Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
Speaker 1: global economy to you. The smart heard among You will
Speaker 1: have noticed I'm not Stephanie Flanders. In fact, I'm Tom Warlick,
Speaker 1: chief economist at Bloomberg. Stephanie is taking a break this week,
Speaker 1: and in a rare display of poor judgment, left me
Speaker 1: to mind the shop. Now. There haven't been many benefits
Speaker 1: from the COVID crisis, but one that is hard to
Speaker 1: deny has been that the planet has been given a
Speaker 1: bit of a breather. Carbon emissions are expected to fall
Speaker 1: in twenty for the first time since the Great Financial Crisis,
Speaker 1: and marine biologists tell us that whales and other aquatic
Speaker 1: life are getting to hear themselves think for a change
Speaker 1: in those respects, at least, we don't really want to
Speaker 1: go back to the way things were about how to
Speaker 1: do it? Bloomberg's own Michell jam risco as a story
Speaker 1: this week explaining how some of Southeast Asia's tourist hotspots
Speaker 1: are trying to answer that question. We also have senior
Speaker 1: UK economist Dan Hansen on Brexit and Dave Rank, America's
Speaker 1: former top diplomat in China, on high relations between the
Speaker 1: world's two biggest powers might look under a Biden administration.
Speaker 1: But first of all, here's Michelle with a view from
Speaker 1: Thailand's tourist authority. These feelings are waiting for you to
Speaker 1: come back from the north. That's the appeal from the
Speaker 1: Tourism Authority of Thailand, a country that typically owes one
Speaker 1: fifth of its economy to tourism. Thailand has seen its
Speaker 1: growth protects fall apart this year with travel shut down
Speaker 1: amid the global pandemic. Yet even as Southeast Asia's second
Speaker 1: biggest economy is doing what it can to bring visitors back,
Speaker 1: it's also doubling down on a rare victor in the pandemic.
Speaker 1: The environment. The country has seen normally packed beaches get
Speaker 1: a reprieve, elephants roam freely, and endangered species pepper lonely shorelines.
Speaker 1: That's prompted Thailand's Environmental Minister, Barrow Silva Archa to dust
Speaker 1: off a decades old dream. Now, by government decree, Thailand's
Speaker 1: national parks will be required to close for at least
Speaker 1: a couple of months every year. That gives mother nature
Speaker 1: the chance to regularly get the sort of virus era
Speaker 1: rehabilitation that's been a silver lining for an otherwise disastrous
Speaker 1: cod COVID nineteen is a big knock on the door.
Speaker 1: That is time for you to adjust your way of life.
Speaker 1: If you don't adjust, mother nature will do it for you.
Speaker 1: The disease is the result of humans upsetting balance in nature.
Speaker 1: Everything has repercussions. We have to find balance and should
Speaker 1: use this pandemic as a lesson that we have to
Speaker 1: protect nature before it's too late. We have to realize
Speaker 1: it's a very see of the damage we've cost. The
Speaker 1: coronavirus pandemic has been a wake up call too many.
Speaker 1: Amid the horrors of sickness, the terrible death toll, and
Speaker 1: the devastation of economies, it's prompted people, businesses, and governments
Speaker 1: across the globe to rethink the way they live and operate. Now,
Speaker 1: as countries try to take their first steps back toward normality,
Speaker 1: many are reassessing and wondering what elements of the COVID
Speaker 1: world they might actually want to keep even after the
Speaker 1: crisis has passed. On the Thai Island destination of cocamt
Speaker 1: which forms part of a marine national park, businesses are
Speaker 1: weighing the government's message on sustainable tourism against their simple
Speaker 1: desperation to have visitors backs. I've lived here for modern tas,
Speaker 1: I've never seen the that Skalawan Kumnum also known as Petch.
Speaker 1: He's a fire dance performer who also owns a bar.
Speaker 1: It is the rule that looks good on paper, but
Speaker 1: in reality, especially for small business populate does who have
Speaker 1: rent to pay would be devastating. Before the pandemic struck,
Speaker 1: cosimt was well known for its nightlife and party scene,
Speaker 1: which profited from the hordes of visitors to the island's idyllic,
Speaker 1: white sand beaches. One afternoon earlier this month, only a
Speaker 1: few visitors walked on the shoreline of the newly pristine
Speaker 1: main beach, talking to locals from the beach front papayas
Speaker 1: salad vendors to bar workers like Wichion Jong. Everyone worries
Speaker 1: how they will survive if there are more months without tourists,
Speaker 1: which who tends the Naga bar on the island thinks
Speaker 1: he might even have to leave the country to find
Speaker 1: employment and pay the bills during the closure. It's one,
Speaker 1: there are two se Some agree with the closures because
Speaker 1: he's during the low season, but some said the closure
Speaker 1: will mean no income for them. Saren tip To Monks,
Speaker 1: president of the Islands Tourism Association, says there was already
Speaker 1: a tangle with government officials on the duration of the
Speaker 1: annual closures, which the ministry first wanted to be four
Speaker 1: months long. Businesses are calling for a waiver from the
Speaker 1: closures altogether. They argue that an annual shutdown would inflict
Speaker 1: yet more pain on the islands residents after the pandemic
Speaker 1: already decimated trade Hawaii will affect us for sure. Don't
Speaker 1: forget that this archipelago isn't just some uninhabited islands. There
Speaker 1: are people living on God Summit, so if they close,
Speaker 1: there will be an impact. At first, they wanted to
Speaker 1: close the park for four months. We've asked them to
Speaker 1: cut it back to two months, but really we don't
Speaker 1: want them to close at all. Who will be responsible
Speaker 1: for our jobs, income and livelihoods For tourism businesses. If
Speaker 1: there's no clients at all for just two or three weeks,
Speaker 1: we'll feel the pain already because there are expenses. People
Speaker 1: here on the island are already taking care of the environment.
Speaker 1: Otherwise we wouldn't be here today. Nobody is here to
Speaker 1: destroy the island. They need to rethink this. Coosamt was
Speaker 1: once a modest fishing village, then it exploded into a
Speaker 1: magnet for European visitors and backpackers. It's only getting tourists
Speaker 1: by the handfuls these days, though, and even then it's
Speaker 1: usually locals visiting on the weekends with borders still largely
Speaker 1: closed in a special tourism visa only just being offered now.
Speaker 1: Thailand's efforts to revive the industry have relied on getting
Speaker 1: that domestic travel churning again. They've even tried offering high
Speaker 1: roller packages to push wealthier travelers to depleted resorts, but
Speaker 1: these have been met with limited success and are no
Speaker 1: match for Thai tourism's ban or year of when it
Speaker 1: took in more than sixty billion dollars in revenue from
Speaker 1: about forty million foreign visitors. There's a heated debate in
Speaker 1: the business world about how hard to push sustainability tourism
Speaker 1: right now. If you don't prioritize it, you risk overstressing
Speaker 1: popular destinations and ruining what visitors came to enjoy in
Speaker 1: the first place. But push too hard and only the
Speaker 1: very wealthiest will be able to frequent these beautiful corners
Speaker 1: of the earth, crushing local mom and pop firms that
Speaker 1: rely on mass tourism. McKinsey and Company partner Steve Saxon
Speaker 1: has spent the past decade and a half watching the
Speaker 1: fast evolving tourism landscape and Asia, including a long building
Speaker 1: debate on how many visitors might mean too much of
Speaker 1: a good thing. What we called over tourism before was
Speaker 1: never actually any good for anybody. The toys themselves didn't
Speaker 1: enjoy going to crowded places where they couldn't enjoy the
Speaker 1: natural beauty or see the sites because there were just
Speaker 1: too many other tourists, and in some cases this even
Speaker 1: started to frustrate the local residents. Higher end or more
Speaker 1: affluent tourism does support a bit more in terms of
Speaker 1: jobs and in terms of GDP. However, in terms of
Speaker 1: flights coming in hotel rooms you need, that's dependent on
Speaker 1: the number of guests. The focus needs to be on
Speaker 1: how do we bring back the quantity and improve the
Speaker 1: quality at the same time. Thailand isn't alone in its dilemma,
Speaker 1: especially in Southeast Asia, whose travel and tourism industries account
Speaker 1: for over one tenth of the region's GDP and its employment.
Speaker 1: The boom already had policymakers thinking about how to make
Speaker 1: sure these gains were sustainable. As in Thailand, the Philippines
Speaker 1: is now making the environment a bigger part of that conversation.
Speaker 1: It's become a sort of grassroots movement. Take Alamino's home
Speaker 1: of the Hundred Islands National Park as an example. Twenty
Speaker 1: four year old Mayor Brian Celeste is sketching plans for
Speaker 1: longer term restrictions to foot traffic. Local scuba sureros divers
Speaker 1: who collect garbage have been retrieving only a few kilograms
Speaker 1: a month recently, compared with hundreds before the virus hit.
Speaker 1: So Lestie wants to preserve those games long after COVID
Speaker 1: nineteen has eased, and he's commissioned to study to help
Speaker 1: local officials moderate the inflow of visitors. For me, because
Speaker 1: under dions it's a it's a pressure, do I know,
Speaker 1: it's a pressure to our city. So we cannot afford
Speaker 1: to loose under dias And if we continue to over
Speaker 1: commercialize our our and all we may stand in the
Speaker 1: honorand so we try our best to limit, not severely
Speaker 1: limit the man very at least to balance everything, balancing
Speaker 1: commercialization and preservation between if you overcommercialize preserved, if you
Speaker 1: overpreserve the kind of man An incong cities. So it
Speaker 1: does we have to strike the balance between. We heard
Speaker 1: a lot about balance and the course of reporting this story.
Speaker 1: In reality, government officials are all quick to celebrate environmental gains,
Speaker 1: the far more at odds about how to sustain them.
Speaker 1: That's especially true during a highly fraught economic recovery, as
Speaker 1: other problems pop up like a game of whack mole
Speaker 1: competing for attention. Even just across Asia, there are plenty
Speaker 1: of countries that are implementing their own environmental studies, but
Speaker 1: prioritizing the prittying up of local attractions in preparation for
Speaker 1: mobs of tourists to return Sri Lanka's enjoying a bit
Speaker 1: of a boom and domestic tourism and New Zealand's authorities
Speaker 1: are pushing the same. At Cambodia's world famous anchor Wad
Speaker 1: Temple complex, flower beds and thousands of trees are being
Speaker 1: planted and anticipation of the crowd's return. Mother Nature certainly
Speaker 1: has more adoring fans these days. It'll be tough to
Speaker 1: keep up her winning street because everyone recalibrates their lives
Speaker 1: yet again after the pandemic. But environmental activists Billy doom
Speaker 1: Leeing in this Philippines is upbeat. She sees businesses adapting
Speaker 1: because they'll have to because Touristan has been closed for
Speaker 1: so long. Um businessmen are tourists and enterprises. I detempted,
Speaker 1: do you know, get as many people back as possible.
Speaker 1: But I think the circumstances surrounding the pandemic will naturally
Speaker 1: UM help crypt that because now people are forced to
Speaker 1: see it to innovate, what other experiences, what other models
Speaker 1: they can use to become sustainable financially and ecologically. As
Speaker 1: travel lanes reopen and fits and starts, some of the
Speaker 1: world's hattes destinations will have a new look, and they'll
Speaker 1: expect everyone to help keep it that way. For Bloomberg News,
Speaker 1: this is Michelle jam Risco. Thanks Michelle for that report.
Speaker 1: Good to hear that the pandemic is having at these
Speaker 1: some positive impacts, even if the main beneficiaries so far
Speaker 1: a Thailand's elephant population. Now let's go from a part
Speaker 1: of the world where the COVID pandemic is providing some
Speaker 1: respite to a partner. It definitely is not U. S.
Speaker 1: China relations Already in we've had a war of words
Speaker 1: between Washington, d C. And Beijing over the origins of
Speaker 1: the COVID crisis, US sanctions on Chinese technology firms, escalating
Speaker 1: concern about events in Shinjang in Hong Kong, the US
Speaker 1: closing a Chinese consulate, and China retaliating in kind. All
Speaker 1: of this, of course, is bad news for the global economy.
Speaker 1: At Bloomberg Economics, we've estimated the decoupling between China and
Speaker 1: the US could deal a significant blow to China's growth,
Speaker 1: and if the US persuaded its allies to join up
Speaker 1: on a containment strategy, China's annual expansion could slow all
Speaker 1: the way down towards one percent. Now, not a lot
Speaker 1: of people know more about U. S. China relations than
Speaker 1: Dave Rank. Dave served as the Deputy Chief of Mission
Speaker 1: in the US Embassy in Beijing. That means he was
Speaker 1: the most senior career diplomat charged with making the relationship
Speaker 1: work on the ground. He quit in two thousand and
Speaker 1: seventeen after a difference of opinion with the Trump administration
Speaker 1: whole climate change. He believed in it and they didn't,
Speaker 1: and is now teaching at Yale and providing advice to
Speaker 1: business leaders from a perch at the Cohen Group. I'm
Speaker 1: very glad he's able to join us today. It's really
Speaker 1: been a remarkable deterioration in US in your relationships over
Speaker 1: the course of the last four years, but with the
Speaker 1: election coming up in November, there's a chance for reset.
Speaker 1: How should we think about this? How much is how
Speaker 1: much of the deterioration in the relationship is an idiosyncrasy
Speaker 1: of the Trump administration and how much of it is
Speaker 1: structural something we shouldn't expect to change no matter who's
Speaker 1: in power. Sure, I mean that's a great question to
Speaker 1: start with. Tom And as you know, I left government
Speaker 1: about three years ago. But I'll say even at the
Speaker 1: end of the Obama administration, there was a strong sense
Speaker 1: that the U. S. China relationship was coming to a
Speaker 1: really fundamental change, that that the paradigm the way we
Speaker 1: had looked at the relationship essentially since since UH the U. S.
Speaker 1: And China started, UH recognized each other that the rules
Speaker 1: of the game had changed, and that whether it was
Speaker 1: Donald Trump or Hillary Clinton, UH, you were going to
Speaker 1: see a change in the U. S. China relationship. I
Speaker 1: think though that you know, Donald Trump took the relationship
Speaker 1: that no American government, at least since the end of
Speaker 1: the Second World War has gone, which is much more unilateral,
Speaker 1: much less interested in the global structures and partnerships and
Speaker 1: alliances that really had been our hallmark since And so
Speaker 1: you know, I think there's an aberration in the sense
Speaker 1: that Donald Trump is not the internationalists, not interested in
Speaker 1: international partnerships, but the concern about China and what it
Speaker 1: means for for the US that competition. I think that
Speaker 1: was coming no matter who was there. And I think
Speaker 1: you'll see if if Biden is elected, that there will
Speaker 1: be a tension in the relationship, even if we get
Speaker 1: back to a more normal way of working within the
Speaker 1: US government. Dave, you worked with a number of officials
Speaker 1: under the Obama administration who we might well see coming
Speaker 1: back if we see a Biden win in November. What's
Speaker 1: your sense of how the Biden team views the U S.
Speaker 1: China relationship. What do you think their priorities would be
Speaker 1: if we saw them coming in at the end of November. Sure, well,
Speaker 1: I think some of you you'd see some consistency. There's
Speaker 1: real concern, not just in the at the political level,
Speaker 1: in other words, in the Democratic and Republican Party, but
Speaker 1: also within the bureaucracy about particularly in the area of technology,
Speaker 1: the rivalry between the United States and China and the
Speaker 1: relevance of a lot of those technologies to really core
Speaker 1: national security concerns. And I think that will be, at
Speaker 1: least from what I can see and read, that will
Speaker 1: be a concern of a would be a concern of
Speaker 1: a Biden administration if there is one. But you know,
Speaker 1: I think you'd also see, which is I think very
Speaker 1: different from the Trump administration, an effort because the the
Speaker 1: you know, the people around Biden, and as I understand
Speaker 1: Vice President Biden himself, see a lot of areas where,
Speaker 1: you know, whether we want to or not, we're gonna
Speaker 1: have to cooperate with the Chinese. We're gonna have to
Speaker 1: work together areas like climate change, the Iran nuclear deal,
Speaker 1: and of course the pandemic and dealing with the global
Speaker 1: public health issues. Is there a world where things keep
Speaker 1: getting worse? I wonder whether the Chinese side have been
Speaker 1: pulling their punches because they're thinking, we need to maintain
Speaker 1: optionality for when a Biden administration comes in. We don't
Speaker 1: want to burn our bridges. If a Biden team comes
Speaker 1: in and they maintain the same kind of broad strategic
Speaker 1: orientation regarding China as a kind of strategic threat, but
Speaker 1: they're more effective at building alliances. Is there a world
Speaker 1: where the gloves come off and China's restraint is removed
Speaker 1: and we see relations deteriorating even further and faster than
Speaker 1: they have under the Trump administration. So I left town
Speaker 1: because anyone who has lived through will tell you that
Speaker 1: it can always get worse, right, But I'm I'm relatively
Speaker 1: optimistic that I mean, for for however much the Chinese
Speaker 1: are concerned about, you know, a rivalry with the United States, fundamentally,
Speaker 1: they've got a lot of interest in stability, not just
Speaker 1: in the in the U. S. China relationship, but overall
Speaker 1: that they they have a big vested stake in the
Speaker 1: success of global systems, in the global trading system, and
Speaker 1: in not uh sort of dediating that from that and
Speaker 1: heading down the path to a really hot competition. I
Speaker 1: think they understand that that's not in their interests, it's
Speaker 1: not in our interests, and there is a middle ground
Speaker 1: where we can It's kind of cliche, but we can
Speaker 1: compete without being without confrontation that that you know, we
Speaker 1: can walk that fine line at less drill dine on
Speaker 1: a couple of live issues, um. First of all, Um,
Speaker 1: I'd be really interested to get your view on financial decoupling.
Speaker 1: There's been a couple of great Bloomberg news scoops recently
Speaker 1: suggesting that at a senior level in the US administration
Speaker 1: there's been real consideration of imposing sanctions on a big
Speaker 1: Chinese bank, possibly imposing sanctions on some big Chinese financial
Speaker 1: startups and financial Um, the kind of the the child
Speaker 1: of the Ali Baba group is one that's been mentioned
Speaker 1: from yours insiders experience. Could you tell us a little
Speaker 1: bit about how that kind of decision would be made? Well,
Speaker 1: I guess I can talk about how that kind of
Speaker 1: decision used to you know, would have used to be
Speaker 1: made under the Trump administrations a little different. And that's why,
Speaker 1: first of all, I've heard the same reports and and
Speaker 1: of course Bloomberg has done a great job and in
Speaker 1: uh flushing some of those out. But it's really hard
Speaker 1: to tell what's going on in the in the Trump
Speaker 1: administration because so many decisions seem to be not just
Speaker 1: made at the highest levels, but started and finished at
Speaker 1: the highest levels. And so in the Obama administration or
Speaker 1: previous administrations, you'd have people who know the issues intimately
Speaker 1: understand the ups and downs. Why, you know, taking action
Speaker 1: against one of the big big four Chinese banks or
Speaker 1: against and financial you know, the impacts that could have
Speaker 1: on real life issues here, whether they're financial or legal
Speaker 1: or technical in the United States. In the Trump administration,
Speaker 1: you look at the TikTok and the wee chat bands
Speaker 1: and all of the legal trouble they run into. That's
Speaker 1: what I think is different about this administration, and where
Speaker 1: if something like that were to be rolled out, the
Speaker 1: odds that it would run into something that sort of
Speaker 1: working level folks would have flagged as, hey, this is
Speaker 1: gonna be a problem. It's not legal, it's going to
Speaker 1: have huge blowback for the U. S economy that the
Speaker 1: Trump administration I think is liable to miss. Let's say
Speaker 1: they do it anyway. Let's say the Trump administration has
Speaker 1: a swing at and financial If you were sitting if
Speaker 1: you were still sitting in the embassy in Beijing, what
Speaker 1: would you be worried about? What would you see as
Speaker 1: the sort of the range of possible Chinese reactions to
Speaker 1: a to a U S move like that. Yeah, I mean,
Speaker 1: I think the the at least traditionally, I would worry about, Okay,
Speaker 1: what American companies are on the outs the Chinese anyway,
Speaker 1: that have a toe hold here, but but are are vulnerable?
Speaker 1: Are they liable to come under Chinese pressure? That's probably
Speaker 1: where I would look first. You know that I won't
Speaker 1: name names, but there I'm sure companies that have had
Speaker 1: problems and and just look for additional problems in that area,
Speaker 1: you know, something like the Unreliable Entities List. I could
Speaker 1: see the mof COM, the Commerce Ministry floating out a
Speaker 1: name for some critical American company that may end up
Speaker 1: on that list. And you know, that's that's hard to
Speaker 1: do business if you're that kind of rumors circulating for
Speaker 1: you around you selling their treasury holdings. That's the kind
Speaker 1: of the big sort of stick which many believe that
Speaker 1: China holds over the US. Is that a real possibility?
Speaker 1: Isn't there an old joke? You know, if you owe
Speaker 1: the bank fifty you're in trouble. If you owe the
Speaker 1: bank five million dollars, they're in trouble. I guess the
Speaker 1: numbers have gone up since the joke was first issued.
Speaker 1: But but you know, this is kind of I mean,
Speaker 1: it's an ill stration of the the difficulty of taking actions,
Speaker 1: whether it's the US against and financial or the Chinese
Speaker 1: selling T bills, because you know that the act of
Speaker 1: selling those would have enormous negative consequences for the Chinese,
Speaker 1: and so it would be a tough decision to make,
Speaker 1: and that technocrats in China would be I'm sure making
Speaker 1: that case mutually assured destruction. I think Larry Summers once
Speaker 1: called it. Let's talk about a risk which is kind
Speaker 1: of increasingly sort of mentioned in the markets, um popping
Speaker 1: up a little bit in commentary about the relationship. Let's
Speaker 1: talk about the risk that something radical and destabilizing happens
Speaker 1: with Taiwan. UM. Now, you've not only worked in the
Speaker 1: US Embassy in Beijing, you've also worked in the US
Speaker 1: mission in Taiwan. What probability would you put on a
Speaker 1: Chinese invasion of Taiwan in between the US election on
Speaker 1: November three and a new president coming into office on
Speaker 1: January twentie So I should start off by saying I
Speaker 1: am concerned. You listen to some of the rhetor coming
Speaker 1: out of China. You saw that warning. I think it
Speaker 1: was in people's daily that to the Taiwanese. Don't say
Speaker 1: you haven't been warned, you know, a very stern tone
Speaker 1: that you haven't. You know, the Chinese rarely roll out
Speaker 1: unless they're contemplating something serious. I'm not a military person,
Speaker 1: but my understanding from from talking to people who do
Speaker 1: it for a living, say, it's not you know, an
Speaker 1: invasion of Taiwan would not be an easy thing, and
Speaker 1: the kind of preparations it would require to do that
Speaker 1: we'd see between now and January twenties. So that's kind
Speaker 1: of cold comfort that to me. I'm I'm I'm fairly
Speaker 1: sanguine about the risk of an invasion before January twenty,
Speaker 1: but I think the long term issue is one that
Speaker 1: we ought to be concerned about. That. You know that
Speaker 1: that the status quo that kept peace in the Taiwan
Speaker 1: Strait is really starting to break down, and that wouldn't
Speaker 1: be good for us, and I think it'll be good
Speaker 1: for Beijing, it would be bad for Taiwan. So so
Speaker 1: I worry about that. Dave, great pleasure having you on
Speaker 1: the show. Thanks so much for sharing your insights. Thank you,
Speaker 1: Tom Great to be here, So from a country that's
Speaker 1: rising up in the global economic rankings to one that
Speaker 1: is not. Every so often on Stephanomics, we like to
Speaker 1: check in on progress with Britain's century long process of
Speaker 1: industrial decline and with Brexit talks again in the news
Speaker 1: now seems like a good moment. So I'm very glad
Speaker 1: to be joined by one of the most astute observers
Speaker 1: of the economics of Brexit, Bloomberg's UK economist Dan handsOn.
Speaker 1: So we're in the middle of negotiations, or we're in
Speaker 1: the middle of the commencement of some new negotiations. What's
Speaker 1: the latest So over the past week or say, there's
Speaker 1: been a bit of a stalemate, surprise surprise in the
Speaker 1: in the Brexit negotiations. So we've had the UK saying
Speaker 1: that it doesn't want to continue for more negotiations with
Speaker 1: the EU until the SHOW signs that it's willing to
Speaker 1: make concessions. And the UK also wants the EU to
Speaker 1: recognize the UK is a sovereign equal and also the
Speaker 1: final the final request from the UK side is to
Speaker 1: start work on the legal text of the treaty that
Speaker 1: will underpin the free trade agreement and of course we've
Speaker 1: got on the U side, you still looking for the
Speaker 1: UK to make compromises as well. There's been a bit
Speaker 1: of a change in the tone in the past twenty
Speaker 1: four hours between the two sides. We've heard positive sounds
Speaker 1: coming from the US chief negotiator Michelle Barnier, and Bloomberg
Speaker 1: has reported that both sides could return to the negotiation
Speaker 1: table and coming days. The aim of getting a deal
Speaker 1: done in the next month or so. And the reason
Speaker 1: that the deal needs to be done over that time
Speaker 1: period is because laments need to ratify national partiments. I
Speaker 1: should say, I need to ratify the deal in time
Speaker 1: for the end of the Brexit transition period on December
Speaker 1: thirty one. So as things down, it looks like we're
Speaker 1: in for a dash to the finish line. And as
Speaker 1: I say that, that deadline is December thirty one, when
Speaker 1: the UK finally leaves the European Union. So some some
Speaker 1: very modest good news, but even as we hope for
Speaker 1: the recommencement of negotiations. You've written that the difference between
Speaker 1: deal and no deal is pretty small. Why is that so?
Speaker 1: I think the answer to that relates to the nature
Speaker 1: of the deal the UK is seeking to negotiate with.
Speaker 1: The EU is looking to sign a free trade agreement
Speaker 1: with the Block, which, if we look on the spectrum
Speaker 1: of possible trading relationships it could have chosen to pursue.
Speaker 1: A free trade agreement is close to the bottom in
Speaker 1: terms of the level of integration it demands or requires.
Speaker 1: With the European Union and with an FDA. The UK
Speaker 1: and EU would avoid tariffs and quotas that would come
Speaker 1: alongside a no deal outcome, but there will still be
Speaker 1: a significant increase in non tariff barriers. Now those range
Speaker 1: from customs checks at the border, documentation around rules of origin,
Speaker 1: but they're also behind the border costs such as regulatory barriers,
Speaker 1: and those apply to both goods and services. So the
Speaker 1: key point is that trade frictions are likely to ride
Speaker 1: sharply at the start of next year, whether there's a
Speaker 1: deal or not. And that's why the gap between a
Speaker 1: deal and no deal is smaller than if, say you
Speaker 1: compared to no deal outcome to the UK staying in
Speaker 1: the Single Market or even staying in the Customers Union. Still,
Speaker 1: no deal is not zero cost. You've put a number
Speaker 1: on it and around one point five of GDP. How
Speaker 1: did you get to that number. Well, we've we've looked
Speaker 1: at it through three key channels that we think will
Speaker 1: impact the economy in the short term. So the first
Speaker 1: of those, and I mentioned it in the answer before,
Speaker 1: there will be increase in tariffs and quotas if there
Speaker 1: is no deal outcome between at the UK and the
Speaker 1: added to that, it seems pretty certain that sterling would appreciate.
Speaker 1: And you add those two things together and you get
Speaker 1: a rise in import costs and what that does is
Speaker 1: it squeezed how household real incomes through a rise in
Speaker 1: inflation um. Taken those assumptions together, so we think tarrists
Speaker 1: could rise by about five cent on imports coming from
Speaker 1: the EU, and we've assumed a five percent fall in
Speaker 1: sterling um at those together and we think it could
Speaker 1: knock about half a percent of GDP next year. The
Speaker 1: second channel that we've looked at is uncertainty. And we
Speaker 1: know uncertainty has affected the UK economy since it voted
Speaker 1: to leave the European Union in twix and it's most
Speaker 1: obviously seen in the business investment numbers. But if we
Speaker 1: see uncertainty rise back up again, that could not a
Speaker 1: further zero points six percent of GDP next year. We
Speaker 1: think in the final channel that we've looked at is
Speaker 1: the extent to which lower trade flows predominantly as a
Speaker 1: result of the tariffs and the quotas, could feed through
Speaker 1: to the supply capacity of the economy, and that could
Speaker 1: add We think the story could not go further zero
Speaker 1: point two percent off GDP next year. So you add
Speaker 1: those three numbers up, you get close to one and
Speaker 1: a half cent off GDP. So our baseline forecast where
Speaker 1: there's a deal is for growth of five point four
Speaker 1: percent next year. If there is no deal, we'd lower
Speaker 1: that forecast to around four percent growth. So even that
Speaker 1: one point five percent drag assumes a bit of goodwill
Speaker 1: on both sides to prevent a complete snarl up in
Speaker 1: the trade relationship. What happens if we don't even get that?
Speaker 1: Could you outline a doomsday scenario for us? So you're
Speaker 1: right that ar scenario assumes that even if both sides
Speaker 1: decide that a trade deal is a stretch too far.
Speaker 1: Are we've assumed that talks do continue to in an
Speaker 1: effort to mitigate some of the most disrupted parts of
Speaker 1: a no deal breakup. But clearly, as you say, there
Speaker 1: is room for an acrimonious enter the talks and things
Speaker 1: could get could get messy. So there are two two
Speaker 1: channels that we've you can think about this through. First
Speaker 1: is the disruption of the border, and it would clearly
Speaker 1: be far more significant if there were big cues down
Speaker 1: in over and over in Calais and goods couldn't move
Speaker 1: across the border, and that would significantly way on the
Speaker 1: supply capacity of the economy. Now, given this is unprecedented,
Speaker 1: there isn't any clear way to calibrate the size of
Speaker 1: the shock, but I don't think it's unreasonable to say
Speaker 1: that in the near term the fall in trade, so
Speaker 1: that's exports and imports, could easily be in double figures. Then,
Speaker 1: on the demand side, you you would expect a few
Speaker 1: things to happen, so you'd expect a bigger fall in
Speaker 1: Sterling than we've assumed. You would expect tightening of financial
Speaker 1: conditions as well. Um and you'll also see a bigger
Speaker 1: lift in the uncertainty that's facing the economy, and all
Speaker 1: of those factors together would contribute to an even bigger
Speaker 1: fall in GDP. Now, bringing it all together, it's very
Speaker 1: difficult to put a precise number on it, but I
Speaker 1: think you could easily double the one and a half
Speaker 1: percent that we've assumed in our scenario, and I go
Speaker 1: so far to say that the risks to that view
Speaker 1: would be still tilted to the downsides. The risk would
Speaker 1: be to an even larger near term hit to the economy.
Speaker 1: New Deal Brexit potentially good news to companies renting portable
Speaker 1: toilets to lorry drivers trapped in the Kent countryside, but
Speaker 1: probably bad news to a much larger constituency. Dad Hanson,
Speaker 1: thanks very much for sharing your insights. Well, unfortunately that's
Speaker 1: about all we have time for, so let me thank
Speaker 1: our guests and reporters Michelle jan Risco, Grandy fanthol Knight,
Speaker 1: Secret Alligado, Dave Rank, and Dan Hanson. Voice overs by
Speaker 1: Chai Channock, Ran now Kel, Doc Noi and krim Gee
Speaker 1: we Ruch. This week's episode of Stephanomics was brought to
Speaker 1: you by executive producer Lucy Meekin, signed engineer Magnus Hendrickson,
Speaker 1: and me Tom Wallack. You can get your regular fix
Speaker 1: of economics on the Bloomberg Terminal website and app, and
Speaker 1: please tune in again next week when your host, the
Speaker 1: eponymous Stephanie Flanders will be back in the hot seat
Speaker 1: and normal standards of economic insight and interviewing dexterity will
Speaker 1: be restored.