Speaker 1: Hello, and welcome to another episode of the Odd Locked Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, there's a
Speaker 1: new story that's made our job is very exciting again. Uh, well,
Speaker 1: there's any number of things at the moment, but I
Speaker 1: think I know what you're talking about. It's trade, right, Yeah,
Speaker 1: But you're actually right that we're in this moment for
Speaker 1: markets where there just seems to be a lot going
Speaker 1: on again, lots of different cross winds and narratives and themes,
Speaker 1: whether it's anxiety about rising inflation, concern about the FED,
Speaker 1: the changing leadership in the market with regards to text docs,
Speaker 1: and now, as you say, trade has really come to
Speaker 1: the fore as a major thing that people are trying
Speaker 1: to wrap their heads around. Right. So, what we've seen
Speaker 1: just over the past couple of weeks is the Trump
Speaker 1: administration unveiled a big set of tariffs on goods imported
Speaker 1: from China, and then China retaliated. They announced I think
Speaker 1: it was tariffs on about fifty billion dollars worth of
Speaker 1: goods including aircraft parts, soybeans, and cars, which are some
Speaker 1: big ones for the market and for the economy. Right
Speaker 1: because a few days earlier, China had announced some retaliatory
Speaker 1: tariff measures, but they were on pretty minor stuff like
Speaker 1: jensing exports, which I doubt the U S exports a
Speaker 1: lot of jensing too China, or macadamia nuts and stuff
Speaker 1: like that, or wine earlier. Stuff that's kind of a
Speaker 1: little bit more marginal. But when they announced the tariffs
Speaker 1: on soybeans, given that that's a major crop in the US,
Speaker 1: and given how much China consumes of soybeans, then people
Speaker 1: are like, WHOA, this is maybe a little bit more
Speaker 1: serious than we expected. Right, this is the week that
Speaker 1: everyone decided that soybeans were actually very very important. Um,
Speaker 1: we are sort of dancing around one issue, Joe, that
Speaker 1: we've been speaking a lot about internally, and that what
Speaker 1: do we call this? Are we calling it a trade war? Right?
Speaker 1: We've had this discussion internally because I kind of get
Speaker 1: the impression that trade war is one of these things
Speaker 1: that doesn't have a very crisp definition. It's kind of
Speaker 1: like you know it when you see it. So some
Speaker 1: people are using that term, others aren't. But that's obviously
Speaker 1: something we have to figure out. And are we just
Speaker 1: seeing sort of a standard early stage negotiation or is
Speaker 1: this a serious thing? And that's sort of what we're
Speaker 1: all trying to uh wrap our heads around, right, And
Speaker 1: some people are being really cute about it and calling
Speaker 1: a trade skirmish or a trade standoff, or a trade tiff,
Speaker 1: any number of trade war. All right, So for the
Speaker 1: purposes of this podcast, can we just agree that we're
Speaker 1: going to call it various things and no one can
Speaker 1: get mad at us. That sounds good. Well, I think
Speaker 1: we actually have the perfect guest to tell us exactly
Speaker 1: what we're seeing right now. We're going to be speaking
Speaker 1: with Brad Setser. He's the stephen A. Tannenbaum Senior Fellow
Speaker 1: for International Economics. He's written for years about trade and
Speaker 1: other macroeconomic issues. He blogs. He used to be at
Speaker 1: the Treasury. Anyone who follows this space has has surely
Speaker 1: seen his work. He's here with us now, Brad. Thank
Speaker 1: you very much for joining us, my pleasure. So, Brad, uh,
Speaker 1: what is a trade war? I think a trade war
Speaker 1: is a series of measures. I guess a significant set
Speaker 1: of trade restrictive measures by one country that prompt an
Speaker 1: equally significant response from another country. And you could call
Speaker 1: that a trade war. You could say you need another
Speaker 1: round of escalation before you have a trade war. I
Speaker 1: wouldn't use the term trade war if you're playing in
Speaker 1: what you might call the standard trade remedy space, a
Speaker 1: standard dumping case, a standard safeguards case. But the US
Speaker 1: is doing a three oh one case, which is a
Speaker 1: tool that hasn't been used for a long time, and
Speaker 1: fifty billion is it's not enormous relative to the size
Speaker 1: of our economy, but for a trade measure or it's
Speaker 1: quite large. So if we proceed to the stage where
Speaker 1: we actually implement the tariffs, which we haven't done, and
Speaker 1: if China proceeds to implement the tariffs in response, I
Speaker 1: think for all intents and purposes, that would meet a
Speaker 1: reasonable standard for a trade war. So we want to
Speaker 1: focus on what actually happens to the international economy when
Speaker 1: such a trade war is underway. But before we do,
Speaker 1: this is a big question that's currently hanging over markets
Speaker 1: and people who are watching this entire spat unfold. What
Speaker 1: are the prospects, in your opinion, that we get some
Speaker 1: sort of compromise before the tariffs are actually enacted. I'm
Speaker 1: having a hard time getting a clear read on that
Speaker 1: particular issue, in large part because I don't quite know
Speaker 1: what the Trump administration views as an acceptable compromise. There's
Speaker 1: been a lot of criticism that the Trump administration hasn't
Speaker 1: really articulated what trade peace would look like, what set
Speaker 1: of concessions would be enough. I think the Chinese are
Speaker 1: willing to offer some modest concessions, and maybe they will
Speaker 1: go beyond the more modest concessions that they've been signaling,
Speaker 1: But I don't know that the US has decided on
Speaker 1: what would constitute an acceptable offer. Can I just say
Speaker 1: before we go on that I am very relieved, And
Speaker 1: then I'm actually excited that you say that if the
Speaker 1: current measures went into effect, we could call it a
Speaker 1: trade war, because I was worried that you're gonna say, oh,
Speaker 1: everyone needs to be less hysterical about this. So it's
Speaker 1: nice to talk to an expert who has given us
Speaker 1: the green light to use the exciting language. So I
Speaker 1: just want to say thank you. Right, And a trade
Speaker 1: war is not a shooting war. A trade war is
Speaker 1: a period of economic hostility. Tell us, you mentioned the
Speaker 1: difference between the standard trade remedies, the anti dumping stuff,
Speaker 1: stuff like that in a threal one case. Just walk
Speaker 1: us through the differences between those two things. So you know,
Speaker 1: a standard emmedy, a safeguard, or a dumping comes. When
Speaker 1: a sort of specific product is flowing into, say the US,
Speaker 1: the industry petitions for relief either on the grounds that
Speaker 1: there's been a surgeon imports, which is a safeguard, or
Speaker 1: on the grounds that the other country is dumping or
Speaker 1: unfairly subsidizing its products, in which case there would be
Speaker 1: a dumping duty or countervailing duty. All these things go
Speaker 1: through a standardized process with lags. At the end of
Speaker 1: the day, the President has to authorize the tariffs in
Speaker 1: the case of a safeguard, but they are approved within
Speaker 1: the rules remedies that are available, and after the fact
Speaker 1: people will litigate whether the dumping criteria or used correctly
Speaker 1: and whether there really was a subsidy. So they maybe
Speaker 1: be cases in the w t O, but these are
Speaker 1: sort of the within the system safety valves relief measures.
Speaker 1: A three oh one in this particular case, is aimed
Speaker 1: at practices which the U S tr argues imphurt the
Speaker 1: U S economy that fall outside the scope of China's
Speaker 1: w t O commitments, and because of that, the US
Speaker 1: is essentially unilaterally imposing tariffs and other sanctions on China
Speaker 1: in order to change policies where there where there isn't
Speaker 1: really an argument that China's already agreed in the w
Speaker 1: t O to get rid of them. So do the
Speaker 1: three oh one measures? Do those have a different impact
Speaker 1: than the sort of more standard anti dumping measures would Well,
Speaker 1: in a dumping case, you're going to target the sector
Speaker 1: where the dumping takes place. In a three oh one,
Speaker 1: you're essentially choosing the sectors where you want to impose
Speaker 1: tariffs to impose pain in order to try to convince
Speaker 1: your trading partner to remove measures that you judge to
Speaker 1: be unfair. So it's a US determination that China's actions
Speaker 1: constitute something that impedes American exports and impedes American firms,
Speaker 1: And as a result of that unilateral judgment, the US
Speaker 1: will decide on its own what sectors at targets. So
Speaker 1: there's a lot more freedom and flexibility to broaden out
Speaker 1: the set of sectors that are covered by the tariffs
Speaker 1: when you're not responding to a specific concern of a
Speaker 1: specific industry that is seeking relief from a flood of imports. Now,
Speaker 1: President Trump seems very fixated on the bilateral trade deficit
Speaker 1: with China. He's always growing around that number, I think
Speaker 1: billion or whatever it is, and he just wants to
Speaker 1: see it lowered. And typically the response from economists is
Speaker 1: that looking at the trade deficit in isolation like that
Speaker 1: is not a particularly productive way to think about our
Speaker 1: trading relationship with any given country, or even the idea
Speaker 1: that a trade deficit with all countries is per se
Speaker 1: a bad thing, most economists argue, is not a particularly
Speaker 1: useful way to think about the scoreboard. So can you,
Speaker 1: for the average listener, sort of explain why that is
Speaker 1: generally not viewed as a useful way to think about
Speaker 1: the relationship. So think about the following set of trading patterns.
Speaker 1: Say the US is exporting a lot of construction equipment
Speaker 1: to a third party, which is mining a lot of iron,
Speaker 1: which is shipping that iron to I guess a second party.
Speaker 1: I got my math a little wrong. That is taking
Speaker 1: iron and then selling consumer goods. It is quite possible
Speaker 1: that that three way trade would be entirely balanced. I
Speaker 1: think of it as the US selling construction equipment to Australia,
Speaker 1: Australia selling iron to China, China selling consumer goods to
Speaker 1: the United States could be a perfectly balanced trading relationship,
Speaker 1: but the US would be running a bilateral deficit with China.
Speaker 1: So there's there's no particular reason why trade should balance
Speaker 1: between any individual country pair, And when you look at
Speaker 1: simply the bilateral balance, that can be quite misleading. The
Speaker 1: global trade deficit is, I think a little bit different.
Speaker 1: The global trade deficit indicates that you're either receiving equity
Speaker 1: investment from the world or borrowing from the world. In
Speaker 1: the US case, we've been borrowing for from the world
Speaker 1: for a long time, and the trade deficit represents both
Speaker 1: you know, we're importing more than we export, but also
Speaker 1: that we are building up our external debt. And there's
Speaker 1: always a question about whether or not that build up
Speaker 1: of external debt is fueling unhealthy economic expansion, fueling a
Speaker 1: lot of investment, or whether it's some sense unhealthy that
Speaker 1: it reflects an excess of spending and excess of consumption,
Speaker 1: and that we are borrowing from our future wealth. And
Speaker 1: I would say the US trade deficit is right at
Speaker 1: the edge of being a problem. That's my personal view,
Speaker 1: So I don't I don't view that the any trade
Speaker 1: deficit is a problem, but I do think that trade
Speaker 1: deficits can be a problem. Okay, Well, as Joe mentioned,
Speaker 1: Donald Trump clearly has his own views about the desirability
Speaker 1: trade deficits. So let's say that all these various tariffs
Speaker 1: go through and we have an actual trade war on
Speaker 1: our hands. Walk us through the real world effects that
Speaker 1: we would likely see, you know, from day one, how
Speaker 1: does it actually play out? Well, before we jump to
Speaker 1: the implementation of the tariffs, I think it's important to
Speaker 1: recognize that there's a period of comment and the immediate
Speaker 1: next step will be essentially a review of the U
Speaker 1: s tariffs, where industries that are believe they're adversely affected
Speaker 1: will lobby U s DR to change the list, and
Speaker 1: then after that there's a period of time for negotiations.
Speaker 1: Tariffs don't have to be introduced at the end of
Speaker 1: the common period, so we're not necessarily going to implement
Speaker 1: tariffs tomorrow. It could come with a significant lag, but
Speaker 1: let's assume there isn't an agreement that the tariff list
Speaker 1: stays pretty much as it is. The US was put
Speaker 1: tariffs on fifty billion roughly of Chinese goods. Some are
Speaker 1: more final stage consumer goods like TVs. Some are more
Speaker 1: intermediate inputs into production various categories of parts, parts for
Speaker 1: air conditioners, parts for various mechanical devices. In some cases
Speaker 1: there may not be any possibility to substitute, in which
Speaker 1: case American consumers will see an increase in price. In
Speaker 1: the US government was see an increase in revenue. Fifty
Speaker 1: is ballpark a quarter of a point of US GDP,
Speaker 1: so the tariff would be, if if fully paid, would
Speaker 1: be in the order of magnitude of a little over
Speaker 1: you know, five basis points of GDP, so you know,
Speaker 1: meaningful but not giant. In some product categories, though there
Speaker 1: may be opportunities to substitute, be it US production, or
Speaker 1: be at production of parts from Europe or Mexico or
Speaker 1: elsewhere in Asia, in which case you would see trade
Speaker 1: diverted away from China toward the untariffed parts of the
Speaker 1: global economy. Then the economy would react to the Chinese tariffs,
Speaker 1: and there I think it really depends on the sectors
Speaker 1: China went after the Big Three, or threatened to go
Speaker 1: after the Big three. US export categories to China aircraft, soybeans,
Speaker 1: and autos. With air craft, I think they were pretty
Speaker 1: they may have been playing it a little cute. They
Speaker 1: clearly have exempted wide bodies from the tariffs. They may
Speaker 1: have exempted most of the new seven thirty seven line.
Speaker 1: There's a debate about whether the seven seven eight Max
Speaker 1: has a weight that would exclude it from the tariff
Speaker 1: or not. They clearly have tariff used seven seven for
Speaker 1: what it's worth and golf streams, So I think you
Speaker 1: can argue that that it was designed to avoid immediately
Speaker 1: whacking Chinese airlines that have large orders on the books
Speaker 1: for Boeing, And I think what probably matters more going
Speaker 1: forward is will those airlines continue to buy Bowings or
Speaker 1: will they tilt towards air Bus. There's an interesting side
Speaker 1: note there, which is that China has always tried to
Speaker 1: play Bowing against Airbus, both to get about our price,
Speaker 1: of course, but also to induce both companies to shift
Speaker 1: more production to China, to do offsets, to buy more parts,
Speaker 1: and to help build up China's own aviation industry. If
Speaker 1: there isn't a threat of buying Boing, China loses a
Speaker 1: little bit of leverage in future negotiations with Airbus. So
Speaker 1: I think China is in some ways constrained in the
Speaker 1: aircraft sector. There's another important note though, which is China
Speaker 1: has its own narrow body aircraft to see nine one nine,
Speaker 1: and undoubtedly Chinese airlines are going to be buying one
Speaker 1: nine rather than seven thirty seven s. Or does China
Speaker 1: have ambitions to have a homegrown aviation company that is
Speaker 1: on the same scale and capabilities as a Boeing or
Speaker 1: an air Bus and is that plausible in the medium
Speaker 1: term future In your view, China unambiguously has that ambition.
Speaker 1: China has been working over time to build up in
Speaker 1: domestic aviations. Whether or not they will succeed at building
Speaker 1: planes that can compete with the latest generation from Airbus
Speaker 1: and Boeing, I think, remains an open question. But I
Speaker 1: I suspect that China won't give up. It's too important,
Speaker 1: it's too central to the China Plan and to China's
Speaker 1: own vision of what it wants to become. This China Plan,
Speaker 1: I don't think, is something that a lot of Americans
Speaker 1: are particularly familiar with. The ambitions the country has to
Speaker 1: sort of develop its own homegrown champions in all these
Speaker 1: different spaces like medical technology and aviation and semi conductors.
Speaker 1: Can you just explain to US a little bit about
Speaker 1: what this plan is and how they've gone about implementing
Speaker 1: it so far. So China Dinner fies a set of
Speaker 1: advanced manufacturing technology sectors, generally you know, medical equipment, semiconductors, aviation,
Speaker 1: next generation vehicles, and it sets out targets for Chinese
Speaker 1: production and Chinese market share, Chinese firm and Chinese production
Speaker 1: inside China to meet the Chinese market. A lot of
Speaker 1: these sectors are sort of cutting edge sectors where China
Speaker 1: now is a large buyer of goods made in the
Speaker 1: rest of the world, So there certainly is a component
Speaker 1: in the targets of import substitution. These are products that
Speaker 1: China now imports, and China has articulated a goal of
Speaker 1: being able to meet its own demand with its own
Speaker 1: production and to do so with technology developed and owned
Speaker 1: by China. So there is a very legitimate trade complaint
Speaker 1: around these industrial real policy goals. I think the tools
Speaker 1: that China uses vary from sector to sector. So how
Speaker 1: much do the U S tariffs actually play into China's
Speaker 1: long term ambitions of import substitution, Because you know, if
Speaker 1: if the US slaps teariffs some things like aerospace equipment
Speaker 1: and China has ambitions to build up its own industry
Speaker 1: in the space, then that seems almost like a benefit
Speaker 1: to them. Well, I'm not sure that's the case. China
Speaker 1: and say aerospace needs to develop its capability, and as
Speaker 1: I mentioned earlier, in order to develop its capability, China
Speaker 1: likes to play Bowing against Airbus. It got Airbus to
Speaker 1: build a three twenty line in China. And if the
Speaker 1: US is saying more or less, if Boeing subcontracts from China,
Speaker 1: it faces a tariff on anything at imports that would
Speaker 1: discourage Bowing at the margin from shifting production to China.
Speaker 1: Are shifting some of is contracting towards Chinese sub subcomponent manufacturing.
Speaker 1: And if China is not going to buy any Boeings
Speaker 1: going forward because of the Chinese retaliation, airbuses incentives change.
Speaker 1: They don't have to produce aircraft in China to celt
Speaker 1: to China. They're the only supplier. There's not that competition.
Speaker 1: So I think that's the sense in which China is
Speaker 1: in some ways still constrained by the fact that in
Speaker 1: some of these sectors it is not yet at the
Speaker 1: cutting edge of technology and it still needs to play
Speaker 1: European and US firms off against each other to help
Speaker 1: it progress up the technological ladder. One of the things
Speaker 1: you hear, and I think the Trump administration has frustrations
Speaker 1: about it is the degree to which China demand some
Speaker 1: sort of transfer of technological know how from these companies
Speaker 1: that want to participate in the Chinese market. So I
Speaker 1: don't know exactly what it does with aviation this idea
Speaker 1: that these big companies, if they want to access to
Speaker 1: the Chinese market, have to have some mechanism to give
Speaker 1: their technology to the local players. Can you walk us
Speaker 1: through what exactly China does with that and how much
Speaker 1: that deviates from sort of typical international norms. So this
Speaker 1: is uh the substance of the three oh one complaint.
Speaker 1: This is what the US is saying that China is
Speaker 1: doing that warrants the unilateral u S tariffs. China, under
Speaker 1: its w t O obligations cannot condition approval of investment
Speaker 1: on technology transfer as a matter of policy. So that
Speaker 1: is one of China's w t O obligations. But there
Speaker 1: are an awful lot of things that China still can do.
Speaker 1: So China is not required on the w t O
Speaker 1: to allow investment into any sector that's a choice that
Speaker 1: China makes. In many cases, China can require does require
Speaker 1: that any US firm wanting to produce in China set
Speaker 1: up a joint venture, and if the joint venture partner
Speaker 1: and most of the plausible joint venture partners will be
Speaker 1: stayed owned firms, given the nature of China's economy, and
Speaker 1: if the joint venture partner says that as a commercial matter,
Speaker 1: we will only enter into this joint venture if you
Speaker 1: agree to transfer technology to our subsidiary where we will
Speaker 1: have control, then you have to kind of transfer the technology.
Speaker 1: It's part of the conditions of the deal. But it
Speaker 1: is not a matter of government policy. Is a matter
Speaker 1: of commercial negotiations between two companies. Similarly, saying the electric
Speaker 1: vehicle space, if you want to qualify for the subsidies
Speaker 1: for new energy vehicles, well you're much better off if
Speaker 1: you have a Chinese partner and if the technology has
Speaker 1: been moved to China. So you know, there's a there's
Speaker 1: a lot of sources of pressure given the nature of
Speaker 1: China's economy, that don't come in the form of formally
Speaker 1: conditioning as a matter of government policy approval of investment
Speaker 1: on technology transfer. But have nonetheless created de facto requirements
Speaker 1: that if you want to supply the Chinese market, it's
Speaker 1: pretty hard to do that without producing in China. And
Speaker 1: if you want to produce in China, you pretty much
Speaker 1: need a state firm as your joint venture partner, and
Speaker 1: that state firm can, as a matter of its own policy,
Speaker 1: so to speak, ask for tech transfer, because if it
Speaker 1: doesn't get that tech transfer, it will lose out because
Speaker 1: you know, the joint venture with the European company has
Speaker 1: agreed to do something a little bit more in China.
Speaker 1: So there's there's certainly are many pressure points, and I
Speaker 1: don't think very many people challenge the core truth of
Speaker 1: the three oh one complaint. I want to talk about
Speaker 1: something that comes up whenever we talk about the US
Speaker 1: China trade deficit, and that is the idea of China
Speaker 1: retaliating by basically boycotting the US is biggest export, which
Speaker 1: has to be US treasuries. This always always comes up
Speaker 1: the idea that China is going to retaliate in a
Speaker 1: trade war by selling off some of its vast treasury holdings.
Speaker 1: How realistic do you think that actually is? And I
Speaker 1: know there are strong opinions on either side I personally
Speaker 1: think I was one of the first to use the
Speaker 1: line that the US's biggest export was treasuries and agencies
Speaker 1: ten years ago, when the US is running a five
Speaker 1: percent of GDP trade deficits. It's been one of my
Speaker 1: favorite lines for a long time. I've definitely borrowed it
Speaker 1: since then, so thank you. I'm not sure I can
Speaker 1: claim original credit, but I like the phrase. Let's stipulate
Speaker 1: a couple of things. Let's stipulate that Chinese holdings of
Speaker 1: treasuries are typically a function of China's reserve holdings. Private
Speaker 1: Chinese investors tend not to buy treasuries. They tend to
Speaker 1: put money in bank accounts are in real estate, so
Speaker 1: the vast bulk of the Chinese holdings of treasuries are
Speaker 1: a reflection of Chinese reserves. Second point to stipulate is
Speaker 1: that over time, the amount of treasuries that China holds
Speaker 1: has tended to move in line with the evolution of
Speaker 1: China's reserves, been a pretty constant share of China's portfolio
Speaker 1: over time. And third point is that China's reserves are
Speaker 1: right now not growing very fast, so you would not
Speaker 1: normally expect China to be a big buyer right now.
Speaker 1: In fact, if you look at kind of the global
Speaker 1: flow of funds, China's current account surplus, so the aggregate
Speaker 1: amount that it is lending to the world is smaller
Speaker 1: than that of Japan, certainly smaller than that of the
Speaker 1: Euro Area, and well below the combined current account surplus
Speaker 1: of the Asian newly industrialized economies Korea, Taiwan, Singapore, and
Speaker 1: you know, just for the sake of argument and not
Speaker 1: I would throw in Thailand into that category. So much
Speaker 1: or even the majority of the financing that the US
Speaker 1: is getting to support its trade deficit and current account
Speaker 1: deficit is not right now coming from China. So I
Speaker 1: think those are kind of important background pieces. This is
Speaker 1: not two thousand seven, when China's current account surplus was
Speaker 1: the biggest in the world, and when China was adding
Speaker 1: six billion to its reserves every year and two thirds
Speaker 1: of that ballpark was flowing into US bonds. China, though,
Speaker 1: of course, does have a large outstanding stock of treasuries,
Speaker 1: biggest in the world, probably a little bit bigger than
Speaker 1: it is then shows up in the data the Treasury releases,
Speaker 1: and China, if it wanted too, could move its portfolio around.
Speaker 1: We know that during the crisis, China shifted its portfolio.
Speaker 1: It's sold agencies and it bought treacheries. And by selling agencies,
Speaker 1: it put pressure on the agency market, so China can
Speaker 1: affect spreads in them. Just for the terminology the agency market.
Speaker 1: There's like Fannie and Freddie, the housing agencies issued a
Speaker 1: lot of no I just you know, just for the
Speaker 1: sake of people. The terminology that went into funding a
Speaker 1: lot of American homes and stuff. That's right, and that
Speaker 1: was you know, before the crisis, everyone spoke of China's
Speaker 1: being a big buyer of treasuries, when actually before the crisis,
Speaker 1: China was the biggest buyer of agencies. It's it's like
Speaker 1: one of those little details that is actually quite important
Speaker 1: that tends to get glossed over. But during the crisis,
Speaker 1: China shifted its portfolio out of agencies and into treasuries.
Speaker 1: That undoubtedly caused problems in the agency market. But remember
Speaker 1: that in Quee one, the started buying agencies and that
Speaker 1: stabilize the market. I think there's a little bit of
Speaker 1: a lesson there. If China sells treasuries a it has
Speaker 1: to put its money somewhere. It may sell long term
Speaker 1: treasuries and buy short term bills, which would raise long
Speaker 1: term rates relative to short term rates. It may sell
Speaker 1: treasuries and then sell dollars and move into euros or
Speaker 1: yet that would weaken the dollar, and I think it
Speaker 1: would cost more problems for Japan and Europe, which would
Speaker 1: see their currencies appreciate and have difficulty exporting. Or it
Speaker 1: could just move within the US market moved to the
Speaker 1: short end of the curve, which is probably the most
Speaker 1: plausible option. If it did that, I think it would
Speaker 1: have a short term impact on the market, but I
Speaker 1: don't think you should think of it as a one
Speaker 1: round game. If it's impacting the market in a way
Speaker 1: that adversely impacts the U S economy, the Fed should
Speaker 1: logically respond, either by adjusting the pace at which it
Speaker 1: tightens or by adjusting the pace of the balance sheet
Speaker 1: roll off. I think at the end of the day,
Speaker 1: there should be no question that the Federal Reserve has
Speaker 1: a much bigger impact on the U. S. Treasury market
Speaker 1: than China. So, just to sort of some up what
Speaker 1: you're saying, a lot of interesting points there is that
Speaker 1: this sort of naive way you hear people talk about
Speaker 1: it is we borrow a lot from China, one day
Speaker 1: they might not want to lend to us, and then
Speaker 1: we're in trouble. Whereas the more subtle point is, yes,
Speaker 1: China could change its policies and change the market, but
Speaker 1: the response would be not as clear cut, it's not
Speaker 1: as binary, and the moves into some ways could harm
Speaker 1: them or harm others. It's just it's not as simple
Speaker 1: as say, your bank no longer willing to extend your credit.
Speaker 1: That's right. If you work through all the the reactions
Speaker 1: and the counter reactions, what eventually happens is the FED
Speaker 1: is up easy and the dollar ends up weakening, which
Speaker 1: isn't actually necessarily a bad thing for the U. S. Economy.
Speaker 1: It's a bad thing, much worse thing in some ways
Speaker 1: for those who have lent money to the US and
Speaker 1: dollars and so it's uh. It is hard to imagine
Speaker 1: how China could cause a a funding crisis for the U. S. Treasury. Actually,
Speaker 1: China's greatest leverage comes, at least in my view, when
Speaker 1: it is buying things other than treasuries, when it was
Speaker 1: buying agencies, or if it's buying corporate bonds, it's buying
Speaker 1: things that in the normal course of monetary policy, the
Speaker 1: FED doesn't typically buy, and so it is much easier
Speaker 1: for China to influence credit spreads or the agency treasury spread,
Speaker 1: and a little bit more difficult for the FED to respond,
Speaker 1: although obviously we did respond by extending our purchases of
Speaker 1: assets to agencies. So I think there are subtle ways
Speaker 1: that China can put pressure on the US market, but
Speaker 1: that at the end of the day, this isn't China's
Speaker 1: most powerful source of leverage. So once a trade war
Speaker 1: is well and truly underway, what stops it? Like? What
Speaker 1: is the resolution? I guess? My other question is how
Speaker 1: how much of our existing tariffs stem from trade wars
Speaker 1: that started, you know, ten, twenty, maybe even fifty years ago.
Speaker 1: How long do these effects actually linger? There are interesting
Speaker 1: quirks in global trade that reflect the legacy of past
Speaker 1: trade fights. So the very high US tariff on light
Speaker 1: trucks apparently stems from a fight in the nineteen sixties.
Speaker 1: So we have a two point five percent tariff on cars,
Speaker 1: but a tariff on light trucks, and that that's now
Speaker 1: enshrined in our w t O commitments. And da da
Speaker 1: da dada back a long, long time ago, the Europeans
Speaker 1: agreed to as an concession to the US to get
Speaker 1: rid of tariffs on soybeans but not grain, which is
Speaker 1: why soybeans sort of emerged as the globally traded animal
Speaker 1: food and became a much more traded commodity than say corn,
Speaker 1: given that both can be used as a source of
Speaker 1: animal feed. So you know, there certainly are permanent scars
Speaker 1: in the trading system that reflect past decisions. I think
Speaker 1: there are three ways the current three oh one tariff
Speaker 1: threat could play out. One is, after the list is refined,
Speaker 1: there's a period of negotiation in the US and China
Speaker 1: come to a deal that either permanently removes the threat
Speaker 1: of tariffs or leads the Trump administration to, let's say,
Speaker 1: put the tariffs on hold on ice to allow more
Speaker 1: time for negotiation. We will withdraw this current petition and
Speaker 1: we will refile it if necessary. But we don't have
Speaker 1: full agreement, but we have enough progress us to allow
Speaker 1: us to have confidence that we will get to agreement
Speaker 1: with more time. That's possibility. One possibility, too, is that
Speaker 1: the US imposes its tariffs, China imposes its tariffs, and
Speaker 1: more or less that's the end of it. There are
Speaker 1: tariffs on soybeans, there are tariffs on US auto exports.
Speaker 1: Interestingly enough, the biggest at least in my view, exporters
Speaker 1: of cars from the US to China are the two
Speaker 1: German transplants, so the BMW factory in South Carolina and
Speaker 1: the Mercedes factory in Alabama. So the global economy is integrated.
Speaker 1: And then it sort of stops there that there's no
Speaker 1: further escalation, and then there will be ongoing negotiations over
Speaker 1: the conditions that would allow both sides to step back down,
Speaker 1: but there wouldn't be a threat of further measures. And
Speaker 1: China of course would challenge the U S tariffs of
Speaker 1: the w t O because the RIO one's legality under
Speaker 1: the w t O is very unclear. The US is
Speaker 1: violating it's w t O commitments by raising tariffs against
Speaker 1: Chinese goods, at least in the Chinese few. Third option
Speaker 1: is that it continues to escalate and that the US
Speaker 1: comes up with an additional a round of tariffs, and
Speaker 1: then China responds with another round of tariffs, and so
Speaker 1: we go from fifty billion to a bigger number. And
Speaker 1: there are other ways that either China or the U
Speaker 1: S could escalate, so China could retaliate against US firms
Speaker 1: operating inside China, the US could take steps that adversely
Speaker 1: affect Chinese interests in the U S. Alright, so then
Speaker 1: we gotta put you on the spot here of the scenarios,
Speaker 1: what is your guests and what is the trading relationship
Speaker 1: between the US and China look like a year from now.
Speaker 1: If I had to guess right now, I would say
Speaker 1: we both implement the tariffs and then it stops. That
Speaker 1: seems like a plausible equilibrium. I think it will be
Speaker 1: hard for the Trump administration to get enough from China
Speaker 1: to convince the President, who seems personally animated by this,
Speaker 1: to step back. I also don't see any other major
Speaker 1: legal process underway that where the U S would initiate
Speaker 1: another type of complaint that would extend tariffs to new sectors.
Speaker 1: The highest probability is that we new round one of
Speaker 1: a trade war, but then we don't. There isn't further escalation,
Speaker 1: but of course that has knock on impacts throughout the
Speaker 1: global economy. Red said Sir Stephen A. Tannembaum's Senior Fellow
Speaker 1: for International Economics at the Council Foreign Relations. That was awesome.
Speaker 1: I learned a lot from that discussion, Thank you very much, Pleasure, Joe.
Speaker 1: I enjoyed that conversation so much, not least because I
Speaker 1: continued to learn more about soybeans with every passing day
Speaker 1: this month. Yeah, I definitely did not predict that the
Speaker 1: big commodity at the heart of the biggest economic story
Speaker 1: this month would be soybeans. But it's kind of a
Speaker 1: pleasant surprise, and I guess we should have seen it coming, because,
Speaker 1: as Brad mentioned, there's the big three aviation autos and soybeans,
Speaker 1: So if we were a little more knowledgeable, we could
Speaker 1: have seen that coming. Nonetheless, now you have to learn
Speaker 1: something new all the time. Yeah. The other thing I
Speaker 1: liked about that conversation obviously a really really nuanced a
Speaker 1: series of thoughts from Brad, But I also like that
Speaker 1: we have to go ahead to use the term trade
Speaker 1: war essentially, or we're one round of escalation away from it. Yeah.
Speaker 1: I agree, it's right if the if the tariffs actually
Speaker 1: go into places planned and we have the green light
Speaker 1: to use that colorful language. I'm glad that you brought
Speaker 1: up the treasury issue is and the theoretical threat of
Speaker 1: China not buying our treasuries, because when you think about
Speaker 1: various ways that if things deteriorated between the two countries,
Speaker 1: and deterioration could transmit themselves to the market, you always
Speaker 1: hear about the treasury angle, and so I like that
Speaker 1: it's not that there's nothing there, but that it's just
Speaker 1: far more complex and subtle than perhaps most of us
Speaker 1: think of it. Yeah, I suppose in retrospect it's not
Speaker 1: a major surprise that talk about China's selling off it's
Speaker 1: US bond holdings tends to descend into a lot of
Speaker 1: rhetoric on either side rather than having a realistic conversation
Speaker 1: about it. But there we are. But Brad definitely walked
Speaker 1: us through all the details of that, which was fantastic. Um.
Speaker 1: The other interesting thing, Joe and I know you've been
Speaker 1: talking about it, but the market reaction to the trade
Speaker 1: wars that we've been seeing so far. Yeah, I love
Speaker 1: the way in which people's perception of how the trade
Speaker 1: war is going or the trade tensions. We're not there yet,
Speaker 1: how the trade tensions are going seemed to invariably be
Speaker 1: dictated by the market. So on days when markets are green,
Speaker 1: it's like, oh, people are optimistic that they're gonna be talks,
Speaker 1: and some of the rhetoric is easing, and then that
Speaker 1: afternoon stocks turned red and suddenly everyone is afraid of
Speaker 1: imminent trade warriors. It's a good reminder then our business
Speaker 1: price always leads to narrative. We like to pretend that
Speaker 1: we construct these stories and then the market digest them
Speaker 1: and then reprices. But I'm pretty sure it's the exact opposite.
Speaker 1: The market does its thing and then we construct stories
Speaker 1: expost facto to explain it. And it would be nice
Speaker 1: to get away from that, but I'm not sure that's
Speaker 1: gonna happen anytime soon. Good thing we don't host a
Speaker 1: narrative markets podcast or anything like that. We would never
Speaker 1: do that, and we would never like do articles about
Speaker 1: these subjects day after day, trying to explain market movies.
Speaker 1: I'm glad we never do anything like that. Okay, I
Speaker 1: think we better stop here. This has been another edition
Speaker 1: of the Odd Lots Podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway, and I'm Joe
Speaker 1: wi Isn't though. You could follow me on Twitter at
Speaker 1: the Stalwart, and you could follow Brad on Twitter at
Speaker 1: Brad Setzer with an underscore between Brad and Setzer, and
Speaker 1: you could follow our producer tofur Foreheads at Foreheads t
Speaker 1: and follow the bloomberg head of podcast, Francesco Levie at
Speaker 1: Francesco Today. Thanks for listening,