WEBVTT - This Is What A Trade War With China Would Actually Look Like 0:00:08.200 --> 0:00:11.559 Hello, and welcome to another episode of the Odd Locked Podcast. 0:00:11.640 --> 0:00:16.240 I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, there's a 0:00:16.239 --> 0:00:19.759 new story that's made our job is very exciting again. Uh, well, 0:00:19.920 --> 0:00:21.759 there's any number of things at the moment, but I 0:00:21.840 --> 0:00:24.360 think I know what you're talking about. It's trade, right, Yeah, 0:00:24.400 --> 0:00:27.440 But you're actually right that we're in this moment for 0:00:27.680 --> 0:00:30.040 markets where there just seems to be a lot going 0:00:30.160 --> 0:00:33.959 on again, lots of different cross winds and narratives and themes, 0:00:34.280 --> 0:00:39.160 whether it's anxiety about rising inflation, concern about the FED, 0:00:39.840 --> 0:00:43.560 the changing leadership in the market with regards to text docs, 0:00:43.960 --> 0:00:46.879 and now, as you say, trade has really come to 0:00:46.960 --> 0:00:49.120 the fore as a major thing that people are trying 0:00:49.159 --> 0:00:51.440 to wrap their heads around. Right. So, what we've seen 0:00:51.800 --> 0:00:54.720 just over the past couple of weeks is the Trump 0:00:54.720 --> 0:00:59.640 administration unveiled a big set of tariffs on goods imported 0:00:59.680 --> 0:01:04.679 from China, and then China retaliated. They announced I think 0:01:04.680 --> 0:01:07.959 it was tariffs on about fifty billion dollars worth of 0:01:08.040 --> 0:01:13.840 goods including aircraft parts, soybeans, and cars, which are some 0:01:13.880 --> 0:01:16.920 big ones for the market and for the economy. Right 0:01:17.000 --> 0:01:21.800 because a few days earlier, China had announced some retaliatory 0:01:21.840 --> 0:01:24.720 tariff measures, but they were on pretty minor stuff like 0:01:25.640 --> 0:01:28.160 jensing exports, which I doubt the U S exports a 0:01:28.200 --> 0:01:31.720 lot of jensing too China, or macadamia nuts and stuff 0:01:31.760 --> 0:01:34.760 like that, or wine earlier. Stuff that's kind of a 0:01:34.800 --> 0:01:37.920 little bit more marginal. But when they announced the tariffs 0:01:38.000 --> 0:01:41.319 on soybeans, given that that's a major crop in the US, 0:01:41.400 --> 0:01:45.000 and given how much China consumes of soybeans, then people 0:01:45.040 --> 0:01:46.720 are like, WHOA, this is maybe a little bit more 0:01:46.720 --> 0:01:50.080 serious than we expected. Right, this is the week that 0:01:50.160 --> 0:01:53.960 everyone decided that soybeans were actually very very important. Um, 0:01:54.040 --> 0:01:57.200 we are sort of dancing around one issue, Joe, that 0:01:57.280 --> 0:02:00.880 we've been speaking a lot about internally, and that what 0:02:00.960 --> 0:02:04.680 do we call this? Are we calling it a trade war? Right? 0:02:04.880 --> 0:02:08.160 We've had this discussion internally because I kind of get 0:02:08.200 --> 0:02:11.280 the impression that trade war is one of these things 0:02:11.320 --> 0:02:14.560 that doesn't have a very crisp definition. It's kind of 0:02:14.560 --> 0:02:16.520 like you know it when you see it. So some 0:02:16.520 --> 0:02:19.920 people are using that term, others aren't. But that's obviously 0:02:19.919 --> 0:02:21.880 something we have to figure out. And are we just 0:02:21.919 --> 0:02:25.440 seeing sort of a standard early stage negotiation or is 0:02:25.480 --> 0:02:28.280 this a serious thing? And that's sort of what we're 0:02:28.280 --> 0:02:30.960 all trying to uh wrap our heads around, right, And 0:02:31.000 --> 0:02:33.080 some people are being really cute about it and calling 0:02:33.240 --> 0:02:38.160 a trade skirmish or a trade standoff, or a trade tiff, 0:02:38.760 --> 0:02:43.200 any number of trade war. All right, So for the 0:02:43.240 --> 0:02:45.840 purposes of this podcast, can we just agree that we're 0:02:45.840 --> 0:02:47.840 going to call it various things and no one can 0:02:47.840 --> 0:02:50.160 get mad at us. That sounds good. Well, I think 0:02:50.200 --> 0:02:52.600 we actually have the perfect guest to tell us exactly 0:02:52.639 --> 0:02:55.480 what we're seeing right now. We're going to be speaking 0:02:55.480 --> 0:02:58.720 with Brad Setser. He's the stephen A. Tannenbaum Senior Fellow 0:02:58.760 --> 0:03:03.040 for International Economics. He's written for years about trade and 0:03:03.080 --> 0:03:06.000 other macroeconomic issues. He blogs. He used to be at 0:03:06.000 --> 0:03:09.840 the Treasury. Anyone who follows this space has has surely 0:03:09.919 --> 0:03:12.520 seen his work. He's here with us now, Brad. Thank 0:03:12.560 --> 0:03:16.120 you very much for joining us, my pleasure. So, Brad, uh, 0:03:16.280 --> 0:03:18.960 what is a trade war? I think a trade war 0:03:19.440 --> 0:03:25.040 is a series of measures. I guess a significant set 0:03:25.120 --> 0:03:28.440 of trade restrictive measures by one country that prompt an 0:03:28.480 --> 0:03:32.560 equally significant response from another country. And you could call 0:03:32.639 --> 0:03:34.240 that a trade war. You could say you need another 0:03:34.320 --> 0:03:37.360 round of escalation before you have a trade war. I 0:03:37.360 --> 0:03:41.800 wouldn't use the term trade war if you're playing in 0:03:41.880 --> 0:03:45.040 what you might call the standard trade remedy space, a 0:03:45.120 --> 0:03:49.120 standard dumping case, a standard safeguards case. But the US 0:03:49.200 --> 0:03:51.200 is doing a three oh one case, which is a 0:03:51.200 --> 0:03:54.240 tool that hasn't been used for a long time, and 0:03:54.680 --> 0:03:58.360 fifty billion is it's not enormous relative to the size 0:03:58.360 --> 0:04:00.560 of our economy, but for a trade measure or it's 0:04:00.600 --> 0:04:04.200 quite large. So if we proceed to the stage where 0:04:04.200 --> 0:04:07.160 we actually implement the tariffs, which we haven't done, and 0:04:07.200 --> 0:04:11.360 if China proceeds to implement the tariffs in response, I 0:04:11.400 --> 0:04:14.560 think for all intents and purposes, that would meet a 0:04:14.600 --> 0:04:17.599 reasonable standard for a trade war. So we want to 0:04:17.640 --> 0:04:22.000 focus on what actually happens to the international economy when 0:04:22.120 --> 0:04:25.200 such a trade war is underway. But before we do, 0:04:25.839 --> 0:04:29.520 this is a big question that's currently hanging over markets 0:04:29.560 --> 0:04:33.120 and people who are watching this entire spat unfold. What 0:04:33.240 --> 0:04:35.960 are the prospects, in your opinion, that we get some 0:04:36.000 --> 0:04:39.880 sort of compromise before the tariffs are actually enacted. I'm 0:04:39.920 --> 0:04:42.680 having a hard time getting a clear read on that 0:04:42.720 --> 0:04:45.920 particular issue, in large part because I don't quite know 0:04:46.440 --> 0:04:50.560 what the Trump administration views as an acceptable compromise. There's 0:04:50.600 --> 0:04:53.440 been a lot of criticism that the Trump administration hasn't 0:04:53.440 --> 0:04:58.360 really articulated what trade peace would look like, what set 0:04:58.400 --> 0:05:02.120 of concessions would be enough. I think the Chinese are 0:05:02.120 --> 0:05:07.440 willing to offer some modest concessions, and maybe they will 0:05:07.600 --> 0:05:11.440 go beyond the more modest concessions that they've been signaling, 0:05:12.000 --> 0:05:15.719 But I don't know that the US has decided on 0:05:15.760 --> 0:05:19.360 what would constitute an acceptable offer. Can I just say 0:05:19.480 --> 0:05:22.279 before we go on that I am very relieved, And 0:05:22.320 --> 0:05:25.000 then I'm actually excited that you say that if the 0:05:25.080 --> 0:05:27.520 current measures went into effect, we could call it a 0:05:27.520 --> 0:05:29.840 trade war, because I was worried that you're gonna say, oh, 0:05:29.880 --> 0:05:32.440 everyone needs to be less hysterical about this. So it's 0:05:32.560 --> 0:05:35.720 nice to talk to an expert who has given us 0:05:35.800 --> 0:05:38.080 the green light to use the exciting language. So I 0:05:38.080 --> 0:05:40.280 just want to say thank you. Right, And a trade 0:05:40.279 --> 0:05:42.800 war is not a shooting war. A trade war is 0:05:43.640 --> 0:05:48.000 a period of economic hostility. Tell us, you mentioned the 0:05:48.040 --> 0:05:53.279 difference between the standard trade remedies, the anti dumping stuff, 0:05:53.279 --> 0:05:56.520 stuff like that in a threal one case. Just walk 0:05:56.600 --> 0:05:59.120 us through the differences between those two things. So you know, 0:05:59.160 --> 0:06:03.000 a standard emmedy, a safeguard, or a dumping comes. When 0:06:03.080 --> 0:06:07.400 a sort of specific product is flowing into, say the US, 0:06:08.000 --> 0:06:12.039 the industry petitions for relief either on the grounds that 0:06:12.040 --> 0:06:15.240 there's been a surgeon imports, which is a safeguard, or 0:06:15.279 --> 0:06:18.000 on the grounds that the other country is dumping or 0:06:18.080 --> 0:06:22.120 unfairly subsidizing its products, in which case there would be 0:06:22.360 --> 0:06:25.760 a dumping duty or countervailing duty. All these things go 0:06:25.880 --> 0:06:30.920 through a standardized process with lags. At the end of 0:06:30.960 --> 0:06:33.640 the day, the President has to authorize the tariffs in 0:06:33.640 --> 0:06:38.440 the case of a safeguard, but they are approved within 0:06:38.680 --> 0:06:43.760 the rules remedies that are available, and after the fact 0:06:43.839 --> 0:06:48.640 people will litigate whether the dumping criteria or used correctly 0:06:48.800 --> 0:06:51.159 and whether there really was a subsidy. So they maybe 0:06:51.160 --> 0:06:53.560 be cases in the w t O, but these are 0:06:53.560 --> 0:06:57.680 sort of the within the system safety valves relief measures. 0:06:58.200 --> 0:07:02.000 A three oh one in this particular case, is aimed 0:07:02.120 --> 0:07:07.440 at practices which the U S tr argues imphurt the 0:07:07.520 --> 0:07:10.760 U S economy that fall outside the scope of China's 0:07:10.880 --> 0:07:13.840 w t O commitments, and because of that, the US 0:07:13.960 --> 0:07:19.720 is essentially unilaterally imposing tariffs and other sanctions on China 0:07:20.200 --> 0:07:23.720 in order to change policies where there where there isn't 0:07:23.720 --> 0:07:27.360 really an argument that China's already agreed in the w 0:07:27.440 --> 0:07:29.720 t O to get rid of them. So do the 0:07:29.960 --> 0:07:33.760 three oh one measures? Do those have a different impact 0:07:34.400 --> 0:07:38.520 than the sort of more standard anti dumping measures would Well, 0:07:38.920 --> 0:07:41.600 in a dumping case, you're going to target the sector 0:07:41.640 --> 0:07:44.520 where the dumping takes place. In a three oh one, 0:07:44.880 --> 0:07:48.840 you're essentially choosing the sectors where you want to impose 0:07:48.920 --> 0:07:51.880 tariffs to impose pain in order to try to convince 0:07:51.920 --> 0:07:55.600 your trading partner to remove measures that you judge to 0:07:55.640 --> 0:08:00.480 be unfair. So it's a US determination that China's actions 0:08:00.920 --> 0:08:07.320 constitute something that impedes American exports and impedes American firms, 0:08:08.160 --> 0:08:10.840 And as a result of that unilateral judgment, the US 0:08:10.880 --> 0:08:14.520 will decide on its own what sectors at targets. So 0:08:14.520 --> 0:08:19.960 there's a lot more freedom and flexibility to broaden out 0:08:20.720 --> 0:08:23.000 the set of sectors that are covered by the tariffs 0:08:23.280 --> 0:08:26.560 when you're not responding to a specific concern of a 0:08:26.600 --> 0:08:31.320 specific industry that is seeking relief from a flood of imports. Now, 0:08:31.840 --> 0:08:36.600 President Trump seems very fixated on the bilateral trade deficit 0:08:37.080 --> 0:08:39.560 with China. He's always growing around that number, I think 0:08:40.240 --> 0:08:43.000 billion or whatever it is, and he just wants to 0:08:43.000 --> 0:08:48.120 see it lowered. And typically the response from economists is 0:08:48.160 --> 0:08:51.960 that looking at the trade deficit in isolation like that 0:08:52.480 --> 0:08:55.680 is not a particularly productive way to think about our 0:08:55.679 --> 0:08:59.840 trading relationship with any given country, or even the idea 0:09:00.160 --> 0:09:02.400 that a trade deficit with all countries is per se 0:09:02.400 --> 0:09:06.400 a bad thing, most economists argue, is not a particularly 0:09:06.440 --> 0:09:08.960 useful way to think about the scoreboard. So can you, 0:09:09.400 --> 0:09:13.880 for the average listener, sort of explain why that is 0:09:13.920 --> 0:09:16.520 generally not viewed as a useful way to think about 0:09:16.600 --> 0:09:23.400 the relationship. So think about the following set of trading patterns. 0:09:24.240 --> 0:09:27.600 Say the US is exporting a lot of construction equipment 0:09:28.040 --> 0:09:30.880 to a third party, which is mining a lot of iron, 0:09:31.320 --> 0:09:35.559 which is shipping that iron to I guess a second party. 0:09:35.600 --> 0:09:38.680 I got my math a little wrong. That is taking 0:09:38.720 --> 0:09:44.000 iron and then selling consumer goods. It is quite possible 0:09:44.040 --> 0:09:47.280 that that three way trade would be entirely balanced. I 0:09:47.320 --> 0:09:50.360 think of it as the US selling construction equipment to Australia, 0:09:50.720 --> 0:09:54.400 Australia selling iron to China, China selling consumer goods to 0:09:54.400 --> 0:09:58.559 the United States could be a perfectly balanced trading relationship, 0:09:58.880 --> 0:10:01.480 but the US would be running a bilateral deficit with China. 0:10:02.280 --> 0:10:07.320 So there's there's no particular reason why trade should balance 0:10:07.760 --> 0:10:11.839 between any individual country pair, And when you look at 0:10:11.880 --> 0:10:17.040 simply the bilateral balance, that can be quite misleading. The 0:10:17.240 --> 0:10:20.120 global trade deficit is, I think a little bit different. 0:10:20.679 --> 0:10:26.040 The global trade deficit indicates that you're either receiving equity 0:10:26.080 --> 0:10:28.640 investment from the world or borrowing from the world. In 0:10:28.679 --> 0:10:31.199 the US case, we've been borrowing for from the world 0:10:31.480 --> 0:10:36.240 for a long time, and the trade deficit represents both 0:10:36.520 --> 0:10:39.120 you know, we're importing more than we export, but also 0:10:39.200 --> 0:10:42.320 that we are building up our external debt. And there's 0:10:42.360 --> 0:10:45.520 always a question about whether or not that build up 0:10:45.559 --> 0:10:51.840 of external debt is fueling unhealthy economic expansion, fueling a 0:10:51.920 --> 0:10:57.560 lot of investment, or whether it's some sense unhealthy that 0:10:57.679 --> 0:11:01.280 it reflects an excess of spending and excess of consumption, 0:11:02.120 --> 0:11:05.000 and that we are borrowing from our future wealth. And 0:11:05.280 --> 0:11:07.640 I would say the US trade deficit is right at 0:11:07.679 --> 0:11:10.920 the edge of being a problem. That's my personal view, 0:11:11.000 --> 0:11:13.720 So I don't I don't view that the any trade 0:11:13.720 --> 0:11:16.200 deficit is a problem, but I do think that trade 0:11:16.240 --> 0:11:19.560 deficits can be a problem. Okay, Well, as Joe mentioned, 0:11:19.720 --> 0:11:24.240 Donald Trump clearly has his own views about the desirability 0:11:24.679 --> 0:11:28.679 trade deficits. So let's say that all these various tariffs 0:11:28.880 --> 0:11:32.480 go through and we have an actual trade war on 0:11:32.520 --> 0:11:37.040 our hands. Walk us through the real world effects that 0:11:37.080 --> 0:11:39.640 we would likely see, you know, from day one, how 0:11:39.640 --> 0:11:43.600 does it actually play out? Well, before we jump to 0:11:43.640 --> 0:11:46.080 the implementation of the tariffs, I think it's important to 0:11:46.880 --> 0:11:50.760 recognize that there's a period of comment and the immediate 0:11:51.800 --> 0:11:55.600 next step will be essentially a review of the U 0:11:55.679 --> 0:11:59.040 s tariffs, where industries that are believe they're adversely affected 0:11:59.559 --> 0:12:04.760 will lobby U s DR to change the list, and 0:12:04.800 --> 0:12:08.720 then after that there's a period of time for negotiations. 0:12:08.800 --> 0:12:10.880 Tariffs don't have to be introduced at the end of 0:12:10.880 --> 0:12:15.000 the common period, so we're not necessarily going to implement 0:12:15.040 --> 0:12:19.280 tariffs tomorrow. It could come with a significant lag, but 0:12:19.440 --> 0:12:23.280 let's assume there isn't an agreement that the tariff list 0:12:23.400 --> 0:12:27.760 stays pretty much as it is. The US was put 0:12:28.559 --> 0:12:31.880 tariffs on fifty billion roughly of Chinese goods. Some are 0:12:32.040 --> 0:12:35.920 more final stage consumer goods like TVs. Some are more 0:12:36.480 --> 0:12:42.760 intermediate inputs into production various categories of parts, parts for 0:12:42.800 --> 0:12:49.520 air conditioners, parts for various mechanical devices. In some cases 0:12:49.559 --> 0:12:52.720 there may not be any possibility to substitute, in which 0:12:52.760 --> 0:12:55.640 case American consumers will see an increase in price. In 0:12:55.679 --> 0:12:58.319 the US government was see an increase in revenue. Fifty 0:12:58.880 --> 0:13:02.720 is ballpark a quarter of a point of US GDP, 0:13:03.720 --> 0:13:06.720 so the tariff would be, if if fully paid, would 0:13:06.720 --> 0:13:08.880 be in the order of magnitude of a little over 0:13:09.760 --> 0:13:12.520 you know, five basis points of GDP, so you know, 0:13:12.920 --> 0:13:17.360 meaningful but not giant. In some product categories, though there 0:13:17.360 --> 0:13:21.520 may be opportunities to substitute, be it US production, or 0:13:21.679 --> 0:13:26.960 be at production of parts from Europe or Mexico or 0:13:27.600 --> 0:13:30.320 elsewhere in Asia, in which case you would see trade 0:13:30.360 --> 0:13:36.320 diverted away from China toward the untariffed parts of the 0:13:36.320 --> 0:13:44.079 global economy. Then the economy would react to the Chinese tariffs, 0:13:45.280 --> 0:13:48.480 and there I think it really depends on the sectors 0:13:49.200 --> 0:13:52.720 China went after the Big Three, or threatened to go 0:13:52.800 --> 0:13:58.080 after the Big three. US export categories to China aircraft, soybeans, 0:13:58.080 --> 0:14:01.520 and autos. With air craft, I think they were pretty 0:14:01.559 --> 0:14:04.200 they may have been playing it a little cute. They 0:14:04.240 --> 0:14:08.840 clearly have exempted wide bodies from the tariffs. They may 0:14:08.920 --> 0:14:12.600 have exempted most of the new seven thirty seven line. 0:14:13.080 --> 0:14:18.520 There's a debate about whether the seven seven eight Max 0:14:19.080 --> 0:14:22.800 has a weight that would exclude it from the tariff 0:14:22.880 --> 0:14:27.680 or not. They clearly have tariff used seven seven for 0:14:27.720 --> 0:14:30.320 what it's worth and golf streams, So I think you 0:14:30.360 --> 0:14:37.080 can argue that that it was designed to avoid immediately 0:14:38.040 --> 0:14:43.240 whacking Chinese airlines that have large orders on the books 0:14:43.240 --> 0:14:45.880 for Boeing, And I think what probably matters more going 0:14:45.960 --> 0:14:49.960 forward is will those airlines continue to buy Bowings or 0:14:49.960 --> 0:14:54.200 will they tilt towards air Bus. There's an interesting side 0:14:54.240 --> 0:14:56.960 note there, which is that China has always tried to 0:14:57.040 --> 0:15:00.480 play Bowing against Airbus, both to get about our price, 0:15:00.640 --> 0:15:04.520 of course, but also to induce both companies to shift 0:15:04.560 --> 0:15:08.480 more production to China, to do offsets, to buy more parts, 0:15:09.000 --> 0:15:14.520 and to help build up China's own aviation industry. If 0:15:14.560 --> 0:15:17.840 there isn't a threat of buying Boing, China loses a 0:15:17.880 --> 0:15:21.160 little bit of leverage in future negotiations with Airbus. So 0:15:21.200 --> 0:15:25.360 I think China is in some ways constrained in the 0:15:25.400 --> 0:15:29.200 aircraft sector. There's another important note though, which is China 0:15:29.240 --> 0:15:32.440 has its own narrow body aircraft to see nine one nine, 0:15:32.760 --> 0:15:35.800 and undoubtedly Chinese airlines are going to be buying one 0:15:35.880 --> 0:15:41.160 nine rather than seven thirty seven s. Or does China 0:15:41.240 --> 0:15:47.800 have ambitions to have a homegrown aviation company that is 0:15:47.840 --> 0:15:50.240 on the same scale and capabilities as a Boeing or 0:15:50.240 --> 0:15:52.840 an air Bus and is that plausible in the medium 0:15:52.880 --> 0:15:57.760 term future In your view, China unambiguously has that ambition. 0:15:58.920 --> 0:16:03.840 China has been working over time to build up in 0:16:03.920 --> 0:16:09.680 domestic aviations. Whether or not they will succeed at building 0:16:09.800 --> 0:16:15.240 planes that can compete with the latest generation from Airbus 0:16:15.240 --> 0:16:19.600 and Boeing, I think, remains an open question. But I 0:16:19.600 --> 0:16:22.960 I suspect that China won't give up. It's too important, 0:16:23.000 --> 0:16:28.040 it's too central to the China Plan and to China's 0:16:28.040 --> 0:16:33.840 own vision of what it wants to become. This China Plan, 0:16:34.040 --> 0:16:37.640 I don't think, is something that a lot of Americans 0:16:37.720 --> 0:16:42.080 are particularly familiar with. The ambitions the country has to 0:16:42.200 --> 0:16:46.000 sort of develop its own homegrown champions in all these 0:16:46.000 --> 0:16:50.040 different spaces like medical technology and aviation and semi conductors. 0:16:50.360 --> 0:16:52.720 Can you just explain to US a little bit about 0:16:52.760 --> 0:16:56.320 what this plan is and how they've gone about implementing 0:16:56.320 --> 0:17:01.920 it so far. So China Dinner fies a set of 0:17:02.880 --> 0:17:10.200 advanced manufacturing technology sectors, generally you know, medical equipment, semiconductors, aviation, 0:17:10.359 --> 0:17:15.800 next generation vehicles, and it sets out targets for Chinese 0:17:15.800 --> 0:17:21.040 production and Chinese market share, Chinese firm and Chinese production 0:17:21.080 --> 0:17:24.000 inside China to meet the Chinese market. A lot of 0:17:24.040 --> 0:17:27.560 these sectors are sort of cutting edge sectors where China 0:17:27.600 --> 0:17:31.320 now is a large buyer of goods made in the 0:17:31.400 --> 0:17:34.719 rest of the world, So there certainly is a component 0:17:35.160 --> 0:17:39.080 in the targets of import substitution. These are products that 0:17:39.160 --> 0:17:43.760 China now imports, and China has articulated a goal of 0:17:43.800 --> 0:17:47.200 being able to meet its own demand with its own 0:17:47.200 --> 0:17:52.000 production and to do so with technology developed and owned 0:17:52.400 --> 0:17:57.240 by China. So there is a very legitimate trade complaint 0:17:57.840 --> 0:18:02.960 around these industrial real policy goals. I think the tools 0:18:03.000 --> 0:18:08.840 that China uses vary from sector to sector. So how 0:18:08.920 --> 0:18:12.800 much do the U S tariffs actually play into China's 0:18:12.840 --> 0:18:16.359 long term ambitions of import substitution, Because you know, if 0:18:16.840 --> 0:18:20.680 if the US slaps teariffs some things like aerospace equipment 0:18:20.840 --> 0:18:23.640 and China has ambitions to build up its own industry 0:18:23.640 --> 0:18:25.960 in the space, then that seems almost like a benefit 0:18:26.000 --> 0:18:30.920 to them. Well, I'm not sure that's the case. China 0:18:31.240 --> 0:18:35.639 and say aerospace needs to develop its capability, and as 0:18:35.680 --> 0:18:38.760 I mentioned earlier, in order to develop its capability, China 0:18:38.880 --> 0:18:41.439 likes to play Bowing against Airbus. It got Airbus to 0:18:41.440 --> 0:18:45.840 build a three twenty line in China. And if the 0:18:45.960 --> 0:18:50.359 US is saying more or less, if Boeing subcontracts from China, 0:18:50.880 --> 0:18:54.560 it faces a tariff on anything at imports that would 0:18:54.600 --> 0:18:58.320 discourage Bowing at the margin from shifting production to China. 0:18:59.080 --> 0:19:03.560 Are shifting some of is contracting towards Chinese sub subcomponent manufacturing. 0:19:04.160 --> 0:19:06.320 And if China is not going to buy any Boeings 0:19:06.320 --> 0:19:11.560 going forward because of the Chinese retaliation, airbuses incentives change. 0:19:11.680 --> 0:19:15.320 They don't have to produce aircraft in China to celt 0:19:15.320 --> 0:19:19.120 to China. They're the only supplier. There's not that competition. 0:19:19.680 --> 0:19:23.280 So I think that's the sense in which China is 0:19:23.280 --> 0:19:26.840 in some ways still constrained by the fact that in 0:19:26.960 --> 0:19:29.159 some of these sectors it is not yet at the 0:19:29.200 --> 0:19:33.439 cutting edge of technology and it still needs to play 0:19:34.760 --> 0:19:38.320 European and US firms off against each other to help 0:19:38.359 --> 0:19:42.760 it progress up the technological ladder. One of the things 0:19:42.840 --> 0:19:46.760 you hear, and I think the Trump administration has frustrations 0:19:46.760 --> 0:19:50.880 about it is the degree to which China demand some 0:19:50.920 --> 0:19:55.000 sort of transfer of technological know how from these companies 0:19:55.040 --> 0:19:57.440 that want to participate in the Chinese market. So I 0:19:57.440 --> 0:20:00.600 don't know exactly what it does with aviation this idea 0:20:00.680 --> 0:20:02.600 that these big companies, if they want to access to 0:20:02.640 --> 0:20:06.600 the Chinese market, have to have some mechanism to give 0:20:06.640 --> 0:20:09.520 their technology to the local players. Can you walk us 0:20:09.560 --> 0:20:13.480 through what exactly China does with that and how much 0:20:13.560 --> 0:20:19.320 that deviates from sort of typical international norms. So this 0:20:19.440 --> 0:20:22.560 is uh the substance of the three oh one complaint. 0:20:22.640 --> 0:20:25.000 This is what the US is saying that China is 0:20:25.080 --> 0:20:31.960 doing that warrants the unilateral u S tariffs. China, under 0:20:32.000 --> 0:20:38.159 its w t O obligations cannot condition approval of investment 0:20:38.640 --> 0:20:44.080 on technology transfer as a matter of policy. So that 0:20:44.240 --> 0:20:48.239 is one of China's w t O obligations. But there 0:20:48.240 --> 0:20:50.760 are an awful lot of things that China still can do. 0:20:51.160 --> 0:20:53.399 So China is not required on the w t O 0:20:53.680 --> 0:20:56.560 to allow investment into any sector that's a choice that 0:20:56.640 --> 0:21:01.360 China makes. In many cases, China can require does require 0:21:01.640 --> 0:21:04.480 that any US firm wanting to produce in China set 0:21:04.520 --> 0:21:07.920 up a joint venture, and if the joint venture partner 0:21:08.600 --> 0:21:10.879 and most of the plausible joint venture partners will be 0:21:10.960 --> 0:21:14.080 stayed owned firms, given the nature of China's economy, and 0:21:14.119 --> 0:21:18.200 if the joint venture partner says that as a commercial matter, 0:21:18.240 --> 0:21:21.840 we will only enter into this joint venture if you 0:21:21.920 --> 0:21:27.640 agree to transfer technology to our subsidiary where we will 0:21:27.680 --> 0:21:31.720 have control, then you have to kind of transfer the technology. 0:21:31.720 --> 0:21:34.159 It's part of the conditions of the deal. But it 0:21:34.280 --> 0:21:37.320 is not a matter of government policy. Is a matter 0:21:37.720 --> 0:21:44.080 of commercial negotiations between two companies. Similarly, saying the electric 0:21:44.200 --> 0:21:49.160 vehicle space, if you want to qualify for the subsidies 0:21:49.200 --> 0:21:53.679 for new energy vehicles, well you're much better off if 0:21:53.680 --> 0:21:57.400 you have a Chinese partner and if the technology has 0:21:57.440 --> 0:21:59.520 been moved to China. So you know, there's a there's 0:21:59.520 --> 0:22:04.600 a lot of sources of pressure given the nature of 0:22:04.680 --> 0:22:09.160 China's economy, that don't come in the form of formally 0:22:09.280 --> 0:22:13.120 conditioning as a matter of government policy approval of investment 0:22:13.119 --> 0:22:18.960 on technology transfer. But have nonetheless created de facto requirements 0:22:19.520 --> 0:22:22.200 that if you want to supply the Chinese market, it's 0:22:22.240 --> 0:22:25.000 pretty hard to do that without producing in China. And 0:22:25.040 --> 0:22:27.440 if you want to produce in China, you pretty much 0:22:27.480 --> 0:22:30.760 need a state firm as your joint venture partner, and 0:22:30.840 --> 0:22:34.800 that state firm can, as a matter of its own policy, 0:22:34.920 --> 0:22:38.000 so to speak, ask for tech transfer, because if it 0:22:38.040 --> 0:22:41.159 doesn't get that tech transfer, it will lose out because 0:22:42.440 --> 0:22:44.359 you know, the joint venture with the European company has 0:22:44.400 --> 0:22:47.240 agreed to do something a little bit more in China. 0:22:47.359 --> 0:22:51.080 So there's there's certainly are many pressure points, and I 0:22:51.080 --> 0:22:56.719 don't think very many people challenge the core truth of 0:22:56.760 --> 0:22:59.920 the three oh one complaint. I want to talk about 0:23:00.040 --> 0:23:03.560 something that comes up whenever we talk about the US 0:23:03.680 --> 0:23:07.600 China trade deficit, and that is the idea of China 0:23:07.840 --> 0:23:13.480 retaliating by basically boycotting the US is biggest export, which 0:23:13.520 --> 0:23:17.919 has to be US treasuries. This always always comes up 0:23:17.960 --> 0:23:20.080 the idea that China is going to retaliate in a 0:23:20.119 --> 0:23:24.080 trade war by selling off some of its vast treasury holdings. 0:23:24.080 --> 0:23:27.359 How realistic do you think that actually is? And I 0:23:27.400 --> 0:23:31.320 know there are strong opinions on either side I personally 0:23:31.359 --> 0:23:33.119 think I was one of the first to use the 0:23:33.240 --> 0:23:38.080 line that the US's biggest export was treasuries and agencies 0:23:38.119 --> 0:23:40.400 ten years ago, when the US is running a five 0:23:40.440 --> 0:23:43.280 percent of GDP trade deficits. It's been one of my 0:23:44.200 --> 0:23:47.399 favorite lines for a long time. I've definitely borrowed it 0:23:47.440 --> 0:23:50.560 since then, so thank you. I'm not sure I can 0:23:50.600 --> 0:23:55.720 claim original credit, but I like the phrase. Let's stipulate 0:23:55.840 --> 0:24:00.760 a couple of things. Let's stipulate that Chinese holdings of 0:24:00.800 --> 0:24:06.440 treasuries are typically a function of China's reserve holdings. Private 0:24:06.520 --> 0:24:09.199 Chinese investors tend not to buy treasuries. They tend to 0:24:09.240 --> 0:24:12.080 put money in bank accounts are in real estate, so 0:24:12.200 --> 0:24:17.240 the vast bulk of the Chinese holdings of treasuries are 0:24:17.280 --> 0:24:22.520 a reflection of Chinese reserves. Second point to stipulate is 0:24:22.560 --> 0:24:26.520 that over time, the amount of treasuries that China holds 0:24:26.880 --> 0:24:29.520 has tended to move in line with the evolution of 0:24:29.560 --> 0:24:33.600 China's reserves, been a pretty constant share of China's portfolio 0:24:33.640 --> 0:24:37.199 over time. And third point is that China's reserves are 0:24:37.280 --> 0:24:40.119 right now not growing very fast, so you would not 0:24:40.440 --> 0:24:44.720 normally expect China to be a big buyer right now. 0:24:46.000 --> 0:24:47.640 In fact, if you look at kind of the global 0:24:47.680 --> 0:24:51.600 flow of funds, China's current account surplus, so the aggregate 0:24:51.640 --> 0:24:54.840 amount that it is lending to the world is smaller 0:24:54.880 --> 0:24:57.720 than that of Japan, certainly smaller than that of the 0:24:57.720 --> 0:25:02.080 Euro Area, and well below the combined current account surplus 0:25:02.119 --> 0:25:08.600 of the Asian newly industrialized economies Korea, Taiwan, Singapore, and 0:25:08.680 --> 0:25:11.399 you know, just for the sake of argument and not 0:25:11.520 --> 0:25:15.040 I would throw in Thailand into that category. So much 0:25:15.400 --> 0:25:18.040 or even the majority of the financing that the US 0:25:18.160 --> 0:25:21.000 is getting to support its trade deficit and current account 0:25:21.000 --> 0:25:24.359 deficit is not right now coming from China. So I 0:25:24.359 --> 0:25:28.399 think those are kind of important background pieces. This is 0:25:28.480 --> 0:25:33.440 not two thousand seven, when China's current account surplus was 0:25:33.480 --> 0:25:37.040 the biggest in the world, and when China was adding 0:25:37.040 --> 0:25:40.240 six billion to its reserves every year and two thirds 0:25:40.280 --> 0:25:46.360 of that ballpark was flowing into US bonds. China, though, 0:25:46.359 --> 0:25:50.240 of course, does have a large outstanding stock of treasuries, 0:25:50.520 --> 0:25:53.240 biggest in the world, probably a little bit bigger than 0:25:53.280 --> 0:25:57.400 it is then shows up in the data the Treasury releases, 0:25:58.600 --> 0:26:03.320 and China, if it wanted too, could move its portfolio around. 0:26:04.119 --> 0:26:07.800