WEBVTT - Brad Setser on How World Trade Changed In the Last Three Years 0:00:10.400 --> 0:00:13.680 Hello, and welcome to another episode of the Authoughts Podcast. 0:00:13.720 --> 0:00:17.120 I'm Tracy Alloway and I'm Jill Whysantal. Joe, can you 0:00:17.200 --> 0:00:19.720 remember the last time we had Brad Setser on. 0:00:20.560 --> 0:00:22.599 It's been too long. I don't know the exact time. 0:00:22.720 --> 0:00:25.400 I think we had it on once since the pandemic, 0:00:25.480 --> 0:00:29.200 but obviously he did his stint at the administration, so 0:00:29.240 --> 0:00:31.640 it sort of like disappeared from public view for a while, 0:00:32.120 --> 0:00:33.960 and it's just like, it's been too long without a 0:00:34.000 --> 0:00:35.000 Brad sets Or episode. 0:00:35.040 --> 0:00:37.440 Well, you are absolutely right that it has been too long, 0:00:37.960 --> 0:00:39.720 But the last time we had him on the show 0:00:39.840 --> 0:00:42.080 was it was actually April twenty twenty, so it's sort 0:00:42.120 --> 0:00:46.000 of firmly in the death right there right at the 0:00:46.680 --> 0:00:50.080 start of the pandemic economic experience. 0:00:50.120 --> 0:00:51.600 This over three years ago, now. 0:00:51.520 --> 0:00:55.600 I know, and a lot has happened since then. As 0:00:55.640 --> 0:00:59.360 you mentioned, he did leave the Council on Foreign Relations 0:00:59.400 --> 0:01:03.400 CFR to join the Biden administration as a trade representative. 0:01:03.400 --> 0:01:06.319 He's since come back, which means we get to enjoy 0:01:06.480 --> 0:01:11.080 his blog posts again, his tweeting, but also setting aside 0:01:11.200 --> 0:01:15.520 Brad's personal experience over the past three years, there's just 0:01:15.560 --> 0:01:19.240 a lot that's happened with global trade, with the economy, 0:01:20.160 --> 0:01:23.360 and the weird thing is a lot's happened, but a 0:01:23.400 --> 0:01:25.720 lot has kind of stayed the same as well well. 0:01:25.880 --> 0:01:29.440 So it's really well put because I think that, you know, 0:01:29.560 --> 0:01:33.040 one of the expectations during probably the last time we 0:01:33.120 --> 0:01:35.840 talked in April twenty twenty or middle of twenty twenty 0:01:35.920 --> 0:01:38.880 years like everyone's like, oh, near shoring or you know, 0:01:39.040 --> 0:01:42.560 great separation or and I don't think that really is 0:01:42.640 --> 0:01:45.240 the story. So on some level, I don't, you know, 0:01:45.280 --> 0:01:47.720 I do think maybe at the margins, like we're still 0:01:47.760 --> 0:01:50.720 trading a lot with China, right for all of the clock, 0:01:50.760 --> 0:01:53.160 We're still trading a lot with China's part. But it 0:01:53.200 --> 0:01:56.600 does feel like on the other hand, big things are 0:01:56.720 --> 0:02:00.440 changing with the nature of Chinese exports, the auto industry, 0:02:00.480 --> 0:02:03.880 and then all of these things with like EVS and 0:02:04.040 --> 0:02:06.520 the Inflationial Reduction Act and the Chips Act. So big 0:02:06.560 --> 0:02:09.800 things are happening on the global trade level, tensions between 0:02:09.800 --> 0:02:12.040 the US and the EU. Big things are happening on 0:02:12.080 --> 0:02:14.160 the global trade level, even if some of the immediate 0:02:14.240 --> 0:02:18.840 predictions didn't exactly like unfold yet how people thought back then. 0:02:19.000 --> 0:02:21.079 Yeah, I mean the US is still running a current 0:02:21.080 --> 0:02:24.679 account deficit, China is still running a current account surplus. 0:02:24.720 --> 0:02:28.559 But things are sort of changing within those broad categories. 0:02:28.639 --> 0:02:31.320 So we need to check in with Brad. We need 0:02:31.360 --> 0:02:34.480 to get his take on stuff that has changed or 0:02:34.520 --> 0:02:37.120 hasn't changed over the past three years in the global 0:02:37.120 --> 0:02:40.560 economy and global trade, in the balance of payments. And 0:02:40.600 --> 0:02:42.760 I'm very pleased to say that he's going to join 0:02:42.840 --> 0:02:46.120 us now. Brad Setzer, Senior Fellow at the Council on 0:02:46.200 --> 0:02:48.480 Foreign Relations. It's so good to have you back on 0:02:48.520 --> 0:02:48.880 the show. 0:02:49.840 --> 0:02:50.920 Thanks for bringing me back. 0:02:51.240 --> 0:02:55.200 Setting aside some of the job change that you had, 0:02:55.720 --> 0:02:58.480 what's been your impression of the past three years, Like 0:02:58.600 --> 0:03:00.840 broad stroke has happened? 0:03:01.800 --> 0:03:05.440 Where to begin? I mean, the world economy did didn't 0:03:05.440 --> 0:03:08.000 completely come to a halt in the first few months 0:03:08.000 --> 0:03:13.560 of the pandemic, but it did sort of stall intentionally 0:03:14.320 --> 0:03:19.280 enormous stimulus packages or pat or passed. There was a 0:03:19.320 --> 0:03:23.639 real effort to protect people's income during the pandemic induced 0:03:23.840 --> 0:03:26.919 slow down, and then I think, you know, a series 0:03:27.120 --> 0:03:32.720 of shocks have unfolded after that. I don't think when 0:03:32.720 --> 0:03:36.560 the pandemic initially struck, people realized there was going to 0:03:36.600 --> 0:03:39.840 be this enormous shift in the composition of demand towards 0:03:39.880 --> 0:03:44.480 goods and away from services, which really was quite enormous, 0:03:44.520 --> 0:03:48.240 and it gummed up global trade routes for a while. 0:03:48.240 --> 0:03:50.760 There was just more demand for goods than there was capacity, 0:03:51.960 --> 0:03:54.720 even in places where we thought there was tons of capacity. 0:03:56.560 --> 0:03:59.680 And then you have the shocks from Russia's invasion and 0:03:59.680 --> 0:04:04.520 oil markets, the closing of the pipelines to Europe. So 0:04:04.560 --> 0:04:07.880 you know, there have been enormous shifts. But you know, 0:04:07.920 --> 0:04:10.720 as you as you alluded to the basic some of 0:04:10.760 --> 0:04:16.240 the basic patterns of the global economy didn't immediately change, 0:04:16.680 --> 0:04:20.080 or in some cases they reasserted themselves more strongly. So 0:04:20.160 --> 0:04:22.480 you know, China's trades are plus is way bigger than 0:04:22.480 --> 0:04:25.960 it was before the pandemic. The US trade deficit is 0:04:26.200 --> 0:04:32.240 slightly bigger. Some of the trajectories that were probably emerging 0:04:32.920 --> 0:04:37.240 even before the pandemic China. China is no longer just 0:04:38.080 --> 0:04:41.680 a location of final assembly. China produces a lot of 0:04:41.839 --> 0:04:45.720 key intermediate goods. It now produces a lot of capital goods. 0:04:45.720 --> 0:04:49.080 It's now producing and exporting a ton of electric vehicles. 0:04:49.120 --> 0:04:52.000 I think some of those trends were quite clear before 0:04:52.040 --> 0:04:56.080 the pandemic, they're now more apparent. And it's also fair 0:04:56.120 --> 0:05:00.000 to say that while while it hasn't changed global trade, 0:05:00.640 --> 0:05:05.600 there is a new concern about weaponizing supply chains that's 0:05:05.680 --> 0:05:10.159 leading to policy chefs that you know, maybe or maybe 0:05:10.200 --> 0:05:12.400 won't have a big future impact. 0:05:12.839 --> 0:05:15.760 So what do you know, Let's talk about China or 0:05:15.800 --> 0:05:18.960 the US China trade relationship. You know, people have talked 0:05:18.960 --> 0:05:21.440 about decoupling, but it doesn't really seem like that it's 0:05:21.480 --> 0:05:24.760 happened or it's happening, but there is this impulse, maybe 0:05:24.800 --> 0:05:29.039 partly for national security reasons, maybe partly for just competitive 0:05:29.080 --> 0:05:31.880 reasons other you know, to change the nature of the relationship. 0:05:32.160 --> 0:05:34.440 How is it different you know here in May twenty 0:05:34.520 --> 0:05:38.200 twenty three versus say, if we had been talking about 0:05:38.200 --> 0:05:41.560 this US China relationship in May twenty nineteen. 0:05:42.200 --> 0:05:45.560 Well, May twenty nineteen, we would have been debating whether 0:05:45.600 --> 0:05:48.159 Trump was going to raise tariffs or not raised terrorists. 0:05:48.200 --> 0:05:51.640 Not sure I would have been at the fight over 0:05:51.680 --> 0:05:53.200 tariffs would have been at its peak. I mean, I 0:05:53.240 --> 0:05:58.200 think the biggest difference now is we've largely it's not 0:05:58.240 --> 0:06:01.640 like the tariffs have gone away, but the tariffs didn't 0:06:01.760 --> 0:06:05.040 drive as big as shift in trade as some expected, 0:06:07.680 --> 0:06:11.200 and the tools that are being employed to try to 0:06:11.320 --> 0:06:16.839 change the structure of the relationship have evolved. So, you know, 0:06:16.880 --> 0:06:22.480 the Inflation Reduction Act introduced a set of requirements for 0:06:22.520 --> 0:06:26.880 eligibility for electric vehicle subsidies that have an impact on 0:06:27.880 --> 0:06:32.679 continued use of the Chinese battery critical mineral supply chain. 0:06:33.080 --> 0:06:35.159 None of that would have been on anyone's radar screens 0:06:35.200 --> 0:06:38.080 back in twenty nineteen. You know, evs weren't that big. 0:06:38.920 --> 0:06:42.160 The notion that all critical materials for batteries were processed 0:06:42.160 --> 0:06:45.720 in China wasn't part of common knowledge. Joe Manchin had 0:06:45.720 --> 0:06:48.720 not determined that that was a future national security threat 0:06:48.720 --> 0:06:53.320 for the United States. You know, probably in twenty nineteen, 0:06:53.560 --> 0:06:57.200 it wasn't widely recognized that Intel was falling behind the 0:06:57.279 --> 0:07:01.839 leading edge of semi conductor manufact string technology, and the 0:07:01.960 --> 0:07:06.480 vulnerabilities that were associated with reliance on TSMC weren't kind 0:07:06.480 --> 0:07:09.000 of front and center. Now. I think if you go 0:07:09.080 --> 0:07:12.600 to ask anyone at the NSC, you know, what would 0:07:12.640 --> 0:07:18.680 happen if there were a negative escalation around the Taiwan Straits. 0:07:19.760 --> 0:07:22.960 Their thoughts would go quite quickly, what happens to Semicocter supplies, 0:07:23.360 --> 0:07:26.440 where that would not have been as prominent in people's 0:07:26.480 --> 0:07:29.880 thinking in twenty nineteen about Look, the other thing I 0:07:29.960 --> 0:07:33.720 keep coming back to this, China is exporting a trillion 0:07:33.760 --> 0:07:37.360 dollars more than it was before the pandemic. It's exporting 0:07:37.400 --> 0:07:40.720 a trillion dollars more than it did when Trump started 0:07:40.720 --> 0:07:44.880 his trade war. A whole bunch of large, you know, 0:07:44.960 --> 0:07:50.080 kind of policy measures that were designed to make trade 0:07:50.160 --> 0:07:53.560 less attractive didn't have the effect of making China less 0:07:53.600 --> 0:07:58.760 dependent on trade. Other thing, other forces had a bigger impact, 0:07:59.160 --> 0:08:02.400 the shift towards global demand for good, The fact that 0:08:02.400 --> 0:08:05.080 you know, the Chinese yuan is still basically where it was. 0:08:06.520 --> 0:08:07.680 It depends on what you want to do it, but 0:08:07.720 --> 0:08:09.520 you know, it hasn't had a lot of strength since 0:08:09.560 --> 0:08:15.720 twenty fourteen, the evolution of the competitive of a competitive 0:08:15.760 --> 0:08:18.880 auto industry in China. All these things, in the end 0:08:19.040 --> 0:08:23.280 mattered more whether we were tariffed one third, two thirds, 0:08:23.400 --> 0:08:25.880 or all of our trade with China, which was the 0:08:25.920 --> 0:08:26.920 debate back in twenty. 0:08:26.760 --> 0:08:29.120 Two You know, you mentioned the idea that China is 0:08:29.160 --> 0:08:33.280 still very much dependent on trade, and you see that 0:08:33.679 --> 0:08:39.640 even internally from a policy perspective, we know, for instance, 0:08:40.280 --> 0:08:43.280 the Chinese economy has been a little weaker than it 0:08:43.280 --> 0:08:47.839 has been historically. Recently, they've been experiencing a much lower 0:08:47.920 --> 0:08:49.880 level of inflation than a lot of other places in 0:08:49.920 --> 0:08:53.920 the world, And as part of the policy response, China 0:08:54.040 --> 0:09:00.200 seems to be trying to boost supply side support and capacity, 0:09:00.440 --> 0:09:04.880 which will inevitably just feed into an even bigger trade surplus. 0:09:05.400 --> 0:09:09.600 Despite the stated ambition of trying to build up domestic 0:09:09.640 --> 0:09:14.360 demand shift more to a services led economy, why does 0:09:14.400 --> 0:09:18.520 that transition seem to be so difficult and why does 0:09:18.559 --> 0:09:23.800 it feel like China often falls back on supply side 0:09:23.840 --> 0:09:24.880 support policies. 0:09:26.120 --> 0:09:30.920 Well, at this point, I think my operating hypothesis is 0:09:30.920 --> 0:09:35.959 that President she doesn't really believe in providing direct support 0:09:36.000 --> 0:09:41.119 to households. That would be the simplest, most straightforward explanation 0:09:41.280 --> 0:09:44.480 for why China, in the face of shocks that seem 0:09:44.559 --> 0:09:47.559 to call for direct support for households, has not done 0:09:47.559 --> 0:09:51.880 so the other measure. And people to often talk about 0:09:51.960 --> 0:09:55.720 difficult structural forms, and usually they mean laying people off 0:09:55.920 --> 0:10:01.239 or cutting back on subsidies, But in China, it strangely 0:10:01.320 --> 0:10:05.200 seems to be a very difficult structural reform, to change 0:10:05.880 --> 0:10:11.840 a very regressive system of taxation, move away from very 0:10:11.880 --> 0:10:16.640 hefty contributions organized through the payroll system with a big 0:10:16.720 --> 0:10:19.720 lump sum when you enter the formal labor force, so 0:10:19.720 --> 0:10:24.040 that your marginal tax rate for low income formal work 0:10:24.120 --> 0:10:28.160 is incredibly high, and to shift to a different system 0:10:28.200 --> 0:10:32.600 of tax and a system that provides a better balance 0:10:32.640 --> 0:10:35.520 of revenues between the center and the provinces, and that 0:10:36.600 --> 0:10:41.560 allows more policy support for consumption. You know, demand in 0:10:41.640 --> 0:10:44.400 China was generated through investment, and there's a there's a 0:10:44.559 --> 0:10:51.559 sense in China that handing checks to consumers doesn't generate 0:10:51.640 --> 0:10:56.640 any productive activity, it doesn't generate any any assets, it 0:10:56.640 --> 0:11:04.680 doesn't build anything. Whereas you know, authorizing lending to through 0:11:04.679 --> 0:11:08.880 the state banks to support construction of a lot ice 0:11:08.920 --> 0:11:13.959 of new semiconductor or manufacturing facilities, you're obviously investing. You're 0:11:14.000 --> 0:11:19.239 obviously building things, and even if there's maybe over investment, 0:11:19.800 --> 0:11:22.480 you end up with assets. Whereas what do you end 0:11:22.600 --> 0:11:25.000 up when you write a check to consumers other than 0:11:25.040 --> 0:11:28.959 the debt. So there's there's been a bit of reluctance, 0:11:29.160 --> 0:11:33.800 I would say, to borrow to support household consumption. There 0:11:33.840 --> 0:11:36.839 hasn't been a reluctance to borrow to support infrastructure or 0:11:36.840 --> 0:11:40.160 other investment, and so what China tends to do when 0:11:40.760 --> 0:11:45.240 the economy slows, and sometimes it slows because everyone because 0:11:45.320 --> 0:11:48.760 Chinese policy makers worry that the debt growth has been 0:11:48.760 --> 0:11:52.720 too fast and that there's pockets of excess, and some 0:11:52.760 --> 0:11:55.440 people are borrowing that won't be able to pay the 0:11:55.520 --> 0:11:58.680 money back, and they clamp down, and then they clamp 0:11:58.720 --> 0:12:04.000 down too hard, and then there's pressure to restart the 0:12:04.080 --> 0:12:08.880 investment engine. And then frankly, over the past couple of years, 0:12:09.320 --> 0:12:13.600 there was sort of a complementarity between the US and 0:12:13.640 --> 0:12:17.880 European policy response to the pandemic, which emphasized supporting demands, 0:12:17.920 --> 0:12:22.720 supporting household income, using the government's balance sheet to insulate 0:12:22.760 --> 0:12:26.440 households from the impact of the shock to some degree 0:12:26.440 --> 0:12:29.600 in the process insulating firms, but a great deal of 0:12:29.640 --> 0:12:36.680 emphasis on protecting households, and then China, which emphasized maintaining 0:12:36.720 --> 0:12:41.120 its productive capacity and didn't provide much direct household income support. 0:12:41.440 --> 0:12:45.160 And China's gotten a quite substantial boost to growth over 0:12:45.200 --> 0:12:47.920 the past three or four years from that exports. So 0:12:48.000 --> 0:12:51.200 that's to me, like the irony we talk about deglobalization, 0:12:52.000 --> 0:12:57.200 when on most measures China's economy actually reglobilized. The political 0:12:57.240 --> 0:13:03.760 debate around trade overwhelmed the discourse, but in a quantitative sense, 0:13:04.920 --> 0:13:07.280 exports is a shriff. GDP have gone up in China. 0:13:07.520 --> 0:13:10.560 China's getting as much of a contribution from net exports 0:13:10.640 --> 0:13:13.360 over the past four years as it got during the 0:13:13.440 --> 0:13:20.880 China Shock. Manufacturing, China's manufacturing surplus is back close to 0:13:20.920 --> 0:13:23.559 ten percent of China's GDP after a dipped a bit. 0:13:24.120 --> 0:13:26.920 So there's just all sorts of measures that suggest China 0:13:28.480 --> 0:13:33.160 the overall policy response to the pandemic made the world more, 0:13:33.240 --> 0:13:36.760 not less dependent on Chinese manufacturing. But there clearly is 0:13:36.800 --> 0:13:38.680 a little bit of a reaction to that, a sense 0:13:38.679 --> 0:13:43.239 of vulnerability, and a policy effort in the US, increasingly 0:13:43.280 --> 0:13:47.560 in Europe to make sure that that manufacturing dependence isn't 0:13:47.559 --> 0:13:57.959 permanent and doesn't extend to too many strategic products. 0:14:08.559 --> 0:14:10.240 I don't know if there's like a really elegant way 0:14:10.280 --> 0:14:14.360 to ask this question, how freaked out are they in Europe? 0:14:15.800 --> 0:14:18.000 By I don't even think you tried, Jeff No, I 0:14:18.080 --> 0:14:19.320 was like, I just like, how is. 0:14:19.320 --> 0:14:20.000 It on my mind? 0:14:20.600 --> 0:14:24.480 By what the power of the Chinese exports auto exports, 0:14:24.520 --> 0:14:26.960 because I mean, I feel like there was this sort 0:14:27.000 --> 0:14:30.200 of view that well, like they were cheap cars, they 0:14:30.200 --> 0:14:33.240 weren't really like global quality. They certainly weren't going to 0:14:33.280 --> 0:14:35.560 be like global brands, and the sort of perception that 0:14:35.640 --> 0:14:39.120 China wouldn't create global brands. And my impression is that 0:14:39.280 --> 0:14:41.280 at least at the margins, and maybe more than at 0:14:41.280 --> 0:14:45.920 the margins, Chinese evs are increasingly of global quality and 0:14:45.960 --> 0:14:50.840 maybe some brand awareness, particularly in Europe. And when you 0:14:51.000 --> 0:14:53.800 sort of factor in the you know, lower production costs 0:14:53.800 --> 0:14:57.520 and they skilled that the Chinese manufacturers have in batteries, 0:14:57.520 --> 0:14:59.480 stuff like that, Like how big of a threat is 0:14:59.480 --> 0:15:02.360 this to some one of the big industrial giants of 0:15:02.400 --> 0:15:05.560 Europe and the sort of business model of Europe. 0:15:05.720 --> 0:15:10.000 Well, strangely enough, at a political level, the Europeans freaked 0:15:10.040 --> 0:15:12.560 out about the Inflation Reduction Act. 0:15:11.920 --> 0:15:14.280 I was wondering if I should go the like which 0:15:14.320 --> 0:15:16.600 direction I was going to, whether I should ask about 0:15:16.640 --> 0:15:19.200 the US policy respond to the Chinese cars. But anyway, 0:15:19.280 --> 0:15:19.760 keep going. 0:15:19.680 --> 0:15:21.400 You know, I mean, like in some sense, I think 0:15:21.440 --> 0:15:24.960 the US, you know, and you know, the administration which 0:15:24.960 --> 0:15:28.800 I was a part of, had had was very conscious 0:15:29.680 --> 0:15:33.200 that the transition to electric vehicles should not be a 0:15:33.280 --> 0:15:37.720 transition to Chinese made electric vehicles. Very conscious of the 0:15:37.760 --> 0:15:41.920 fact that if you're going to close down factories making 0:15:41.960 --> 0:15:45.840 internal combustion engines, you wanted there to be new factories 0:15:45.880 --> 0:15:48.960 being built in the United States to make batteries to 0:15:49.000 --> 0:15:51.800 make the components of an electric car. And I think 0:15:51.800 --> 0:15:56.520 you know, the US had in a sense anticipated that 0:15:57.320 --> 0:15:59.880 there could potentially be as shocked and move more pro 0:16:00.120 --> 0:16:02.920 actively to manage it now in the process that you 0:16:03.360 --> 0:16:08.280 introduced some measures that are debatable in their wto consistency 0:16:09.160 --> 0:16:13.200 subsidies that didn't extend to all of America's friends because 0:16:13.200 --> 0:16:16.560 of the way the Inflation Reduction Act was designed, and 0:16:16.680 --> 0:16:21.080 Europe really did display a lot of a surprise at 0:16:21.080 --> 0:16:24.640 how the Inflation Reduction Act was constructed and a lot 0:16:24.680 --> 0:16:27.360 of concern about how it is going to de industrialize Europe. 0:16:27.760 --> 0:16:32.760 The irony to me is that there's almost no possibility 0:16:32.800 --> 0:16:37.680 any of the big SUVs or electric SUVs that US 0:16:37.680 --> 0:16:40.960 manufacturers or others were planning to make in the US 0:16:41.000 --> 0:16:45.640 are going to invade the European market. They're designed for 0:16:45.680 --> 0:16:48.920 the US market, they're not designed for export. And while 0:16:48.960 --> 0:16:55.080 the Europeans were complaining about the formal protection in the 0:16:55.120 --> 0:16:59.200 Inflation Reduction Act. They had ignored the informal protection that 0:16:59.280 --> 0:17:03.240 China had extended to its electric vehicle industry, that had 0:17:03.280 --> 0:17:07.680 sort of successfully nurtured in infant industry, created a very 0:17:07.720 --> 0:17:14.000 successful supply chain for up and down the electric vehicle process, 0:17:14.400 --> 0:17:19.680 batteries to drive chains, et cetera, and had suddenly become 0:17:19.720 --> 0:17:23.919 a big, big exporter. The Chinese did wall off their market. 0:17:24.040 --> 0:17:29.359 No imported vehicle ever qualified for Chize and electric vehicle subsidies. 0:17:29.920 --> 0:17:33.760 But they didn't do it by writing that into the law. 0:17:33.840 --> 0:17:36.080 They did it by setting up a list, and no 0:17:36.160 --> 0:17:41.720 import happened to qualify. And so there has been a discrepancy, 0:17:41.760 --> 0:17:45.760 I would say, between how Europe formally has responded to 0:17:45.840 --> 0:17:50.679 the electric vehicle shock coming from China, largely by complaining 0:17:50.920 --> 0:17:59.960 about US policies. That said, there is undoubtedly a shift 0:18:00.119 --> 0:18:03.639 underway in Europe. The fact that VW's losing market share 0:18:03.720 --> 0:18:08.600 in China has not escaped their attention and the increase 0:18:08.640 --> 0:18:12.960 in imports is quite significant and it is generating pressure 0:18:13.040 --> 0:18:17.920 on the European side to replicate some aspects of US policy. 0:18:18.280 --> 0:18:22.560 But that the Europeans find the China a bit harder 0:18:22.600 --> 0:18:26.600 to handle because the measures that would insulate the European 0:18:26.680 --> 0:18:30.239 market from a wave of Chinese exports are likely a 0:18:30.240 --> 0:18:36.040 little bit wto inconsistent, And the European complaint about the 0:18:36.160 --> 0:18:40.240 US is that we're wto inconsistent, so they've sort of 0:18:40.320 --> 0:18:44.800 let formalism overwhelm pragmatism. 0:18:45.359 --> 0:18:49.880 Maybe everyone can just agree to be wto adjacent, so. 0:18:49.800 --> 0:18:52.159 That would be somewhat helpful for solving a bunch of 0:18:52.200 --> 0:18:53.639 trade disputes. But set that aside. 0:18:53.920 --> 0:18:57.080 So since we're the theme of this discussion is sort 0:18:57.080 --> 0:19:00.359 of the more things change, the more they stay the same. 0:19:00.640 --> 0:19:02.879 I thought maybe we could talk a little bit about 0:19:03.160 --> 0:19:08.560 China debt issues, and specifically in recent months, there's been 0:19:09.200 --> 0:19:14.720 more attention paid to the local Chinese debt so stuff 0:19:14.760 --> 0:19:19.800 issued by municipalities basically, and these are headlines that I 0:19:19.840 --> 0:19:23.240 can remember, you know, from ten or fifteen years ago, 0:19:23.359 --> 0:19:26.879 this idea of a China local debt time bomb. The 0:19:26.960 --> 0:19:30.600 numbers have changed, so I've seen twenty three trillion dollars 0:19:30.680 --> 0:19:35.960 worth mentioned relatively recently, but the overall thesis is the same, 0:19:36.040 --> 0:19:40.240 this idea that eventually these local authorities aren't going to 0:19:40.280 --> 0:19:42.600 be able to sell bonds or they're going to have 0:19:42.640 --> 0:19:46.520 to default on their debt, and the assumption always seems 0:19:46.520 --> 0:19:50.159 to be that the Chinese central government is going to 0:19:50.200 --> 0:19:53.960 step in and backstop them. So I guess my question 0:19:54.080 --> 0:19:58.520 is is this something worth paying attention to? Why does 0:19:58.560 --> 0:19:59.159 this matter? 0:20:00.920 --> 0:20:04.080 Well, it's certainly something worth paying attention to. You know, 0:20:04.160 --> 0:20:07.560 China's central government has almost no debt by global standards. 0:20:08.920 --> 0:20:11.520 Latest I think numbers are about twenty five percent of GDP. 0:20:11.760 --> 0:20:14.400 You know, US and France are more like one hundred. 0:20:15.400 --> 0:20:22.480 But the Chinese provinces, municipalities, localities have a very large 0:20:22.960 --> 0:20:25.600 pool of debt, direct debt. They have more direct debt 0:20:26.119 --> 0:20:30.800 formally recognized debt than the central government. And then the 0:20:31.640 --> 0:20:35.800 local government financing vehicles, which are not they're supported by 0:20:35.880 --> 0:20:40.200 local governments. They're local government adjacent, so to speak. They 0:20:40.200 --> 0:20:43.159 have even more. So you know, you sum those up 0:20:43.200 --> 0:20:46.239 and you get numbers of total debt of about one 0:20:46.280 --> 0:20:50.639 hundred percent of GDP. That's not such a high level 0:20:50.680 --> 0:20:56.120 that it implies, in my view, that China is forced 0:20:56.160 --> 0:21:00.199 to do nothing except consolidate. China saves a lot, can 0:21:00.280 --> 0:21:04.159 mobilize a lot of money, through its financial system to 0:21:04.240 --> 0:21:09.040 support the government activity at various levels, but the distribution 0:21:09.200 --> 0:21:13.680 of debt is strange. It is strange that China has 0:21:13.720 --> 0:21:15.720 so little debt at the central government and so much 0:21:15.760 --> 0:21:19.119 debt at the local government. The revenue raising capacity is 0:21:19.200 --> 0:21:23.240 much higher at the central government level, it's much weaker 0:21:23.240 --> 0:21:25.560 at the local government level, and a lot of the 0:21:25.680 --> 0:21:29.560 shocks that have hit China over the past several years 0:21:29.560 --> 0:21:34.719 have been shocks to local governments COVID. I mean, I 0:21:34.760 --> 0:21:37.320 was sort of surprised to read this that the central 0:21:37.320 --> 0:21:42.720 government didn't didn't provide large checks to local governments to 0:21:42.760 --> 0:21:45.680 cover the cost of implementing zero COVID. So a lot 0:21:45.720 --> 0:21:50.199 of that was born out of budgets. Infrastructure financing and 0:21:50.400 --> 0:21:54.760 expansion is done through local governments and local government vehicles. 0:21:55.880 --> 0:21:57.560 But local governments also get a lot of money from 0:21:57.640 --> 0:22:01.080 land sales, and land sale revenue has been hit by 0:22:01.119 --> 0:22:05.240 the turn in China's property market, so the weaker local 0:22:05.280 --> 0:22:08.120 governments are really in a bit of a bind. They 0:22:08.160 --> 0:22:12.520 have limited capacity to collect revenue. Some key revenue sources 0:22:12.560 --> 0:22:15.720 have been falling. They don't get as much help from 0:22:15.720 --> 0:22:19.840 the center as probably as needed to cover their legacy debts, 0:22:20.320 --> 0:22:22.600 and it's just always harder to service debts when your 0:22:22.640 --> 0:22:27.560 economy starts slowing, even if overall interest rates are pretty low, 0:22:28.280 --> 0:22:30.320 and for some it's going to be it's hard to 0:22:30.400 --> 0:22:33.600 refinance in the market, so you end up, rather than 0:22:33.680 --> 0:22:38.280 having defaults, you have informal negotiations to stretch out payment. 0:22:38.760 --> 0:22:42.040 But it is a problem. It's you know, the investment 0:22:42.119 --> 0:22:45.240 engine of China's economy maybe had three sources, three or 0:22:45.280 --> 0:22:48.320 four sources. One is sort of call it private investment 0:22:48.400 --> 0:22:52.440 to meet a global demand for exports. One is sort 0:22:52.440 --> 0:22:58.080 of government directed investment in key sectors aimed at import substitution, 0:22:58.400 --> 0:23:04.400 so building a Chinese aircraft, expanding China's indigenous semiconductor manufacturing capacity, 0:23:04.480 --> 0:23:06.920 so forth, and so on. But the biggest ones were 0:23:07.000 --> 0:23:11.680 building real estate for folks in China and building out 0:23:11.720 --> 0:23:17.240 China's infrastructure. And both the real estate and the infrastructure 0:23:17.760 --> 0:23:21.440 engines are now facing strain. And if you take away 0:23:21.480 --> 0:23:27.639 those engines, China's economy looks disequilibriated, it looks it looks weak. 0:23:29.080 --> 0:23:31.560 I want to pivot to something random. One of the 0:23:31.560 --> 0:23:33.040 reasons I like talking to brand is I feel like 0:23:33.080 --> 0:23:35.080 I can throw things out about anywhere in the world, 0:23:35.080 --> 0:23:37.880 and he'll probably have some understanding of what's going on. 0:23:38.080 --> 0:23:40.119 I want to pivot to something that I thought that 0:23:40.280 --> 0:23:42.560 was in the news recently that just popped into my head, 0:23:43.040 --> 0:23:45.320 and I want to get your take on it. What 0:23:45.520 --> 0:23:50.960 is the macroeconomic significance of Saudi Arabia offering Lionel Messi 0:23:51.000 --> 0:23:55.040 four hundred million dollars a year to play soccer there? 0:23:55.119 --> 0:23:57.119 And what is a you know, at a time of 0:23:57.160 --> 0:23:59.879 like booming evs, I would not necessarily think this, like 0:24:00.040 --> 0:24:02.720 oil giant has all this money to splash around on 0:24:02.800 --> 0:24:06.959 like a competing golf tour to the PGA and offering 0:24:07.000 --> 0:24:09.240 someone half a billion dollars a year to play some 0:24:09.359 --> 0:24:11.800 soccer games. What is going on there? And how big 0:24:11.840 --> 0:24:14.240 of a force is like this money emanating out of 0:24:14.680 --> 0:24:16.760 the Saudi Radio Saudi. 0:24:16.440 --> 0:24:18.879 Arabia state sponsored soccer. 0:24:19.800 --> 0:24:23.000 I didn't didn't Saudi Arabia also give a contract to Ronaldo, 0:24:23.119 --> 0:24:28.159 So that's probably right, Runaldo Messy in the desert or 0:24:28.200 --> 0:24:31.320 something like that. Look, I think what it actually means 0:24:31.359 --> 0:24:33.840 is that Saudi Arabia's current account surplus isn't gonna last 0:24:33.920 --> 0:24:40.879 much longer. You know, oil prices have adjusted down and 0:24:41.000 --> 0:24:44.600 oil in the seventies or eighties now in my calculations, 0:24:44.760 --> 0:24:49.320 just covers Saudi import bill and expensive soccer players are 0:24:49.400 --> 0:24:51.639 kind of kind of kind of a luxury good import, 0:24:51.680 --> 0:24:54.920 and they're the kind of luxury good import that quickly 0:24:54.960 --> 0:24:58.880 reduces your current account surplus. So I think Saudi Arabia 0:24:58.920 --> 0:25:02.639 is heading towards at current oil prices. And if you 0:25:02.640 --> 0:25:06.840 want to build cities in the desert, sponsored global golf 0:25:06.880 --> 0:25:09.400 tours and hire the best soccer players to come play 0:25:09.400 --> 0:25:12.119 in the desert, so they probably need air conditioned stadiums, 0:25:13.240 --> 0:25:17.440 you're going to run a current account deficit if oil 0:25:18.119 --> 0:25:21.000 doesn't rebound back up. The Saudi's got one hundred and 0:25:21.040 --> 0:25:24.840 fifty billion dollars windfall last year, though from their oil exports. 0:25:24.920 --> 0:25:29.159 The golf countries were like generally got about a three 0:25:29.240 --> 0:25:34.200 hundred billion dollar windfall. They had been relatively conservative, I 0:25:34.240 --> 0:25:37.160 would say over the past ten years. I kept expecting 0:25:38.160 --> 0:25:43.359 some of the splashy policy chiefts, the cities, all the 0:25:43.400 --> 0:25:50.000 other MBS investments to really changed the macro numbers, and 0:25:50.040 --> 0:25:52.280 it didn't happen until the last two quarters. But I 0:25:52.320 --> 0:25:56.080 think you've really seen a big increase in Saudi spending. 0:25:56.200 --> 0:25:59.960