Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: Terminal and the Bloomberg Business app. Ambassador Catherine Tie, us
Speaker 2: trade representative, joins us now from New York. Ambassador, wonderful
Speaker 2: to have you with us on the program. We've some
Speaker 2: called us done a role reversal. You're in New York
Speaker 2: and we're down in Washington. We'll make this work properly
Speaker 2: next time, Ambassador. This is a topic we've been talking
Speaker 2: about for a long long time, Chinese overcapacity.
Speaker 1: We all know about the China shark.
Speaker 2: We all studied it an obliterated manufacturing basis in places
Speaker 2: like the United States of America. Can I just give
Speaker 2: you a few minutes just to sort of lay the
Speaker 2: ground for us what's changed and what's new about what's
Speaker 2: developing right now.
Speaker 3: Well, i'd be delighted too. It's wonderful to be here
Speaker 3: with all of you. You're absolutely right about the China Shock,
Speaker 3: and it's become an established set of facts as we
Speaker 3: look back on the last several decades of China's emergence
Speaker 3: as an economic powerhouse.
Speaker 4: In the world.
Speaker 3: As you've seen the growth of the Chinese economy, what
Speaker 3: you've also seen is the negative impacts on other economies
Speaker 3: like that of the United States, and of course the.
Speaker 4: Industrial erosion that you've seen here.
Speaker 3: The manufacturing capacity loss isn't just limited to the United States.
Speaker 3: You see it in other advanced economies. You also see
Speaker 3: it in developing countries as well. But to your point,
Speaker 3: a lot of what we're seeing right now is not new.
Speaker 3: The China Shock continues. We've seen it in the sectors
Speaker 3: steel and aluminum. We've seen it in solar panels. Twenty
Speaker 3: years ago, the United States several other countries had growing
Speaker 3: economies and industries around solar panels. The Chinese double down
Speaker 3: on their what we call non market practices. There a
Speaker 3: state investment in a strategic emerging sector. And what you've
Speaker 3: seen is something we've seen over and over again, a
Speaker 3: creation of excess capacity over production that brings down prices.
Speaker 3: It's a kind of predatory pricing practice worldwide that has
Speaker 3: driven out producers in other economies, leaving the Chinese economy
Speaker 3: having cornered the market in production. Right now, we're still
Speaker 3: eighty five percent reliant on Chinese production and supply in
Speaker 3: solar panels. We've also seen it in batteries. We're seeing
Speaker 3: it now in evs and critical minerals is another example.
Speaker 4: So what you see is doing with respect to.
Speaker 3: Steel is actually responding to a set of pressures that
Speaker 3: have been building over a couple decades. On the steel
Speaker 3: point in particular, I wanted to really enforce that. What
Speaker 3: you heard President Biden talk about earlier this week was
Speaker 3: to call on me as the US Trade representative, to
Speaker 3: consider increasing the existing tariffs on Chinese steel imports. But
Speaker 3: we know that the challenge with Chinese over capacity and
Speaker 3: excess production is a world economy challenge. The scale of
Speaker 3: the Chinese economy and its ability to manufacture and produce.
Speaker 4: Will depress prices worldwide.
Speaker 3: It infects the global economy and global prices, and so
Speaker 3: what you've.
Speaker 4: Seen is as well the maintenance of.
Speaker 3: The global steel tariffs and aluminum terraffs. But you also
Speaker 3: see us as the Biden administration evolving out of that
Speaker 3: particular framework. You see us in particular taking leadership role
Speaker 3: with the European Union. Over the last two years, we
Speaker 3: have been engaged in intensive negotiations for a new framework, a.
Speaker 4: Global Sustainable Steel and.
Speaker 3: Aluminum Agreement that we are working on to address not
Speaker 3: just the excess capacity pressures, but also to try to
Speaker 3: create incentives for cleaner production and cleaner trade in steel
Speaker 3: and aluminum.
Speaker 2: So, Ambassador, if I can jump in, if we can
Speaker 2: focus just on steel, because we've got so much to
Speaker 2: unpack there. Let's take steel, and we both know how
Speaker 2: complex this is, and I can share some numbers with
Speaker 2: our audience, certainly not for your benefit direct Chinese imports.
Speaker 2: As you know, the estimate is something like zero point
Speaker 2: six percent of total steel demand in the United States.
Speaker 2: The problem is a lot of this is going through Mexico. So, Ambassador,
Speaker 2: a question I heard someone ask recently is how do
Speaker 2: we make them eat it? So how can you address
Speaker 2: what is happening in Mexico? How do we stop the
Speaker 2: steel coming through the back do.
Speaker 3: So I'm going to impact this back at you in
Speaker 3: a couple of ways. One is to reinforce the point
Speaker 3: that when you have a producer, a major, major, dominant
Speaker 3: producer like China, producing at below market rates, it affects
Speaker 3: the entire supply chain starting upstream, all the way downstream.
Speaker 3: The Mexico challenge is a piece of this, and again.
Speaker 4: The challenge is worldwide.
Speaker 3: So I think with respect to Mexico, there are a
Speaker 3: couple pieces. One is to the extent that upstream steel
Speaker 3: is coming into Mexico and being worked on and then
Speaker 3: coming into the United States, You've got to figure out
Speaker 3: how to level the playing field there. Secondly, there's a
Speaker 3: much more blunt challenge with respect to steel coming into
Speaker 3: Mexico and improperly coming into view United States as Mexican steel.
Speaker 4: So there is a challenge with.
Speaker 3: Respect to the evasion of trade programs and trade frameworks
Speaker 3: where steel that's not properly Mexican is coming in as
Speaker 3: Mexican steel and enjoying the preferences that we provide to
Speaker 3: the Mexican economy and Mexican producers. So again, with respect
Speaker 3: to steel production, in order for the United States to
Speaker 3: continue to be able to produce, to continue to grow
Speaker 3: our steel industry, to continue to grow cleaner steel industries.
Speaker 3: What you see is a number of programs that we
Speaker 3: are putting in place to ensure the integrity of trade systems.
Speaker 3: The challenge right now is and steal is an excellent,
Speaker 3: excellent example that there is no such thing as free
Speaker 3: trade in steel. The market in steel globally is significantly
Speaker 3: distorted by what we are calling the non market policies
Speaker 3: and practices coming out of China. Supply that's being created,
Speaker 3: production plans that are not linked to demand, and so
Speaker 3: what happens is you have a significant depression of prices,
Speaker 3: and it requires economies like the United States to work
Speaker 3: with other economies that want to be opened, that want
Speaker 3: to openly trade, to take more significant defensive measures against
Speaker 3: the unfair practices that have infected this sector.
Speaker 5: Ambassador Tide, do you see the similar dynamics and what
Speaker 5: you're describing in steel happening right now with the ev
Speaker 5: market one percent?
Speaker 3: It's the same pattern that we see repeated over and
Speaker 3: over in different sectors. And the challenge for us is
Speaker 3: is this has not been our practice largely. We have
Speaker 3: really adhered to this notion that if you just keep
Speaker 3: taking down barriers, if you just keep trying to trade more,
Speaker 3: if you just keep chasing efficiency, that everything will work
Speaker 3: out great. The challenge is that in every one of
Speaker 3: these sectors, we see that Chinese practices allow for Beijing
Speaker 3: to capture larger and larger shares of the global market,
Speaker 3: so that you end up with a dominant producer in
Speaker 3: this entire economy, and what happens is the rest of
Speaker 3: us become extremely vulnerable and reliant on that supply.
Speaker 4: What we are trying to do is.
Speaker 3: To find opportunities for us to descend, to stand up
Speaker 3: so that we can restore more freedom to trade, more
Speaker 3: freedom to economy, more freedom for other economies to stand
Speaker 3: up to the coercion that results when you have these
Speaker 3: types of vulnerabilities that can be used to create political
Speaker 3: pressures on economies.
Speaker 5: Well, the Biden administrations made very clear that tariffs on
Speaker 5: Chinese evs, bigger tariffs are coming down the pipeline, but
Speaker 5: Secretary Yellen also said the US quote won't take anything
Speaker 5: off the table when it comes to this over capacity
Speaker 5: coming out of China. We though, have not seen one
Speaker 5: single wto complaint from the United States is that potentially
Speaker 5: a tool that you can use.
Speaker 3: I wonder if you get your TV say you're talking
Speaker 3: points from my Republican senator counterparts from my hearing earlier
Speaker 3: this week. Look, the World Trade Organization is incredibly is
Speaker 3: an incredibly important, valuable institution in the world. As part
Speaker 3: of the post World War two Bretton Woods Framework, the
Speaker 3: World Trade Organization is critical to the functioning of a
Speaker 3: modern world economy. That said, we also are very clear
Speaker 3: in our commitment to the WTO lies our commitment to
Speaker 3: reforming the WTO. I know this conversation is actually not
Speaker 3: unique to the WTO. All the Bretton Woods institutions, the IMF,
Speaker 3: the World Bank, this is their week. In all of
Speaker 3: the conversations today, what.
Speaker 4: You hear in all of those.
Speaker 3: Conversations is the question of how these institutions evolve to
Speaker 3: meet the challenges that we're facing today.
Speaker 4: With respect to the WTO.
Speaker 3: That is also true, and in terms of WTO dispute settlement,
Speaker 3: we as the United States, are very very proud of
Speaker 3: our record with respect.
Speaker 4: To challenging Chinese practices at the WTO.
Speaker 3: What we have found over time, however, is that each
Speaker 3: one of those cases that we bring. Each victory that
Speaker 3: we score ends up being a quite limited victory. It
Speaker 3: ends up in quite limited change. What we are dealing
Speaker 3: with in terms of the challenge of the Chinese economic
Speaker 3: system is structural, it's systemic, and so that's why we
Speaker 3: are bringing more strategy. We are bringing more creativity to
Speaker 3: look for more effective ways to level the playing field,
Speaker 3: working with other like minded economies, and also working to
Speaker 3: raise these concerns inside of the.
Speaker 5: Wto ambassad it's funny you bring up Republicans and their
Speaker 5: talking points because broad strokes wise, what we see is
Speaker 5: that whether or not we get another Biden administration or
Speaker 5: Trump back into the White House, trade policies look almost
Speaker 5: the same when it comes to China. Do you see
Speaker 5: a divergence in what we potentially could see from Trump
Speaker 5: or Biden given the fact that we still have Trump
Speaker 5: erraor tariffs right now under this administration.
Speaker 1: So I think what.
Speaker 3: I will say is this that whether it's Republicans or Democrats,
Speaker 3: going back to the earlier comments around the China shock,
Speaker 3: we are together. And I think that this also applies
Speaker 3: outside of the United States as well. We are coming
Speaker 3: to a realization and raising in our consciousness a common
Speaker 3: assessment with respect to diagnosing what the problem is, what
Speaker 3: the source of today's world economic and trade challenges is,
Speaker 3: then you have to move on to what are you
Speaker 3: going to do about it? And with respect to the
Speaker 3: Biden administration, we are very proud of our record. First
Speaker 3: of all, the tariffs are an important tool in the
Speaker 3: trade toolbox, and that it is important to use them
Speaker 3: effectively and strategically and to know what the leverage is
Speaker 3: with respect to the tariffs. So yes, we continue to
Speaker 3: retain tariffs for strategic purposes. Second, the Widen administration hasn't
Speaker 3: rested on just trade or just teriffs to address the
Speaker 3: challenges that we face with respect to competing fairly with China.
Speaker 3: We have also, as you've seen, activated significant investments into
Speaker 3: the United States economy for the US workers and for
Speaker 3: American infrastructure. It's the bipart is an infrastructure law, chips
Speaker 3: and science, the Inflation Reduction Act, the investments into the
Speaker 3: Clean energy revolution. In addition to that, you also see
Speaker 3: that we have initiated an investigation into China's unfair non
Speaker 3: market practices that have been alleged by five of our
Speaker 3: labor unions with respect to their maritime logistics and shipbuilding sectors.
Speaker 3: When you take these three segments together, what you have
Speaker 3: is the articulation of the Biden administration's China trade.
Speaker 2: Response and by SID, I just want to ask you
Speaker 2: a question very quickly about Chinese evs. If you had
Speaker 2: a decision on that, can we expect a conclusion anytime soon?
Speaker 3: So I'm not quite sure there's not a specific question
Speaker 3: before us. I think with respect to maritime logistics and shipbuilding,
Speaker 3: for instance, there is a petition that was presented to us.
Speaker 3: Think to your point, it's what are we going to
Speaker 3: do about this trend that we see repeating itself in
Speaker 3: the EV sector. Again, we have an entire set of
Speaker 3: tools before us, many of them are with the US
Speaker 3: Trade Representative, whether it's with respect to investigations that we
Speaker 3: can begin, whether it's looking at the set of tariffs
Speaker 3: that are and trined in our tariff review which has
Speaker 3: been ongoing for the last eighteen months. With respect to
Speaker 3: that tariff review, I am confident that as a whole
Speaker 3: of government exercise that we have been in an undertaking
Speaker 3: with deliberation, seriousness, especially with respect to looking at more strategic,
Speaker 3: more effective deployment of the tariffs that we have to
Speaker 3: address the inequities.
Speaker 4: In our trade relationship with China.
Speaker 3: I am confident that conclusion will be coming soon.
Speaker 2: And Besida, I can't just conclude with the following question,
Speaker 2: and it's probably difficult to answer directly, but the issues
Speaker 2: that you and I have discussed, that we've discussed over
Speaker 2: the last ten minutes or so as we started this conversation,
Speaker 2: they're not new. They've been at the forefront of many
Speaker 2: economist minds for a long long time. What strikes me
Speaker 2: is somewhat amusing is that it took someone like Donald
Speaker 2: Trump in twenty sixteen to put the forefront of American
Speaker 2: politics to shake the establishment to almost make this consensus.
Speaker 1: When I was listening to Secretary.
Speaker 2: Yellen over the last few weeks, I just thought, this
Speaker 2: feels like a Secretary Yellen discovery tour, something personal to
Speaker 2: her and nothing really new for policy. And Bassador, can
Speaker 2: I ask you what took long for the establishment in
Speaker 2: America to figure out this was the road they needed
Speaker 2: to go down?
Speaker 3: Well, it's an excellent question, because you know what I
Speaker 3: would do is I would actually have leaders in trade
Speaker 3: policy take ownership of the call. The earliest calls for
Speaker 3: the need for attention to the challenges that we are
Speaker 3: all focused on now. These are issues that we have
Speaker 3: been raising at the wto bilaterally with.
Speaker 4: China, very directly for a very long time.
Speaker 3: We had direct dialogues with China where we would raise
Speaker 3: these issues over and over. We would raise them with
Speaker 3: our partners. I think part of what you see is
Speaker 3: the increasing pressure that is being placed on economic dynamics.
Speaker 3: One last point I wanted to make with respect to inflation.
Speaker 3: Inflation conversation gets attached to tariffs a lot. The more
Speaker 3: we are talking about inflation and examining our worldwide experience
Speaker 3: with this phenomenon over the last couple years, the more
Speaker 3: we are realizing that the inflationary pressures are linked to
Speaker 3: the supply challenges that we have. Those supply challenges go
Speaker 3: to our vulnerabilities over concentration, the domination that we see
Speaker 3: by certain producers in the world economy. I think that
Speaker 3: is the next area where we need to drive coalescence
Speaker 3: around our analysis so that we can work together, whether
Speaker 3: it's Democrats and Republicans, whether it's the United States and
Speaker 3: other countries on solutions.
Speaker 2: I'm Bassaldor looking forward to having this conversation in person.
Speaker 1: Next time in join New York. Adam's with us here
Speaker 1: in Washington. Adam, good morning to you, Welcome to Washington.
Speaker 1: Thank you very much for having a set.
Speaker 2: Can we talk about the lack of cooperation and maybe
Speaker 2: even the complaints that you've heard this week about the
Speaker 2: strength of the US dollar.
Speaker 1: How loud are those complaints?
Speaker 6: Well, after a long time of silence, even though the
Speaker 6: dollar kept we saw yesterday Janet Yellen and her counterparts
Speaker 6: from Japan and Korea do an open mouth operation. Open mouth.
Speaker 6: Sometimes stuff comes out, sometimes stuff doesn't. You know, there's
Speaker 6: very big fundamentals here. The Japanese economy is doing very
Speaker 6: well by its standards, but and potentially could be raising rates,
Speaker 6: but it's not.
Speaker 1: The US.
Speaker 6: Korea has a lot of positive fundamentals. But the point is,
Speaker 6: if even Japan and Korea are losing ground against the dollar,
Speaker 6: this is a wave and my fear is it just
Speaker 6: goes up from here and that problems get bigger, political
Speaker 6: problems and economic problems more political than economic.
Speaker 2: But yeah, can we talk about the political and the
Speaker 2: economic problems?
Speaker 1: First? The political?
Speaker 2: What would be the political problems that come about off
Speaker 2: the back of this move so.
Speaker 6: It's probably not gonna affect the election directly, but it
Speaker 6: sets things up for bigger trade deficits, which again is
Speaker 6: not necessarily a bad thing. But if Trump is stated
Speaker 6: and Lightheiser view that as a real problem, or if
Speaker 6: over the course of the campaign the Biden administration starts
Speaker 6: talking about and decides it's a real problem, then you
Speaker 6: have a need to deal with it.
Speaker 1: And tariffs, whatever.
Speaker 6: Their lack of virtues on their own merits, they don't
Speaker 6: fix trade deficits. That was demonstrated amply over the last
Speaker 6: seven years. So you end up back in if you
Speaker 6: care about the trade officer, you care about the dollar,
Speaker 6: and most importantly, you care about what that does to
Speaker 6: credit conditions. So Lisa's rightly talking about monetary policy isn't
Speaker 6: as tight as the Fed thought. If you have a
Speaker 6: very strong dollar and money flowing into the dollar, that
Speaker 6: further loosens credit conditions.
Speaker 5: You mentioned the fiscal deficit. The IMF pretty much put
Speaker 5: out a warning to the United States almost it's too loose.
Speaker 5: We've prepared to be looser this year because it's an
Speaker 5: election year and there's no path forward for fiscal discipline.
Speaker 5: How much is the US the biggest problem when you're
Speaker 5: talking to officials from around the.
Speaker 6: World, I mean, the US is the problem memory, mostly
Speaker 6: because of our unreliability in international commitments and the potential
Speaker 6: for unwinding even further those commitments, and a lot of
Speaker 6: self dealing. So a lot of it's on the trade front,
Speaker 6: the security front, unreliability like with Ukraine funding, unreliability with
Speaker 6: trade deals with the USMCA. But in terms of the
Speaker 6: dollar in the fiscal I was glad to see the
Speaker 6: IMF getting loud because sometimes they are scared to do
Speaker 6: real surveillance on China, US, the big economies, and you know,
Speaker 6: we got open ended fiscal problems. We've got this threat
Speaker 6: that by end of twenty twenty five, the twenty seventeen
Speaker 6: tax cuts expire. So whoever's in Congress, whoever's in the
Speaker 6: White House, has to make some deal. There's no historical
Speaker 6: precedent for letting tax cuts expire, as you well know,
Speaker 6: and then having them jump seven percent. But the nature
Speaker 6: of that deal is almost certainly not going to include
Speaker 6: much tax increase. And without tax increase, I don't know
Speaker 6: how you get the budget deficit down.
Speaker 7: You mentioned something, let's go there, monetary policy. You wrote,
Speaker 7: it's not that tight at all. Are you saying that
Speaker 7: it needs to be significantly higher in terms of the
Speaker 7: benchmark rate in order to get inflation back down even
Speaker 7: close to two percent?
Speaker 6: I think it does have to be higher if you
Speaker 6: want to go to two percent. I'm actually calm with
Speaker 6: the Fed letting it stay roughly where it is and
Speaker 6: say it's a two sided risk. Because John Williams started
Speaker 6: to say, I'd be okay with that, but I do
Speaker 6: believe that the monetary conditions are not tight. Let me
Speaker 6: take you back, Lisa a year ago February February March
Speaker 6: people like us, which is a funny category be anyway,
Speaker 6: as for yourself Fed nerds, we're talking about the fact
Speaker 6: that FED it tightened, you know, x hundred bases points
Speaker 6: and it really wasn't affecting the economy that much. And
Speaker 6: then KME SVB and everybody got distracted. But if you
Speaker 6: go back to the first quarter of twenty twenty three,
Speaker 6: that was the talk, and I kept saying a few
Speaker 6: other people kept saying, Look, credit conditions are what matter,
Speaker 6: not what the FED fund's rate. So John Williams, Lori
Speaker 6: Logan from FED Dallas, we're coming out about six months ago,
Speaker 6: five months ago talking about oh my god, there might
Speaker 6: be a recession because the interest rate goes up as
Speaker 6: inflation comes down, and I and a few other people
Speaker 6: kept saying, don't obsess with the FED funds. Rate credit
Speaker 6: spreads are incredibly narrow, so anyway.
Speaker 1: It's less about the Fed has to.
Speaker 6: Do something different because the numbers are okay unless you
Speaker 6: really care about getting into two percent. But the extent
Speaker 6: to which it's tight I think is way over estimated.
Speaker 7: And you've been talking for a long time about how
Speaker 7: they need to have a higher target, even around three percent,
Speaker 7: So this coheres.
Speaker 1: With that idea.
Speaker 7: We keep going back to the pivot, and we can
Speaker 7: talk about the pivot of pivot and you turn and
Speaker 7: all that, but let's not I think there is a
Speaker 7: key question here of whether it was a policy error
Speaker 7: for Fedshair Powell to enunciate the possibility and the likelihood
Speaker 7: of rate cuts this year back at the end of.
Speaker 1: Last I think it was.
Speaker 8: I think it was.
Speaker 6: I mean, it's a communications error, and it goes with
Speaker 6: I think two things that have generally been suboptimal. As
Speaker 6: we say, first, they're too busy trying to guide the
Speaker 6: markets in a decision to decision way. And second, they're
Speaker 6: too reactive to data, so if they had a bit
Speaker 6: more structured they just say we've gotten it to hear.
Speaker 6: You can say I'm data dependent, but you can say
Speaker 6: what why you're data dependent instead of just saying I'm
Speaker 6: data dependent.
Speaker 1: But I think I'm going to do this. Did the
Speaker 1: politics matter? Does the election matter?
Speaker 2: Could you give us some kind of on that, your
Speaker 2: impression of what people are saying in Washington, because you
Speaker 2: know what the story is in woll Streight. On woll Streight,
Speaker 2: there is a belief that there is this window in July, right,
Speaker 2: and if they don't go through it, that door slam
Speaker 2: shut and it doesn't reopen until the end of the year.
Speaker 6: Window for essentially all constructed for the recut. Yeah, I
Speaker 6: think that's fair. I've been saying for a while, if
Speaker 6: they can avoid it. Even when I thought they were
Speaker 6: going to cut in June or March, I never thought March.
Speaker 1: I was said June.
Speaker 6: I thought they would try to avoid cutting again so
Speaker 6: close to the election. So but I don't think that's
Speaker 6: big picture really.
Speaker 1: What matters.
Speaker 6: What matters is us is essentially sidelined itself for the
Speaker 6: next year. We don't know what the fiscal policy is
Speaker 6: going to be. The monetary policy is on hold, which
Speaker 6: is reasonable but therefore not reacting to things. And you
Speaker 6: know foreign policy, which you all also covers, of course
Speaker 6: dominating matters.
Speaker 5: But if there's so many unknowns then to twenty twenty five,
Speaker 5: how can if I do anything, If we get sixty
Speaker 5: percent blank in tariffs on Chinese imports and a ten
Speaker 5: percent tariff wall for every single good coming into the
Speaker 5: United States, inflation may potentially skyrocket, which is what every
Speaker 5: economist is saying. How do you, as the Federal Reserve
Speaker 5: then cut rates going into potentially that?
Speaker 6: I completely agree with you, and I'm glad I Marie
Speaker 6: you're saying that out there because it is a true statement.
Speaker 6: Tariffs mean inflation no matter how you cut it. And
Speaker 6: if you do broad across the board terrace even more
Speaker 6: than the anti China tariffs, you're talking one to two
Speaker 6: percent jump in inflation almost immediately in another percent probably
Speaker 6: it's over three and a half in one percent the
Speaker 6: next year before you even get some pass on effects.
Speaker 1: So what does the FED do now?
Speaker 6: Of course, the Fed doesn't want to be seen as
Speaker 6: judging trade policy. So if this is a one off.
Speaker 6: They can say, well, it's just one off, but they
Speaker 6: certainly should be saying that there's a risk of an
Speaker 6: upward spiral if you're putting that on top of inflation
Speaker 6: that's already above target, if you haven't changed your target
Speaker 6: and it's already low unemployment. I agree, I mean, I
Speaker 6: think they should be warning about that.
Speaker 7: So will you just take a step back and put
Speaker 7: all this together. There's a real question of how vulnerable
Speaker 7: the financial system is to some of the shocks that
Speaker 7: come from higher inflation higher rates. We did speak yesterday
Speaker 7: with Jonathan Pingle of UBS, who talked about the potential
Speaker 7: for the Federal Reserve to raise rates to six and
Speaker 7: a half percent next year. If inflation stays above three
Speaker 7: percent in a persistent way throughout the rest of this year,
Speaker 7: what's the rate at which you start to see things
Speaker 7: break both on the yield space side as well as
Speaker 7: on the dollar.
Speaker 6: Here's where I'm I'm probably more optimistically. I think what
Speaker 6: we've seen over the last year two years is how
Speaker 6: much bank capital, household balance sheets risk aversion matter, and
Speaker 6: the households having a lot of savings, so you know,
Speaker 6: we had much less breakage from these rate increases than
Speaker 6: we've had in the past. So I think talking to
Speaker 6: the financial and monetary officials who were in Washington this week,
Speaker 6: I think they're rightly even though it's boring because they
Speaker 6: never do anything talking about non financial non bank financial
Speaker 6: intermediary is what we used to call shadow banks, because
Speaker 6: we don't have transparency into what part of the credit
Speaker 6: system is in there and how risky is it and
Speaker 6: how they reprice it. And so if I'm worried about
Speaker 6: something breaking, that's where I worry about it breaking. I
Speaker 6: think what we're talking about is potentially a further hike
Speaker 6: in the dollar, and that going back to where we started,
Speaker 6: that is not sustainable long term. And then if you're
Speaker 6: busy having been annoying to all your allies and putting
Speaker 6: tariffs on them, it's a little hard to then say, oh,
Speaker 6: please do something cooperatively to bring down the dollar.
Speaker 1: Ye, can we finish on trite?
Speaker 2: But the thing of the program over the last couple
Speaker 2: of days for us, who in this city is left
Speaker 2: fighting for free trade?
Speaker 1: Who's leading that fight anymore?
Speaker 6: So anyway, I wouldn't say we're leading it, but the
Speaker 6: Peterson the only ones who are trying. We're trying to
Speaker 6: feed people to fake facts about what happens to American households,
Speaker 6: what happens to inflation, what happens to growth with the tariffs,
Speaker 6: the facts about on the macro side, you're getting a
Speaker 6: stronger and stroller dollar, which is distortionary and which is
Speaker 6: going to overshoot. But if it's like eighty five, when
Speaker 6: you're putting tariffs on people, and also when you're not
Speaker 6: letting them invest in the US, you can't unwind this.
Speaker 6: Remember in the mid eighties when everyone was so concerned
Speaker 6: about Japan and the dollar shot up hugely because you
Speaker 6: had loose fiscal type money, so a lot of echoes
Speaker 6: of today. Part of the way we got out of
Speaker 6: it was we got the Plaza Cord. But part of
Speaker 6: the way we got the Plaza cord was also politically.
Speaker 6: Japanese and other foreign countries had their multinationals invest a
Speaker 6: lot in the US. So there's hundreds of thousands of
Speaker 6: toyoda and hunter workers now in the US. We're not
Speaker 6: letting the Chinese do that, So you're making it even
Speaker 6: more complicated to unwind this. If we get into this mess.
Speaker 2: It's a complicated mess already some people might say, Adam,
Speaker 2: thank you so much for your time today.
Speaker 1: We appreciate it.
Speaker 2: Thanks for having Adam post Un at the Peterson Institute
Speaker 2: for International Economics on a whole range of EXAs in
Speaker 2: the United States, FED officials are warning cuts may not
Speaker 2: come at all this year, and about saying it's looking
Speaker 2: to navigate these challenges and more. As share of Bank
Speaker 2: of Santander and theif ANDA joins us in Washington this morning,
Speaker 2: and a good morning to you, Good morning, thank you
Speaker 2: so much for being with us today. We had a
Speaker 2: guest with us about five minutes ago. It was pretty depressing,
Speaker 2: very downbeayond cooperation in Washington, the future for growth outside
Speaker 2: of the United States, How down be you and your
Speaker 2: team about the same things.
Speaker 8: Well, you know, first of all, we are at war.
Speaker 8: We have two wars, which is a human tragedy, and
Speaker 8: our thoughts of with all the people that are suffering.
Speaker 8: But aside from those very important issues which obviously we
Speaker 8: must deal with first, the economy does not look bad.
Speaker 8: So you know, we have managed to bring down inflation.
Speaker 8: Remember we were around nine ten percent, were around three
Speaker 8: to four in most countries. Really important. That's the one
Speaker 8: thing we cannot allow to get out of control. We
Speaker 8: have growth, yes, lower growth, but growth overall. And third,
Speaker 8: we have very high employment levels. If I think about
Speaker 8: sometimes there's Europe and America's footprint. Every single one of
Speaker 8: our countries is at historically high levels of employment. So
Speaker 8: you know this is not bad. A year ago you
Speaker 8: had asked many people where are we going to be?
Speaker 8: Anybody that said soft landing, you would say, oh, you're
Speaker 8: being too optimistic. We have a super soft landing. So far,
Speaker 8: so far, so good.
Speaker 2: The growth profile is certainly much better than we thought
Speaker 2: it would be, not just twelve months ago, but maybe
Speaker 2: even three months ago. Though we still have two wards.
Speaker 2: We also have increased protectionism. It's but a key feature
Speaker 2: of the meetings this week, as you well know, a
Speaker 2: backslide towards industrial policy in places like the United States.
Speaker 2: Can I ask you, as someone who leads a bank,
Speaker 2: does that make it more difficult to be an international
Speaker 2: bank against that backdrop?
Speaker 8: The key thing we're all looking to, and this is
Speaker 8: not different from what everybody is saying, is that the
Speaker 8: most difficult and you know the key risks now are geopolitical.
Speaker 8: As I said, the macro looks much better at least
Speaker 8: for now. So as we think about what is happening
Speaker 8: and what these geopolitics mean for supply chains for our business,
Speaker 8: understanding that this is going to mean more structural inflation
Speaker 8: because you know you're going to have higher cost Understanding
Speaker 8: that you need to prioritize the defense or national security
Speaker 8: or in the case of companies, you know, diversification, which
Speaker 8: again is a key asset at least for us, and
Speaker 8: this is really very valuable. So these are the things
Speaker 8: you need to think about. How do I protect my
Speaker 8: business at the time when the world is increasingly volatile
Speaker 8: where you're having a big shift in terms of we
Speaker 8: want secure supply chain. Yes, we want it to be affordable,
Speaker 8: good prices, but security is paramount. And of course we
Speaker 8: also want to ensure that we can manage the green
Speaker 8: and the climate transition.
Speaker 5: If geopolitical rests are in number one concern and that
Speaker 5: can potentially meet a spike in inflation, do you expect
Speaker 5: the EASYB to then what it's been pretty much forecasted
Speaker 5: by everyone, go ahead of the FAED and have this
Speaker 5: rate cut in June.
Speaker 8: So you know, what we're thinking about is what is
Speaker 8: the terminal rate? Where does this end up. That is
Speaker 8: the key question and of you and as an institution,
Speaker 8: is that that terminal rate is not going to be
Speaker 8: the same in Europe as in the US. It's probably
Speaker 8: be around if your top the most economy is four
Speaker 8: percent in the US, around three percent in Europe. What
Speaker 8: it means is that let's say rates will end up
Speaker 8: around those levels, around three percent four percent, And that
Speaker 8: is really what we That is what allows us to plan. Again,
Speaker 8: that is not a bad thing for commercial banks for
Speaker 8: the sector. Negative rates were unsustainable, risky for the system.
Speaker 8: Very high rates kill the economy. You know, low rates,
Speaker 8: maybe we are going to have too low growth. And
Speaker 8: that is the one thing we need to focus on.
Speaker 8: How do we manage an economy where terminal rates are
Speaker 8: a bit higher because all the structural factors not just defence, demographics,
Speaker 8: the carbonization, So you have structural trends that are more
Speaker 8: inflation than before, slow growth.
Speaker 1: What do we do about it?
Speaker 2: So I know that you're in acquired period, so you
Speaker 2: can't talk directly about the financials, but can you help
Speaker 2: me understand how do you plan for things like net
Speaker 2: interesting income when you're across so many different regions, with
Speaker 2: so many different policies and so many different so called
Speaker 2: terminal rates. How do you plan for that kind of thing?
Speaker 2: What does that look like?
Speaker 8: Look sometimes that is a global bank, but basically it's
Speaker 8: Europe and the Americas and we have one hundred and
Speaker 8: sixty six million customers. First thing is diversification is key,
Speaker 8: not just for us, for anybody. And we have diversification
Speaker 8: by businesses five global businesses, and by regions and countries.
Speaker 8: So that means that if something doesn't go well in
Speaker 8: one country usually gets compensated by another. And so what
Speaker 8: you try is to really have a context for risk appetite.
Speaker 8: Do we take more risk less risk? We don't manage
Speaker 8: interest rates right? As I said, the context is really
Speaker 8: good for financial institutions, especially commercial banks like ours. Why
Speaker 8: because negative rates meant that with a big retail base,
Speaker 8: you're not charged, but you were being charged by the
Speaker 8: central banks for twenty percent of other posits and we
Speaker 8: couldn't charge so positive rates. Low growth, high and employment
Speaker 8: is another bad scenario for commercial banks.
Speaker 2: Some other banks have told bank from the United States,
Speaker 2: international banks I'm thinking specifically of HSBC being preparable are
Speaker 2: still there. They still have a presence. You've been leaning
Speaker 2: in a little bit more. Could you develop that for
Speaker 2: us this morning? What are you planning in the United States?
Speaker 2: How big is your presence going to be going forward
Speaker 2: from here.
Speaker 8: We're very excited about the opportunities in the United States.
Speaker 8: We're very confident we'll reach the fifteen percent return on
Speaker 8: tangible equity, and we're keeping it simple. Play to our strengths.
Speaker 8: Where do we have global scale that helps us in
Speaker 8: this market. Make sure that we're leveraging our network. And
Speaker 8: so in the biggest business, which is the consumer, we
Speaker 8: have something none of the other foreign banks have or had,
Speaker 8: which is at scale auto business. We're number five in
Speaker 8: the US, we're number one in Europe. We bring our
Speaker 8: OEMs here, and second, we have scale to invest in
Speaker 8: our own technology. So we're going to deploy our own
Speaker 8: technology to launch a digital bank to make sure we
Speaker 8: can fund the auto business competitively.
Speaker 1: Simple and this was brilliant.
Speaker 2: I know you've got a super busy morning, so we
Speaker 2: appreciate you carving out some time for us here at Bloomberg.
Speaker 2: Thank you so much. Great to be here in the
Speaker 2: Libanco Santander Chairman. This is the Bloomberg Surveillance Podcast, bringing
Speaker 2: you the best in markets, economics, and geopolitics. You can
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