speaker 3: permanent and doesn't extend to too many strategic products. 216 00:14:08,559 --> 00:14:10,240 Speaker 2: I don't know if there's like a really elegant way 217 00:14:10,280 --> 00:14:14,360 Speaker 2: to ask this question, how freaked out are they in Europe? 218 00:14:15,800 --> 00:14:18,000 Speaker 1: By I don't even think you tried, Jeff No, I 219 00:14:18,080 --> 00:14:19,320 Speaker 1: was like, I just like, how is. 220 00:14:19,320 --> 00:14:20,000 Speaker 3: It on my mind? 221 00:14:20,600 --> 00:14:24,480 Speaker 2: By what the power of the Chinese exports auto exports, 222 00:14:24,520 --> 00:14:26,960 Speaker 2: because I mean, I feel like there was this sort 223 00:14:27,000 --> 00:14:30,200 Speaker 2: of view that well, like they were cheap cars, they 224 00:14:30,200 --> 00:14:33,240 Speaker 2: weren't really like global quality. They certainly weren't going to 225 00:14:33,280 --> 00:14:35,560 Speaker 2: be like global brands, and the sort of perception that 226 00:14:35,640 --> 00:14:39,120 Speaker 2: China wouldn't create global brands. And my impression is that 227 00:14:39,280 --> 00:14:41,280 Speaker 2: at least at the margins, and maybe more than at 228 00:14:41,280 --> 00:14:45,920 Speaker 2: the margins, Chinese evs are increasingly of global quality and 229 00:14:45,960 --> 00:14:50,840 Speaker 2: maybe some brand awareness, particularly in Europe. And when you 230 00:14:51,000 --> 00:14:53,800 Speaker 2: sort of factor in the you know, lower production costs 231 00:14:53,800 --> 00:14:57,520 Speaker 2: and they skilled that the Chinese manufacturers have in batteries, 232 00:14:57,520 --> 00:14:59,480 Speaker 2: stuff like that, Like how big of a threat is 233 00:14:59,480 --> 00:15:02,360 Speaker 2: this to some one of the big industrial giants of 234 00:15:02,400 --> 00:15:05,560 Speaker 2: Europe and the sort of business model of Europe. 235 00:15:05,720 --> 00:15:10,000 Speaker 3: Well, strangely enough, at a political level, the Europeans freaked 236 00:15:10,040 --> 00:15:12,560 Speaker 3: out about the Inflation Reduction Act. 237 00:15:11,920 --> 00:15:14,280 Speaker 2: I was wondering if I should go the like which 238 00:15:14,320 --> 00:15:16,600 Speaker 2: direction I was going to, whether I should ask about 239 00:15:16,640 --> 00:15:19,200 Speaker 2: the US policy respond to the Chinese cars. But anyway, 240 00:15:19,280 --> 00:15:19,760 Speaker 2: keep going. 241 00:15:19,680 --> 00:15:21,400 Speaker 3: You know, I mean, like in some sense, I think 242 00:15:21,440 --> 00:15:24,960 Speaker 3: the US, you know, and you know, the administration which 243 00:15:24,960 --> 00:15:28,800 Speaker 3: I was a part of, had had was very conscious 244 00:15:29,680 --> 00:15:33,200 Speaker 3: that the transition to electric vehicles should not be a 245 00:15:33,280 --> 00:15:37,720 Speaker 3: transition to Chinese made electric vehicles. Very conscious of the 246 00:15:37,760 --> 00:15:41,920 Speaker 3: fact that if you're going to close down factories making 247 00:15:41,960 --> 00:15:45,840 Speaker 3: internal combustion engines, you wanted there to be new factories 248 00:15:45,880 --> 00:15:48,960 Speaker 3: being built in the United States to make batteries to 249 00:15:49,000 --> 00:15:51,800 Speaker 3: make the components of an electric car. And I think 250 00:15:51,800 --> 00:15:56,520 Speaker 3: you know, the US had in a sense anticipated that 251 00:15:57,320 --> 00:15:59,880 Speaker 3: there could potentially be as shocked and move more pro 252 00:16:00,120 --> 00:16:02,920 Speaker 3: actively to manage it now in the process that you 253 00:16:03,360 --> 00:16:08,280 Speaker 3: introduced some measures that are debatable in their wto consistency 254 00:16:09,160 --> 00:16:13,200 Speaker 3: subsidies that didn't extend to all of America's friends because 255 00:16:13,200 --> 00:16:16,560 Speaker 3: of the way the Inflation Reduction Act was designed, and 256 00:16:16,680 --> 00:16:21,080 Speaker 3: Europe really did display a lot of a surprise at 257 00:16:21,080 --> 00:16:24,640 Speaker 3: how the Inflation Reduction Act was constructed and a lot 258 00:16:24,680 --> 00:16:27,360 Speaker 3: of concern about how it is going to de industrialize Europe. 259 00:16:27,760 --> 00:16:32,760 Speaker 3: The irony to me is that there's almost no possibility 260 00:16:32,800 --> 00:16:37,680 Speaker 3: any of the big SUVs or electric SUVs that US 261 00:16:37,680 --> 00:16:40,960 Speaker 3: manufacturers or others were planning to make in the US 262 00:16:41,000 --> 00:16:45,640 Speaker 3: are going to invade the European market. They're designed for 263 00:16:45,680 --> 00:16:48,920 Speaker 3: the US market, they're not designed for export. And while 264 00:16:48,960 --> 00:16:55,080 Speaker 3: the Europeans were complaining about the formal protection in the 265 00:16:55,120 --> 00:16:59,200 Speaker 3: Inflation Reduction Act. They had ignored the informal protection that 266 00:16:59,280 --> 00:17:03,240 Speaker 3: China had extended to its electric vehicle industry, that had 267 00:17:03,280 --> 00:17:07,680 Speaker 3: sort of successfully nurtured in infant industry, created a very 268 00:17:07,720 --> 00:17:14,000 Speaker 3: successful supply chain for up and down the electric vehicle process, 269 00:17:14,400 --> 00:17:19,680 Speaker 3: batteries to drive chains, et cetera, and had suddenly become 270 00:17:19,720 --> 00:17:23,919 Speaker 3: a big, big exporter. The Chinese did wall off their market. 271 00:17:24,040 --> 00:17:29,359 Speaker 3: No imported vehicle ever qualified for Chize and electric vehicle subsidies. 272 00:17:29,920 --> 00:17:33,760 Speaker 3: But they didn't do it by writing that into the law. 273 00:17:33,840 --> 00:17:36,080 Speaker 3: They did it by setting up a list, and no 274 00:17:36,160 --> 00:17:41,720 Speaker 3: import happened to qualify. And so there has been a discrepancy, 275 00:17:41,760 --> 00:17:45,760 Speaker 3: I would say, between how Europe formally has responded to 276 00:17:45,840 --> 00:17:50,679 Speaker 3: the electric vehicle shock coming from China, largely by complaining 277 00:17:50,920 --> 00:17:59,960 Speaker 3: about US policies. That said, there is undoubtedly a shift 278 00:18:00,119 --> 00:18:03,639 Speaker 3: underway in Europe. The fact that VW's losing market share 279 00:18:03,720 --> 00:18:08,600 Speaker 3: in China has not escaped their attention and the increase 280 00:18:08,640 --> 00:18:12,960 Speaker 3: in imports is quite significant and it is generating pressure 281 00:18:13,040 --> 00:18:17,920 Speaker 3: on the European side to replicate some aspects of US policy. 282 00:18:18,280 --> 00:18:22,560 Speaker 3: But that the Europeans find the China a bit harder 283 00:18:22,600 --> 00:18:26,600 Speaker 3: to handle because the measures that would insulate the European 284 00:18:26,680 --> 00:18:30,239 Speaker 3: market from a wave of Chinese exports are likely a 285 00:18:30,240 --> 00:18:36,040 Speaker 3: little bit wto inconsistent, And the European complaint about the 286 00:18:36,160 --> 00:18:40,240 Speaker 3: US is that we're wto inconsistent, so they've sort of 287 00:18:40,320 --> 00:18:44,800 Speaker 3: let formalism overwhelm pragmatism. 288 00:18:45,359 --> 00:18:49,880 Speaker 1: Maybe everyone can just agree to be wto adjacent, so. 289 00:18:49,800 --> 00:18:52,159 Speaker 3: That would be somewhat helpful for solving a bunch of 290 00:18:52,200 --> 00:18:53,639 Speaker 3: trade disputes. But set that aside. 291 00:18:53,920 --> 00:18:57,080 Speaker 1: So since we're the theme of this discussion is sort 292 00:18:57,080 --> 00:19:00,359 Speaker 1: of the more things change, the more they stay the same. 293 00:19:00,640 --> 00:19:02,879 Speaker 1: I thought maybe we could talk a little bit about 294 00:19:03,160 --> 00:19:08,560 Speaker 1: China debt issues, and specifically in recent months, there's been 295 00:19:09,200 --> 00:19:14,720 Speaker 1: more attention paid to the local Chinese debt so stuff 296 00:19:14,760 --> 00:19:19,800 Speaker 1: issued by municipalities basically, and these are headlines that I 297 00:19:19,840 --> 00:19:23,240 Speaker 1: can remember, you know, from ten or fifteen years ago, 298 00:19:23,359 --> 00:19:26,879 Speaker 1: this idea of a China local debt time bomb. The 299 00:19:26,960 --> 00:19:30,600 Speaker 1: numbers have changed, so I've seen twenty three trillion dollars 300 00:19:30,680 --> 00:19:35,960 Speaker 1: worth mentioned relatively recently, but the overall thesis is the same, 301 00:19:36,040 --> 00:19:40,240 Speaker 1: this idea that eventually these local authorities aren't going to 302 00:19:40,280 --> 00:19:42,600 Speaker 1: be able to sell bonds or they're going to have 303 00:19:42,640 --> 00:19:46,520 Speaker 1: to default on their debt, and the assumption always seems 304 00:19:46,520 --> 00:19:50,159 Speaker 1: to be that the Chinese central government is going to 305 00:19:50,200 --> 00:19:53,960 Speaker 1: step in and backstop them. So I guess my question 306 00:19:54,080 --> 00:19:58,520 Speaker 1: is is this something worth paying attention to? Why does 307 00:19:58,560 --> 00:19:59,159 Speaker 1: this matter? 308 00:20:00,920 --> 00:20:04,080 Speaker 3: Well, it's certainly something worth paying attention to. You know, 309 00:20:04,160 --> 00:20:07,560 Speaker 3: China's central government has almost no debt by global standards. 310 00:20:08,920 --> 00:20:11,520 Speaker 3: Latest I think numbers are about twenty five percent of GDP. 311 00:20:11,760 --> 00:20:14,400 Speaker 3: You know, US and France are more like one hundred. 312 00:20:15,400 --> 00:20:22,480 Speaker 3: But the Chinese provinces, municipalities, localities have a very large 313 00:20:22,960 --> 00:20:25,600 Speaker 3: pool of debt, direct debt. They have more direct debt 314 00:20:26,119 --> 00:20:30,800 Speaker 3: formally recognized debt than the central government. And then the 315 00:20:31,640 --> 00:20:35,800 Speaker 3: local government financing vehicles, which are not they're supported by 316 00:20:35,880 --> 00:20:40,200 Speaker 3: local governments. They're local government adjacent, so to speak. They 317 00:20:40,200 --> 00:20:43,159 Speaker 3: have even more. So you know, you sum those up 318 00:20:43,200 --> 00:20:46,239 Speaker 3: and you get numbers of total debt of about one 319 00:20:46,280 --> 00:20:50,639 Speaker 3: hundred percent of GDP. That's not such a high level 320 00:20:50,680 --> 00:20:56,120 Speaker 3: that it implies, in my view, that China is forced 321 00:20:56,160 --> 00:21:00,199 Speaker 3: to do nothing except consolidate. China saves a lot, can 322 00:21:00,280 --> 00:21:04,159 Speaker 3: mobilize a lot of money, through its financial system to 323 00:21:04,240 --> 00:21:09,040 Speaker 3: support the government activity at various levels, but the distribution 324 00:21:09,200 --> 00:21:13,680 Speaker 3: of debt is strange. It is strange that China has 325 00:21:13,720 --> 00:21:15,720 Speaker 3: so little debt at the central government and so much 326 00:21:15,760 --> 00:21:19,119 Speaker 3: debt at the local government. The revenue raising capacity is 327 00:21:19,200 --> 00:21:23,240 Speaker 3: much higher at the central government level, it's much weaker 328 00:21:23,240 --> 00:21:25,560 Speaker 3: at the local government level, and a lot of the 329 00:21:25,680 --> 00:21:29,560 Speaker 3: shocks that have hit China over the past several years 330 00:21:29,560 --> 00:21:34,719 Speaker 3: have been shocks to local governments COVID. I mean, I 331 00:21:34,760 --> 00:21:37,320 Speaker 3: was sort of surprised to read this that the central 332 00:21:37,320 --> 00:21:42,720 Speaker 3: government didn't didn't provide large checks to local governments to 333 00:21:42,760 --> 00:21:45,680 Speaker 3: cover the cost of implementing zero COVID. So a lot 334 00:21:45,720 --> 00:21:50,199 Speaker 3: of that was born out of budgets. Infrastructure financing and 335 00:21:50,400 --> 00:21:54,760 Speaker 3: expansion is done through local governments and local government vehicles. 336 00:21:55,880 --> 00:21:57,560 Speaker 3: But local governments also get a lot of money from 337 00:21:57,640 --> 00:22:01,080 Speaker 3: land sales, and land sale revenue has been hit by 338 00:22:01,119 --> 00:22:05,240 Speaker 3: the turn in China's property market, so the weaker local 339 00:22:05,280 --> 00:22:08,120 Speaker 3: governments are really in a bit of a bind. They 340 00:22:08,160 --> 00:22:12,520 Speaker 3: have limited capacity to collect revenue. Some key revenue sources 341 00:22:12,560 --> 00:22:15,720 Speaker 3: have been falling. They don't get as much help from 342 00:22:15,720 --> 00:22:19,840 Speaker 3: the center as probably as needed to cover their legacy debts, 343 00:22:20,320 --> 00:22:22,600 Speaker 3: and it's just always harder to service debts when your 344 00:22:22,640 --> 00:22:27,560 Speaker 3: economy starts slowing, even if overall interest rates are pretty low, 345 00:22:28,280 --> 00:22:30,320 Speaker 3: and for some it's going to be it's hard to 346 00:22:30,400 --> 00:22:33,600 Speaker 3: refinance in the market, so you end up, rather than 347 00:22:33,680 --> 00:22:38,280 Speaker 3: having defaults, you have informal negotiations to stretch out payment. 348 00:22:38,760 --> 00:22:42,040 Speaker 3: But it is a problem. It's you know, the investment 349 00:22:42,119 --> 00:22:45,240 Speaker 3: engine of China's economy maybe had three sources, three or 350 00:22:45,280 --> 00:22:48,320 Speaker 3: four sources. One is sort of call it private investment 351 00:22:48,400 --> 00:22:52,440 Speaker 3: to meet a global demand for exports. One is sort 352 00:22:52,440 --> 00:22:58,080 Speaker 3: of government directed investment in key sectors aimed at import substitution, 353 00:22:58,400 --> 00:23:04,400 Speaker 3: so building a Chinese aircraft, expanding China's indigenous semiconductor manufacturing capacity, 354 00:23:04,480 --> 00:23:06,920 Speaker 3: so forth, and so on. But the biggest ones were 355 00:23:07,000 --> 00:23:11,680 Speaker 3: building real estate for folks in China and building out 356 00:23:11,720 --> 00:23:17,240 Speaker 3: China's infrastructure. And both the real estate and the infrastructure 357 00:23:17,760 --> 00:23:21,440 Speaker 3: engines are now facing strain. And if you take away 358 00:23:21,480 --> 00:23:27,639 Speaker 3: those engines, China's economy looks disequilibriated, it looks it looks weak. 359 00:23:29,080 --> 00:23:31,560 Speaker 2: I want to pivot to something random. One of the 360 00:23:31,560 --> 00:23:33,040 Speaker 2: reasons I like talking to brand is I feel like 361 00:23:33,080 --> 00:23:35,080 Speaker 2: I can throw things out about anywhere in the world, 362 00:23:35,080 --> 00:23:37,880 Speaker 2: and he'll probably have some understanding of what's going on. 363 00:23:38,080 --> 00:23:40,119 Speaker 2: I want to pivot to something that I thought that 364 00:23:40,280 --> 00:23:42,560 Speaker 2: was in the news recently that just popped into my head, 365 00:23:43,040 --> 00:23:45,320 Speaker 2: and I want to get your take on it. What 366 00:23:45,520 --> 00:23:50,960 Speaker 2: is the macroeconomic significance of Saudi Arabia offering Lionel Messi 367 00:23:51,000 --> 00:23:55,040 Speaker 2: four hundred million dollars a year to play soccer there? 368 00:23:55,119 --> 00:23:57,119 Speaker 2: And what is a you know, at a time of 369 00:23:57,160 --> 00:23:59,879 Speaker 2: like booming evs, I would not necessarily think this, like 370 00:24:00,040 --> 00:24:02,720 Speaker 2: oil giant has all this money to splash around on 371 00:24:02,800 --> 00:24:06,959 Speaker 2: like a competing golf tour to the PGA and offering 372 00:24:07,000 --> 00:24:09,240 Speaker 2: someone half a billion dollars a year to play some 373 00:24:09,359 --> 00:24:11,800 Speaker 2: soccer games. What is going on there? And how big 374 00:24:11,840 --> 00:24:14,240 Speaker 2: of a force is like this money emanating out of 375 00:24:14,680 --> 00:24:16,760 Speaker 2: the Saudi Radio Saudi. 376 00:24:16,440 --> 00:24:18,879 Speaker 1: Arabia state sponsored soccer. 377 00:24:19,800 --> 00:24:23,000 Speaker 3: I didn't didn't Saudi Arabia also give a contract to Ronaldo, 378 00:24:23,119 --> 00:24:28,159 Speaker 3: So that's probably right, Runaldo Messy in the desert or 379 00:24:28,200 --> 00:24:31,320 Speaker 3: something like that. Look, I think what it actually means 380 00:24:31,359 --> 00:24:33,840 Speaker 3: is that Saudi Arabia's current account surplus isn't gonna last 381 00:24:33,920 --> 00:24:40,879 Speaker 3: much longer. You know, oil prices have adjusted down and 382 00:24:41,000 --> 00:24:44,600 Speaker 3: oil in the seventies or eighties now in my calculations, 383 00:24:44,760 --> 00:24:49,320 Speaker 3: just covers Saudi import bill and expensive soccer players are 384 00:24:49,400 --> 00:24:51,639 Speaker 3: kind of kind of kind of a luxury good import, 385 00:24:51,680 --> 00:24:54,920 Speaker 3: and they're the kind of luxury good import that quickly 386 00:24:54,960 --> 00:24:58,880 Speaker 3: reduces your current account surplus. So I think Saudi Arabia 387 00:24:58,920 --> 00:25:02,639 Speaker 3: is heading towards at current oil prices. And if you 388 00:25:02,640 --> 00:25:06,840 Speaker 3: want to build cities in the desert, sponsored global golf 389 00:25:06,880 --> 00:25:09,400 Speaker 3: tours and hire the best soccer players to come play 390 00:25:09,400 --> 00:25:12,119 Speaker 3: in the desert, so they probably need air conditioned stadiums, 391 00:25:13,240 --> 00:25:17,440 Speaker 3: you're going to run a current account deficit if oil 392 00:25:18,119 --> 00:25:21,000 Speaker 3: doesn't rebound back up. The Saudi's got one hundred and 393 00:25:21,040 --> 00:25:24,840 Speaker 3: fifty billion dollars windfall last year, though from their oil exports. 394 00:25:24,920 --> 00:25:29,159 Speaker 3: The golf countries were like generally got about a three 395 00:25:29,240 --> 00:25:34,200 Speaker 3: hundred billion dollar windfall. They had been relatively conservative, I 396 00:25:34,240 --> 00:25:37,160 Speaker 3: would say over the past ten years. I kept expecting 397 00:25:38,160 --> 00:25:43,359 Speaker 3: some of the splashy policy chiefts, the cities, all the 398 00:25:43,400 --> 00:25:50,000 Speaker 3: other MBS investments to really changed the macro numbers, and 399 00:25:50,040 --> 00:25:52,280 Speaker 3: it didn't happen until the last two quarters. But I 400 00:25:52,320 --> 00:25:56,080 Speaker 3: think you've really seen a big increase in Saudi spending. 401 00:25:56,200 --> 00:25:59,960 Speaker 3: So Saudi Arabia structurally is either going to be drawing 402 00:26:00,040 --> 00:26:02,720 Speaker 3: on its accumulated savings, which it has a lot, or 403 00:26:02,720 --> 00:26:05,280 Speaker 3: it needs somehow to orchestrate higher outpices. 404 00:26:06,160 --> 00:26:09,720 Speaker 1: So just on this note, you wrote a piece. I 405 00:26:09,720 --> 00:26:12,480 Speaker 1: can't remember when exactly you did it, but it might 406 00:26:12,480 --> 00:26:15,280 Speaker 1: have been one of the first ones that you wrote 407 00:26:15,359 --> 00:26:18,320 Speaker 1: after you returned to CFR. But you made the point 408 00:26:18,359 --> 00:26:21,720 Speaker 1: that most of these surplus countries in the world nowadays 409 00:26:21,760 --> 00:26:26,000 Speaker 1: seem to be countries that may not necessarily be that 410 00:26:26,160 --> 00:26:29,359 Speaker 1: friendly to the US, or maybe attitudes are shifting, so 411 00:26:29,560 --> 00:26:34,640 Speaker 1: places like China, Saudi Arabia, Russia would be an obvious one. 412 00:26:35,240 --> 00:26:40,359 Speaker 1: What does that mean for global trade as geopolitics kind 413 00:26:40,400 --> 00:26:45,760 Speaker 1: of seeps in and adds presumably some complexity to you know, 414 00:26:45,880 --> 00:26:47,600 Speaker 1: deficit surplus relationships. 415 00:26:48,600 --> 00:26:52,280 Speaker 3: Well, I did probably probably was a conscious choice to 416 00:26:52,320 --> 00:26:56,199 Speaker 3: make that one of my first blog posts, because I 417 00:26:56,200 --> 00:26:59,320 Speaker 3: did think it was something worth noting than something that 418 00:26:59,359 --> 00:27:04,560 Speaker 3: hadn't been noticed. You know, last year, oil prices shot 419 00:27:04,640 --> 00:27:09,639 Speaker 3: up and this Chinese current account surplus also increased, and 420 00:27:09,760 --> 00:27:14,879 Speaker 3: the European, Japanese, Korean current account surplus either shrank. In 421 00:27:14,920 --> 00:27:20,119 Speaker 3: the case of Japan, swung briefly into deficit for for Korea, 422 00:27:20,240 --> 00:27:23,239 Speaker 3: or really swung into deficit for Europe. So we were 423 00:27:23,240 --> 00:27:28,119 Speaker 3: in a unique period when, despite all the talk about 424 00:27:28,200 --> 00:27:33,520 Speaker 3: fragmentation and limiting trade and financial flows too, flows within 425 00:27:34,560 --> 00:27:40,520 Speaker 3: blocks who share values, who share similar political systems. All 426 00:27:40,560 --> 00:27:44,360 Speaker 3: the big autocracies around the world, China, Saudi Arabia, Russia, 427 00:27:45,200 --> 00:27:48,680 Speaker 3: the GCC monarchies, and you know, the GCC is a 428 00:27:48,680 --> 00:27:51,879 Speaker 3: bit separate because they're kind of militarily allied with the US, 429 00:27:51,880 --> 00:27:55,280 Speaker 3: so they're but they're kind of, at least the Saudi case, 430 00:27:55,280 --> 00:27:57,720 Speaker 3: they're also a little scared of some US sanctions because 431 00:27:57,760 --> 00:28:01,879 Speaker 3: some you know, MBS has has a checkered history, let's say. 432 00:28:02,040 --> 00:28:04,480 Speaker 3: And then clearly the political systems differ even if there's 433 00:28:04,520 --> 00:28:07,480 Speaker 3: a military alliance. So you have a world where the 434 00:28:07,520 --> 00:28:10,720 Speaker 3: autocracies had surpluses. The big deficits were in the US, 435 00:28:11,600 --> 00:28:15,280 Speaker 3: UK and India democracies, and we were talking about fragmentation. 436 00:28:16,000 --> 00:28:18,639 Speaker 3: There was clearly a limit to how much fragmentation is 437 00:28:18,680 --> 00:28:23,040 Speaker 3: possible when all the autocracies are running surpluses. With all 438 00:28:23,040 --> 00:28:25,800 Speaker 3: the democracies, there has to be there is a trade 439 00:28:25,800 --> 00:28:29,800 Speaker 3: flow implied by the deficit, and there is a financial 440 00:28:29,800 --> 00:28:31,400 Speaker 3: flow that is also implied. 441 00:28:32,000 --> 00:28:34,240 Speaker 1: So this would be like FX reserves and things like that. 442 00:28:34,520 --> 00:28:36,920 Speaker 3: Well it wasn't FX reserve. So that's the other interesting 443 00:28:36,920 --> 00:28:41,120 Speaker 3: thing is that Russia literally could not accumulate assets in 444 00:28:41,160 --> 00:28:44,120 Speaker 3: his reserves. The Saudis had decided they had plenty of 445 00:28:44,200 --> 00:28:48,240 Speaker 3: reserves and were channeling money into private equity funds through 446 00:28:48,280 --> 00:28:52,440 Speaker 3: their sovereign Wealth Fund, building up deposits, maybe getting ready 447 00:28:52,480 --> 00:28:54,360 Speaker 3: to make sure that they had so much money in 448 00:28:54,360 --> 00:28:57,360 Speaker 3: the bank they could pay Messi and Ronaldo and cash. 449 00:28:57,840 --> 00:29:01,720 Speaker 3: And the Chinese have a long standing now for ten years, 450 00:29:02,040 --> 00:29:05,120 Speaker 3: close to ten years, policy of more or less not 451 00:29:05,440 --> 00:29:11,080 Speaker 3: adding to their formal reserves and instead, when there's appreciation pressure, 452 00:29:11,120 --> 00:29:13,480 Speaker 3: that pressure shows up in a build up of assets 453 00:29:13,480 --> 00:29:17,520 Speaker 3: in the state banking system. And then when there's depreciation pressure, 454 00:29:17,600 --> 00:29:21,560 Speaker 3: exporters just seemed to hold hoard dollars. So unlike in 455 00:29:21,600 --> 00:29:23,840 Speaker 3: the past when you had this big build up of 456 00:29:23,880 --> 00:29:27,800 Speaker 3: foreign assets and autocracies and you would see it in 457 00:29:27,840 --> 00:29:29,800 Speaker 3: their reserves and you could track the flow back to 458 00:29:29,840 --> 00:29:31,920 Speaker 3: the US, and you know, people would say, oh my god, 459 00:29:32,480 --> 00:29:37,000 Speaker 3: China's buying up the US treasury market. We had implicit 460 00:29:37,200 --> 00:29:42,680 Speaker 3: in this constellation of surpluses and deficits. Was a big 461 00:29:42,720 --> 00:29:47,840 Speaker 3: flow from China, Saudi Arabia, Russia and the other GCC 462 00:29:47,960 --> 00:29:50,600 Speaker 3: countries to the US and the UK. I'm gonna leave 463 00:29:50,640 --> 00:29:53,040 Speaker 3: India out because we know India finance it's current account 464 00:29:53,040 --> 00:29:56,640 Speaker 3: deficit last year by selling reserves, but you didn't see 465 00:29:56,680 --> 00:29:58,840 Speaker 3: that in the build up of reserves or a build 466 00:29:58,880 --> 00:30:01,560 Speaker 3: up in their holdings of treasure. So it's sort of 467 00:30:01,560 --> 00:30:05,320 Speaker 3: a hidden financial flow that you can infer from the 468 00:30:05,320 --> 00:30:08,680 Speaker 3: global balance of payments. So I think it is interesting 469 00:30:08,760 --> 00:30:12,840 Speaker 3: in a lot of ways. One is that there are 470 00:30:12,880 --> 00:30:15,760 Speaker 3: so many things that happened over the past several years 471 00:30:15,760 --> 00:30:19,440 Speaker 3: in the global economy that don't easily fit into a 472 00:30:19,560 --> 00:30:23,720 Speaker 3: narrative of fragmentation into rival blocks, that don't easily fit 473 00:30:23,840 --> 00:30:28,800 Speaker 3: into a deglobalization narrative, that don't fit into a dedollarization narrative. 474 00:30:29,760 --> 00:30:33,120 Speaker 3: And so this was an attempt to highlight the limits 475 00:30:33,160 --> 00:30:35,720 Speaker 3: of trying to think about the world in those terms. 476 00:30:36,920 --> 00:30:40,320 Speaker 3: But it was also just an attempt to say, look, 477 00:30:41,480 --> 00:30:44,160 Speaker 3: there's a set of financial flows that have to be 478 00:30:44,200 --> 00:30:48,240 Speaker 3: occurring through parts of the global economy that bring China 479 00:30:48,280 --> 00:30:51,320 Speaker 3: surplus to the US and the UK without a build 480 00:30:51,400 --> 00:30:56,080 Speaker 3: up of reserves without a formal without obvious purchases of treasuries, 481 00:30:56,640 --> 00:30:58,560 Speaker 3: and we need to do a better job of trying 482 00:30:58,560 --> 00:31:01,440 Speaker 3: to understand that. But I also look, there's a risk, 483 00:31:01,480 --> 00:31:04,480 Speaker 3: and I think the risk is that we have a 484 00:31:04,520 --> 00:31:09,360 Speaker 3: global economy which has quite large financial and trade interconnections 485 00:31:09,400 --> 00:31:13,320 Speaker 3: between the different blocks, and there isn't a political consensus 486 00:31:13,360 --> 00:31:15,480 Speaker 3: on either part of the block that they want to 487 00:31:15,520 --> 00:31:19,880 Speaker 3: maintain that level of interconnection, but it is costly to 488 00:31:19,920 --> 00:31:23,200 Speaker 3: move away. So there's a tension between the world as 489 00:31:23,240 --> 00:31:25,080 Speaker 3: it is and the world as some would like attain. 490 00:31:42,040 --> 00:31:43,520 Speaker 2: You know, I want to go back actually to the 491 00:31:43,680 --> 00:31:46,840 Speaker 2: US Europe tension, but in terms of like some of 492 00:31:46,880 --> 00:31:51,200 Speaker 2: these things that have changed. You know, this might sound 493 00:31:51,240 --> 00:31:54,400 Speaker 2: like sort of like a Winter twenty twenty two questions, 494 00:31:54,400 --> 00:31:57,360 Speaker 2: So maybe a little late, but maybe it made sense 495 00:31:57,400 --> 00:32:00,880 Speaker 2: when electricity prices in Europe were higher. But obviously, like 496 00:32:00,880 --> 00:32:03,600 Speaker 2: there's still I think a sort of big long term 497 00:32:03,680 --> 00:32:08,040 Speaker 2: question mark about energy security in Europe, especially given the 498 00:32:08,120 --> 00:32:11,200 Speaker 2: you know, the obvious questions about the Russia relationship. And 499 00:32:11,240 --> 00:32:12,840 Speaker 2: then at the same time, the US spent a lot 500 00:32:12,880 --> 00:32:15,440 Speaker 2: of US you know, several years like building up export 501 00:32:15,480 --> 00:32:19,640 Speaker 2: capacity and we're like swimming in a floating in natural gas, 502 00:32:19,680 --> 00:32:22,240 Speaker 2: maybe is a way to put it. How meaningful is 503 00:32:22,320 --> 00:32:24,920 Speaker 2: this that there's tons of cheap energy in the US, 504 00:32:25,080 --> 00:32:27,040 Speaker 2: and is this sort of like going to be a 505 00:32:27,120 --> 00:32:30,720 Speaker 2: source of marginal investment decisions to go towards the US 506 00:32:31,080 --> 00:32:33,280 Speaker 2: out of Europe. That's sort of further threat to the 507 00:32:33,600 --> 00:32:37,040 Speaker 2: European industrial economy that can move to the US and 508 00:32:37,160 --> 00:32:39,520 Speaker 2: get a lot of cheap energy and there's no threat 509 00:32:39,520 --> 00:32:40,360 Speaker 2: of it being cut off. 510 00:32:40,640 --> 00:32:45,120 Speaker 3: It is a it is a modest challenge the parts 511 00:32:45,160 --> 00:32:48,400 Speaker 3: of European industry. It's it's the most significantly it's a 512 00:32:48,480 --> 00:32:51,960 Speaker 3: challenge to the German chemical industry, and there's certain other 513 00:32:52,160 --> 00:32:58,080 Speaker 3: energy intensive parts of the European economy that that broadly speaking, 514 00:32:58,160 --> 00:33:01,560 Speaker 3: don't make sense. If you have to pay really high 515 00:33:01,640 --> 00:33:04,280 Speaker 3: cost to import natural gas, it makes more sense to 516 00:33:04,440 --> 00:33:08,760 Speaker 3: move the industry closer to cheap sources of gas. So 517 00:33:08,800 --> 00:33:12,040 Speaker 3: there are there's a there's a part of particularly German, 518 00:33:12,120 --> 00:33:17,200 Speaker 3: but more broadly European industry that was built up around 519 00:33:17,720 --> 00:33:21,280 Speaker 3: you know, a steady supply of Russian pipeline gas at 520 00:33:21,320 --> 00:33:25,760 Speaker 3: a relatively low cost, and if that goes away, you know, 521 00:33:25,800 --> 00:33:27,960 Speaker 3: in the short run, you can keep the plants running 522 00:33:27,960 --> 00:33:32,600 Speaker 3: by importing an expensive LNG. In the long run, you 523 00:33:32,760 --> 00:33:38,719 Speaker 3: probably want to reallocate production of the most energy intensive 524 00:33:38,880 --> 00:33:43,600 Speaker 3: chemicals towards the US. Aluminum is another one, you know, 525 00:33:43,640 --> 00:33:46,800 Speaker 3: but like there's a huge difference between Norwegian aluminum made 526 00:33:46,800 --> 00:33:50,880 Speaker 3: with trapped hydro and some of the other aluminum factories 527 00:33:50,920 --> 00:33:53,720 Speaker 3: which are you know, run off either gas or coal. 528 00:33:55,040 --> 00:33:57,239 Speaker 3: And the US ain't ain't actually a cheap place for 529 00:33:57,240 --> 00:34:01,280 Speaker 3: producing alumini either for different reasons. But uh, you know, 530 00:34:01,320 --> 00:34:04,720 Speaker 3: I think there's there, there is a threat there. There's 531 00:34:04,800 --> 00:34:07,960 Speaker 3: a challenge to European industry coming from the auto industry, 532 00:34:08,080 --> 00:34:14,120 Speaker 3: which isn't as energy intensive, coming from China. Uh, there's 533 00:34:14,160 --> 00:34:17,719 Speaker 3: a challenge from Europe's very ambitious climate goals and how 534 00:34:17,719 --> 00:34:20,000 Speaker 3: do you produce steel in a way that doesn't use coal. 535 00:34:20,040 --> 00:34:23,319 Speaker 3: It's it's it's it's a challenge. But I think to 536 00:34:23,400 --> 00:34:29,680 Speaker 3: Europe's credit, Europe, probably more than the US, has thought 537 00:34:29,800 --> 00:34:33,719 Speaker 3: seriously about all the changes to Europe's energy system that 538 00:34:33,760 --> 00:34:37,480 Speaker 3: would needed to that would eventually be needed to decarbonize 539 00:34:37,480 --> 00:34:41,359 Speaker 3: the economy. It's it's more of a planning and more 540 00:34:41,440 --> 00:34:45,520 Speaker 3: done through the electricity companies but I think the you know, 541 00:34:45,560 --> 00:34:48,120 Speaker 3: in the US, because we have cheap gas, there there's 542 00:34:48,360 --> 00:34:52,360 Speaker 3: a tendency to think the energy, energy security, and future 543 00:34:52,800 --> 00:34:55,759 Speaker 3: climate commitments can be met in the short run by 544 00:34:55,760 --> 00:34:59,840 Speaker 3: burning gas and not burning coal, whereas in Europe you 545 00:34:59,880 --> 00:35:03,280 Speaker 3: have there is a much stronger effort to think twenty 546 00:35:03,360 --> 00:35:06,600 Speaker 3: years ahead and think of an energy system that really 547 00:35:06,600 --> 00:35:11,960 Speaker 3: doesn't rely on imported fossil fuels, including energy. So but 548 00:35:12,239 --> 00:35:16,040 Speaker 3: it is a challenge, it is a threat. And you 549 00:35:16,080 --> 00:35:19,799 Speaker 3: know the fact that Europe was paying like two to 550 00:35:19,880 --> 00:35:23,120 Speaker 3: three times the energy equivalent per barrel of oil for 551 00:35:23,160 --> 00:35:27,759 Speaker 3: imported gas just tells you how extreme the shock was. 552 00:35:29,280 --> 00:35:31,839 Speaker 1: You know, you touched on this already a little bit. 553 00:35:31,920 --> 00:35:34,719 Speaker 1: But one of the things that has happened recently is 554 00:35:34,760 --> 00:35:39,359 Speaker 1: there does seem to be growing attention paid to the 555 00:35:39,400 --> 00:35:45,960 Speaker 1: idea of dedollarization, and to some extent, these conversations have 556 00:35:46,080 --> 00:35:48,760 Speaker 1: been going on for a long time. This is also 557 00:35:48,840 --> 00:35:50,719 Speaker 1: in the more things change, the more they stay the 558 00:35:50,760 --> 00:35:54,680 Speaker 1: same category. People have been talking about usurping the dollar's 559 00:35:54,880 --> 00:35:58,799 Speaker 1: role in the global financial system for decades now. But 560 00:35:58,920 --> 00:36:04,040 Speaker 1: I'm curious how seriously, if at all, you are taking 561 00:36:04,560 --> 00:36:06,320 Speaker 1: some of those concerns at the moment. 562 00:36:08,080 --> 00:36:12,000 Speaker 3: Well, I guess I like pointing out ironies, and to me, 563 00:36:12,080 --> 00:36:16,960 Speaker 3: the ironies were debating dedollarization when the best evidence is 564 00:36:17,000 --> 00:36:23,080 Speaker 3: of deuroization, and the deuised trade was trade that Europe sanctioned. 565 00:36:24,120 --> 00:36:27,520 Speaker 3: Europe made it more or less impossible, not completely impossible, 566 00:36:27,560 --> 00:36:32,440 Speaker 3: but narrowed the channels to use euros to pay for 567 00:36:32,560 --> 00:36:35,920 Speaker 3: trade between China and Europe. Russia moved away from the 568 00:36:36,000 --> 00:36:40,560 Speaker 3: dollar to settle trade with China after the fourteen fifteen 569 00:36:40,640 --> 00:36:45,120 Speaker 3: sanctions in Crimea. They thought it would be safer to 570 00:36:45,160 --> 00:36:49,680 Speaker 3: denominate trade in euros. And then this last round of sanctions, 571 00:36:51,600 --> 00:36:55,920 Speaker 3: you know, essentially showed Russia that putting your reserves in 572 00:36:56,040 --> 00:36:59,760 Speaker 3: euros and putting denominating your trade with China in euros 573 00:36:59,760 --> 00:37:03,359 Speaker 3: didn't offer significantly more protection than doing the same thing 574 00:37:03,400 --> 00:37:06,359 Speaker 3: in dollars. So to me, it is a isn't really 575 00:37:06,360 --> 00:37:13,440 Speaker 3: a de dollarization question. It should be a move away 576 00:37:13,480 --> 00:37:19,839 Speaker 3: from using G seven currencies question. Because the easy alternative 577 00:37:19,880 --> 00:37:22,040 Speaker 3: for people who are worried about US sanctions used to 578 00:37:22,120 --> 00:37:25,880 Speaker 3: be the euro and the sanctions against Russia, which were 579 00:37:25,880 --> 00:37:28,960 Speaker 3: completely appropriate, you had to do the euro or it 580 00:37:29,000 --> 00:37:32,480 Speaker 3: wasn't going to be meaningful. And you know, Russia did 581 00:37:32,600 --> 00:37:40,160 Speaker 3: violate all sorts of norms, laws, expectations, name it when 582 00:37:40,200 --> 00:37:42,840 Speaker 3: it invaded Ukraine, So you should be taking steps that 583 00:37:42,920 --> 00:37:50,320 Speaker 3: are bold and consequential. But cutting off the biggest Russian 584 00:37:50,320 --> 00:37:55,640 Speaker 3: banks except for Gazprom Bank, from the European financial system 585 00:37:55,680 --> 00:37:59,040 Speaker 3: to you know, there's some narrow carveouts. It's not full, 586 00:37:59,440 --> 00:38:02,120 Speaker 3: but it truly is much riskier now for China to 587 00:38:02,160 --> 00:38:05,040 Speaker 3: be paid for its oil and gas from Europe and 588 00:38:05,040 --> 00:38:08,000 Speaker 3: euro So, you know, no shock, there's been a move 589 00:38:08,040 --> 00:38:11,480 Speaker 3: towards settling that trade in yuan. China sees the G 590 00:38:11,600 --> 00:38:17,040 Speaker 3: seven sanctions and realizes that insulating its economy and its 591 00:38:17,080 --> 00:38:21,239 Speaker 3: ability to pay for resources, securing China's supply chains in 592 00:38:21,239 --> 00:38:24,759 Speaker 3: a financial sense will likely require greater use of the 593 00:38:24,800 --> 00:38:28,359 Speaker 3: yuan in settlement. So that it doesn't surprise me that 594 00:38:28,400 --> 00:38:31,959 Speaker 3: we're seeing this debate now. It is a natural consequence 595 00:38:32,400 --> 00:38:37,120 Speaker 3: to really significant sanctions, sanctions that in effect forced Russia 596 00:38:37,480 --> 00:38:41,320 Speaker 3: to move off the euro to denominate its global trade. 597 00:38:41,680 --> 00:38:44,960 Speaker 3: That showed that the euro is not a full substitute 598 00:38:45,320 --> 00:38:48,319 Speaker 3: for the dollar in most purposes. I think it's also 599 00:38:48,360 --> 00:38:49,759 Speaker 3: shown that there are limits to what you can do 600 00:38:49,800 --> 00:38:52,880 Speaker 3: in yuan. It was striking to me that the Indians 601 00:38:52,880 --> 00:38:56,319 Speaker 3: and Russians have spent a lot of time discussing how 602 00:38:56,320 --> 00:39:00,960 Speaker 3: they're going to settle the now quite large oil trade 603 00:39:01,000 --> 00:39:03,759 Speaker 3: between India and Russia. And you know, India doesn't like 604 00:39:03,920 --> 00:39:06,400 Speaker 3: the yuan. They don't have the best relationship with China, 605 00:39:06,400 --> 00:39:08,920 Speaker 3: so they weren't really talking about yuan. They wanted to 606 00:39:08,920 --> 00:39:12,280 Speaker 3: pay in rupee, but the Russians didn't want to build 607 00:39:12,320 --> 00:39:15,040 Speaker 3: up a big rupee balance because that you know, it 608 00:39:15,080 --> 00:39:17,279 Speaker 3: isn't a global currency. The only place you can really 609 00:39:17,360 --> 00:39:20,320 Speaker 3: use rupee is to buy in India, to buy Indian goods. 610 00:39:20,800 --> 00:39:23,799 Speaker 3: They wanted something that was more global, so they have 611 00:39:23,960 --> 00:39:27,480 Speaker 3: ended up relying still on the dollar, weirdly in on 612 00:39:28,000 --> 00:39:31,120 Speaker 3: the Imorati durham, which is pegged to the dollar. 613 00:39:32,320 --> 00:39:33,560 Speaker 2: I didn't realize the settlements. 614 00:39:33,960 --> 00:39:38,879 Speaker 3: Yeah, so's it's it's just been this. Yes, there's been 615 00:39:38,960 --> 00:39:43,319 Speaker 3: a shift. Russia and China are no longer trading with 616 00:39:43,360 --> 00:39:48,200 Speaker 3: each other in a currency from the rival block or dollars, 617 00:39:48,239 --> 00:39:52,719 Speaker 3: euros or yen. But there's also been big limits on 618 00:39:52,880 --> 00:39:56,040 Speaker 3: how far Russia has been able to go in moving 619 00:39:56,120 --> 00:40:00,560 Speaker 3: its trade to pure yuan settlement. Or pure settlement and 620 00:40:00,640 --> 00:40:04,600 Speaker 3: more sanctions remote currencies. And you know, it is funny 621 00:40:04,640 --> 00:40:08,920 Speaker 3: to me that, you know, the GCC countries end up 622 00:40:08,960 --> 00:40:13,319 Speaker 3: acting as financial hubs and you denominate trade in their 623 00:40:13,360 --> 00:40:18,000 Speaker 3: currency when you know that is a dollar just guaranteed 624 00:40:18,920 --> 00:40:19,839 Speaker 3: by their central bank. 625 00:40:20,200 --> 00:40:21,240 Speaker 2: They should trade and tether. 626 00:40:21,800 --> 00:40:26,440 Speaker 3: It is your world, Joe, it's not mine. You know. 627 00:40:26,560 --> 00:40:28,799 Speaker 2: Actually I want to go back to something we were 628 00:40:28,800 --> 00:40:31,480 Speaker 2: talking about, you know, or you you brought up with 629 00:40:31,600 --> 00:40:34,799 Speaker 2: China and the sort of like the strides that they've 630 00:40:34,800 --> 00:40:37,799 Speaker 2: made on some of this advanced manufacturing. I don't remember what. 631 00:40:38,000 --> 00:40:40,280 Speaker 2: You know, We've talked to several times over the years. 632 00:40:40,640 --> 00:40:43,120 Speaker 2: I know that one at least in one of those 633 00:40:43,120 --> 00:40:48,640 Speaker 2: conversations we talked about the failure of China's passenger plane 634 00:40:48,800 --> 00:40:51,960 Speaker 2: industry or to build up a competitor to blowing an airbus. 635 00:40:52,400 --> 00:40:54,920 Speaker 2: And I believe in twenty twenty three that's still basically 636 00:40:54,960 --> 00:40:58,000 Speaker 2: the case, that they have not made much progress in 637 00:40:58,080 --> 00:41:01,200 Speaker 2: that area. And then of course they're there's the semiconductors, 638 00:41:01,320 --> 00:41:04,800 Speaker 2: and obviously lots of sanctions and efforts to constrain China's 639 00:41:04,840 --> 00:41:08,840 Speaker 2: ability to make advanced chips on its own. Do what 640 00:41:09,000 --> 00:41:12,400 Speaker 2: is like going on there. Like the question is kind 641 00:41:12,440 --> 00:41:14,480 Speaker 2: of on my mind because I was rereading a transcript 642 00:41:14,800 --> 00:41:17,319 Speaker 2: of an episode we recently did with Dan Wong. But 643 00:41:17,440 --> 00:41:19,040 Speaker 2: what you know, do you see like in some of 644 00:41:19,080 --> 00:41:25,640 Speaker 2: these like very like difficult complex industries like passenger jet, 645 00:41:25,719 --> 00:41:27,799 Speaker 2: like is there a change in the trajectory there? 646 00:41:29,360 --> 00:41:32,799 Speaker 3: I'm hesitating because I'm I'm honestly not sure. I mean, 647 00:41:32,840 --> 00:41:35,280 Speaker 3: the the C nine to one nine has taken forever, 648 00:41:35,640 --> 00:41:38,920 Speaker 3: but it is now in service. China can't build very 649 00:41:39,000 --> 00:41:42,000 Speaker 3: many of them. I don't think there's yet data on 650 00:41:42,040 --> 00:41:48,000 Speaker 3: their operational and fuel efficiency that will show how close 651 00:41:48,040 --> 00:41:53,520 Speaker 3: they are to mapping to the three twenty, the seven 652 00:41:53,640 --> 00:41:56,799 Speaker 3: thirty seven, their main main competitors. I mean, I think 653 00:41:56,920 --> 00:41:59,800 Speaker 3: actually the biggest change, and this is not what is 654 00:41:59,840 --> 00:42:05,000 Speaker 3: ane on anyone's mind, has not been the C nine 655 00:42:05,080 --> 00:42:07,200 Speaker 3: one nine, which has been slow. I mean, for all 656 00:42:07,239 --> 00:42:11,360 Speaker 3: of China's success in electric vehicles, they've done something amazing 657 00:42:11,360 --> 00:42:15,560 Speaker 3: in electric vehicles, and they've wagged expectations on aircraft. Aircraft 658 00:42:15,560 --> 00:42:19,440 Speaker 3: are I guess harder. China didn't have as well developed 659 00:42:19,480 --> 00:42:23,600 Speaker 3: a supply chain. The safety concerns are bigger, But the 660 00:42:23,640 --> 00:42:26,920 Speaker 3: biggest shock has been that Boeing's done a made a 661 00:42:26,960 --> 00:42:32,160 Speaker 3: series of major errors, and so independent of the success 662 00:42:32,160 --> 00:42:34,799 Speaker 3: of the C nine one nine, the seven thirty seven 663 00:42:34,840 --> 00:42:40,239 Speaker 3: has essentially been frozen out of the Chinese market the 664 00:42:40,320 --> 00:42:44,400 Speaker 3: safety concerns after the MAX, it's been hard to just 665 00:42:44,440 --> 00:42:48,560 Speaker 3: hasn't come back. And then obviously it's an area where 666 00:42:49,920 --> 00:42:52,480 Speaker 3: Chinese orders for new seven thirty sevens are a bit 667 00:42:52,520 --> 00:42:55,359 Speaker 3: of a geopolitical hostage, and there just haven't been any 668 00:42:55,400 --> 00:42:59,080 Speaker 3: after the trade war, may facilitated by the fact that Boeing, 669 00:42:59,320 --> 00:43:03,560 Speaker 3: you know, the MAX crashes provided ample opportunity for the 670 00:43:03,560 --> 00:43:05,440 Speaker 3: C nine one nine to show that it could be 671 00:43:05,520 --> 00:43:08,640 Speaker 3: a safer alternative to Boeing, which no one would have 672 00:43:08,680 --> 00:43:12,480 Speaker 3: considered possible. But it also highlighted that the biggest risk 673 00:43:12,560 --> 00:43:14,960 Speaker 3: that the C nine one nine faces is that it crashes. 674 00:43:15,280 --> 00:43:16,799 Speaker 3: So I think it's made the Chinese a little bit 675 00:43:16,840 --> 00:43:22,440 Speaker 3: more more conservative, But there is evolution there right now. 676 00:43:22,440 --> 00:43:27,400 Speaker 3: The evolution is mostly boeing own goals, giving Airbus a 677 00:43:27,440 --> 00:43:31,000 Speaker 3: big advantage and giving Airbus an opportunity which is right 678 00:43:31,040 --> 00:43:35,160 Speaker 3: now only limited by Airbus's capacity to scale up production 679 00:43:36,640 --> 00:43:40,160 Speaker 3: C nine one nine. It will be a marginal player 680 00:43:40,200 --> 00:43:42,680 Speaker 3: for a while China doesn't have the capacity to produce 681 00:43:42,800 --> 00:43:47,960 Speaker 3: that many, but maybe ten or twenty years down the 682 00:43:48,080 --> 00:43:52,719 Speaker 3: road there will be enough capacity for that, you know, 683 00:43:52,760 --> 00:43:55,800 Speaker 3: for China to have moved not only into the front 684 00:43:55,920 --> 00:43:58,960 Speaker 3: of the ev transportation sector, but also to be making 685 00:43:59,000 --> 00:44:02,040 Speaker 3: in roads in aviation. You know, on chips, I have 686 00:44:02,080 --> 00:44:04,319 Speaker 3: a you know, China is not at the cutting edge. 687 00:44:04,719 --> 00:44:07,760 Speaker 3: There are enormous sanctions to keep China from the cutting edge. 688 00:44:08,239 --> 00:44:10,800 Speaker 3: There are still China still produces a lot of lagging 689 00:44:10,880 --> 00:44:13,759 Speaker 3: edge chips, and those chips play big roles in a 690 00:44:13,760 --> 00:44:17,040 Speaker 3: lot of supply chains. So vulnerability from China is not 691 00:44:17,280 --> 00:44:22,600 Speaker 3: limited to Chinese production capacity and cutting edge and I 692 00:44:22,600 --> 00:44:25,719 Speaker 3: think it will be interesting to see if some of 693 00:44:25,760 --> 00:44:32,239 Speaker 3: these Chinese subsidies do generate enough capacity on some of 694 00:44:32,239 --> 00:44:35,440 Speaker 3: the lagging edge chips that the lagging edge chips are 695 00:44:35,680 --> 00:44:40,040 Speaker 3: are cheap, and a combination of lagging chips put together 696 00:44:40,239 --> 00:44:43,360 Speaker 3: can produce an effective substitute for some of the cutting 697 00:44:43,440 --> 00:44:47,839 Speaker 3: edge chips. So it's it's complex, but clearly, you know, 698 00:44:49,320 --> 00:44:52,840 Speaker 3: when China decided it wanted to catch the technological frontier 699 00:44:52,880 --> 00:44:55,520 Speaker 3: and semiconductors, that caught the United States attention. And one 700 00:44:55,560 --> 00:44:57,360 Speaker 3: of the things the US discovered was that it was 701 00:44:57,400 --> 00:45:00,560 Speaker 3: no longer at the cutting edge of semiconductor manufacturing, not 702 00:45:00,680 --> 00:45:06,000 Speaker 3: because of China, but because Intel was lagging TSMC and Samsung. 703 00:45:06,600 --> 00:45:09,320 Speaker 3: And it seems obvious to me that until the US 704 00:45:09,600 --> 00:45:12,799 Speaker 3: is comfortable that it is back at the cutting edge, 705 00:45:13,000 --> 00:45:15,400 Speaker 3: there's going to be some reluctance to allow China to 706 00:45:15,440 --> 00:45:19,600 Speaker 3: move ahead too fast, in part because there are there 707 00:45:19,640 --> 00:45:26,600 Speaker 3: are military applications that are real. So it's become that 708 00:45:26,760 --> 00:45:30,120 Speaker 3: is one place where parts of global trade have become 709 00:45:30,200 --> 00:45:33,680 Speaker 3: hostages to a geopolitical settlement. 710 00:45:34,239 --> 00:45:37,479 Speaker 1: Could I ask you about something that Karthik Sanchron brought 711 00:45:37,560 --> 00:45:41,480 Speaker 1: up on a recent episode, which is basically he mentioned 712 00:45:41,680 --> 00:45:44,760 Speaker 1: that none of the Belt and Road debt that various 713 00:45:44,800 --> 00:45:48,680 Speaker 1: countries owe to China is actually denominated in UN but 714 00:45:48,760 --> 00:45:51,600 Speaker 1: all of it's and dollars. Why is that, because that 715 00:45:51,640 --> 00:45:55,240 Speaker 1: would have seemed to be, you know, an obvious one 716 00:45:55,360 --> 00:45:58,640 Speaker 1: for China to try to do, assuming you know that 717 00:45:58,719 --> 00:46:01,600 Speaker 1: it wants a greater role for the UN in the system. 718 00:46:03,200 --> 00:46:09,160 Speaker 3: I don't have a full answer. I find it a mystery. 719 00:46:10,680 --> 00:46:14,960 Speaker 3: I find it a puzzle. I have a set of theories, 720 00:46:16,120 --> 00:46:23,200 Speaker 3: but they're contingent on getting confirmation from actual Chinese sources. 721 00:46:24,920 --> 00:46:27,280 Speaker 3: But my, I mean it does. It would have made 722 00:46:27,320 --> 00:46:30,760 Speaker 3: sense to have the Belton Road in you on, because 723 00:46:30,800 --> 00:46:34,360 Speaker 3: there was a whole push for R and B internationalization 724 00:46:34,440 --> 00:46:38,400 Speaker 3: at the time. Right. It is strange that when you 725 00:46:38,480 --> 00:46:42,120 Speaker 3: go into the sometimes secret loan docs you discover they're 726 00:46:42,160 --> 00:46:45,360 Speaker 3: all they're all not only in dollars, they're libor linkers 727 00:46:45,880 --> 00:46:50,080 Speaker 3: with a spread, and they typically amortize after five years. 728 00:46:50,120 --> 00:46:54,319 Speaker 3: There's a certain standard structure to them. And you know, 729 00:46:54,719 --> 00:46:58,600 Speaker 3: the fact that they're libor linkers actually really now matters 730 00:46:58,640 --> 00:47:01,799 Speaker 3: because libor is quite you know, US short term rates 731 00:47:01,800 --> 00:47:06,640 Speaker 3: have gone up a lot hy in dollars, I presume 732 00:47:06,719 --> 00:47:09,880 Speaker 3: because at the origin this was an effort to recycle 733 00:47:10,040 --> 00:47:15,440 Speaker 3: China's dollar surplus as trade surplus and to use dollars 734 00:47:15,480 --> 00:47:18,480 Speaker 3: in a way that didn't add to the formal reported 735 00:47:18,520 --> 00:47:22,680 Speaker 3: reserves of China's Central bank. We know that was the case. 736 00:47:22,719 --> 00:47:26,960 Speaker 3: In some of the early first steps in the Belton Road. 737 00:47:27,000 --> 00:47:30,080 Speaker 3: There was something called an entrusted loan, which was save 738 00:47:30,560 --> 00:47:34,560 Speaker 3: money from China's foreign exchange reserves that was entrusted with 739 00:47:35,400 --> 00:47:37,520 Speaker 3: XM or CDB, and they would lend it out and 740 00:47:37,560 --> 00:47:41,840 Speaker 3: just get a spread. They would provide a service to Safe, 741 00:47:41,920 --> 00:47:45,360 Speaker 3: the holder of the reserves, without necessarily having it one 742 00:47:45,440 --> 00:47:47,440 Speaker 3: hundred percent on their balance sheets. So it was clearly 743 00:47:47,800 --> 00:47:50,120 Speaker 3: in dollars because it was a dollar they had. They'd 744 00:47:50,160 --> 00:47:52,799 Speaker 3: taken a dollar from Safe and they lint out that 745 00:47:52,880 --> 00:47:55,920 Speaker 3: dollar and they needed to get repaid in dollars. A 746 00:47:55,960 --> 00:47:58,799 Speaker 3: lot of those entrusted loans were converted into capital, and 747 00:47:58,960 --> 00:48:02,480 Speaker 3: to some degree, the money trail has gotten a little faint, 748 00:48:02,520 --> 00:48:04,480 Speaker 3: a little harder to follow. But I think a lot 749 00:48:04,560 --> 00:48:09,040 Speaker 3: of the funding for XM and CDB coming from various 750 00:48:09,200 --> 00:48:13,040 Speaker 3: internal funds, some of which have support from China's reserves. 751 00:48:14,640 --> 00:48:18,120 Speaker 3: Probably CDB gets some swaps from someone in China. Bank 752 00:48:18,160 --> 00:48:21,360 Speaker 3: of China PBOC would be the logical ones en dollars. 753 00:48:21,920 --> 00:48:23,719 Speaker 3: So if you're taking in dollars, you got to lend 754 00:48:23,719 --> 00:48:28,040 Speaker 3: out dollars, and so it becomes necessary in order to 755 00:48:28,120 --> 00:48:33,560 Speaker 3: recycle China's global surplus. You know, Chinese reserves have been 756 00:48:33,719 --> 00:48:39,760 Speaker 3: flat roughly since twenty sixteen, so seven is years. During 757 00:48:39,840 --> 00:48:44,319 Speaker 3: that period, the net foreign asset position of both the 758 00:48:44,320 --> 00:48:46,879 Speaker 3: state commercial banks and the policy banks has probably gone 759 00:48:46,960 --> 00:48:50,759 Speaker 3: up by one point five trillion. So if you're recycling 760 00:48:50,800 --> 00:48:55,719 Speaker 3: a big surplus, someone in the economy has to be 761 00:48:55,840 --> 00:48:58,960 Speaker 3: using up some of the dollars you generate and lending 762 00:48:59,000 --> 00:49:03,760 Speaker 3: them out. And that mechanism of recycling in complex ways 763 00:49:04,160 --> 00:49:06,600 Speaker 3: seems to have included the policy banks and the Belton 764 00:49:06,680 --> 00:49:09,520 Speaker 3: Road loones. That is the best explanation I can come 765 00:49:09,600 --> 00:49:12,000 Speaker 3: up with, but it is a mystery. And you would 766 00:49:12,000 --> 00:49:14,160 Speaker 3: think that China would have made more of an effort 767 00:49:14,840 --> 00:49:19,360 Speaker 3: not just to use the yuan to settle bilateral trade, 768 00:49:19,400 --> 00:49:23,200 Speaker 3: to make that trade a bit remove from sanctions, but 769 00:49:23,480 --> 00:49:26,000 Speaker 3: would have made an effort to kind of make the 770 00:49:26,120 --> 00:49:33,719 Speaker 3: yuan into a global currency of denomination for debt contracts. 771 00:49:34,120 --> 00:49:36,480 Speaker 3: And the easiest way would be to say that countries 772 00:49:36,960 --> 00:49:39,240 Speaker 3: that wanted to borrow money from China needed to borrow 773 00:49:39,239 --> 00:49:41,320 Speaker 3: a yuan, But that didn't happen. 774 00:49:41,920 --> 00:49:43,920 Speaker 2: And I have one last question for me. So the 775 00:49:44,000 --> 00:49:45,960 Speaker 2: last time we had you on Tracy mentioned is April 776 00:49:46,000 --> 00:49:49,120 Speaker 2: twenty twenty, and we are specifically talking then about the 777 00:49:49,520 --> 00:49:54,080 Speaker 2: engulfing crisis that emerging markets were facing. First obviously just 778 00:49:54,200 --> 00:49:57,480 Speaker 2: the pure like the econ shock due to everything shutting 779 00:49:57,560 --> 00:50:01,399 Speaker 2: down with the pandemic, but then numerous things on top 780 00:50:01,400 --> 00:50:04,120 Speaker 2: of that, including the inflation and the commodity surge, etcetera. 781 00:50:04,520 --> 00:50:07,200 Speaker 2: Within the China context. I know this is not something 782 00:50:07,239 --> 00:50:10,120 Speaker 2: I follow closely, but I know that like China and 783 00:50:10,160 --> 00:50:12,759 Speaker 2: the rest of the world, the IMF etc. Have not 784 00:50:12,800 --> 00:50:16,360 Speaker 2: been on the same page with respect to restructuring or 785 00:50:16,400 --> 00:50:20,360 Speaker 2: forgiving or lessening in some way the em debt burden. 786 00:50:20,880 --> 00:50:23,360 Speaker 2: Can you explain just like what we should understand about 787 00:50:23,360 --> 00:50:25,160 Speaker 2: like that gap and where those talks are. 788 00:50:26,560 --> 00:50:31,520 Speaker 3: I can try whether that's probably a whole episode. Look, 789 00:50:33,040 --> 00:50:35,440 Speaker 3: I guess you know, there's a question of terminology. Most 790 00:50:35,440 --> 00:50:39,200 Speaker 3: of the big emerging markets are in pretty solid financial 791 00:50:39,200 --> 00:50:43,919 Speaker 3: shape India, Brazil, Mexico, Indonesia, nothing to worry about. There's 792 00:50:43,920 --> 00:50:47,200 Speaker 3: a set of what I would consider as emerging markets, 793 00:50:47,280 --> 00:50:50,000 Speaker 3: or some at the cutting edge of what are called 794 00:50:50,080 --> 00:50:53,280 Speaker 3: frontier markets, that are in a bit of trouble. Turkey 795 00:50:53,440 --> 00:50:57,480 Speaker 3: Egypt Neither has been a big recipient of Chinese credit, Okay, 796 00:50:58,360 --> 00:51:01,520 Speaker 3: they have different issues. Both have been recipients of golf 797 00:51:01,600 --> 00:51:05,640 Speaker 3: bailout money. Some of the Saudi surplus that didn't go 798 00:51:05,680 --> 00:51:09,160 Speaker 3: to Messi and Ronaldo did go to Egypt and Turkey, 799 00:51:10,040 --> 00:51:15,640 Speaker 3: to Urduwan and others Urwan and Sici and then Pakistan 800 00:51:15,640 --> 00:51:18,960 Speaker 3: which has been a big recipient of Chinese money. So 801 00:51:19,000 --> 00:51:23,960 Speaker 3: the current debate isn't around some of the bigger, more 802 00:51:24,040 --> 00:51:28,200 Speaker 3: systemically important emerging economies. It's around some of the smaller 803 00:51:29,840 --> 00:51:33,920 Speaker 3: economies frontier markets that both borrowed heavily from China and 804 00:51:33,960 --> 00:51:38,120 Speaker 3: borrowed from the bond market. And the basic difficulty is 805 00:51:38,120 --> 00:51:43,040 Speaker 3: that we these countries can't pay. They've most cases stopped paying. 806 00:51:43,080 --> 00:51:49,120 Speaker 3: Sri Lanka, Gona, Zambia have stopped paying. There clearly needs 807 00:51:49,160 --> 00:51:53,080 Speaker 3: to be a restructuring, and the Chinese and to some 808 00:51:53,120 --> 00:51:57,239 Speaker 3: degree the bond mark bond investors haven't entirely accepted the 809 00:51:57,280 --> 00:52:00,000 Speaker 3: IMF judgment on the amount of debt relief that is needed. 810 00:52:00,680 --> 00:52:04,440 Speaker 3: There is no need, consistent with China's preferences, for China 811 00:52:04,800 --> 00:52:08,400 Speaker 3: to write down the face value of their loans, but 812 00:52:08,480 --> 00:52:10,800 Speaker 3: there probably is a need in some of the specific 813 00:52:10,880 --> 00:52:14,680 Speaker 3: cases for XM and CDB to accept a very concessional 814 00:52:14,719 --> 00:52:18,200 Speaker 3: interest rate, and there just isn't a model whereby they have, 815 00:52:19,040 --> 00:52:25,359 Speaker 3: with scrutiny, with visibility to other creditors and to other borrowers, 816 00:52:25,560 --> 00:52:31,040 Speaker 3: accepted obviously concessional interest rates on what they view as 817 00:52:31,080 --> 00:52:36,000 Speaker 3: originally commercial loans, so that is the core IMPASS. That 818 00:52:36,160 --> 00:52:40,279 Speaker 3: IMPASS because China, because official creditors have a role to 819 00:52:40,280 --> 00:52:43,480 Speaker 3: play in improving IMF lending, has meant that it has 820 00:52:43,520 --> 00:52:47,120 Speaker 3: been difficult for the IMF to lend after a country defaults. 821 00:52:47,760 --> 00:52:53,880 Speaker 3: And because traditionally the restructuring of bilateral official credits proceeds 822 00:52:53,960 --> 00:52:57,359 Speaker 3: bond restructurings, the bond restructurings have been held up. So 823 00:52:57,440 --> 00:53:01,480 Speaker 3: for a set of lower middle income cories, they've fallen 824 00:53:01,480 --> 00:53:04,440 Speaker 3: into default. The number of countries into fault keeps growing 825 00:53:04,800 --> 00:53:08,400 Speaker 3: and there aren't any exits through restructurings. So there's hope 826 00:53:08,440 --> 00:53:11,840 Speaker 3: maybe that either in Sri Lanka or Zambia or Aghana, 827 00:53:11,960 --> 00:53:16,040 Speaker 3: someone will come up with a model for restructuring the 828 00:53:16,200 --> 00:53:19,520 Speaker 3: XM and CDB loans and like people talk about China, 829 00:53:19,560 --> 00:53:22,640 Speaker 3: but the bulk of the loans are from those two institutions, 830 00:53:23,320 --> 00:53:25,840 Speaker 3: and you'll find a model, a model that works, and 831 00:53:25,840 --> 00:53:28,200 Speaker 3: then you can kind of move on. But right now, 832 00:53:28,280 --> 00:53:33,040 Speaker 3: you know, the Chinese have been contesting every technical detail 833 00:53:33,080 --> 00:53:36,560 Speaker 3: of the traditional restructuring process. Whether that's because they feel 834 00:53:36,600 --> 00:53:41,040 Speaker 3: like the restructuring process was designed by their geopolitical enemies 835 00:53:41,400 --> 00:53:44,160 Speaker 3: and they are being forced to accept a dictate of 836 00:53:44,840 --> 00:53:47,920 Speaker 3: how to restructure debts or whether because they're just stalling 837 00:53:47,960 --> 00:53:50,080 Speaker 3: because their banks aren't willing to take losses. We don't know. 838 00:53:50,440 --> 00:53:53,200 Speaker 1: All right, Well, Brad, I feel like we could throw 839 00:53:53,239 --> 00:53:57,080 Speaker 1: out some more of the great financial mysteries of our 840 00:53:57,120 --> 00:53:59,439 Speaker 1: time at you and you listen to you to try 841 00:53:59,440 --> 00:54:01,440 Speaker 1: to tackle them all, but we're gonna have to leave 842 00:54:01,440 --> 00:54:03,799 Speaker 1: it there. Thank you so much for coming back on 843 00:54:03,840 --> 00:54:05,239 Speaker 1: the show. It was really great to have you. 844 00:54:05,880 --> 00:54:08,480 Speaker 3: Oh thanks, Maybe next time we'll pick some narrower topics. 845 00:54:08,760 --> 00:54:09,400 Speaker 2: Yes, we had this. 846 00:54:10,320 --> 00:54:11,200 Speaker 1: This is our jumping off. 847 00:54:11,239 --> 00:54:13,080 Speaker 2: This is what happens when you go three years went 848 00:54:13,160 --> 00:54:15,040 Speaker 2: out a brand, So the next time we could go. 849 00:54:15,120 --> 00:54:31,759 Speaker 1: Now, Joe, so much to pick out of that conversation. 850 00:54:31,840 --> 00:54:34,120 Speaker 1: I'm kind of having a hard time focusing on just 851 00:54:34,160 --> 00:54:36,320 Speaker 1: one or two things. I did think the point about 852 00:54:36,680 --> 00:54:41,000 Speaker 1: de euroisation versus de dollarization was a really interesting one. 853 00:54:41,120 --> 00:54:44,080 Speaker 2: There's no one you could talk about, you could talk 854 00:54:44,120 --> 00:54:48,760 Speaker 2: to in which the conversation includes Lionel Messi, the COMAC 855 00:54:48,880 --> 00:54:53,279 Speaker 2: C nine one nine, and how trade denominated in the 856 00:54:54,000 --> 00:54:58,840 Speaker 2: Mrodi Durham is really dollar denominated trade in disguise and 857 00:54:58,880 --> 00:55:01,160 Speaker 2: have it all be coherent, but that's why we like 858 00:55:01,200 --> 00:55:01,840 Speaker 2: touring the bread. 859 00:55:02,000 --> 00:55:03,879 Speaker 1: It's true. I do you think next time we need 860 00:55:03,920 --> 00:55:07,360 Speaker 1: to choose one thing? That episode we did on the 861 00:55:07,360 --> 00:55:09,839 Speaker 1: Taiwanese life insurance is still one of my all time 862 00:55:10,000 --> 00:55:12,680 Speaker 1: favorite episodes. Next time we need to do a whole 863 00:55:12,680 --> 00:55:17,560 Speaker 1: episode on em debt restructuring or maybe the structure of 864 00:55:18,440 --> 00:55:21,880 Speaker 1: a similar topic, but the structuring of China's belt and 865 00:55:22,000 --> 00:55:23,880 Speaker 1: road liabilities. That would be interesting. 866 00:55:24,120 --> 00:55:26,399 Speaker 2: And we got to do a like a really deep 867 00:55:26,480 --> 00:55:29,880 Speaker 2: dive into Chinese EV exports and what it's doing to 868 00:55:29,920 --> 00:55:33,480 Speaker 2: the European car manufacturers in particular, because that feels like 869 00:55:33,480 --> 00:55:35,359 Speaker 2: like an Earth quick story. Just something that I don't 870 00:55:35,360 --> 00:55:37,600 Speaker 2: think was on anyone's radar a few years ago, is 871 00:55:37,600 --> 00:55:38,960 Speaker 2: something that could have happened. 872 00:55:39,560 --> 00:55:42,440 Speaker 1: Yeah, this was a macro conversation that has led to 873 00:55:42,560 --> 00:55:45,799 Speaker 1: like eighteen different micro episodes to do. 874 00:55:46,480 --> 00:55:47,359 Speaker 3: All right, the. 875 00:55:47,280 --> 00:55:50,360 Speaker 2: Fuel efficiency of the sea, and it was not you know, 876 00:55:50,440 --> 00:55:52,239 Speaker 2: it's like where that stands versus the air? 877 00:55:52,480 --> 00:55:55,600 Speaker 1: You know, I can't wait? All right, shall we leave 878 00:55:55,640 --> 00:55:58,520 Speaker 1: it there for a Okay? This has been another episode 879 00:55:58,560 --> 00:56:01,160 Speaker 1: of the Odd Lots podcast. I'm Tracy Alloway. You can 880 00:56:01,160 --> 00:56:04,520 Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe Wisenthal. 881 00:56:04,560 --> 00:56:07,240 Speaker 2: You can follow me on Twitter at The Stalwart. Follow 882 00:56:07,280 --> 00:56:10,920 Speaker 2: our guest Brad Setser on Twitter. He's Brad Underscore Setser. 883 00:56:11,360 --> 00:56:15,000 Speaker 2: Follow our producers Carman Rodriguez at Carmen Arman and dash 884 00:56:15,000 --> 00:56:17,480 Speaker 2: O Bennett at dashbot. And check out all of the 885 00:56:17,480 --> 00:56:21,680 Speaker 2: Bloomberg podcasts under the handle at podcasts. And for more 886 00:56:21,680 --> 00:56:24,640 Speaker 2: Oddlots content, go to Bloomberg dot com slash odd Lots, 887 00:56:24,640 --> 00:56:27,360 Speaker 2: where we have a blog, we post transcripts, and we 888 00:56:27,400 --> 00:56:30,319 Speaker 2: have a newsletter that comes out every Friday. And for 889 00:56:30,360 --> 00:56:33,040 Speaker 2: more check out our discord. It's a really fun place 890 00:56:33,080 --> 00:56:35,200 Speaker 2: to hang out and chat. People are in their twenty 891 00:56:35,239 --> 00:56:37,200 Speaker 2: four to seven talk about all of these topics. They'll 892 00:56:37,200 --> 00:56:41,800 Speaker 2: definitely be talking about this episode. Discord dot gg, slash Odlogs. 893 00:56:42,040 --> 00:57:01,320 Speaker 2: Thanks for listening in