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Speaker 1: There's little sign of a sweeping deal to resolve the

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Speaker 1: US China trade conflict. Even a quick fix to some

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Speaker 1: of the issues is eluding officials, and hoping for that

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Speaker 1: fix probably misses the broader point that China's economy is

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Speaker 1: undergoing profound internal change. If anything, tariff battles will only

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Speaker 1: accelerate that change. Welcome to Benchmark, A show about the bloody.

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Speaker 1: I'm Daniel Moss, columnist at Bloomberg Indion in New York.

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Speaker 1: Beneath the headlines, what's happening on the ground in China

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Speaker 1: and what are executives that have to make decisions doing

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Speaker 1: about it? In the era of trade slings and arrows?

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Speaker 1: Should we even be talking about globalization at least as

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Speaker 1: far as we've come to understand the term. Francis Slim

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Speaker 1: from Colberg Cravis Roberts spent some time in China recently

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Speaker 1: and his co author of a penetrating report called China

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Speaker 1: a Visit to the Epicenter. She joins us from Sydney,

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Speaker 1: where she's head of the Asia Pacific Macro Research Team.

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Speaker 1: Francis welcome. Thank you very much. Dan. I'm very happy

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Speaker 1: to be here and so thank you for the induct

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Speaker 1: What was unique about this trip to China. It's been

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Speaker 1: the epicenter of a lot for quite a while, or

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Speaker 1: at least some of the seismic points. What's going on

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Speaker 1: there right now? Oh, I think you're very right. China

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Speaker 1: has been the epicenter for a very long time. We

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Speaker 1: have been meet Henry mcbeh and myself have been traveling

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Speaker 1: to China for many years now, and I think what's

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Speaker 1: different now is this intense focus on trade and the

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Speaker 1: tensions going on there where US is imposing tariffs on

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Speaker 1: China and China is imposing terroffs on the US. So

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Speaker 1: we took a visit to Shanhai um and we're heading

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Speaker 1: to Beijing next to find out what's really happening on

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Speaker 1: the ground, what's the view from China, because a lot

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Speaker 1: of the rhetoric we here is from the US and

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Speaker 1: less from China. So we went there to learn more

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Speaker 1: about how Chinese authorities are thinking about the trade issues.

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Speaker 1: But not just Chinese authorities, you also talk to executives

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Speaker 1: making daily decisions about how to deal with the headlines. Absolutely,

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Speaker 1: and to me, that's the that's the key way that

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Speaker 1: you understand what's actually going on when you speak to

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Speaker 1: business leaders in China, they tell you what they're feeling

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Speaker 1: on the ground, and that was what was different this

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Speaker 1: time around. Previously, you'd always hear the policies that are

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Speaker 1: being rolled out from Chinese authorities, and it was very

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Speaker 1: clear the direction they were going as it pertained to trade.

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Speaker 1: There was a vacuum of conversation, so unlike the US,

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Speaker 1: where you're here daily comments coming from d C, you

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Speaker 1: don't hear that coming from China. So when you speak

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Speaker 1: to the business executives, they tell you that things have changed,

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Speaker 1: and that was what was so interesting about this visit,

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Speaker 1: and you were getting that same impression from locals as

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Speaker 1: well as expatriates. Yes, um, the locals. I think the

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Speaker 1: local business folk had a different view of what was happening,

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Speaker 1: and a very big, long term structural view of the

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Speaker 1: tectonic shifts really that are happening in the global economy

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Speaker 1: and how the center of gravity, the center of economic

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Speaker 1: functions are shifting, and they felt that was the core

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Speaker 1: reason why we had these trade tensions today. The foreign

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Speaker 1: nationals that were in China were more reacting to policies

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Speaker 1: that were shifting as a result of these tensions. So

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Speaker 1: You've got a good flay or of what locals were

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Speaker 1: feeling and what foreign companies were feeling. You're asking readers

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Speaker 1: to look beyond the prospect of any short term fix

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Speaker 1: to end the trade dispute between the US and China.

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Speaker 1: What's wrong with looking for a fix. This is our

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Speaker 1: view and it's my view as well. I think the

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Speaker 1: reason why the trade tensions are here today is not

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Speaker 1: so much because of trade as it is about broader issues.

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Speaker 1: And the key issue that's different today is China has

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Speaker 1: come of age. China now can make smartphones. China actually

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Speaker 1: makes more smartphones than some Song and Apple combined. Nobody

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Speaker 1: talks about that. This is what's shifting. China is capable

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Speaker 1: of doing a lot of things the US is doing.

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Speaker 1: The US is trying to slow down in China's progress,

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Speaker 1: and the trade is a tool to make that happen.

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Speaker 1: In my view, a lot of the domestic commentary in

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Speaker 1: the It States does feel like it's in a time warp. Francis.

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Speaker 1: People talk about sweatshops. People bemoaned that factory producing furniture

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Speaker 1: that was once in North Carolina and now it's gone,

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Speaker 1: oh somewhere in China. In reality, that factory has probably

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Speaker 1: moved on somewhere else from China. If I'm understanding you correctly,

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Speaker 1: that's correct. So maybe about ten twenty years ago, China

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Speaker 1: did have a lot of factories manufacturing low end goods.

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Speaker 1: When they first entered the w t O, they were

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Speaker 1: making t shirts and toys, low end goods with massive factories.

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Speaker 1: Today it's very different. What has been amazing is that

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Speaker 1: you know that the US developed a lot of the technology.

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Speaker 1: The US developed the iPhone, the US developed the iPad.

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Speaker 1: But what China has done is they have really mastered

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Speaker 1: the use of technology that has been built by the US.

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Speaker 1: And if you look at the progress they have made

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Speaker 1: in terms of uh Internet penetration, the use of phones,

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Speaker 1: and ride sharing and even e commerce, it has just

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Speaker 1: leaped throut the US. Ten years ago they were at zero.

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Speaker 1: Today their way ahead of the US in terms of

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Speaker 1: the application of new technologies. That's what this trade war

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Speaker 1: is about. We need of the U s fields. They

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Speaker 1: need to slow China down. That's not going to shift

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Speaker 1: and that's why I think the change that's happening UM

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Speaker 1: is more structural in nature. The tensions will be more

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Speaker 1: long tailed than people think because the fundamental reason is

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Speaker 1: that China is now a real competitor to major developed

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Speaker 1: countries like the US, like Europe and Japan. Does that

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Speaker 1: make China more resilient to a trade war than was

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Speaker 1: the case a few years ago. Yes, absolutely. If you

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Speaker 1: look at the amount of exports as a set of GDP,

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Speaker 1: it's fallen from more than hardly eighteen today, which is

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Speaker 1: not too far from where the US is in terms

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Speaker 1: of its trade exposure, So absolutely makes it more resilient.

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Speaker 1: There's also a great resolve to continue moving forward. They

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Speaker 1: are continuing to invest in education, they're continuing to invest

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Speaker 1: in innovation, and in fact, as a result of the

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Speaker 1: trade war and the potential of losing supply of these

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Speaker 1: precious semi conductor ships, which is the core of a

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Speaker 1: lot of the trade tensions, they have actually raised a

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Speaker 1: fund to accelerate progress in manufacturing high end semiconductor technology. Francis,

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Speaker 1: you cast serious doubts in this report over the future

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Speaker 1: of global supply chains. Talk a bit about that place.

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Speaker 1: So if you think about the world twenty years ago,

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Speaker 1: when China first and the World Trade Organization, everyone would

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Speaker 1: grow through expanding their export base, and that was a

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Speaker 1: really good strategy in terms of uh expanding GDP growth

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Speaker 1: and increasing wealth in a lot of emerging countries. That

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Speaker 1: was because the US was a major consuming economy. Today,

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Speaker 1: though the dynamic has shifted. China is a much more

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Speaker 1: wealthy country. Today. GDP per capital is in the ten

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Speaker 1: thousand range, and they have one point four billion people

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Speaker 1: compared to America's three hundred thirty million. So when you

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Speaker 1: do the math, within five years, China's consuming power will

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Speaker 1: be greater than the US. As that consumption market shifts,

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Speaker 1: the epicenter of growth and the dynamics they're shift. And

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Speaker 1: that's where I find it fascinating that even though their

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Speaker 1: trade tensions, there are a lot of things that are

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Speaker 1: moving very um rapidly, which makes me very excited about

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Speaker 1: the prospects on certain fields in China. But China also

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Speaker 1: recognizes that they are reliant on some countries for materials

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Speaker 1: and they're trying to make themselves self sufficient. The trade

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Speaker 1: war accelerates that. As you impose tariffs, you create inefficiencies

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Speaker 1: in the market. Profitabilities hurt in companies, productivity is hurt

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Speaker 1: in countries. If these tensions continue, that the better way

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Speaker 1: would be to insource a lot of the goods right

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Speaker 1: from the manufacturing of things like semiconductor chips right to

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Speaker 1: the end product of the smartphone, and that would all

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Speaker 1: stay within China. That would all stay within China and

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Speaker 1: China's trade partners which are more closely aligned to me.

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Speaker 1: That means that although the US China is West trade

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Speaker 1: may not grow as fast. In fact, we have seen

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Speaker 1: science that it has fallen off quite a bit. We

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Speaker 1: think that the Asia regional trade will actually pick up

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Speaker 1: because that cooperation between Asian countries will pick up. So

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Speaker 1: there are beneficiaries of the trade tensions today, and that

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Speaker 1: insourcing would come from supplies within that Asia regional supply

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Speaker 1: network as well as manufacturing some of these items on

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Speaker 1: shore in China. So let's say I make widgets in Indonesia.

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Speaker 1: My widgets go somewhere in Malaysia, then somewhere in Thailand,

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Speaker 1: they find their way to Taiwan, then over to the

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Speaker 1: People's Republic of China where they're assembled and shipped back,

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Speaker 1: and I go to Best Buy in New Jersey and

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Speaker 1: pick up my PC. So how does what you're talking

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Speaker 1: about change that arrangement. The part of the supply chain

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Speaker 1: that shifts is the part that probably goes to the

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Speaker 1: US because that is the trade trade tension that's been

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Speaker 1: discussed today. That to me, the bigger issue in what's

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Speaker 1: happening is what's happening between how China looks at what

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Speaker 1: trade total trade is relative to how the US looks

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Speaker 1: at trade, and what you're identifying today is key. Right.

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Speaker 1: If you think about what President Trump is talking about

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Speaker 1: in terms of trade, he is only referring to goods

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Speaker 1: sold from China and exported to the US. He's not

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Speaker 1: talking about goods sold to China from US companies that

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Speaker 1: are based in China. And to explain that a little further,

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Speaker 1: take Apple. For example, Apple sold forty billion dollars worth

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Speaker 1: of iPhones in China last year. None of that is

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Speaker 1: considered trade from US to China. Now, if you talk

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Speaker 1: the i R S that and told the arras now

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Speaker 1: to tax that, that wouldn't fly. But this is how

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Speaker 1: President Trump is looking at the trade issue. On the

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Speaker 1: China side, they said, hang on, we bought four million

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Speaker 1: cars from General motors last year. The US only brought

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Speaker 1: three million cars from General motors. You didn't count that

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Speaker 1: in your trade surplus or deficit because you made those

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Speaker 1: onshore in China. So when you think about that supply chain,

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Speaker 1: those dynamics will shift going forward um and to me,

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Speaker 1: those are the areas that are most at risk. So

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Speaker 1: the parts of the iPhone and the iPhone itself that

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Speaker 1: is to be sold in China is made in China,

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Speaker 1: and the iPhone that's bought in Brooklyn is put together

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Speaker 1: from a number of places, none of which is China.

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Speaker 1: Some of it is China, and some of it is

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Speaker 1: the other Asian countries that flow through into China and

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Speaker 1: onto Brooklyn as well. So there there's a lot of

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Speaker 1: supply chain linkages to get to that point right where

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Speaker 1: you have a phone. Like you said, Taiwan, Korea, Japan,

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Speaker 1: they're all part of that supply chain linkage. And if

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Speaker 1: you look at the inter regional trade of Asian electronics

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Speaker 1: in particular, it's massive. Um. For a country like Singapore,

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Speaker 1: almost of the electronic trade is within Asia itself. It's

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Speaker 1: very hard to isolate it um and and tell you

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Speaker 1: specifically how much of it because if I tell you

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Speaker 1: any percent is to Asia, part of it could be

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Speaker 1: going to Hong Kong before it heads to Taiwan, before

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Speaker 1: it heads to China. But you know that it lives.

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Speaker 1: That ecosystem is within Asia, so it's not a value

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Speaker 1: add from China. In fact, I believe China says its

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Speaker 1: value add to UH that I phone is much less

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Speaker 1: than the total value exported because of that supply chain linkage.

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Speaker 1: But that comes with other issues as well. Right, So

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Speaker 1: the Asian country is, because of their interlinkages, are also

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Speaker 1: at risk as a result of these trade tensions. Francis,

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Speaker 1: are we talking about the end of globalization, which in

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Speaker 1: the corporate sphere has had a lifespan of say three decades.

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Speaker 1: Is that now over or is globalization just changing its

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Speaker 1: shape evolving its form. I think globalization is evolving. I

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Speaker 1: think technology is evolving globalization because we're moving towards more

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Speaker 1: of a service based economy globally, and part of that

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Speaker 1: is driven by demographics. The other part is driven by

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Speaker 1: rising incomes globally. As people move up the income chain

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Speaker 1: from low income to higher income, there's less goods consumed

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Speaker 1: and more services consumed. So I do think globalization is shifting,

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Speaker 1: and if you're only focused on goods, you're going to

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Speaker 1: miss the other part of the picture, which is growing.

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Speaker 1: The other point I would make on why globalization is shifting,

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Speaker 1: and why global trade in particular has peaked is because

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Speaker 1: normally trade is driven by massive investment cycles. If you

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Speaker 1: look back in time, we've had three massive investment cycles,

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Speaker 1: the U S industrialization cycle back in the nine era,

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Speaker 1: then when you had Japanese and Korean industrialization cycle in

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Speaker 1: the late sixties seventies to eighties, and then when China

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Speaker 1: industrialized most recently post two thousand. I can't think of

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Speaker 1: another economy that could have as big an impact on

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Speaker 1: industrialized ation that could drive global trade for another cycle

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Speaker 1: in the near future. Not India. I think India has

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Speaker 1: a lot of work to do and it's a very

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Speaker 1: interesting economy. I'm very excited about the potential in India

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Speaker 1: given the changes I've seen in the economy, the reforms

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Speaker 1: that Prime Minister Morey has made. But it does not

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Speaker 1: move as swiftly as China as it is a democracy,

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Speaker 1: Whereas China has moved faster than the US and any

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Speaker 1: other country that I've seen because it's not a democracy.

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Speaker 1: In fact, if to give you an example on the

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Speaker 1: technology side, how fast it's moved, if you take rides sharing.

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Speaker 1: Uber has been around for more than eight years. It

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Speaker 1: has not reached fifty penetration. China has d D, which

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Speaker 1: is equivalent to Uber. In China, within three years they

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Speaker 1: hit fifty penetration rates. This is true of almost any

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Speaker 1: Internet category you can think of. They just move at

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Speaker 1: the speed of light. I find it hard to think

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Speaker 1: that another economy that's big enough can move as swiftly

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Speaker 1: as China has. You devote considerable time in your report

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Speaker 1: Francis to talking about Chinese millennials and their impact over

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Speaker 1: the next few decades. I found that surprising because there's

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Speaker 1: a lot of discussion about a demographic bomb that's going

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Speaker 1: to catch up with China from the twenty thirties onwards.

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Speaker 1: Can you reconcile that absolutely? When you look at the

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Speaker 1: headline numbers, the Chinese population is slowing and is shrinking,

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Speaker 1: particularly the working age population. And we generally focused on

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Speaker 1: the working age population because they're the income earning population

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Speaker 1: and the income spending population. Right, if you think of

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Speaker 1: the population between zero to fifteen who aren't earning an income,

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Speaker 1: they don't really spend the same way. And you think

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Speaker 1: of the population that sixt and above who are retired,

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Speaker 1: they don't spend the same way. So the thrust of

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Speaker 1: your income power and spending power is within the working population.

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Speaker 1: Now that cohort is shrinking. But within any aggregate, there

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Speaker 1: are always different things to look for. And what's different

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Speaker 1: about China is you also have a backdrop of a

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Speaker 1: growing middle class population. Now, if you take a big

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Speaker 1: step back and look at the projections across the different countries,

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Speaker 1: you'll see that the next generation in the US will

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Speaker 1: actually be poorer than their parents and grandparents. That's not

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Speaker 1: the case in Asia because of this rising GDP per

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Speaker 1: capital story, rising income growth, rising UH and growing middle

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Speaker 1: income cohort. And that's what makes me excited about this

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Speaker 1: group of millennials because they're the ones who are coming

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Speaker 1: of age and entering this middle income category. As you

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Speaker 1: enter that middle income category, you're spending patterns change, your

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Speaker 1: incomes grow, and that's what we're excited about. Francis, this

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Speaker 1: is fascinating. We could talk for hours, Unfortunately we can't.

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Speaker 1: I want to close with just one point. You have

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Speaker 1: a fascinating graph in your report which gets at a

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Speaker 1: legacy of two thousand and eight that isn't often discussed

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Speaker 1: in the season of Lehman retrospectives. You're saying global trade

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Speaker 1: peaked in two thousand and eight. That's not something you

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Speaker 1: hear very often. Absolutely, and that was the dynamic I

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Speaker 1: was describing earlier on. There are a number of reasons

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Speaker 1: why trade grows. One is the industrialization cycle. I don't

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Speaker 1: see that happening against sou Um and the just the

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Speaker 1: opening up of economies which happened UM as the CEO

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Speaker 1: got off the ground and China started opening stores. That

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Speaker 1: linkage between trade and China drove global trade to a

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Speaker 1: peak in two thousand and eight. Together a couple together

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Speaker 1: with the investment cycle. That cycle now has passed UM

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Speaker 1: for a number of reasons. One is China is now

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Speaker 1: quite fully developed. In fact, they're one of the more

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Speaker 1: advanced countries in terms of making sure that infrastructure is

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Speaker 1: in place for the next few decades. The second reason

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Speaker 1: is credit was freely available and that drove investment and

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Speaker 1: the demand for goods to be traded. Investments are very

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Speaker 1: trade intensive because you need to buy materials to build things.

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Speaker 1: Now that the cycle is shifting towards more of a

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Speaker 1: consumption based cycle and service based cycle, there's less need

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Speaker 1: for things to be traded. It doesn't mean that there

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Speaker 1: isn't going to be any trade. It just means that

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Speaker 1: the growth will be higher in other sectors which are

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Speaker 1: less trade and commodity intensive. Francis, thanks for sharing this

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Speaker 1: perspective with us, and we'd love to have you back

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Speaker 1: again to talk about what else you find on your

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Speaker 1: travels and in your research. I would love to talk

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Speaker 1: to you again and thank you so much. Dan. Benchmark

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Speaker 1: will be back next week. Until then, you can find

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Speaker 1: us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app,

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Speaker 1: as well as podcast destinations such as Apple Podcasts, Spotify,

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Speaker 1: or wherever you listen. We'd love it if you took

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Speaker 1: the time to rate and review the show so more

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Speaker 1: listeners can find us, and you can follow me on

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Speaker 1: Twitter at Moss underscore Ico. Benchmark is produced by Top

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Speaker 1: of Foreheads. The head of Bloomberg Podcasts is Frances Believe.

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Speaker 1: Thanks for listening. See you next time is pastasy Fer

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Speaker 1: four