WEBVTT - How Trade War is Reshaping China

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<v Speaker 1>There's little sign of a sweeping deal to resolve the

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<v Speaker 1>US China trade conflict. Even a quick fix to some

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<v Speaker 1>of the issues is eluding officials, and hoping for that

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<v Speaker 1>fix probably misses the broader point that China's economy is

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<v Speaker 1>undergoing profound internal change. If anything, tariff battles will only

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<v Speaker 1>accelerate that change. Welcome to Benchmark, A show about the bloody.

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

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<v Speaker 1>Beneath the headlines, what's happening on the ground in China

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<v Speaker 1>and what are executives that have to make decisions doing

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<v Speaker 1>about it? In the era of trade slings and arrows?

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<v Speaker 1>Should we even be talking about globalization at least as

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<v Speaker 1>far as we've come to understand the term. Francis Slim

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<v Speaker 1>from Colberg Cravis Roberts spent some time in China recently

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<v Speaker 1>and his co author of a penetrating report called China

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<v Speaker 1>a Visit to the Epicenter. She joins us from Sydney,

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<v Speaker 1>where she's head of the Asia Pacific Macro Research Team.

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<v Speaker 1>Francis welcome. Thank you very much. Dan. I'm very happy

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<v Speaker 1>to be here and so thank you for the induct

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<v Speaker 1>What was unique about this trip to China. It's been

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<v Speaker 1>the epicenter of a lot for quite a while, or

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<v Speaker 1>at least some of the seismic points. What's going on

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

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<v Speaker 1>has been the epicenter for a very long time. We

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<v Speaker 1>have been meet Henry mcbeh and myself have been traveling

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<v Speaker 1>to China for many years now, and I think what's

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<v Speaker 1>different now is this intense focus on trade and the

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<v Speaker 1>tensions going on there where US is imposing tariffs on

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<v Speaker 1>China and China is imposing terroffs on the US. So

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<v Speaker 1>we took a visit to Shanhai um and we're heading

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<v Speaker 1>to Beijing next to find out what's really happening on

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<v Speaker 1>the ground, what's the view from China, because a lot

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<v Speaker 1>of the rhetoric we here is from the US and

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<v Speaker 1>less from China. So we went there to learn more

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<v Speaker 1>about how Chinese authorities are thinking about the trade issues.

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<v Speaker 1>But not just Chinese authorities, you also talk to executives

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<v Speaker 1>making daily decisions about how to deal with the headlines. Absolutely,

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<v Speaker 1>and to me, that's the that's the key way that

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<v Speaker 1>you understand what's actually going on when you speak to

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<v Speaker 1>business leaders in China, they tell you what they're feeling

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<v Speaker 1>on the ground, and that was what was different this

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

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<v Speaker 1>being rolled out from Chinese authorities, and it was very

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<v Speaker 1>clear the direction they were going as it pertained to trade.

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<v Speaker 1>There was a vacuum of conversation, so unlike the US,

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<v Speaker 1>where you're here daily comments coming from d C, you

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<v Speaker 1>don't hear that coming from China. So when you speak

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<v Speaker 1>to the business executives, they tell you that things have changed,

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<v Speaker 1>and that was what was so interesting about this visit,

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<v Speaker 1>and you were getting that same impression from locals as

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<v Speaker 1>well as expatriates. Yes, um, the locals. I think the

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<v Speaker 1>local business folk had a different view of what was happening,

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<v Speaker 1>and a very big, long term structural view of the

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<v Speaker 1>tectonic shifts really that are happening in the global economy

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<v Speaker 1>and how the center of gravity, the center of economic

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<v Speaker 1>functions are shifting, and they felt that was the core

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<v Speaker 1>reason why we had these trade tensions today. The foreign

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<v Speaker 1>nationals that were in China were more reacting to policies

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<v Speaker 1>that were shifting as a result of these tensions. So

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<v Speaker 1>You've got a good flay or of what locals were

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<v Speaker 1>feeling and what foreign companies were feeling. You're asking readers

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<v Speaker 1>to look beyond the prospect of any short term fix

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<v Speaker 1>to end the trade dispute between the US and China.

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<v Speaker 1>What's wrong with looking for a fix. This is our

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<v Speaker 1>view and it's my view as well. I think the

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<v Speaker 1>reason why the trade tensions are here today is not

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<v Speaker 1>so much because of trade as it is about broader issues.

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<v Speaker 1>And the key issue that's different today is China has

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<v Speaker 1>come of age. China now can make smartphones. China actually

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<v Speaker 1>makes more smartphones than some Song and Apple combined. Nobody

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<v Speaker 1>talks about that. This is what's shifting. China is capable

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<v Speaker 1>of doing a lot of things the US is doing.

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<v Speaker 1>The US is trying to slow down in China's progress,

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<v Speaker 1>and the trade is a tool to make that happen.

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<v Speaker 1>In my view, a lot of the domestic commentary in

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

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<v Speaker 1>People talk about sweatshops. People bemoaned that factory producing furniture

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<v Speaker 1>that was once in North Carolina and now it's gone,

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<v Speaker 1>oh somewhere in China. In reality, that factory has probably

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

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

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<v Speaker 1>did have a lot of factories manufacturing low end goods.

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<v Speaker 1>When they first entered the w t O, they were

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<v Speaker 1>making t shirts and toys, low end goods with massive factories.

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<v Speaker 1>Today it's very different. What has been amazing is that

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<v Speaker 1>you know that the US developed a lot of the technology.

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<v Speaker 1>The US developed the iPhone, the US developed the iPad.

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<v Speaker 1>But what China has done is they have really mastered

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<v Speaker 1>the use of technology that has been built by the US.

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<v Speaker 1>And if you look at the progress they have made

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<v Speaker 1>in terms of uh Internet penetration, the use of phones,

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<v Speaker 1>and ride sharing and even e commerce, it has just

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<v Speaker 1>leaped throut the US. Ten years ago they were at zero.

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<v Speaker 1>Today their way ahead of the US in terms of

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<v Speaker 1>the application of new technologies. That's what this trade war

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<v Speaker 1>is about. We need of the U s fields. They

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<v Speaker 1>need to slow China down. That's not going to shift

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<v Speaker 1>and that's why I think the change that's happening UM

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<v Speaker 1>is more structural in nature. The tensions will be more

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<v Speaker 1>long tailed than people think because the fundamental reason is

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<v Speaker 1>that China is now a real competitor to major developed

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<v Speaker 1>countries like the US, like Europe and Japan. Does that

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<v Speaker 1>make China more resilient to a trade war than was

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<v Speaker 1>the case a few years ago. Yes, absolutely. If you

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<v Speaker 1>look at the amount of exports as a set of GDP,

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<v Speaker 1>it's fallen from more than hardly eighteen today, which is

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<v Speaker 1>not too far from where the US is in terms

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<v Speaker 1>of its trade exposure, So absolutely makes it more resilient.

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<v Speaker 1>There's also a great resolve to continue moving forward. They

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<v Speaker 1>are continuing to invest in education, they're continuing to invest

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<v Speaker 1>in innovation, and in fact, as a result of the

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<v Speaker 1>trade war and the potential of losing supply of these

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<v Speaker 1>precious semi conductor ships, which is the core of a

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<v Speaker 1>lot of the trade tensions, they have actually raised a

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<v Speaker 1>fund to accelerate progress in manufacturing high end semiconductor technology. Francis,

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<v Speaker 1>you cast serious doubts in this report over the future

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<v Speaker 1>of global supply chains. Talk a bit about that place.

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<v Speaker 1>So if you think about the world twenty years ago,

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<v Speaker 1>when China first and the World Trade Organization, everyone would

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<v Speaker 1>grow through expanding their export base, and that was a

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<v Speaker 1>really good strategy in terms of uh expanding GDP growth

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<v Speaker 1>and increasing wealth in a lot of emerging countries. That

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<v Speaker 1>was because the US was a major consuming economy. Today,

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<v Speaker 1>though the dynamic has shifted. China is a much more

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<v Speaker 1>wealthy country. Today. GDP per capital is in the ten

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<v Speaker 1>thousand range, and they have one point four billion people

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<v Speaker 1>compared to America's three hundred thirty million. So when you

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<v Speaker 1>do the math, within five years, China's consuming power will

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<v Speaker 1>be greater than the US. As that consumption market shifts,

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<v Speaker 1>the epicenter of growth and the dynamics they're shift. And

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<v Speaker 1>that's where I find it fascinating that even though their

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<v Speaker 1>trade tensions, there are a lot of things that are

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<v Speaker 1>moving very um rapidly, which makes me very excited about

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<v Speaker 1>the prospects on certain fields in China. But China also

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<v Speaker 1>recognizes that they are reliant on some countries for materials

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<v Speaker 1>and they're trying to make themselves self sufficient. The trade

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<v Speaker 1>war accelerates that. As you impose tariffs, you create inefficiencies

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<v Speaker 1>in the market. Profitabilities hurt in companies, productivity is hurt

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<v Speaker 1>in countries. If these tensions continue, that the better way

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<v Speaker 1>would be to insource a lot of the goods right

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<v Speaker 1>from the manufacturing of things like semiconductor chips right to

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<v Speaker 1>the end product of the smartphone, and that would all

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<v Speaker 1>stay within China. That would all stay within China and

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<v Speaker 1>China's trade partners which are more closely aligned to me.

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<v Speaker 1>That means that although the US China is West trade

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<v Speaker 1>may not grow as fast. In fact, we have seen

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<v Speaker 1>science that it has fallen off quite a bit. We

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<v Speaker 1>think that the Asia regional trade will actually pick up

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<v Speaker 1>because that cooperation between Asian countries will pick up. So

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<v Speaker 1>there are beneficiaries of the trade tensions today, and that

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<v Speaker 1>insourcing would come from supplies within that Asia regional supply

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<v Speaker 1>network as well as manufacturing some of these items on

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<v Speaker 1>shore in China. So let's say I make widgets in Indonesia.

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<v Speaker 1>My widgets go somewhere in Malaysia, then somewhere in Thailand,

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<v Speaker 1>they find their way to Taiwan, then over to the

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

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<v Speaker 1>and I go to Best Buy in New Jersey and

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<v Speaker 1>pick up my PC. So how does what you're talking

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<v Speaker 1>about change that arrangement. The part of the supply chain

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<v Speaker 1>that shifts is the part that probably goes to the

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<v Speaker 1>US because that is the trade trade tension that's been

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

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<v Speaker 1>happening is what's happening between how China looks at what

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<v Speaker 1>trade total trade is relative to how the US looks

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

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<v Speaker 1>If you think about what President Trump is talking about

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<v Speaker 1>in terms of trade, he is only referring to goods

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<v Speaker 1>sold from China and exported to the US. He's not

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<v Speaker 1>talking about goods sold to China from US companies that

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<v Speaker 1>are based in China. And to explain that a little further,

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<v Speaker 1>take Apple. For example, Apple sold forty billion dollars worth

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<v Speaker 1>of iPhones in China last year. None of that is

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<v Speaker 1>considered trade from US to China. Now, if you talk

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<v Speaker 1>the i R S that and told the arras now

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<v Speaker 1>to tax that, that wouldn't fly. But this is how

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<v Speaker 1>President Trump is looking at the trade issue. On the

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<v Speaker 1>China side, they said, hang on, we bought four million

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<v Speaker 1>cars from General motors last year. The US only brought

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<v Speaker 1>three million cars from General motors. You didn't count that

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<v Speaker 1>in your trade surplus or deficit because you made those

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<v Speaker 1>onshore in China. So when you think about that supply chain,

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<v Speaker 1>those dynamics will shift going forward um and to me,

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<v Speaker 1>those are the areas that are most at risk. So

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<v Speaker 1>the parts of the iPhone and the iPhone itself that

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<v Speaker 1>is to be sold in China is made in China,

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<v Speaker 1>and the iPhone that's bought in Brooklyn is put together

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<v Speaker 1>from a number of places, none of which is China.

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<v Speaker 1>Some of it is China, and some of it is

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<v Speaker 1>the other Asian countries that flow through into China and

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<v Speaker 1>onto Brooklyn as well. So there there's a lot of

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<v Speaker 1>supply chain linkages to get to that point right where

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<v Speaker 1>you have a phone. Like you said, Taiwan, Korea, Japan,

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<v Speaker 1>they're all part of that supply chain linkage. And if

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<v Speaker 1>you look at the inter regional trade of Asian electronics

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

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<v Speaker 1>almost of the electronic trade is within Asia itself. It's

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<v Speaker 1>very hard to isolate it um and and tell you

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<v Speaker 1>specifically how much of it because if I tell you

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<v Speaker 1>any percent is to Asia, part of it could be

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<v Speaker 1>going to Hong Kong before it heads to Taiwan, before

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<v Speaker 1>it heads to China. But you know that it lives.

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<v Speaker 1>That ecosystem is within Asia, so it's not a value

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<v Speaker 1>add from China. In fact, I believe China says its

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<v Speaker 1>value add to UH that I phone is much less

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<v Speaker 1>than the total value exported because of that supply chain linkage.

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<v Speaker 1>But that comes with other issues as well. Right, So

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<v Speaker 1>the Asian country is, because of their interlinkages, are also

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<v Speaker 1>at risk as a result of these trade tensions. Francis,

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<v Speaker 1>are we talking about the end of globalization, which in

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<v Speaker 1>the corporate sphere has had a lifespan of say three decades.

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<v Speaker 1>Is that now over or is globalization just changing its

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<v Speaker 1>shape evolving its form. I think globalization is evolving. I

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<v Speaker 1>think technology is evolving globalization because we're moving towards more

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<v Speaker 1>of a service based economy globally, and part of that

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<v Speaker 1>is driven by demographics. The other part is driven by

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<v Speaker 1>rising incomes globally. As people move up the income chain

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<v Speaker 1>from low income to higher income, there's less goods consumed

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<v Speaker 1>and more services consumed. So I do think globalization is shifting,

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<v Speaker 1>and if you're only focused on goods, you're going to

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<v Speaker 1>miss the other part of the picture, which is growing.

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<v Speaker 1>The other point I would make on why globalization is shifting,

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<v Speaker 1>and why global trade in particular has peaked is because

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<v Speaker 1>normally trade is driven by massive investment cycles. If you

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<v Speaker 1>look back in time, we've had three massive investment cycles,

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<v Speaker 1>the U S industrialization cycle back in the nine era,

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<v Speaker 1>then when you had Japanese and Korean industrialization cycle in

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<v Speaker 1>the late sixties seventies to eighties, and then when China

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<v Speaker 1>industrialized most recently post two thousand. I can't think of

0:15:55.760 --> 0:15:59.280
<v Speaker 1>another economy that could have as big an impact on

0:15:59.320 --> 0:16:03.920
<v Speaker 1>industrialized ation that could drive global trade for another cycle

0:16:04.600 --> 0:16:09.160
<v Speaker 1>in the near future. Not India. I think India has

0:16:09.240 --> 0:16:12.360
<v Speaker 1>a lot of work to do and it's a very

0:16:12.400 --> 0:16:15.800
<v Speaker 1>interesting economy. I'm very excited about the potential in India

0:16:15.960 --> 0:16:20.160
<v Speaker 1>given the changes I've seen in the economy, the reforms

0:16:20.240 --> 0:16:24.360
<v Speaker 1>that Prime Minister Morey has made. But it does not

0:16:24.720 --> 0:16:28.920
<v Speaker 1>move as swiftly as China as it is a democracy,

0:16:28.920 --> 0:16:34.240
<v Speaker 1>Whereas China has moved faster than the US and any

0:16:34.280 --> 0:16:38.000
<v Speaker 1>other country that I've seen because it's not a democracy.

0:16:38.240 --> 0:16:40.320
<v Speaker 1>In fact, if to give you an example on the

0:16:40.360 --> 0:16:44.080
<v Speaker 1>technology side, how fast it's moved, if you take rides sharing.

0:16:45.080 --> 0:16:47.360
<v Speaker 1>Uber has been around for more than eight years. It

0:16:47.440 --> 0:16:52.640
<v Speaker 1>has not reached fifty penetration. China has d D, which

0:16:52.680 --> 0:16:56.640
<v Speaker 1>is equivalent to Uber. In China, within three years they

0:16:56.720 --> 0:17:01.080
<v Speaker 1>hit fifty penetration rates. This is true of almost any

0:17:01.120 --> 0:17:04.000
<v Speaker 1>Internet category you can think of. They just move at

0:17:04.000 --> 0:17:08.160
<v Speaker 1>the speed of light. I find it hard to think

0:17:08.480 --> 0:17:13.679
<v Speaker 1>that another economy that's big enough can move as swiftly

0:17:13.720 --> 0:17:18.040
<v Speaker 1>as China has. You devote considerable time in your report

0:17:18.160 --> 0:17:23.080
<v Speaker 1>Francis to talking about Chinese millennials and their impact over

0:17:23.080 --> 0:17:27.640
<v Speaker 1>the next few decades. I found that surprising because there's

0:17:27.640 --> 0:17:31.080
<v Speaker 1>a lot of discussion about a demographic bomb that's going

0:17:31.080 --> 0:17:34.320
<v Speaker 1>to catch up with China from the twenty thirties onwards.

0:17:35.160 --> 0:17:39.679
<v Speaker 1>Can you reconcile that absolutely? When you look at the

0:17:39.800 --> 0:17:45.840
<v Speaker 1>headline numbers, the Chinese population is slowing and is shrinking,

0:17:46.800 --> 0:17:51.439
<v Speaker 1>particularly the working age population. And we generally focused on

0:17:51.520 --> 0:17:56.080
<v Speaker 1>the working age population because they're the income earning population

0:17:56.160 --> 0:18:00.040
<v Speaker 1>and the income spending population. Right, if you think of

0:18:01.240 --> 0:18:05.520
<v Speaker 1>the population between zero to fifteen who aren't earning an income,

0:18:06.400 --> 0:18:09.800
<v Speaker 1>they don't really spend the same way. And you think

0:18:09.840 --> 0:18:12.520
<v Speaker 1>of the population that sixt and above who are retired,

0:18:12.560 --> 0:18:14.960
<v Speaker 1>they don't spend the same way. So the thrust of

0:18:15.040 --> 0:18:18.719
<v Speaker 1>your income power and spending power is within the working population.

0:18:19.080 --> 0:18:23.760
<v Speaker 1>Now that cohort is shrinking. But within any aggregate, there

0:18:23.760 --> 0:18:27.600
<v Speaker 1>are always different things to look for. And what's different

0:18:27.720 --> 0:18:30.960
<v Speaker 1>about China is you also have a backdrop of a

0:18:31.080 --> 0:18:35.960
<v Speaker 1>growing middle class population. Now, if you take a big

0:18:36.000 --> 0:18:39.680
<v Speaker 1>step back and look at the projections across the different countries,

0:18:39.840 --> 0:18:42.640
<v Speaker 1>you'll see that the next generation in the US will

0:18:42.680 --> 0:18:46.239
<v Speaker 1>actually be poorer than their parents and grandparents. That's not

0:18:46.280 --> 0:18:50.520
<v Speaker 1>the case in Asia because of this rising GDP per

0:18:50.560 --> 0:18:55.280
<v Speaker 1>capital story, rising income growth, rising UH and growing middle

0:18:55.320 --> 0:18:58.760
<v Speaker 1>income cohort. And that's what makes me excited about this

0:18:58.920 --> 0:19:01.760
<v Speaker 1>group of millennials because they're the ones who are coming

0:19:01.800 --> 0:19:05.919
<v Speaker 1>of age and entering this middle income category. As you

0:19:06.119 --> 0:19:10.639
<v Speaker 1>enter that middle income category, you're spending patterns change, your

0:19:10.680 --> 0:19:14.960
<v Speaker 1>incomes grow, and that's what we're excited about. Francis, this

0:19:15.119 --> 0:19:18.800
<v Speaker 1>is fascinating. We could talk for hours, Unfortunately we can't.

0:19:19.240 --> 0:19:21.399
<v Speaker 1>I want to close with just one point. You have

0:19:21.480 --> 0:19:24.720
<v Speaker 1>a fascinating graph in your report which gets at a

0:19:24.840 --> 0:19:28.400
<v Speaker 1>legacy of two thousand and eight that isn't often discussed

0:19:28.440 --> 0:19:32.800
<v Speaker 1>in the season of Lehman retrospectives. You're saying global trade

0:19:33.160 --> 0:19:37.040
<v Speaker 1>peaked in two thousand and eight. That's not something you

0:19:37.119 --> 0:19:41.080
<v Speaker 1>hear very often. Absolutely, and that was the dynamic I

0:19:41.160 --> 0:19:45.000
<v Speaker 1>was describing earlier on. There are a number of reasons

0:19:45.040 --> 0:19:49.880
<v Speaker 1>why trade grows. One is the industrialization cycle. I don't

0:19:49.880 --> 0:19:53.480
<v Speaker 1>see that happening against sou Um and the just the

0:19:53.560 --> 0:19:58.040
<v Speaker 1>opening up of economies which happened UM as the CEO

0:19:58.160 --> 0:20:01.120
<v Speaker 1>got off the ground and China started opening stores. That

0:20:01.400 --> 0:20:05.879
<v Speaker 1>linkage between trade and China drove global trade to a

0:20:05.920 --> 0:20:09.199
<v Speaker 1>peak in two thousand and eight. Together a couple together

0:20:09.200 --> 0:20:13.800
<v Speaker 1>with the investment cycle. That cycle now has passed UM

0:20:13.880 --> 0:20:17.200
<v Speaker 1>for a number of reasons. One is China is now

0:20:17.960 --> 0:20:20.679
<v Speaker 1>quite fully developed. In fact, they're one of the more

0:20:20.720 --> 0:20:23.600
<v Speaker 1>advanced countries in terms of making sure that infrastructure is

0:20:23.640 --> 0:20:27.960
<v Speaker 1>in place for the next few decades. The second reason

0:20:28.119 --> 0:20:32.600
<v Speaker 1>is credit was freely available and that drove investment and

0:20:32.680 --> 0:20:36.480
<v Speaker 1>the demand for goods to be traded. Investments are very

0:20:36.520 --> 0:20:40.160
<v Speaker 1>trade intensive because you need to buy materials to build things.

0:20:41.119 --> 0:20:43.320
<v Speaker 1>Now that the cycle is shifting towards more of a

0:20:43.320 --> 0:20:47.440
<v Speaker 1>consumption based cycle and service based cycle, there's less need

0:20:47.520 --> 0:20:50.440
<v Speaker 1>for things to be traded. It doesn't mean that there

0:20:50.520 --> 0:20:53.159
<v Speaker 1>isn't going to be any trade. It just means that

0:20:53.200 --> 0:20:56.600
<v Speaker 1>the growth will be higher in other sectors which are

0:20:56.720 --> 0:21:02.240
<v Speaker 1>less trade and commodity intensive. Francis, thanks for sharing this

0:21:02.400 --> 0:21:04.880
<v Speaker 1>perspective with us, and we'd love to have you back

0:21:04.920 --> 0:21:08.400
<v Speaker 1>again to talk about what else you find on your

0:21:08.440 --> 0:21:11.440
<v Speaker 1>travels and in your research. I would love to talk

0:21:11.440 --> 0:21:22.000
<v Speaker 1>to you again and thank you so much. Dan. Benchmark

0:21:22.080 --> 0:21:25.160
<v Speaker 1>will be back next week. Until then, you can find

0:21:25.240 --> 0:21:30.119
<v Speaker 1>us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app,

0:21:30.480 --> 0:21:35.199
<v Speaker 1>as well as podcast destinations such as Apple Podcasts, Spotify,

0:21:35.720 --> 0:21:38.960
<v Speaker 1>or wherever you listen. We'd love it if you took

0:21:38.960 --> 0:21:41.400
<v Speaker 1>the time to rate and review the show so more

0:21:41.440 --> 0:21:44.600
<v Speaker 1>listeners can find us, and you can follow me on

0:21:44.640 --> 0:21:50.040
<v Speaker 1>Twitter at Moss underscore Ico. Benchmark is produced by Top

0:21:50.080 --> 0:21:54.080
<v Speaker 1>of Foreheads. The head of Bloomberg Podcasts is Frances Believe.

0:21:54.560 --> 0:22:02.480
<v Speaker 1>Thanks for listening. See you next time is pastasy Fer

0:22:03.359 --> 0:22:03.639
<v Speaker 1>four