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Speaker 1: Hello, and welcome to another episode of the Odd Locked Podcast.

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Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, there's a

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Speaker 1: new story that's made our job is very exciting again. Uh, well,

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Speaker 1: there's any number of things at the moment, but I

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Speaker 1: think I know what you're talking about. It's trade, right, Yeah,

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Speaker 1: But you're actually right that we're in this moment for

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Speaker 1: markets where there just seems to be a lot going

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Speaker 1: on again, lots of different cross winds and narratives and themes,

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Speaker 1: whether it's anxiety about rising inflation, concern about the FED,

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Speaker 1: the changing leadership in the market with regards to text docs,

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Speaker 1: and now, as you say, trade has really come to

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Speaker 1: the fore as a major thing that people are trying

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Speaker 1: to wrap their heads around. Right. So, what we've seen

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Speaker 1: just over the past couple of weeks is the Trump

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Speaker 1: administration unveiled a big set of tariffs on goods imported

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Speaker 1: from China, and then China retaliated. They announced I think

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Speaker 1: it was tariffs on about fifty billion dollars worth of

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Speaker 1: goods including aircraft parts, soybeans, and cars, which are some

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Speaker 1: big ones for the market and for the economy. Right

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Speaker 1: because a few days earlier, China had announced some retaliatory

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Speaker 1: tariff measures, but they were on pretty minor stuff like

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Speaker 1: jensing exports, which I doubt the U S exports a

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Speaker 1: lot of jensing too China, or macadamia nuts and stuff

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Speaker 1: like that, or wine earlier. Stuff that's kind of a

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Speaker 1: little bit more marginal. But when they announced the tariffs

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Speaker 1: on soybeans, given that that's a major crop in the US,

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Speaker 1: and given how much China consumes of soybeans, then people

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Speaker 1: are like, WHOA, this is maybe a little bit more

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Speaker 1: serious than we expected. Right, this is the week that

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Speaker 1: everyone decided that soybeans were actually very very important. Um,

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Speaker 1: we are sort of dancing around one issue, Joe, that

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Speaker 1: we've been speaking a lot about internally, and that what

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Speaker 1: do we call this? Are we calling it a trade war? Right?

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Speaker 1: We've had this discussion internally because I kind of get

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Speaker 1: the impression that trade war is one of these things

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Speaker 1: that doesn't have a very crisp definition. It's kind of

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Speaker 1: like you know it when you see it. So some

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Speaker 1: people are using that term, others aren't. But that's obviously

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Speaker 1: something we have to figure out. And are we just

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Speaker 1: seeing sort of a standard early stage negotiation or is

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Speaker 1: this a serious thing? And that's sort of what we're

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Speaker 1: all trying to uh wrap our heads around, right, And

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Speaker 1: some people are being really cute about it and calling

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Speaker 1: a trade skirmish or a trade standoff, or a trade tiff,

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Speaker 1: any number of trade war. All right, So for the

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Speaker 1: purposes of this podcast, can we just agree that we're

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Speaker 1: going to call it various things and no one can

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Speaker 1: get mad at us. That sounds good. Well, I think

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Speaker 1: we actually have the perfect guest to tell us exactly

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Speaker 1: what we're seeing right now. We're going to be speaking

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Speaker 1: with Brad Setser. He's the stephen A. Tannenbaum Senior Fellow

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Speaker 1: for International Economics. He's written for years about trade and

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Speaker 1: other macroeconomic issues. He blogs. He used to be at

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Speaker 1: the Treasury. Anyone who follows this space has has surely

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Speaker 1: seen his work. He's here with us now, Brad. Thank

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Speaker 1: you very much for joining us, my pleasure. So, Brad, uh,

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Speaker 1: what is a trade war? I think a trade war

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Speaker 1: is a series of measures. I guess a significant set

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Speaker 1: of trade restrictive measures by one country that prompt an

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Speaker 1: equally significant response from another country. And you could call

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Speaker 1: that a trade war. You could say you need another

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Speaker 1: round of escalation before you have a trade war. I

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Speaker 1: wouldn't use the term trade war if you're playing in

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Speaker 1: what you might call the standard trade remedy space, a

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Speaker 1: standard dumping case, a standard safeguards case. But the US

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Speaker 1: is doing a three oh one case, which is a

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Speaker 1: tool that hasn't been used for a long time, and

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Speaker 1: fifty billion is it's not enormous relative to the size

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Speaker 1: of our economy, but for a trade measure or it's

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Speaker 1: quite large. So if we proceed to the stage where

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Speaker 1: we actually implement the tariffs, which we haven't done, and

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Speaker 1: if China proceeds to implement the tariffs in response, I

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Speaker 1: think for all intents and purposes, that would meet a

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Speaker 1: reasonable standard for a trade war. So we want to

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Speaker 1: focus on what actually happens to the international economy when

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Speaker 1: such a trade war is underway. But before we do,

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Speaker 1: this is a big question that's currently hanging over markets

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Speaker 1: and people who are watching this entire spat unfold. What

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Speaker 1: are the prospects, in your opinion, that we get some

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Speaker 1: sort of compromise before the tariffs are actually enacted. I'm

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Speaker 1: having a hard time getting a clear read on that

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Speaker 1: particular issue, in large part because I don't quite know

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Speaker 1: what the Trump administration views as an acceptable compromise. There's

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Speaker 1: been a lot of criticism that the Trump administration hasn't

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Speaker 1: really articulated what trade peace would look like, what set

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Speaker 1: of concessions would be enough. I think the Chinese are

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Speaker 1: willing to offer some modest concessions, and maybe they will

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Speaker 1: go beyond the more modest concessions that they've been signaling,

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Speaker 1: But I don't know that the US has decided on

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Speaker 1: what would constitute an acceptable offer. Can I just say

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Speaker 1: before we go on that I am very relieved, And

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Speaker 1: then I'm actually excited that you say that if the

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Speaker 1: current measures went into effect, we could call it a

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Speaker 1: trade war, because I was worried that you're gonna say, oh,

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Speaker 1: everyone needs to be less hysterical about this. So it's

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Speaker 1: nice to talk to an expert who has given us

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Speaker 1: the green light to use the exciting language. So I

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Speaker 1: just want to say thank you. Right, And a trade

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Speaker 1: war is not a shooting war. A trade war is

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Speaker 1: a period of economic hostility. Tell us, you mentioned the

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Speaker 1: difference between the standard trade remedies, the anti dumping stuff,

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Speaker 1: stuff like that in a threal one case. Just walk

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Speaker 1: us through the differences between those two things. So you know,

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Speaker 1: a standard emmedy, a safeguard, or a dumping comes. When

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Speaker 1: a sort of specific product is flowing into, say the US,

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Speaker 1: the industry petitions for relief either on the grounds that

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Speaker 1: there's been a surgeon imports, which is a safeguard, or

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Speaker 1: on the grounds that the other country is dumping or

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Speaker 1: unfairly subsidizing its products, in which case there would be

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Speaker 1: a dumping duty or countervailing duty. All these things go

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Speaker 1: through a standardized process with lags. At the end of

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Speaker 1: the day, the President has to authorize the tariffs in

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Speaker 1: the case of a safeguard, but they are approved within

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Speaker 1: the rules remedies that are available, and after the fact

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Speaker 1: people will litigate whether the dumping criteria or used correctly

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Speaker 1: and whether there really was a subsidy. So they maybe

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Speaker 1: be cases in the w t O, but these are

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Speaker 1: sort of the within the system safety valves relief measures.

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Speaker 1: A three oh one in this particular case, is aimed

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Speaker 1: at practices which the U S tr argues imphurt the

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Speaker 1: U S economy that fall outside the scope of China's

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Speaker 1: w t O commitments, and because of that, the US

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Speaker 1: is essentially unilaterally imposing tariffs and other sanctions on China

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Speaker 1: in order to change policies where there where there isn't

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Speaker 1: really an argument that China's already agreed in the w

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Speaker 1: t O to get rid of them. So do the

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Speaker 1: three oh one measures? Do those have a different impact

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Speaker 1: than the sort of more standard anti dumping measures would Well,

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Speaker 1: in a dumping case, you're going to target the sector

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Speaker 1: where the dumping takes place. In a three oh one,

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Speaker 1: you're essentially choosing the sectors where you want to impose

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Speaker 1: tariffs to impose pain in order to try to convince

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Speaker 1: your trading partner to remove measures that you judge to

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Speaker 1: be unfair. So it's a US determination that China's actions

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Speaker 1: constitute something that impedes American exports and impedes American firms,

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Speaker 1: And as a result of that unilateral judgment, the US

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Speaker 1: will decide on its own what sectors at targets. So

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Speaker 1: there's a lot more freedom and flexibility to broaden out

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Speaker 1: the set of sectors that are covered by the tariffs

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Speaker 1: when you're not responding to a specific concern of a

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Speaker 1: specific industry that is seeking relief from a flood of imports. Now,

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Speaker 1: President Trump seems very fixated on the bilateral trade deficit

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Speaker 1: with China. He's always growing around that number, I think

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Speaker 1: billion or whatever it is, and he just wants to

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Speaker 1: see it lowered. And typically the response from economists is

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Speaker 1: that looking at the trade deficit in isolation like that

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Speaker 1: is not a particularly productive way to think about our

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Speaker 1: trading relationship with any given country, or even the idea

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Speaker 1: that a trade deficit with all countries is per se

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Speaker 1: a bad thing, most economists argue, is not a particularly

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Speaker 1: useful way to think about the scoreboard. So can you,

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Speaker 1: for the average listener, sort of explain why that is

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Speaker 1: generally not viewed as a useful way to think about

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Speaker 1: the relationship. So think about the following set of trading patterns.

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Speaker 1: Say the US is exporting a lot of construction equipment

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Speaker 1: to a third party, which is mining a lot of iron,

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Speaker 1: which is shipping that iron to I guess a second party.

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Speaker 1: I got my math a little wrong. That is taking

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Speaker 1: iron and then selling consumer goods. It is quite possible

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Speaker 1: that that three way trade would be entirely balanced. I

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Speaker 1: think of it as the US selling construction equipment to Australia,

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Speaker 1: Australia selling iron to China, China selling consumer goods to

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Speaker 1: the United States could be a perfectly balanced trading relationship,

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Speaker 1: but the US would be running a bilateral deficit with China.

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Speaker 1: So there's there's no particular reason why trade should balance

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Speaker 1: between any individual country pair, And when you look at

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Speaker 1: simply the bilateral balance, that can be quite misleading. The

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Speaker 1: global trade deficit is, I think a little bit different.

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Speaker 1: The global trade deficit indicates that you're either receiving equity

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Speaker 1: investment from the world or borrowing from the world. In

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Speaker 1: the US case, we've been borrowing for from the world

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Speaker 1: for a long time, and the trade deficit represents both

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Speaker 1: you know, we're importing more than we export, but also

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Speaker 1: that we are building up our external debt. And there's

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Speaker 1: always a question about whether or not that build up

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Speaker 1: of external debt is fueling unhealthy economic expansion, fueling a

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Speaker 1: lot of investment, or whether it's some sense unhealthy that

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Speaker 1: it reflects an excess of spending and excess of consumption,

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Speaker 1: and that we are borrowing from our future wealth. And

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Speaker 1: I would say the US trade deficit is right at

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Speaker 1: the edge of being a problem. That's my personal view,

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Speaker 1: So I don't I don't view that the any trade

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Speaker 1: deficit is a problem, but I do think that trade

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Speaker 1: deficits can be a problem. Okay, Well, as Joe mentioned,

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Speaker 1: Donald Trump clearly has his own views about the desirability

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Speaker 1: trade deficits. So let's say that all these various tariffs

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Speaker 1: go through and we have an actual trade war on

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Speaker 1: our hands. Walk us through the real world effects that

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Speaker 1: we would likely see, you know, from day one, how

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Speaker 1: does it actually play out? Well, before we jump to

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Speaker 1: the implementation of the tariffs, I think it's important to

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Speaker 1: recognize that there's a period of comment and the immediate

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Speaker 1: next step will be essentially a review of the U

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Speaker 1: s tariffs, where industries that are believe they're adversely affected

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Speaker 1: will lobby U s DR to change the list, and

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Speaker 1: then after that there's a period of time for negotiations.

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Speaker 1: Tariffs don't have to be introduced at the end of

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Speaker 1: the common period, so we're not necessarily going to implement

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Speaker 1: tariffs tomorrow. It could come with a significant lag, but

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Speaker 1: let's assume there isn't an agreement that the tariff list

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Speaker 1: stays pretty much as it is. The US was put

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Speaker 1: tariffs on fifty billion roughly of Chinese goods. Some are

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Speaker 1: more final stage consumer goods like TVs. Some are more

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Speaker 1: intermediate inputs into production various categories of parts, parts for

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Speaker 1: air conditioners, parts for various mechanical devices. In some cases

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Speaker 1: there may not be any possibility to substitute, in which

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Speaker 1: case American consumers will see an increase in price. In

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Speaker 1: the US government was see an increase in revenue. Fifty

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Speaker 1: is ballpark a quarter of a point of US GDP,

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Speaker 1: so the tariff would be, if if fully paid, would

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Speaker 1: be in the order of magnitude of a little over

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Speaker 1: you know, five basis points of GDP, so you know,

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Speaker 1: meaningful but not giant. In some product categories, though there

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Speaker 1: may be opportunities to substitute, be it US production, or

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Speaker 1: be at production of parts from Europe or Mexico or

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Speaker 1: elsewhere in Asia, in which case you would see trade

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Speaker 1: diverted away from China toward the untariffed parts of the

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Speaker 1: global economy. Then the economy would react to the Chinese tariffs,

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Speaker 1: and there I think it really depends on the sectors

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Speaker 1: China went after the Big Three, or threatened to go

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Speaker 1: after the Big three. US export categories to China aircraft, soybeans,

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Speaker 1: and autos. With air craft, I think they were pretty

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Speaker 1: they may have been playing it a little cute. They

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Speaker 1: clearly have exempted wide bodies from the tariffs. They may

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Speaker 1: have exempted most of the new seven thirty seven line.

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Speaker 1: There's a debate about whether the seven seven eight Max

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Speaker 1: has a weight that would exclude it from the tariff

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Speaker 1: or not. They clearly have tariff used seven seven for

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Speaker 1: what it's worth and golf streams, So I think you

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Speaker 1: can argue that that it was designed to avoid immediately

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Speaker 1: whacking Chinese airlines that have large orders on the books

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Speaker 1: for Boeing, And I think what probably matters more going

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Speaker 1: forward is will those airlines continue to buy Bowings or

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Speaker 1: will they tilt towards air Bus. There's an interesting side

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Speaker 1: note there, which is that China has always tried to

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Speaker 1: play Bowing against Airbus, both to get about our price,

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Speaker 1: of course, but also to induce both companies to shift

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Speaker 1: more production to China, to do offsets, to buy more parts,

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Speaker 1: and to help build up China's own aviation industry. If

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Speaker 1: there isn't a threat of buying Boing, China loses a

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Speaker 1: little bit of leverage in future negotiations with Airbus. So

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Speaker 1: I think China is in some ways constrained in the

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Speaker 1: aircraft sector. There's another important note though, which is China

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Speaker 1: has its own narrow body aircraft to see nine one nine,

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Speaker 1: and undoubtedly Chinese airlines are going to be buying one

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Speaker 1: nine rather than seven thirty seven s. Or does China

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Speaker 1: have ambitions to have a homegrown aviation company that is

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Speaker 1: on the same scale and capabilities as a Boeing or

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Speaker 1: an air Bus and is that plausible in the medium

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Speaker 1: term future In your view, China unambiguously has that ambition.

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Speaker 1: China has been working over time to build up in

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Speaker 1: domestic aviations. Whether or not they will succeed at building

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Speaker 1: planes that can compete with the latest generation from Airbus

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Speaker 1: and Boeing, I think, remains an open question. But I

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Speaker 1: I suspect that China won't give up. It's too important,

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Speaker 1: it's too central to the China Plan and to China's

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Speaker 1: own vision of what it wants to become. This China Plan,

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Speaker 1: I don't think, is something that a lot of Americans

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Speaker 1: are particularly familiar with. The ambitions the country has to

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Speaker 1: sort of develop its own homegrown champions in all these

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Speaker 1: different spaces like medical technology and aviation and semi conductors.

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Speaker 1: Can you just explain to US a little bit about

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Speaker 1: what this plan is and how they've gone about implementing

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Speaker 1: it so far. So China Dinner fies a set of

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Speaker 1: advanced manufacturing technology sectors, generally you know, medical equipment, semiconductors, aviation,

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Speaker 1: next generation vehicles, and it sets out targets for Chinese

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Speaker 1: production and Chinese market share, Chinese firm and Chinese production

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Speaker 1: inside China to meet the Chinese market. A lot of

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Speaker 1: these sectors are sort of cutting edge sectors where China

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Speaker 1: now is a large buyer of goods made in the

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Speaker 1: rest of the world, So there certainly is a component

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Speaker 1: in the targets of import substitution. These are products that

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Speaker 1: China now imports, and China has articulated a goal of

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Speaker 1: being able to meet its own demand with its own

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Speaker 1: production and to do so with technology developed and owned

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Speaker 1: by China. So there is a very legitimate trade complaint

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Speaker 1: around these industrial real policy goals. I think the tools

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Speaker 1: that China uses vary from sector to sector. So how

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Speaker 1: much do the U S tariffs actually play into China's

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Speaker 1: long term ambitions of import substitution, Because you know, if

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Speaker 1: if the US slaps teariffs some things like aerospace equipment

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Speaker 1: and China has ambitions to build up its own industry

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Speaker 1: in the space, then that seems almost like a benefit

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Speaker 1: to them. Well, I'm not sure that's the case. China

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Speaker 1: and say aerospace needs to develop its capability, and as

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Speaker 1: I mentioned earlier, in order to develop its capability, China

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Speaker 1: likes to play Bowing against Airbus. It got Airbus to

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Speaker 1: build a three twenty line in China. And if the

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Speaker 1: US is saying more or less, if Boeing subcontracts from China,

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Speaker 1: it faces a tariff on anything at imports that would

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Speaker 1: discourage Bowing at the margin from shifting production to China.

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Speaker 1: Are shifting some of is contracting towards Chinese sub subcomponent manufacturing.

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Speaker 1: And if China is not going to buy any Boeings

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Speaker 1: going forward because of the Chinese retaliation, airbuses incentives change.

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Speaker 1: They don't have to produce aircraft in China to celt

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Speaker 1: to China. They're the only supplier. There's not that competition.

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Speaker 1: So I think that's the sense in which China is

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Speaker 1: in some ways still constrained by the fact that in

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Speaker 1: some of these sectors it is not yet at the

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Speaker 1: cutting edge of technology and it still needs to play

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Speaker 1: European and US firms off against each other to help

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Speaker 1: it progress up the technological ladder. One of the things

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Speaker 1: you hear, and I think the Trump administration has frustrations

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Speaker 1: about it is the degree to which China demand some

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Speaker 1: sort of transfer of technological know how from these companies

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Speaker 1: that want to participate in the Chinese market. So I

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Speaker 1: don't know exactly what it does with aviation this idea

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Speaker 1: that these big companies, if they want to access to

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Speaker 1: the Chinese market, have to have some mechanism to give

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Speaker 1: their technology to the local players. Can you walk us

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Speaker 1: through what exactly China does with that and how much

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Speaker 1: that deviates from sort of typical international norms. So this

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Speaker 1: is uh the substance of the three oh one complaint.

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Speaker 1: This is what the US is saying that China is

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Speaker 1: doing that warrants the unilateral u S tariffs. China, under

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Speaker 1: its w t O obligations cannot condition approval of investment

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Speaker 1: on technology transfer as a matter of policy. So that

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Speaker 1: is one of China's w t O obligations. But there

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Speaker 1: are an awful lot of things that China still can do.

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Speaker 1: So China is not required on the w t O

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Speaker 1: to allow investment into any sector that's a choice that

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Speaker 1: China makes. In many cases, China can require does require

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Speaker 1: that any US firm wanting to produce in China set

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Speaker 1: up a joint venture, and if the joint venture partner

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Speaker 1: and most of the plausible joint venture partners will be

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Speaker 1: stayed owned firms, given the nature of China's economy, and

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Speaker 1: if the joint venture partner says that as a commercial matter,

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Speaker 1: we will only enter into this joint venture if you

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Speaker 1: agree to transfer technology to our subsidiary where we will

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Speaker 1: have control, then you have to kind of transfer the technology.

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Speaker 1: It's part of the conditions of the deal. But it

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Speaker 1: is not a matter of government policy. Is a matter

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Speaker 1: of commercial negotiations between two companies. Similarly, saying the electric

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Speaker 1: vehicle space, if you want to qualify for the subsidies

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Speaker 1: for new energy vehicles, well you're much better off if

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Speaker 1: you have a Chinese partner and if the technology has

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Speaker 1: been moved to China. So you know, there's a there's

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Speaker 1: a lot of sources of pressure given the nature of

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Speaker 1: China's economy, that don't come in the form of formally

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Speaker 1: conditioning as a matter of government policy approval of investment

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Speaker 1: on technology transfer. But have nonetheless created de facto requirements

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Speaker 1: that if you want to supply the Chinese market, it's

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Speaker 1: pretty hard to do that without producing in China. And

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Speaker 1: if you want to produce in China, you pretty much

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Speaker 1: need a state firm as your joint venture partner, and

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Speaker 1: that state firm can, as a matter of its own policy,

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Speaker 1: so to speak, ask for tech transfer, because if it

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Speaker 1: doesn't get that tech transfer, it will lose out because

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Speaker 1: you know, the joint venture with the European company has

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Speaker 1: agreed to do something a little bit more in China.

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Speaker 1: So there's there's certainly are many pressure points, and I

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Speaker 1: don't think very many people challenge the core truth of

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Speaker 1: the three oh one complaint. I want to talk about

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Speaker 1: something that comes up whenever we talk about the US

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Speaker 1: China trade deficit, and that is the idea of China

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Speaker 1: retaliating by basically boycotting the US is biggest export, which

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Speaker 1: has to be US treasuries. This always always comes up

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Speaker 1: the idea that China is going to retaliate in a

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Speaker 1: trade war by selling off some of its vast treasury holdings.

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Speaker 1: How realistic do you think that actually is? And I

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Speaker 1: know there are strong opinions on either side I personally

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Speaker 1: think I was one of the first to use the

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Speaker 1: line that the US's biggest export was treasuries and agencies

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Speaker 1: ten years ago, when the US is running a five

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Speaker 1: percent of GDP trade deficits. It's been one of my

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Speaker 1: favorite lines for a long time. I've definitely borrowed it

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Speaker 1: since then, so thank you. I'm not sure I can

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Speaker 1: claim original credit, but I like the phrase. Let's stipulate

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Speaker 1: a couple of things. Let's stipulate that Chinese holdings of

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Speaker 1: treasuries are typically a function of China's reserve holdings. Private

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Speaker 1: Chinese investors tend not to buy treasuries. They tend to

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Speaker 1: put money in bank accounts are in real estate, so

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Speaker 1: the vast bulk of the Chinese holdings of treasuries are

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Speaker 1: a reflection of Chinese reserves. Second point to stipulate is

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Speaker 1: that over time, the amount of treasuries that China holds

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Speaker 1: has tended to move in line with the evolution of

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Speaker 1: China's reserves, been a pretty constant share of China's portfolio

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Speaker 1: over time. And third point is that China's reserves are

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Speaker 1: right now not growing very fast, so you would not

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Speaker 1: normally expect China to be a big buyer right now.

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Speaker 1: In fact, if you look at kind of the global

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Speaker 1: flow of funds, China's current account surplus, so the aggregate

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Speaker 1: amount that it is lending to the world is smaller

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Speaker 1: than that of Japan, certainly smaller than that of the

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Speaker 1: Euro Area, and well below the combined current account surplus

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Speaker 1: of the Asian newly industrialized economies Korea, Taiwan, Singapore, and

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Speaker 1: you know, just for the sake of argument and not

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Speaker 1: I would throw in Thailand into that category. So much

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Speaker 1: or even the majority of the financing that the US

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Speaker 1: is getting to support its trade deficit and current account

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Speaker 1: deficit is not right now coming from China. So I

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Speaker 1: think those are kind of important background pieces. This is

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Speaker 1: not two thousand seven, when China's current account surplus was

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Speaker 1: the biggest in the world, and when China was adding

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Speaker 1: six billion to its reserves every year and two thirds

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Speaker 1: of that ballpark was flowing into US bonds. China, though,

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Speaker 1: of course, does have a large outstanding stock of treasuries,

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Speaker 1: biggest in the world, probably a little bit bigger than

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Speaker 1: it is then shows up in the data the Treasury releases,

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Speaker 1: and China, if it wanted too, could move its portfolio around.

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Speaker 1: We know that during the crisis, China shifted its portfolio.

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Speaker 1: It's sold agencies and it bought treacheries. And by selling agencies,

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Speaker 1: it put pressure on the agency market, so China can

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Speaker 1: affect spreads in them. Just for the terminology the agency market.

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Speaker 1: There's like Fannie and Freddie, the housing agencies issued a

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Speaker 1: lot of no I just you know, just for the

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Speaker 1: sake of people. The terminology that went into funding a

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Speaker 1: lot of American homes and stuff. That's right, and that

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Speaker 1: was you know, before the crisis, everyone spoke of China's

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Speaker 1: being a big buyer of treasuries, when actually before the crisis,

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Speaker 1: China was the biggest buyer of agencies. It's it's like

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Speaker 1: one of those little details that is actually quite important

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Speaker 1: that tends to get glossed over. But during the crisis,

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Speaker 1: China shifted its portfolio out of agencies and into treasuries.

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Speaker 1: That undoubtedly caused problems in the agency market. But remember

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Speaker 1: that in Quee one, the started buying agencies and that

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Speaker 1: stabilize the market. I think there's a little bit of

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Speaker 1: a lesson there. If China sells treasuries a it has

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Speaker 1: to put its money somewhere. It may sell long term

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Speaker 1: treasuries and buy short term bills, which would raise long

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Speaker 1: term rates relative to short term rates. It may sell

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Speaker 1: treasuries and then sell dollars and move into euros or

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Speaker 1: yet that would weaken the dollar, and I think it

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Speaker 1: would cost more problems for Japan and Europe, which would

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Speaker 1: see their currencies appreciate and have difficulty exporting. Or it

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Speaker 1: could just move within the US market moved to the

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Speaker 1: short end of the curve, which is probably the most

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Speaker 1: plausible option. If it did that, I think it would

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Speaker 1: have a short term impact on the market, but I

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Speaker 1: don't think you should think of it as a one

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Speaker 1: round game. If it's impacting the market in a way

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Speaker 1: that adversely impacts the U S economy, the Fed should

433
00:27:54,840 --> 00:27:58,639
Speaker 1: logically respond, either by adjusting the pace at which it

434
00:27:58,680 --> 00:28:02,760
Speaker 1: tightens or by adjusting the pace of the balance sheet

435
00:28:02,800 --> 00:28:05,480
Speaker 1: roll off. I think at the end of the day,

436
00:28:05,880 --> 00:28:09,400
Speaker 1: there should be no question that the Federal Reserve has

437
00:28:09,440 --> 00:28:12,639
Speaker 1: a much bigger impact on the U. S. Treasury market

438
00:28:12,920 --> 00:28:17,760
Speaker 1: than China. So, just to sort of some up what

439
00:28:17,840 --> 00:28:20,520
Speaker 1: you're saying, a lot of interesting points there is that

440
00:28:21,119 --> 00:28:24,040
Speaker 1: this sort of naive way you hear people talk about

441
00:28:24,080 --> 00:28:26,560
Speaker 1: it is we borrow a lot from China, one day

442
00:28:26,600 --> 00:28:28,200
Speaker 1: they might not want to lend to us, and then

443
00:28:28,359 --> 00:28:32,240
Speaker 1: we're in trouble. Whereas the more subtle point is, yes,

444
00:28:32,560 --> 00:28:36,320
Speaker 1: China could change its policies and change the market, but

445
00:28:36,440 --> 00:28:39,880
Speaker 1: the response would be not as clear cut, it's not

446
00:28:39,960 --> 00:28:43,000
Speaker 1: as binary, and the moves into some ways could harm

447
00:28:43,040 --> 00:28:45,720
Speaker 1: them or harm others. It's just it's not as simple

448
00:28:45,840 --> 00:28:49,040
Speaker 1: as say, your bank no longer willing to extend your credit.

449
00:28:49,640 --> 00:28:55,240
Speaker 1: That's right. If you work through all the the reactions

450
00:28:55,240 --> 00:28:59,800
Speaker 1: and the counter reactions, what eventually happens is the FED

451
00:29:00,120 --> 00:29:03,680
Speaker 1: is up easy and the dollar ends up weakening, which

452
00:29:03,720 --> 00:29:07,320
Speaker 1: isn't actually necessarily a bad thing for the U. S. Economy.

453
00:29:07,400 --> 00:29:09,720
Speaker 1: It's a bad thing, much worse thing in some ways

454
00:29:09,720 --> 00:29:11,480
Speaker 1: for those who have lent money to the US and

455
00:29:11,560 --> 00:29:17,240
Speaker 1: dollars and so it's uh. It is hard to imagine

456
00:29:17,680 --> 00:29:23,760
Speaker 1: how China could cause a a funding crisis for the U. S. Treasury. Actually,

457
00:29:23,920 --> 00:29:27,800
Speaker 1: China's greatest leverage comes, at least in my view, when

458
00:29:27,800 --> 00:29:31,160
Speaker 1: it is buying things other than treasuries, when it was

459
00:29:31,160 --> 00:29:33,840
Speaker 1: buying agencies, or if it's buying corporate bonds, it's buying

460
00:29:33,880 --> 00:29:37,320
Speaker 1: things that in the normal course of monetary policy, the

461
00:29:37,360 --> 00:29:40,760
Speaker 1: FED doesn't typically buy, and so it is much easier

462
00:29:40,800 --> 00:29:45,120
Speaker 1: for China to influence credit spreads or the agency treasury spread,

463
00:29:45,600 --> 00:29:47,959
Speaker 1: and a little bit more difficult for the FED to respond,

464
00:29:48,000 --> 00:29:51,680
Speaker 1: although obviously we did respond by extending our purchases of

465
00:29:51,760 --> 00:29:55,320
Speaker 1: assets to agencies. So I think there are subtle ways

466
00:29:55,800 --> 00:29:58,720
Speaker 1: that China can put pressure on the US market, but

467
00:29:59,240 --> 00:30:02,640
Speaker 1: that at the end of the day, this isn't China's

468
00:30:02,680 --> 00:30:06,960
Speaker 1: most powerful source of leverage. So once a trade war

469
00:30:07,240 --> 00:30:12,560
Speaker 1: is well and truly underway, what stops it? Like? What

470
00:30:12,840 --> 00:30:15,719
Speaker 1: is the resolution? I guess? My other question is how

471
00:30:15,760 --> 00:30:19,200
Speaker 1: how much of our existing tariffs stem from trade wars

472
00:30:19,240 --> 00:30:22,960
Speaker 1: that started, you know, ten, twenty, maybe even fifty years ago.

473
00:30:23,400 --> 00:30:27,240
Speaker 1: How long do these effects actually linger? There are interesting

474
00:30:27,360 --> 00:30:32,479
Speaker 1: quirks in global trade that reflect the legacy of past

475
00:30:32,720 --> 00:30:35,960
Speaker 1: trade fights. So the very high US tariff on light

476
00:30:35,960 --> 00:30:39,880
Speaker 1: trucks apparently stems from a fight in the nineteen sixties.

477
00:30:39,880 --> 00:30:42,360
Speaker 1: So we have a two point five percent tariff on cars,

478
00:30:42,720 --> 00:30:46,160
Speaker 1: but a tariff on light trucks, and that that's now

479
00:30:46,280 --> 00:30:49,160
Speaker 1: enshrined in our w t O commitments. And da da

480
00:30:49,200 --> 00:30:54,120
Speaker 1: da dada back a long, long time ago, the Europeans

481
00:30:54,280 --> 00:30:57,880
Speaker 1: agreed to as an concession to the US to get

482
00:30:57,960 --> 00:31:01,320
Speaker 1: rid of tariffs on soybeans but not grain, which is

483
00:31:01,360 --> 00:31:05,400
Speaker 1: why soybeans sort of emerged as the globally traded animal

484
00:31:05,440 --> 00:31:09,720
Speaker 1: food and became a much more traded commodity than say corn,

485
00:31:10,080 --> 00:31:13,000
Speaker 1: given that both can be used as a source of

486
00:31:13,680 --> 00:31:18,840
Speaker 1: animal feed. So you know, there certainly are permanent scars

487
00:31:19,480 --> 00:31:24,920
Speaker 1: in the trading system that reflect past decisions. I think

488
00:31:24,960 --> 00:31:30,320
Speaker 1: there are three ways the current three oh one tariff

489
00:31:30,360 --> 00:31:33,880
Speaker 1: threat could play out. One is, after the list is refined,

490
00:31:34,240 --> 00:31:36,560
Speaker 1: there's a period of negotiation in the US and China

491
00:31:36,640 --> 00:31:41,840
Speaker 1: come to a deal that either permanently removes the threat

492
00:31:41,880 --> 00:31:47,000
Speaker 1: of tariffs or leads the Trump administration to, let's say,

493
00:31:47,400 --> 00:31:51,600
Speaker 1: put the tariffs on hold on ice to allow more

494
00:31:51,640 --> 00:31:55,280
Speaker 1: time for negotiation. We will withdraw this current petition and

495
00:31:55,320 --> 00:31:57,760
Speaker 1: we will refile it if necessary. But we don't have

496
00:31:57,800 --> 00:32:00,640
Speaker 1: full agreement, but we have enough progress us to allow

497
00:32:00,800 --> 00:32:03,720
Speaker 1: us to have confidence that we will get to agreement

498
00:32:03,720 --> 00:32:09,600
Speaker 1: with more time. That's possibility. One possibility, too, is that

499
00:32:10,080 --> 00:32:15,280
Speaker 1: the US imposes its tariffs, China imposes its tariffs, and

500
00:32:15,560 --> 00:32:17,840
Speaker 1: more or less that's the end of it. There are

501
00:32:17,880 --> 00:32:21,920
Speaker 1: tariffs on soybeans, there are tariffs on US auto exports.

502
00:32:22,000 --> 00:32:26,280
Speaker 1: Interestingly enough, the biggest at least in my view, exporters

503
00:32:26,360 --> 00:32:29,520
Speaker 1: of cars from the US to China are the two

504
00:32:29,560 --> 00:32:33,200
Speaker 1: German transplants, so the BMW factory in South Carolina and

505
00:32:33,200 --> 00:32:37,960
Speaker 1: the Mercedes factory in Alabama. So the global economy is integrated.

506
00:32:38,880 --> 00:32:42,040
Speaker 1: And then it sort of stops there that there's no

507
00:32:42,240 --> 00:32:48,600
Speaker 1: further escalation, and then there will be ongoing negotiations over

508
00:32:48,640 --> 00:32:51,600
Speaker 1: the conditions that would allow both sides to step back down,

509
00:32:52,520 --> 00:32:56,440
Speaker 1: but there wouldn't be a threat of further measures. And

510
00:32:56,520 --> 00:32:58,800
Speaker 1: China of course would challenge the U S tariffs of

511
00:32:58,840 --> 00:33:02,720
Speaker 1: the w t O because the RIO one's legality under

512
00:33:02,760 --> 00:33:05,880
Speaker 1: the w t O is very unclear. The US is

513
00:33:05,960 --> 00:33:09,280
Speaker 1: violating it's w t O commitments by raising tariffs against

514
00:33:09,400 --> 00:33:14,600
Speaker 1: Chinese goods, at least in the Chinese few. Third option

515
00:33:14,720 --> 00:33:17,520
Speaker 1: is that it continues to escalate and that the US

516
00:33:18,520 --> 00:33:23,880
Speaker 1: comes up with an additional a round of tariffs, and

517
00:33:23,880 --> 00:33:28,200
Speaker 1: then China responds with another round of tariffs, and so

518
00:33:28,280 --> 00:33:31,680
Speaker 1: we go from fifty billion to a bigger number. And

519
00:33:31,720 --> 00:33:34,040
Speaker 1: there are other ways that either China or the U

520
00:33:34,080 --> 00:33:38,280
Speaker 1: S could escalate, so China could retaliate against US firms

521
00:33:38,320 --> 00:33:44,720
Speaker 1: operating inside China, the US could take steps that adversely

522
00:33:44,760 --> 00:33:48,280
Speaker 1: affect Chinese interests in the U S. Alright, so then

523
00:33:48,320 --> 00:33:51,320
Speaker 1: we gotta put you on the spot here of the scenarios,

524
00:33:51,400 --> 00:33:54,000
Speaker 1: what is your guests and what is the trading relationship

525
00:33:54,040 --> 00:33:56,160
Speaker 1: between the US and China look like a year from now.

526
00:33:57,440 --> 00:33:59,480
Speaker 1: If I had to guess right now, I would say

527
00:33:59,520 --> 00:34:03,320
Speaker 1: we both implement the tariffs and then it stops. That

528
00:34:03,480 --> 00:34:07,520
Speaker 1: seems like a plausible equilibrium. I think it will be

529
00:34:07,560 --> 00:34:10,440
Speaker 1: hard for the Trump administration to get enough from China

530
00:34:11,080 --> 00:34:14,440
Speaker 1: to convince the President, who seems personally animated by this,

531
00:34:15,000 --> 00:34:20,080
Speaker 1: to step back. I also don't see any other major

532
00:34:21,080 --> 00:34:25,440
Speaker 1: legal process underway that where the U S would initiate

533
00:34:26,120 --> 00:34:31,800
Speaker 1: another type of complaint that would extend tariffs to new sectors.

534
00:34:32,680 --> 00:34:37,279
Speaker 1: The highest probability is that we new round one of

535
00:34:37,320 --> 00:34:40,640
Speaker 1: a trade war, but then we don't. There isn't further escalation,

536
00:34:40,719 --> 00:34:44,040
Speaker 1: but of course that has knock on impacts throughout the

537
00:34:44,040 --> 00:34:47,800
Speaker 1: global economy. Red said Sir Stephen A. Tannembaum's Senior Fellow

538
00:34:47,840 --> 00:34:51,760
Speaker 1: for International Economics at the Council Foreign Relations. That was awesome.

539
00:34:52,040 --> 00:35:08,399
Speaker 1: I learned a lot from that discussion, Thank you very much, Pleasure, Joe.

540
00:35:08,440 --> 00:35:11,239
Speaker 1: I enjoyed that conversation so much, not least because I

541
00:35:11,280 --> 00:35:14,920
Speaker 1: continued to learn more about soybeans with every passing day

542
00:35:14,960 --> 00:35:18,400
Speaker 1: this month. Yeah, I definitely did not predict that the

543
00:35:18,440 --> 00:35:21,440
Speaker 1: big commodity at the heart of the biggest economic story

544
00:35:22,040 --> 00:35:24,000
Speaker 1: this month would be soybeans. But it's kind of a

545
00:35:24,120 --> 00:35:27,120
Speaker 1: pleasant surprise, and I guess we should have seen it coming, because,

546
00:35:27,400 --> 00:35:32,560
Speaker 1: as Brad mentioned, there's the big three aviation autos and soybeans,

547
00:35:32,600 --> 00:35:34,319
Speaker 1: So if we were a little more knowledgeable, we could

548
00:35:34,320 --> 00:35:36,919
Speaker 1: have seen that coming. Nonetheless, now you have to learn

549
00:35:36,960 --> 00:35:39,960
Speaker 1: something new all the time. Yeah. The other thing I

550
00:35:40,040 --> 00:35:43,400
Speaker 1: liked about that conversation obviously a really really nuanced a

551
00:35:43,600 --> 00:35:46,120
Speaker 1: series of thoughts from Brad, But I also like that

552
00:35:46,160 --> 00:35:48,400
Speaker 1: we have to go ahead to use the term trade

553
00:35:48,400 --> 00:35:52,360
Speaker 1: war essentially, or we're one round of escalation away from it. Yeah.

554
00:35:52,760 --> 00:35:55,680
Speaker 1: I agree, it's right if the if the tariffs actually

555
00:35:55,719 --> 00:35:58,359
Speaker 1: go into places planned and we have the green light

556
00:35:58,440 --> 00:36:02,080
Speaker 1: to use that colorful language. I'm glad that you brought

557
00:36:02,200 --> 00:36:06,360
Speaker 1: up the treasury issue is and the theoretical threat of

558
00:36:06,480 --> 00:36:09,880
Speaker 1: China not buying our treasuries, because when you think about

559
00:36:10,120 --> 00:36:14,000
Speaker 1: various ways that if things deteriorated between the two countries,

560
00:36:14,320 --> 00:36:18,520
Speaker 1: and deterioration could transmit themselves to the market, you always

561
00:36:18,560 --> 00:36:21,160
Speaker 1: hear about the treasury angle, and so I like that

562
00:36:21,640 --> 00:36:23,880
Speaker 1: it's not that there's nothing there, but that it's just

563
00:36:24,280 --> 00:36:27,520
Speaker 1: far more complex and subtle than perhaps most of us

564
00:36:27,560 --> 00:36:30,600
Speaker 1: think of it. Yeah, I suppose in retrospect it's not

565
00:36:30,680 --> 00:36:34,719
Speaker 1: a major surprise that talk about China's selling off it's

566
00:36:34,840 --> 00:36:39,120
Speaker 1: US bond holdings tends to descend into a lot of

567
00:36:39,200 --> 00:36:42,440
Speaker 1: rhetoric on either side rather than having a realistic conversation

568
00:36:42,480 --> 00:36:45,120
Speaker 1: about it. But there we are. But Brad definitely walked

569
00:36:45,200 --> 00:36:48,480
Speaker 1: us through all the details of that, which was fantastic. Um.

570
00:36:48,480 --> 00:36:50,799
Speaker 1: The other interesting thing, Joe and I know you've been

571
00:36:50,800 --> 00:36:53,800
Speaker 1: talking about it, but the market reaction to the trade

572
00:36:53,800 --> 00:36:56,480
Speaker 1: wars that we've been seeing so far. Yeah, I love

573
00:36:56,560 --> 00:36:59,720
Speaker 1: the way in which people's perception of how the trade

574
00:36:59,719 --> 00:37:03,439
Speaker 1: war is going or the trade tensions. We're not there yet,

575
00:37:03,480 --> 00:37:06,640
Speaker 1: how the trade tensions are going seemed to invariably be

576
00:37:06,760 --> 00:37:09,960
Speaker 1: dictated by the market. So on days when markets are green,

577
00:37:10,320 --> 00:37:12,720
Speaker 1: it's like, oh, people are optimistic that they're gonna be talks,

578
00:37:12,719 --> 00:37:14,759
Speaker 1: and some of the rhetoric is easing, and then that

579
00:37:14,840 --> 00:37:18,560
Speaker 1: afternoon stocks turned red and suddenly everyone is afraid of

580
00:37:18,880 --> 00:37:22,280
Speaker 1: imminent trade warriors. It's a good reminder then our business

581
00:37:22,719 --> 00:37:25,640
Speaker 1: price always leads to narrative. We like to pretend that

582
00:37:25,880 --> 00:37:28,920
Speaker 1: we construct these stories and then the market digest them

583
00:37:28,960 --> 00:37:32,480
Speaker 1: and then reprices. But I'm pretty sure it's the exact opposite.

584
00:37:32,760 --> 00:37:35,680
Speaker 1: The market does its thing and then we construct stories

585
00:37:35,800 --> 00:37:39,040
Speaker 1: expost facto to explain it. And it would be nice

586
00:37:39,080 --> 00:37:41,200
Speaker 1: to get away from that, but I'm not sure that's

587
00:37:41,200 --> 00:37:43,920
Speaker 1: gonna happen anytime soon. Good thing we don't host a

588
00:37:44,200 --> 00:37:48,520
Speaker 1: narrative markets podcast or anything like that. We would never

589
00:37:48,560 --> 00:37:52,040
Speaker 1: do that, and we would never like do articles about

590
00:37:52,040 --> 00:37:55,120
Speaker 1: these subjects day after day, trying to explain market movies.

591
00:37:55,160 --> 00:37:58,000
Speaker 1: I'm glad we never do anything like that. Okay, I

592
00:37:58,000 --> 00:38:00,920
Speaker 1: think we better stop here. This has been another edition

593
00:38:01,000 --> 00:38:03,719
Speaker 1: of the Odd Lots Podcast. I'm Tracy Alloway. You can

594
00:38:03,760 --> 00:38:06,759
Speaker 1: follow me on Twitter at Tracy Alloway, and I'm Joe

595
00:38:06,800 --> 00:38:09,200
Speaker 1: wi Isn't though. You could follow me on Twitter at

596
00:38:09,239 --> 00:38:12,640
Speaker 1: the Stalwart, and you could follow Brad on Twitter at

597
00:38:12,800 --> 00:38:16,719
Speaker 1: Brad Setzer with an underscore between Brad and Setzer, and

598
00:38:16,840 --> 00:38:20,680
Speaker 1: you could follow our producer tofur Foreheads at Foreheads t

599
00:38:21,280 --> 00:38:24,520
Speaker 1: and follow the bloomberg head of podcast, Francesco Levie at

600
00:38:24,560 --> 00:38:26,720
Speaker 1: Francesco Today. Thanks for listening,