Speaker 1: There's little sign of a sweeping deal to resolve the
Speaker 1: US China trade conflict. Even a quick fix to some
Speaker 1: of the issues is eluding officials, and hoping for that
Speaker 1: fix probably misses the broader point that China's economy is
Speaker 1: undergoing profound internal change. If anything, tariff battles will only
Speaker 1: accelerate that change. Welcome to Benchmark, A show about the bloody.
Speaker 1: I'm Daniel Moss, columnist at Bloomberg Indion in New York.
Speaker 1: Beneath the headlines, what's happening on the ground in China
Speaker 1: and what are executives that have to make decisions doing
Speaker 1: about it? In the era of trade slings and arrows?
Speaker 1: Should we even be talking about globalization at least as
Speaker 1: far as we've come to understand the term. Francis Slim
Speaker 1: from Colberg Cravis Roberts spent some time in China recently
Speaker 1: and his co author of a penetrating report called China
Speaker 1: a Visit to the Epicenter. She joins us from Sydney,
Speaker 1: where she's head of the Asia Pacific Macro Research Team.
Speaker 1: Francis welcome. Thank you very much. Dan. I'm very happy
Speaker 1: to be here and so thank you for the induct
Speaker 1: What was unique about this trip to China. It's been
Speaker 1: the epicenter of a lot for quite a while, or
Speaker 1: at least some of the seismic points. What's going on
Speaker 1: there right now? Oh, I think you're very right. China
Speaker 1: has been the epicenter for a very long time. We
Speaker 1: have been meet Henry mcbeh and myself have been traveling
Speaker 1: to China for many years now, and I think what's
Speaker 1: different now is this intense focus on trade and the
Speaker 1: tensions going on there where US is imposing tariffs on
Speaker 1: China and China is imposing terroffs on the US. So
Speaker 1: we took a visit to Shanhai um and we're heading
Speaker 1: to Beijing next to find out what's really happening on
Speaker 1: the ground, what's the view from China, because a lot
Speaker 1: of the rhetoric we here is from the US and
Speaker 1: less from China. So we went there to learn more
Speaker 1: about how Chinese authorities are thinking about the trade issues.
Speaker 1: But not just Chinese authorities, you also talk to executives
Speaker 1: making daily decisions about how to deal with the headlines. Absolutely,
Speaker 1: and to me, that's the that's the key way that
Speaker 1: you understand what's actually going on when you speak to
Speaker 1: business leaders in China, they tell you what they're feeling
Speaker 1: on the ground, and that was what was different this
Speaker 1: time around. Previously, you'd always hear the policies that are
Speaker 1: being rolled out from Chinese authorities, and it was very
Speaker 1: clear the direction they were going as it pertained to trade.
Speaker 1: There was a vacuum of conversation, so unlike the US,
Speaker 1: where you're here daily comments coming from d C, you
Speaker 1: don't hear that coming from China. So when you speak
Speaker 1: to the business executives, they tell you that things have changed,
Speaker 1: and that was what was so interesting about this visit,
Speaker 1: and you were getting that same impression from locals as
Speaker 1: well as expatriates. Yes, um, the locals. I think the
Speaker 1: local business folk had a different view of what was happening,
Speaker 1: and a very big, long term structural view of the
Speaker 1: tectonic shifts really that are happening in the global economy
Speaker 1: and how the center of gravity, the center of economic
Speaker 1: functions are shifting, and they felt that was the core
Speaker 1: reason why we had these trade tensions today. The foreign
Speaker 1: nationals that were in China were more reacting to policies
Speaker 1: that were shifting as a result of these tensions. So
Speaker 1: You've got a good flay or of what locals were
Speaker 1: feeling and what foreign companies were feeling. You're asking readers
Speaker 1: to look beyond the prospect of any short term fix
Speaker 1: to end the trade dispute between the US and China.
Speaker 1: What's wrong with looking for a fix. This is our
Speaker 1: view and it's my view as well. I think the
Speaker 1: reason why the trade tensions are here today is not
Speaker 1: so much because of trade as it is about broader issues.
Speaker 1: And the key issue that's different today is China has
Speaker 1: come of age. China now can make smartphones. China actually
Speaker 1: makes more smartphones than some Song and Apple combined. Nobody
Speaker 1: talks about that. This is what's shifting. China is capable
Speaker 1: of doing a lot of things the US is doing.
Speaker 1: The US is trying to slow down in China's progress,
Speaker 1: and the trade is a tool to make that happen.
Speaker 1: In my view, a lot of the domestic commentary in
Speaker 1: the It States does feel like it's in a time warp. Francis.
Speaker 1: People talk about sweatshops. People bemoaned that factory producing furniture
Speaker 1: that was once in North Carolina and now it's gone,
Speaker 1: oh somewhere in China. In reality, that factory has probably
Speaker 1: moved on somewhere else from China. If I'm understanding you correctly,
Speaker 1: that's correct. So maybe about ten twenty years ago, China
Speaker 1: did have a lot of factories manufacturing low end goods.
Speaker 1: When they first entered the w t O, they were
Speaker 1: making t shirts and toys, low end goods with massive factories.
Speaker 1: Today it's very different. What has been amazing is that
Speaker 1: you know that the US developed a lot of the technology.
Speaker 1: The US developed the iPhone, the US developed the iPad.
Speaker 1: But what China has done is they have really mastered
Speaker 1: the use of technology that has been built by the US.
Speaker 1: And if you look at the progress they have made
Speaker 1: in terms of uh Internet penetration, the use of phones,
Speaker 1: and ride sharing and even e commerce, it has just
Speaker 1: leaped throut the US. Ten years ago they were at zero.
Speaker 1: Today their way ahead of the US in terms of
Speaker 1: the application of new technologies. That's what this trade war
Speaker 1: is about. We need of the U s fields. They
Speaker 1: need to slow China down. That's not going to shift
Speaker 1: and that's why I think the change that's happening UM
Speaker 1: is more structural in nature. The tensions will be more
Speaker 1: long tailed than people think because the fundamental reason is
Speaker 1: that China is now a real competitor to major developed
Speaker 1: countries like the US, like Europe and Japan. Does that
Speaker 1: make China more resilient to a trade war than was
Speaker 1: the case a few years ago. Yes, absolutely. If you
Speaker 1: look at the amount of exports as a set of GDP,
Speaker 1: it's fallen from more than hardly eighteen today, which is
Speaker 1: not too far from where the US is in terms
Speaker 1: of its trade exposure, So absolutely makes it more resilient.
Speaker 1: There's also a great resolve to continue moving forward. They
Speaker 1: are continuing to invest in education, they're continuing to invest
Speaker 1: in innovation, and in fact, as a result of the
Speaker 1: trade war and the potential of losing supply of these
Speaker 1: precious semi conductor ships, which is the core of a
Speaker 1: lot of the trade tensions, they have actually raised a
Speaker 1: fund to accelerate progress in manufacturing high end semiconductor technology. Francis,
Speaker 1: you cast serious doubts in this report over the future
Speaker 1: of global supply chains. Talk a bit about that place.
Speaker 1: So if you think about the world twenty years ago,
Speaker 1: when China first and the World Trade Organization, everyone would
Speaker 1: grow through expanding their export base, and that was a
Speaker 1: really good strategy in terms of uh expanding GDP growth
Speaker 1: and increasing wealth in a lot of emerging countries. That
Speaker 1: was because the US was a major consuming economy. Today,
Speaker 1: though the dynamic has shifted. China is a much more
Speaker 1: wealthy country. Today. GDP per capital is in the ten
Speaker 1: thousand range, and they have one point four billion people
Speaker 1: compared to America's three hundred thirty million. So when you
Speaker 1: do the math, within five years, China's consuming power will
Speaker 1: be greater than the US. As that consumption market shifts,
Speaker 1: the epicenter of growth and the dynamics they're shift. And
Speaker 1: that's where I find it fascinating that even though their
Speaker 1: trade tensions, there are a lot of things that are
Speaker 1: moving very um rapidly, which makes me very excited about
Speaker 1: the prospects on certain fields in China. But China also
Speaker 1: recognizes that they are reliant on some countries for materials
Speaker 1: and they're trying to make themselves self sufficient. The trade
Speaker 1: war accelerates that. As you impose tariffs, you create inefficiencies
Speaker 1: in the market. Profitabilities hurt in companies, productivity is hurt
Speaker 1: in countries. If these tensions continue, that the better way
Speaker 1: would be to insource a lot of the goods right
Speaker 1: from the manufacturing of things like semiconductor chips right to
Speaker 1: the end product of the smartphone, and that would all
Speaker 1: stay within China. That would all stay within China and
Speaker 1: China's trade partners which are more closely aligned to me.
Speaker 1: That means that although the US China is West trade
Speaker 1: may not grow as fast. In fact, we have seen
Speaker 1: science that it has fallen off quite a bit. We
Speaker 1: think that the Asia regional trade will actually pick up
Speaker 1: because that cooperation between Asian countries will pick up. So
Speaker 1: there are beneficiaries of the trade tensions today, and that
Speaker 1: insourcing would come from supplies within that Asia regional supply
Speaker 1: network as well as manufacturing some of these items on
Speaker 1: shore in China. So let's say I make widgets in Indonesia.
Speaker 1: My widgets go somewhere in Malaysia, then somewhere in Thailand,
Speaker 1: they find their way to Taiwan, then over to the
Speaker 1: People's Republic of China where they're assembled and shipped back,
Speaker 1: and I go to Best Buy in New Jersey and
Speaker 1: pick up my PC. So how does what you're talking
Speaker 1: about change that arrangement. The part of the supply chain
Speaker 1: that shifts is the part that probably goes to the
Speaker 1: US because that is the trade trade tension that's been
Speaker 1: discussed today. That to me, the bigger issue in what's
Speaker 1: happening is what's happening between how China looks at what
Speaker 1: trade total trade is relative to how the US looks
Speaker 1: at trade, and what you're identifying today is key. Right.
Speaker 1: If you think about what President Trump is talking about
Speaker 1: in terms of trade, he is only referring to goods
Speaker 1: sold from China and exported to the US. He's not
Speaker 1: talking about goods sold to China from US companies that
Speaker 1: are based in China. And to explain that a little further,
Speaker 1: take Apple. For example, Apple sold forty billion dollars worth
Speaker 1: of iPhones in China last year. None of that is
Speaker 1: considered trade from US to China. Now, if you talk
Speaker 1: the i R S that and told the arras now
Speaker 1: to tax that, that wouldn't fly. But this is how
Speaker 1: President Trump is looking at the trade issue. On the
Speaker 1: China side, they said, hang on, we bought four million
Speaker 1: cars from General motors last year. The US only brought
Speaker 1: three million cars from General motors. You didn't count that
Speaker 1: in your trade surplus or deficit because you made those
Speaker 1: onshore in China. So when you think about that supply chain,
Speaker 1: those dynamics will shift going forward um and to me,
Speaker 1: those are the areas that are most at risk. So
Speaker 1: the parts of the iPhone and the iPhone itself that
Speaker 1: is to be sold in China is made in China,
Speaker 1: and the iPhone that's bought in Brooklyn is put together
Speaker 1: from a number of places, none of which is China.
Speaker 1: Some of it is China, and some of it is
Speaker 1: the other Asian countries that flow through into China and
Speaker 1: onto Brooklyn as well. So there there's a lot of
Speaker 1: supply chain linkages to get to that point right where
Speaker 1: you have a phone. Like you said, Taiwan, Korea, Japan,
Speaker 1: they're all part of that supply chain linkage. And if
Speaker 1: you look at the inter regional trade of Asian electronics
Speaker 1: in particular, it's massive. Um. For a country like Singapore,
Speaker 1: almost of the electronic trade is within Asia itself. It's
Speaker 1: very hard to isolate it um and and tell you
Speaker 1: specifically how much of it because if I tell you
Speaker 1: any percent is to Asia, part of it could be
Speaker 1: going to Hong Kong before it heads to Taiwan, before
Speaker 1: it heads to China. But you know that it lives.
Speaker 1: That ecosystem is within Asia, so it's not a value
Speaker 1: add from China. In fact, I believe China says its
Speaker 1: value add to UH that I phone is much less
Speaker 1: than the total value exported because of that supply chain linkage.
Speaker 1: But that comes with other issues as well. Right, So
Speaker 1: the Asian country is, because of their interlinkages, are also
Speaker 1: at risk as a result of these trade tensions. Francis,
Speaker 1: are we talking about the end of globalization, which in
Speaker 1: the corporate sphere has had a lifespan of say three decades.
Speaker 1: Is that now over or is globalization just changing its
Speaker 1: shape evolving its form. I think globalization is evolving. I
Speaker 1: think technology is evolving globalization because we're moving towards more
Speaker 1: of a service based economy globally, and part of that
Speaker 1: is driven by demographics. The other part is driven by
Speaker 1: rising incomes globally. As people move up the income chain
Speaker 1: from low income to higher income, there's less goods consumed
Speaker 1: and more services consumed. So I do think globalization is shifting,
Speaker 1: and if you're only focused on goods, you're going to
Speaker 1: miss the other part of the picture, which is growing.
Speaker 1: The other point I would make on why globalization is shifting,
Speaker 1: and why global trade in particular has peaked is because
Speaker 1: normally trade is driven by massive investment cycles. If you
Speaker 1: look back in time, we've had three massive investment cycles,
Speaker 1: the U S industrialization cycle back in the nine era,
Speaker 1: then when you had Japanese and Korean industrialization cycle in
Speaker 1: the late sixties seventies to eighties, and then when China
Speaker 1: industrialized most recently post two thousand. I can't think of
Speaker 1: another economy that could have as big an impact on
Speaker 1: industrialized ation that could drive global trade for another cycle
Speaker 1: in the near future. Not India. I think India has
Speaker 1: a lot of work to do and it's a very
Speaker 1: interesting economy. I'm very excited about the potential in India
Speaker 1: given the changes I've seen in the economy, the reforms
Speaker 1: that Prime Minister Morey has made. But it does not
Speaker 1: move as swiftly as China as it is a democracy,
Speaker 1: Whereas China has moved faster than the US and any
Speaker 1: other country that I've seen because it's not a democracy.
Speaker 1: In fact, if to give you an example on the
Speaker 1: technology side, how fast it's moved, if you take rides sharing.
Speaker 1: Uber has been around for more than eight years. It
Speaker 1: has not reached fifty penetration. China has d D, which
Speaker 1: is equivalent to Uber. In China, within three years they
Speaker 1: hit fifty penetration rates. This is true of almost any
Speaker 1: Internet category you can think of. They just move at
Speaker 1: the speed of light. I find it hard to think
Speaker 1: that another economy that's big enough can move as swiftly
Speaker 1: as China has. You devote considerable time in your report
Speaker 1: Francis to talking about Chinese millennials and their impact over
Speaker 1: the next few decades. I found that surprising because there's
Speaker 1: a lot of discussion about a demographic bomb that's going
Speaker 1: to catch up with China from the twenty thirties onwards.
Speaker 1: Can you reconcile that absolutely? When you look at the
Speaker 1: headline numbers, the Chinese population is slowing and is shrinking,
Speaker 1: particularly the working age population. And we generally focused on
Speaker 1: the working age population because they're the income earning population
Speaker 1: and the income spending population. Right, if you think of
Speaker 1: the population between zero to fifteen who aren't earning an income,
Speaker 1: they don't really spend the same way. And you think
Speaker 1: of the population that sixt and above who are retired,
Speaker 1: they don't spend the same way. So the thrust of
Speaker 1: your income power and spending power is within the working population.
Speaker 1: Now that cohort is shrinking. But within any aggregate, there
Speaker 1: are always different things to look for. And what's different
Speaker 1: about China is you also have a backdrop of a
Speaker 1: growing middle class population. Now, if you take a big
Speaker 1: step back and look at the projections across the different countries,
Speaker 1: you'll see that the next generation in the US will
Speaker 1: actually be poorer than their parents and grandparents. That's not
Speaker 1: the case in Asia because of this rising GDP per
Speaker 1: capital story, rising income growth, rising UH and growing middle
Speaker 1: income cohort. And that's what makes me excited about this
Speaker 1: group of millennials because they're the ones who are coming
Speaker 1: of age and entering this middle income category. As you
Speaker 1: enter that middle income category, you're spending patterns change, your
Speaker 1: incomes grow, and that's what we're excited about. Francis, this
Speaker 1: is fascinating. We could talk for hours, Unfortunately we can't.
Speaker 1: I want to close with just one point. You have
Speaker 1: a fascinating graph in your report which gets at a
Speaker 1: legacy of two thousand and eight that isn't often discussed
Speaker 1: in the season of Lehman retrospectives. You're saying global trade
Speaker 1: peaked in two thousand and eight. That's not something you
Speaker 1: hear very often. Absolutely, and that was the dynamic I
Speaker 1: was describing earlier on. There are a number of reasons
Speaker 1: why trade grows. One is the industrialization cycle. I don't
Speaker 1: see that happening against sou Um and the just the
Speaker 1: opening up of economies which happened UM as the CEO
Speaker 1: got off the ground and China started opening stores. That
Speaker 1: linkage between trade and China drove global trade to a
Speaker 1: peak in two thousand and eight. Together a couple together
Speaker 1: with the investment cycle. That cycle now has passed UM
Speaker 1: for a number of reasons. One is China is now
Speaker 1: quite fully developed. In fact, they're one of the more
Speaker 1: advanced countries in terms of making sure that infrastructure is
Speaker 1: in place for the next few decades. The second reason
Speaker 1: is credit was freely available and that drove investment and
Speaker 1: the demand for goods to be traded. Investments are very
Speaker 1: trade intensive because you need to buy materials to build things.
Speaker 1: Now that the cycle is shifting towards more of a
Speaker 1: consumption based cycle and service based cycle, there's less need
Speaker 1: for things to be traded. It doesn't mean that there
Speaker 1: isn't going to be any trade. It just means that
Speaker 1: the growth will be higher in other sectors which are
Speaker 1: less trade and commodity intensive. Francis, thanks for sharing this
Speaker 1: perspective with us, and we'd love to have you back
Speaker 1: again to talk about what else you find on your
Speaker 1: travels and in your research. I would love to talk
Speaker 1: to you again and thank you so much. Dan. Benchmark
Speaker 1: will be back next week. Until then, you can find
Speaker 1: us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app,
Speaker 1: as well as podcast destinations such as Apple Podcasts, Spotify,
Speaker 1: or wherever you listen. We'd love it if you took
Speaker 1: the time to rate and review the show so more
Speaker 1: listeners can find us, and you can follow me on
Speaker 1: Twitter at Moss underscore Ico. Benchmark is produced by Top
Speaker 1: of Foreheads. The head of Bloomberg Podcasts is Frances Believe.
Speaker 1: Thanks for listening. See you next time is pastasy Fer
Speaker 1: four