Speaker 1: You're listening to Asia Centric, the podcast that explores the
Speaker 1: big ideas and trends moving money across the region. I'm
Speaker 1: Kajadmitriyeva in Hong Kong and.
Speaker 2: I'm John Lee. It seems the number one thing on investors'
Speaker 2: minds this year was the US election. Who would win?
Speaker 2: Would US policy become even more protectionist? And what would
Speaker 2: be the implications for economic growth and central bank policy?
Speaker 1: Yeah, and now following the victory of President elect Donald Trump,
Speaker 1: it seems like everyone is still thinking about the implications.
Speaker 1: Trump has vowed steep tariffs of sixty percent on Chinese imports,
Speaker 1: universal levees, and all of these would have obviously sweeping
Speaker 1: consequences in the world. Some analysts have already revised down
Speaker 1: their economic growth expectations in China, and they've lowered the
Speaker 1: outlook for fad cuts.
Speaker 2: And Trump has already started picking his cabinet, which does
Speaker 2: provide some in site into his approach to the world.
Speaker 1: There's a lot to discuss and to help us navigate
Speaker 1: all these moving pieces is Bloomberg Economics chief economist Tom Orlick.
Speaker 1: He's also the author of China, The Bubble That Never
Speaker 1: Pops and previously, he lived in Beijing for about a decade.
Speaker 1: He joins us from DC. Hi, Tom, thanks for being here.
Speaker 3: Great to be a Katya and I see we're doing
Speaker 3: our special podcast voices. I'll try our best to maintain
Speaker 3: the standard.
Speaker 1: Thank you. I really appreciate that.
Speaker 2: Listen.
Speaker 1: It's a big topic on everyone's minds. Trump won in
Speaker 1: a pretty big way. The biggest concern, I think is
Speaker 1: safe to say, is tariffs. So how are you thinking
Speaker 1: of that in terms of timing, in terms of size,
Speaker 1: and whether they even end up coming into place.
Speaker 3: I mean, that's a really huge question. I'm sure we
Speaker 3: can spend quite some time talking about it. Trump on
Speaker 3: the campaign trail talked about sixty percent triffs on China. Now,
Speaker 3: in his first term, he did twenty five percent tariffs
Speaker 3: on hundreds of billions of dollars of goods. And if
Speaker 3: you looked at the macro data in the US, if
Speaker 3: you looked at the growth data, if you look at
Speaker 3: the inflation data, it's actually pretty hard to see the consequences.
Speaker 3: So there's an argument out there and a sentiment that
Speaker 3: you hear from the Trump campaign, which is, well, what
Speaker 3: are all of these economists complaining about? I did twenty
Speaker 3: five percent tariffs last time, it was all good. Sixty
Speaker 3: percent will be fine as well. Our view, though, is
Speaker 3: that sixty percent is quite a bit more tariffs than
Speaker 3: twenty five percent. If you think about profit margins for
Speaker 3: China's small manufacturers, they're really in the single digits. So
Speaker 3: they could just about live with twenty five percent tariffs
Speaker 3: as long as they got some government subsidies and some
Speaker 3: yuan appreciation to get them through it. But they certainly
Speaker 3: couldn't live with sixty percent tariffs. Even if we think
Speaker 3: about the big electronics giants, companies like Apple, which has
Speaker 3: a supply chain spanning the United States and China and
Speaker 3: other parts of Asia, well they'd have a lot of
Speaker 3: difficulty with sixty percent tariffs as well. So was that
Speaker 3: sixty percent number kind of campaign trail red meat or
Speaker 3: was it a genuine commitment that we're going to see
Speaker 3: implemented in office. I think we're going to find out,
Speaker 3: but I think sixty percent would be quite damaging for
Speaker 3: China and the United States. My guess is it's more
Speaker 3: of an initial bargaining gambit rather than a firm commitment.
Speaker 1: Is there an assumption that you have going into twenty
Speaker 1: twenty five of what size tariffs we might be able
Speaker 1: to see here, And you said, it's really hard to
Speaker 1: say whether it'll even come in, if it's bluster, if
Speaker 1: it's reality. But is there sort of a going assumption
Speaker 1: or a hunch that you have as an economist of
Speaker 1: what we might see next year.
Speaker 3: So it is complicated, Kattia. We've got to see who
Speaker 3: Trump gets into the top jobs. Who is the trade representative,
Speaker 3: who's the Commerce secretary, who's the Treasury secretary? They all
Speaker 3: lined up behind tariffs, or do we see some tariff
Speaker 3: advocates like Robert Leinthheiser, who was the main architect of
Speaker 3: Trump's first term tariffs, once again facing off against some
Speaker 3: voices from Wall Street who are more pragmatic, more pro market.
Speaker 3: Tariff lists need to be designed. We know from Trump's
Speaker 3: first term that the Council of Economic Advisors was pouring
Speaker 3: over the data for different imports in different sectors and
Speaker 3: seeing where they could impose tariffs in a way which
Speaker 3: imposed maximum pain on China and minimum pain on the
Speaker 3: US consumer and US retailers. There needs to be a
Speaker 3: decision about what procedure to use to implement tariffs. Can
Speaker 3: the president do it more or less under his own discretion.
Speaker 3: Does there need to be a consultative process. And all
Speaker 3: of this suggests that this is not going to be
Speaker 3: a kind of a one shot game. Right. We don't
Speaker 3: expect Trump to get into office on day one and
Speaker 3: say I'm posing tariffs at this level on these countries
Speaker 3: and on these goods. I think it's going to be
Speaker 3: an iterative process. Where there's a threat from the United States,
Speaker 3: there's a negotiation both with the Chinese and with big
Speaker 3: US companies like Apple that have a big dog in
Speaker 3: the fight. Now you asked if I've got an intuition
Speaker 3: or a hunt as to where this is going to
Speaker 3: come out, I'd be surprised if we went to sixty
Speaker 3: universally across all US imports from China. I wouldn't be
Speaker 3: that surprised if we went to sixty percent on basically
Speaker 3: the same set of goods that phase twenty five percent
Speaker 3: tariffs in Trump's first term, and we had carve outs
Speaker 3: as we did in Trump's first term for some of
Speaker 3: those goods which are manufactured in China by the big
Speaker 3: US electronics giants.
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Speaker 2: can we just pull back? Can you give us a
Speaker 2: rundown of what Bloomberg Economics forecast for the US is
Speaker 2: for next year and possibly for China with the potential
Speaker 2: threat of tariffs.
Speaker 1: Yeah, I think I've seen more forecasts in the past
Speaker 1: week than I have.
Speaker 2: Yep. There's a lot of scenario analysis as well on
Speaker 2: the tariffs as well. Yeah.
Speaker 1: Yeah, the scenario analysis is the way to go. That's
Speaker 1: what all the cool kids are doing.
Speaker 3: I do like to brag out here, but the Bloomberg
Speaker 3: Economics we were doing scenario analysis before it was cool.
Speaker 3: Now to your question on China, we're anticipating growth next
Speaker 3: year of around four point six percent, so that's not
Speaker 3: too far from the government's five percent target. Why do
Speaker 3: we think there's going to be fairly robust growth for
Speaker 3: China next year? Well, basically it's because the government is
Speaker 3: now pumping a lot of stimulus into the economy. Could
Speaker 3: tariffs take a chunk out of that? Well, yes, but
Speaker 3: it depends how high the tariffs are, what goods they're
Speaker 3: imposed on, and when they come during the year. So
Speaker 3: if we look at an extreme scenario where Trump gets
Speaker 3: into office, Robert Leithheiser gets reappointed as USTR on day one,
Speaker 3: day two, we get sixty percent tariffs on everything. So
Speaker 3: that's a really extreme scenario. Well, that would be a
Speaker 3: pretty significant shock to China, and we would be moving
Speaker 3: and I think everyone else will be moving to downgrade
Speaker 3: their forecasts. But that's not what we think is going
Speaker 3: to happen. We think Trump's going to get into office,
Speaker 3: it's going to take time to get his team into place.
Speaker 3: Once his team is in place, it's going to take
Speaker 3: time to design that initial tariff package. Once that's been designed,
Speaker 3: there's going to be a negotiation with the Chinese. Can
Speaker 3: the US extract some concessions or not. So we would
Speaker 3: expect tariffs to kick in not at the start of
Speaker 3: the year, but probably closer to the middle of the year,
Speaker 3: on the second half, and we'd expect them to be
Speaker 3: imposed not on all goods, but on some portion of
Speaker 3: Chinese manufacturing and to be imposed in a way which
Speaker 3: didn't hurt the big US companies that are manufacturing in China.
Speaker 3: So what's that going to do to China's growth? Well,
Speaker 3: it could shade down China's growth in the second half
Speaker 3: of the year, but I don't think it's going to
Speaker 3: be a kind of cataclysmic shock to the Chinese economy
Speaker 3: in twenty twenty five. Now if we flip that round
Speaker 3: and think about the United States, well, our expectation for
Speaker 3: US growth next year is so we think the US
Speaker 3: economy is going to grow a shade less than two
Speaker 3: percent next year. Would tariffs have a significant negative impact
Speaker 3: on that, Well, once again, if they come midway through
Speaker 3: the year, if they're designed in a way which minimizes
Speaker 3: the impact on the US corporate champions, probably not.
Speaker 1: What about central banks, because you know, having tariffs of
Speaker 1: sixty percent or even half that would probably have some
Speaker 1: effects on inflation in the US, and by extension, how
Speaker 1: much the FED can actually cut in twenty twenty five,
Speaker 1: twenty six, and the timing of that, what are your
Speaker 1: expectations for that side of things to sort of monetary policy.
Speaker 3: So there's been a rush after the election to dangrade
Speaker 3: expectations for rid cuts in the US next year, and
Speaker 3: that's partly because of concern that Trump's policies tax cuts
Speaker 3: tariff increases are going to be inflationary, and that's just
Speaker 3: going to mean the FED has less room to reduce rates.
Speaker 3: So I think that's certainly a possibility. At the same time,
Speaker 3: I think it's important to keep in mind that there
Speaker 3: is a dizzying array of dynamics which the Trump administration
Speaker 3: is going to be setting loose for the FED, and
Speaker 3: many of them point in different directions. So the first
Speaker 3: thing that's happened is the Trump trade has driven US
Speaker 3: rates up and the US dollars stronger, and that means
Speaker 3: financial conditions in the US and now tighter than before
Speaker 3: Trump won the election, and that means more pressure for
Speaker 3: the FED to cut more. The second thing, well, it's
Speaker 3: those policies, right. Trump is promising tax cuts, which would
Speaker 3: reduce growth in the United States. He's promising tariff increases,
Speaker 3: which would make imports more expensive, and both of those
Speaker 3: things are inflationary, and so they should need pressure for
Speaker 3: the FED to cut less. But there's huge uncertainty about
Speaker 3: what those policies are going to be actually look like
Speaker 3: and when they're going to be implemented. And the FED
Speaker 3: is not really in the business of responding to policy hypotheticals, right,
Speaker 3: so they want to see what these policies look like
Speaker 3: and when they're kicking in before they start taking account
Speaker 3: of them in their rates decisions. And then, lastly, stretching
Speaker 3: back to Clinton, there's been a tradition for US presidents
Speaker 3: to respect FED independence, right, Clinton, Bush, Obama, Biden. They
Speaker 3: all respected FED independence and left rate decisions for the FED.
Speaker 3: Now you'll immediately notice one US president who I left
Speaker 3: out of that list. That was Donald Trump. Donald Trump,
Speaker 3: in his first term had absolutely no filter in talking
Speaker 3: about the FED. In fact, he once tweeted the question
Speaker 3: who's the greater enemy of the United States? Jerome Powell
Speaker 3: was sheet in ping of China because he was angry
Speaker 3: that Powell wasn't cutting interest rates fast enough for his liking.
Speaker 3: In his second term, will he discover a kind of
Speaker 3: inhibition or a filter and sharing of your monetary policy?
Speaker 3: I doubt it. And what that means is there's going
Speaker 3: to be pressure for the FED to demonstrate that it's
Speaker 3: retaining its independence. And at the margin, that's going to
Speaker 3: mean pressure for the FED to keep rates a little
Speaker 3: bit higher. So you've got tighter monetary conditions already, pressure
Speaker 3: to cut more. You've got the promise, but not yet
Speaker 3: the reality of lower taxes and higher tariffs which are inflationary,
Speaker 3: pressure to cut less, and threats to FED independence pressure
Speaker 3: to cut less. Where's that going to net out? I
Speaker 3: think all we can say now is it nets out
Speaker 3: in quite a lot of uncertainty on the FED forecast.
Speaker 1: Yeah, and we've had Powell saying already that he wouldn't
Speaker 1: step down if Trump asked him, So it's already on
Speaker 1: people's minds.
Speaker 3: Yeah. It was pretty punchy, wasn't it.
Speaker 1: Surprisingly?
Speaker 2: Tom? I know you spent quite a lot of time
Speaker 2: in China. I'd love to talk more about your views
Speaker 2: on China now. The department that you're heading up, Bloomberg Economics,
Speaker 2: in collaboration with Bloomberg Intelligence, wrote a detailed report analyzing
Speaker 2: the effectiveness of the Made in China twenty twenty five
Speaker 2: plan or goals, and it largely came up with the
Speaker 2: conclusion that the US has largely failed in containing China's
Speaker 2: rise in terms of technologies. What does this tell us
Speaker 2: about the effectiveness of these protectist policies.
Speaker 3: It's a great question. John. So when Trump was campaigning
Speaker 3: in twenty sixteen, a big part of the campaign was
Speaker 3: the promise to be China right, restore American greatness, restore
Speaker 3: American primacy, consign China to a kind of permanent second place.
Speaker 3: And since Trump's election win in twenty sixteen, if you
Speaker 3: look at the headline data, things have been moving pretty
Speaker 3: firmly in America's direction. China is no longer closing the
Speaker 3: GDP gap with the United States, It's falling further behind
Speaker 3: China's markets. If we leave aside the excitement around the
Speaker 3: latest stimulus have been slumping, America's market have been soaring.
Speaker 3: So if you look at some of those headline numbers,
Speaker 3: you can make a pretty compelling case that America's winning again.
Speaker 3: Now the question is is that because of America's protectionist
Speaker 3: policies and export controls aimed at blocking China from acquiring
Speaker 3: advanced semiconductors and other technologies. I would make the case,
Speaker 3: and I think those folks of Bloomberg Intelligence who did
Speaker 3: that great analysis on China's set to bisector tech ambitions,
Speaker 3: would make the case that actually China's problems are much
Speaker 3: more homegrown. China has been wrestling with a huge problem
Speaker 3: of overbuilding in the real estate sector. As they wrestle
Speaker 3: with that, there's been a huge drop in real estate construction,
Speaker 3: and that's just a really significant blow to growth. But
Speaker 3: if we look at what's taking place more quietly in
Speaker 3: the tech sector, in the manufacturing sector, if we look
Speaker 3: at the progress which China's making on things like electric vehicles,
Speaker 3: the batteries that power those vehicles, sustainable energy, actually there's
Speaker 3: some pretty remarkable progress being made. And what that suggests
Speaker 3: to me is that the great US China economic race, well,
Speaker 3: America has certainly got the edge right now, but that
Speaker 3: race is far from over.
Speaker 1: Yeah, and despite that tech boom, as you mentioned, China's
Speaker 1: economy is not doing too well these days, and the
Speaker 1: property sector has still yet to find bottom. Consumers aren't
Speaker 1: spending like they used to, and you add tariffs to
Speaker 1: the mix and it's not a great picture. But one
Speaker 1: thing we've heard from Goldman Sachs and investors like Wage
Speaker 1: and Sean from pag who was on our show recently,
Speaker 1: is that tariffs, in a weird way, might actually be
Speaker 1: good for China's economy long term. In other words, it's
Speaker 1: going to potentially force policymakers to start in China to
Speaker 1: really start focusing on the consumer and more consumer led growth.
Speaker 1: And I wonder what you make of that.
Speaker 3: Yeah, I don't think that's going to happen, Katsia. I
Speaker 3: think that China's leaders have a pretty firm view that
Speaker 3: consumption is not the path to prosperity. Production is the
Speaker 3: path to prosperity. So back when Phojinang was in charge,
Speaker 3: if you really read a lot of China's economic policy documents,
Speaker 3: and I'm don't have much of social life, so I
Speaker 3: count myself as someone who's read quite a lot of
Speaker 3: China's economic policy documents.
Speaker 1: That's perct That's why you're here, That's why.
Speaker 3: I'm sitting in my study at nine o'clock talking to
Speaker 3: you on the Asia Central podcast. So so, if you
Speaker 3: go back to the Hujentali era, it wasn't front and center,
Speaker 3: but at least there was like lip service to this
Speaker 3: Washington Wall Street idea that China needed to rebalance its
Speaker 3: economy towards more consumption. Right now, if you read the
Speaker 3: economic policy documents today, if you listen to what Hijinping's
Speaker 3: saying today, really that idea isn't part of the mix
Speaker 3: at all. Right, It's all about building a more productive
Speaker 3: supply side of the economy, acquiring strategic technologies, developing advanced manufacturing.
Speaker 3: China's leadership have decided that that's what worked for Japan,
Speaker 3: that's what worked for Korea, that's what worked for Germany,
Speaker 3: and that's what's going to work for them as well.
Speaker 2: Tom, What are you looking for next? What are the
Speaker 2: catalysts going forward in terms of this US China relationship.
Speaker 3: So I'm going to be looking at three things, John. Firstly,
Speaker 3: I'm going to be looking at who gets the big
Speaker 3: jobs in Washington, DC. Specifically, I'll be looking to see
Speaker 3: whether Robert Leitthheiser, the architect of tariffs in Trump's first term,
Speaker 3: is getting a prominent role in his second administration. The
Speaker 3: second thing, a little bit further down the road, is well,
Speaker 3: the US is going to make a threat to try
Speaker 3: and get some concessions from China. I'm going to be
Speaker 3: looking at how China responds. I think it's actually entirely
Speaker 3: possible that Beijing calls Washington, DC's bluff on this, and
Speaker 3: that Trump says we're going to hit you with sixty
Speaker 3: percent tariffs, and instead of coming forward with some concessions,
Speaker 3: we'll buy some more soybeans, we'll buy some more liquefied
Speaker 3: natural gas. We'll give some more trademarks to your immediate
Speaker 3: family members. China says, you know what, We've played this
Speaker 3: game before in your first term. We're not playing it again.
Speaker 3: Tariff us if you like, but we're not having this
Speaker 3: negotiation a second time. And then the third thing that
Speaker 3: I'm going to be looking for to guide me through
Speaker 3: all this complexity is the Agia Centric podcast, which I
Speaker 3: understand has all the information everyone needs to understand the
Speaker 3: complexities of Asia's politics, economy, and financial markets.
Speaker 1: Really truly the best guest to have on the show.
Speaker 1: We can't wait to have you on next tom Thank
Speaker 1: you so much for joining us on the Asia Centric podcast.
Speaker 3: It's been great to be here. Thanks Katy, thanks job.
Speaker 1: You've been listening to Asia Centric from Bloomberg Intelligence. This
Speaker 1: podcast is produced by Claire Chen