Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, you know, we're several months, I guess, like five
Speaker 2: months or so, recording to September sixteenth, five months or
Speaker 2: so since Liberation days, since the trade war started. By
Speaker 2: and large, the world is still kind of working right.
Speaker 2: You could see its effects for sure, and certain categories
Speaker 2: and so forth, but by and large, I don't think
Speaker 2: the contours of the economy look that much different than
Speaker 2: they did, say in March or April.
Speaker 3: Look, I'm still missing my auction item that's supposed to
Speaker 3: be mailed from the Netherlands, so it has affected me directly.
Speaker 2: Wait what happened with it? Wait? Say more?
Speaker 3: Okay, So I won something from a Dutch auction house
Speaker 3: and they were supposed to mail it in house shipping,
Speaker 3: and instead of mailing it, they sent out an email
Speaker 3: saying that they can't mail it because everyone's trying to
Speaker 3: figure out the new tariff schedule and customs and things
Speaker 3: like that. I still haven't heard from.
Speaker 2: Them, but it still feels like something happened. There was
Speaker 2: some sort of rupture. Kind of hard to imagine going
Speaker 2: to a March twenty twenty five world again, but also
Speaker 2: hard to imagine going to a pre Trump one world ever, Like,
Speaker 2: it's hard for me to imagine that in my lifetime
Speaker 2: that there will ever be a sort of twenty fifteen
Speaker 2: style trading relationship between the US and China.
Speaker 3: Well, I could be wrong, never say never, but.
Speaker 2: It's just hard for me to see at this point.
Speaker 3: At this point, like, it's not a single administration thing. Right,
Speaker 3: We've had Trump one point oh, and then Biden continued
Speaker 3: a lot of the tariffs and even added some new ones,
Speaker 3: and then we have Trump two point zero, which is
Speaker 3: arguably going even harder on China. So it does seem
Speaker 3: like at least a durable trend.
Speaker 2: Yeah, not a fly. And as we've discussed, you mentioned
Speaker 2: the fact that Biden was a continuation arguably an expansion
Speaker 2: of Trump one, particularly with some of the export restrictions
Speaker 2: on technology. Yeah, this is one of the rare trade
Speaker 2: rethinking the global trading system, whatever that means, is one
Speaker 2: of the rare areas of bipartisan consensus in dc IS,
Speaker 2: as has come up in many episodes.
Speaker 3: Yeah, that in housing, that in.
Speaker 2: Housing right, that housing is very expensive. We really do
Speaker 2: have the perfect guest, someone who has a very big
Speaker 2: picture view on trade, someone who has been directly involved
Speaker 2: in trade negotiations, someone who remembers the sort of pre Trump.
Speaker 3: One, the long long long ago, the.
Speaker 2: Long long long ago global trading system, and who could
Speaker 2: talk about whatever remnants of that are left, or even
Speaker 2: maybe who can explain to me what the global trading
Speaker 2: system was. We're going to be speaking with Michael Frohman.
Speaker 2: He is the President of the Council on Foreign Relations
Speaker 2: and he was the former US Trade repper reve during
Speaker 2: the Obama Obama two administration twenty thirteen to twenty seventeen.
Speaker 2: Has continued to write a lot about this topic. So,
Speaker 2: Michael Frohman, thank you so much for coming out odd last,
Speaker 2: Thanks for having me. Absolutely What does the US trade
Speaker 2: representative do? You had that job? I actually realized I
Speaker 2: don't really know.
Speaker 4: It's a great job. It really has the function of
Speaker 4: negotiating trade agreements and enforcing US trade rights under previous agreements.
Speaker 4: The reason I love the job is that it combines
Speaker 4: high diplomacy, sitting down with ministers, presidents, prime ministers of
Speaker 4: other countries, trying to reach agreements with having to have
Speaker 4: a really detailed understanding of elements of the US economy.
Speaker 4: I mean, I learned more from American farmers teaching me
Speaker 4: the five hundred things you can do with a molecule
Speaker 4: of milk and how they manipulate a molecule of milk
Speaker 4: to circumvent trade restrictions and get around tariffs, so you
Speaker 4: export it as butter or his way, or as low
Speaker 4: calorie powder or whatever.
Speaker 5: This is a whole episode episode, right, But that's really
Speaker 5: one example of the literally thousands of issues you have
Speaker 5: to learn as US trade rep to be able to
Speaker 5: sit down with your counterparts in other countries and negotiate agreements.
Speaker 3: Can you give us an idea or a sense of
Speaker 3: the average negotiation? What exactly is the process? Like do
Speaker 3: you meet for the first time in a designated room
Speaker 3: somewhere or is there prep that goes into these you're
Speaker 3: exchanging emails? What exactly happens?
Speaker 4: So in the past, and of course it's a very
Speaker 4: different situation now, But in the past, the US or
Speaker 4: another country might come up with an idea of what
Speaker 4: they wanted to do in a trade negotiation, a set
Speaker 4: of issues they wanted to take on a set of
Speaker 4: countries they wanted to negotiate with, and they would go
Speaker 4: around and do consultations with other countries, float the ideas,
Speaker 4: see what kind of feedback they got, and scope out
Speaker 4: the nature of the negotiation. Is it going to be
Speaker 4: just about goods and tariffs? Is it going to touch
Speaker 4: upon agriculture, sure and regulations and services and labor and
Speaker 4: environment and all various other issues that have become part
Speaker 4: of trade negotiations in the past, and get agreement by
Speaker 4: the other countries that this was the agenda. And then
Speaker 4: in the past usually it's the US that has been
Speaker 4: sort of driving the agenda. These would be the topics
Speaker 4: we would deal with. The US would come up with
Speaker 4: proposals of what are the disciplines that we would like
Speaker 4: to see in each of these areas, what are the
Speaker 4: rules that we'd like to see. And it was the
Speaker 4: way the US brought other countries along to adopt high
Speaker 4: standard rules across one sector, one subject matter or another.
Speaker 4: And the idea was, we know, we live in a
Speaker 4: high wage, highly regulated economy. We compete with economies that
Speaker 4: oftentimes have lower wages, lower regulation, and if we could
Speaker 4: raise other country standards closer to our own. It would
Speaker 4: level the playing field for American workers and farmers and
Speaker 4: ranchers and make it easier for us to compete.
Speaker 2: I mean, for better or worse. It really just seems
Speaker 2: like a totally different era and out the idea of
Speaker 2: getting to the idea of going back to some world
Speaker 2: where the US is actively working with a bunch of
Speaker 2: country on rules rather than rates terror for it really
Speaker 2: does seem it seems like ancient history. Now, it just
Speaker 2: seems right.
Speaker 4: Look, I think that's right. First of all, I think
Speaker 4: I think the international trading system had been under stressed
Speaker 4: for some time. President Trump, in some ways put was
Speaker 4: the final nail in the coffin of it. But you know,
Speaker 4: the global multilateral rules based system, that's like the wto
Speaker 4: the World Trade Organization, where one hundred and sixty plus
Speaker 4: countries got together, agreed to a set of rules, agreed
Speaker 4: to some mechanisms for enforcing those rules and for monitoring them.
Speaker 4: That's been under stress for a long time. There's been dissatisfaction,
Speaker 4: and I think now, in fact, you're right. I think
Speaker 4: we can't go back to the way things were pre Trump.
Speaker 4: We're gonna have to think about what comes next.
Speaker 3: Just to play a devil's advocate for a second, to
Speaker 3: what extent did we actually have a rules based trading
Speaker 3: system in the sense that everyone was actually beholden to
Speaker 3: the same limitations or the same rules, Because looking back,
Speaker 3: there were always accusations about China cheating or maybe the
Speaker 3: US was taking advantage in some way, And in fact,
Speaker 3: you could argue that that sense of unfairness is kind
Speaker 3: of what got us to where we are today. So
Speaker 3: was it really rules based for everyone?
Speaker 4: So I think we have to look back at the
Speaker 4: whole history of the post war period because for decades,
Speaker 4: China wasn't a factor, it wasn't part of the global
Speaker 4: trading system, it wasn't a major economy, and it was
Speaker 4: the US and Europe, Japan, others who came together to
Speaker 4: really form this set of rules. And it's never a
Speaker 4: perfect system. My sense is what rules means is that
Speaker 4: most countries follow most of the rules most of the time,
Speaker 4: not that it's one hundred percent perfection. By the way,
Speaker 4: that's true when you have laws in the United States,
Speaker 4: I mean we have laws of the United States because
Speaker 4: people do commit crimes. The existence of laws does not
Speaker 4: prevent people from committing crimes. That's why you need enforcement.
Speaker 4: Same thing is true on the international side as well.
Speaker 4: The big difference, as you pointed out, Tracy, is when
Speaker 4: China became a major factor in the global economy and
Speaker 4: began to integrate globally. On one hand, there was an
Speaker 4: opportunity to say, Okay, this is an opportunity for bring
Speaker 4: China into the global system, get them to adopt the
Speaker 4: set of rules that the rest of us have all
Speaker 4: agreed to, because they appear to be on this path
Speaker 4: towards market reform, openness, liberalization. I think what happened in
Speaker 4: reality is that trajectory wasn't as linear, didn't go as far,
Speaker 4: didn't go as fast as people anticipated. And what we
Speaker 4: did not anticipate is that somebody like President She would
Speaker 4: come in and in fact stop or reverse it. And
Speaker 4: so now we have an economy that is huge, second
Speaker 4: largest economy in the world, biggest manufacturing part of the
Speaker 4: global economy, likely to be accounting for something like forty
Speaker 4: five percent of all global manufacturing in a few years,
Speaker 4: which is the I guess that any country has ever
Speaker 4: been in history, and it's following a fundamentally different set
Speaker 4: of rules, and that has led to a law of
Speaker 4: the stress in the international system.
Speaker 2: Can you explain maybe the philosophical premise behind the idea
Speaker 2: that trade with China? I guess, why do we care
Speaker 2: about what their internal rules are? Right theory of trade,
Speaker 2: it's sort of okay, they're cheaper for whatever reason, or
Speaker 2: they're more efficient, et cetera, and so you know, comparative
Speaker 2: advantage we benefit from that. Why does the global trading
Speaker 2: system why is it or was it or is it
Speaker 2: premised on this notion that all of the participants would
Speaker 2: and in some sort of more liberal direction with their
Speaker 2: domestic economies.
Speaker 4: You know, I think it's because the actions that China
Speaker 4: has taken domestically to drive they're really quite remarkable economic
Speaker 4: growth over the last few decades does have ramifications outside
Speaker 4: of China, has ramifications for the rest of the world,
Speaker 4: for manufacturing in the rest of the world, for other factors,
Speaker 4: and so it's not something that can be limited to
Speaker 4: China if China gets to where it's going, because it
Speaker 4: steals intellectual property, because it produces over capacity, so it
Speaker 4: creates far more factories than it needs to for the
Speaker 4: reasonable demand for a product in order to drive other
Speaker 4: producers out of the market in other countries that has
Speaker 4: an average effect on us. If they subsidize state owned
Speaker 4: enterprises or even private enterprises in such a way that
Speaker 4: it creates this unlevel playing field, then it affects the
Speaker 4: rest of US as well. And I think that's what's
Speaker 4: really happened, is that China, whether it's a state owned enterprise,
Speaker 4: is subsidization, intellectual property rights, theft, government intervention into the
Speaker 4: private sector, all towards positioning China as the leading manufacturer.
Speaker 4: But it has come at the expense of other industrialized countries,
Speaker 4: in some cases other emerging economies, and that's why there's
Speaker 4: been thisess counter reaction.
Speaker 3: So I know you were trade representative before the tensions
Speaker 3: with China really ramped up under the first Trump administration,
Speaker 3: But how were you thinking back then about incentivizing other
Speaker 3: countries when it comes to trade negotiations like KARRA and
Speaker 3: stick strategy. Was it mostly about incentives and if so,
Speaker 3: what were you giving them or was it sometimes maybe threats?
Speaker 4: So you have to use both. I think on the
Speaker 4: threat side, it's not really threats. It was enforcement that
Speaker 4: we would bring cases against countries, including China at the
Speaker 4: WTO or against other trading partners where we had arrangements
Speaker 4: if we felt that they were violating our rights under
Speaker 4: those agreements. We brought during the Obama I think we
Speaker 4: brought the most cases ever brought against China. We won
Speaker 4: all the cases that got to conclusion. The problem was
Speaker 4: China would find ways either of delaying implementation or by
Speaker 4: the time the fix was implemented, the relevant industry in
Speaker 4: the United States or elsewhere was gone, and so it
Speaker 4: was really sort of cold comfort. And that's one of
Speaker 4: the challenges I think that we saw in the World
Speaker 4: Trade Organization. I think on the incentive side, that's where
Speaker 4: trade agreements, real trade agreements come into play. I was
Speaker 4: involved in something called the Transpecific Partnership, which was twelve
Speaker 4: countries around the Asia Pacific region that were working on
Speaker 4: opening their economies to each other, abiding by a high
Speaker 4: standard set of rules. Some of the countries already had
Speaker 4: free trade agreements with US, about half of them did,
Speaker 4: so we weren't giving them any more access to our economy.
Speaker 4: We'd already given them access. But at the table we
Speaker 4: had Japan, and Japan was an economy that had never
Speaker 4: really opened up to other markets, and these other countries
Speaker 4: knew that they couldn't get Japan to open on their own,
Speaker 4: but if the US was pushing Japan to open, they
Speaker 4: would benefit from it. So you had countries like Peru
Speaker 4: or Chile who already had free trade agreements with US
Speaker 4: willing to raise their labor standards or willing to enforce
Speaker 4: environmental laws because they were getting access not to our market,
Speaker 4: but to Japan, and that incentive was one that was
Speaker 4: powerful for them.
Speaker 2: That's a very uh, that's a very interesting dynamic. Talk
Speaker 2: a little bit more about those years twenty thirteen pre
Speaker 2: Trump in the actions towards China, because if you said,
Speaker 2: by that point Obama had already introduced a record number
Speaker 2: of actions against China, winning many of them, winning all
Speaker 2: of them to do something, well, all of them that
Speaker 2: went to conclusions, all of them that went to conclusion,
Speaker 2: but it didn't really matter because either there was some
Speaker 2: way to evade or the US industry had been decimated.
Speaker 2: Was there something pre Trump, I mean, I don't know.
Speaker 2: Whenever that was there a feeling that something has to
Speaker 2: change fundamentally in how the US and China trade or
Speaker 2: the rules governing that trade.
Speaker 4: At that point, no, absolutely, Look the day one of
Speaker 4: the Obama administration. The world had been involved in something
Speaker 4: called the Doha Round of negotiations at the World Trade
Speaker 4: Organization had been going on since two thousand and one,
Speaker 4: and I remember going to a G twenty summit. There
Speaker 4: was one in April in London, and all the other
Speaker 4: leaders around the table here was the new President of
Speaker 4: the United States. On their mind was asking him, Okay,
Speaker 4: what are you going to do to bring the Doha
Speaker 4: Round to successful conclusion this year? And the President said,
Speaker 4: all right, We're going to go back and take a
Speaker 4: look at this, and he asked a group of us
Speaker 4: to do a study, and by the summer we had
Speaker 4: come back to him and said, this Doha Round isn't
Speaker 4: going to get done. The door A Round was founded
Speaker 4: on this fundamental premise in two thousand and one that
Speaker 4: basically developing countries. It was called the Development Round, and
Speaker 4: the primary beneficiaries of the door A Round would have
Speaker 4: been developing countries, not industrialized countries. And the fundamental premise
Speaker 4: was developing countries shouldn't have to live by too many
Speaker 4: rules industrial countries should, and this would help the developing
Speaker 4: countries catch up. By two thousand and nine, when we
Speaker 4: saw what had happened with China between two thousand and
Speaker 4: one and two thousand and nine. There was no way
Speaker 4: that an agreement that gave China a pass on rules
Speaker 4: so they could continue to expand its manufacturing and undermine
Speaker 4: manufacturing around the world, that that was going to fly.
Speaker 4: And the President went back to the other leaders at
Speaker 4: the next year twenty meeting and said, the Doha Round
Speaker 4: is not going to get done on the path that
Speaker 4: is currently on. And I remember we were at a
Speaker 4: G twenty summit and the other leaders all went around
Speaker 4: and read their talking points. The traditional talking point at
Speaker 4: the time was the Doha Round will get completed by
Speaker 4: December this year or by the ministerial this year. And
Speaker 4: you know, President Obama intervened, He made his point. The
Speaker 4: other leaders read their talking points, and he put his
Speaker 4: flag back up and said, you know, you guys aren't listening.
Speaker 4: This isn't going to happen. And that was the first
Speaker 4: indication that something needed to change. And then we were
Speaker 4: sitting down with the Chinese bilaterally in lots of consultations,
Speaker 4: sort of on ending consultations, and we'd have this conversation
Speaker 4: with them and remind them that their tremendous success was
Speaker 4: based on a benign international environment, the capacity to export
Speaker 4: to the rest of the world, and that if we
Speaker 4: didn't address these underlying concerns, stayed on enterprises, subsidization, IPR rights, etc.
Speaker 4: That benign international environment was going to disappear. And that,
Speaker 4: of course, is exactly what's happened, and that's the bipartisan
Speaker 4: consensus against China that has now emerged. We started warning
Speaker 4: them of that back in two thousand and nine twenty ten,
Speaker 4: and I think we made some modest progress during the
Speaker 4: Obama administration to get them changed certain practices. But by
Speaker 4: the time President she came in and made it clear
Speaker 4: he was going to be dominant in the following sectors.
Speaker 4: He was going to reduce his dependency on the rest
Speaker 4: of the world and increase everybody else's dependency on China,
Speaker 4: the game was over.
Speaker 3: Lead into my next question, which is we've talked a
Speaker 3: lot about how you know there was this break in
Speaker 3: the rules based liberal trading order. Was there a single
Speaker 3: moment where you went like, Aha, this has fundamentally broken
Speaker 3: instead of just like slowly declining, slowly changing, was there
Speaker 3: something that sticks out to you about, Wow, this is
Speaker 3: actually changing right now.
Speaker 4: So I think that Doha moment back in two thousand
Speaker 4: and nine was one of them. I also think later
Speaker 4: on in the Obama administration, we were trying to negotiate
Speaker 4: an agreement over environmental goods. It was a list of
Speaker 4: two hundred and fifty or so products that would have
Speaker 4: been good for countries to buy more of and produce
Speaker 4: more of because it was good for the environment, for
Speaker 4: climate change or otherwise. And it failed. It failed over
Speaker 4: bicycles that between China and the EU. The EU was
Speaker 4: protecting the Polish bicycle industry. I wanted to put bicycles
Speaker 4: on the list, and they couldn't agree on what to
Speaker 4: do with bicycles, and so the entire agreement fell over
Speaker 4: that one issue. And to me, it's sort of underscored. Okay,
Speaker 4: we're pretty far from reaching consensus that if we can't
Speaker 4: reach agreement over bicycles, we're not going to reach agreement
Speaker 4: over things that are much more meaningful.
Speaker 2: Were you surprised at all? I want to we start
Speaker 2: to move a little bit closer to the present. But
Speaker 2: before we go to the present, was it inevitable that,
Speaker 2: in your view, that the Biden administration ended up as
Speaker 2: a continuation slash expansion of some of the Trump restrictions.
Speaker 2: Was there still an opportunity to turn somewhere closer to
Speaker 2: a pre Trump path.
Speaker 4: I think there was an opportunity to make some changes,
Speaker 4: but not to go back to the way things were before.
Speaker 4: The Biden administration, for example, launched a review of the
Speaker 4: China tariffs, and I think in many respects, the by
Speaker 4: administration was very strategic in how it approached export controls
Speaker 4: and foreign investment constraints, was very targeted the tariffs. They
Speaker 4: launched a review to try and distinguish between strategic and
Speaker 4: non strategic tariffs. There's a case to be made for
Speaker 4: tariffs if there's unfair trade practices, or if it's a
Speaker 4: product that you really need to produce here in the
Speaker 4: United States. You don't want dependency, But do we need
Speaker 4: tariffs on t shirts and underwear and socks? Is that
Speaker 4: important to our national security? And they never got themselves
Speaker 4: to the position of reducing those tariffs. And to me,
Speaker 4: it's not necessarily a criticism of the Biden administration. I
Speaker 4: think it just goes to show that tariffs are easy
Speaker 4: to put on and hard to take off, because once
Speaker 4: they're on, there are constituencies that are supportive of them,
Speaker 4: and any movement to reduce tariffs, particularly in this political context,
Speaker 4: is seen as being weak on China, even if it
Speaker 4: makes pure sense from an economic point of view. Who
Speaker 4: is hurt most by tariffs on underwear t? Shirts? And
Speaker 4: it tends to be low income Americans who spend a
Speaker 4: disproportionate amount of their disposable income on imported goods, And
Speaker 4: we could afford to bring in those products from China
Speaker 4: without questioning our national.
Speaker 3: Security, without losing our strategic underwear producing capacity. Although I
Speaker 3: think the US military does actually have some strategy.
Speaker 4: There are restrictions. Yeah, under I used to call it
Speaker 4: the Department of Defense the Department of War, that require
Speaker 4: uniforms for where to the things to be made in
Speaker 4: the United States.
Speaker 3: Fun fact, how would you actually describe the current state
Speaker 3: of the global trade system, because you know, I've heard
Speaker 3: people say there are shades of mercantilism, protectionists, that sort
Speaker 3: of thing. What's your description of where we are right now?
Speaker 4: Well, I think the challenge of where we are right
Speaker 4: now is you have the two largest economies in the world,
Speaker 4: the US and China, basically following their own set of
Speaker 4: rules rather than the multilateral rules based system that the
Speaker 4: US was very much driving the creation and the defense
Speaker 4: of over all these over all these years. And when
Speaker 4: you have the two largest economies doing that, the question is, well,
Speaker 4: what are their other economies going to do? Are they
Speaker 4: going to start imitating the US or China? Will they
Speaker 4: continue to abide by the rules if nobody else does.
Speaker 4: I think they're all sort of wrestling with that question
Speaker 4: because for some of them, like the European Union, European
Speaker 4: Union is more ideologically in favor of free trade, integration,
Speaker 4: the rules based system. The whole notion of the European
Speaker 4: Union is based on that bringing the European countries together,
Speaker 4: let alone the rest of the world. So it's harder
Speaker 4: for them to make this leap than it has been
Speaker 4: for the United States. But I think the reality is
Speaker 4: is that the system is under great stress and we're
Speaker 4: going to have to think through how does it evolve,
Speaker 4: What are the elements of it that we want to
Speaker 4: try and preserve or reconstitute, and how does it need
Speaker 4: to change to take into account not only the lessons
Speaker 4: of the last eighty years prior to Trump, but the
Speaker 4: lessons of the Trump administration. You know, some of which
Speaker 4: will be instructured.
Speaker 2: Let's talk more about some of the paths that things
Speaker 2: could go, because I'm thinking about sitting aside even the
Speaker 2: Europe in the US, you know, there was the bricks
Speaker 2: gathering recently. These are there are a lot of countries
Speaker 2: whose own developmental trajectory could be undermined by China's manufacturing
Speaker 2: success right, and yet perhaps because of the actions of
Speaker 2: this administration, et cetera, they don't feel that there is
Speaker 2: a sort of comfortable home or friend in DC and
Speaker 2: that maybe it makes more sense for them even given
Speaker 2: the competitive challenges to be friendlier with Beijing, et cetera.
Speaker 2: What is your view on that? Do you believe there
Speaker 2: could be a new I mean, one thing we've heard
Speaker 2: we were talking to We recently interviewed Robert Kaplan, vice
Speaker 2: chairman over at Goldman Sect. His view was globalization is alive,
Speaker 2: and well, it's just that the US isn't really part
Speaker 2: of it, and that we're actually re emerging sort of
Speaker 2: free trade, etc. Acceptance with China at the home Is
Speaker 2: that a fair characterization? Like what is happening with these
Speaker 2: mass of other countries as they think about who their
Speaker 2: partners and friends are.
Speaker 4: So, first of all, I think I think globalization is
Speaker 4: not over. Other countries continue to move ahead to integrate
Speaker 4: their economies. European Union has signed additional trade agreements with
Speaker 4: Marcasour that're working on one with India. Africa has a
Speaker 4: continental wide free trade agreement signed a few years ago
Speaker 4: that they're in the process of implementing. So I think
Speaker 4: Robert Kaplan's observation that it's the US that has exempted
Speaker 4: itself is to a certain degree correct. I'm not sure
Speaker 4: the next step is that this is all in a
Speaker 4: shift to China, and it's going to be a China
Speaker 4: led block because there's no country that's more concerned about
Speaker 4: the potential adverse impact of Chinese exports on their own
Speaker 4: manufacturing and economic aspirations than India, India, and you could
Speaker 4: add Brazil, you could add Indonesia, you could add South Africa.
Speaker 4: They're all deeply concerned that if the US and Europe
Speaker 4: begin to close their markets, all that excess capacity from
Speaker 4: China has to go somewhere, and it could well get
Speaker 4: dumped in their markets and hurt their capacity to build
Speaker 4: up their manufacturing base as well. And so I've been
Speaker 4: of the view that we had this. The Cold War
Speaker 4: was about bipolarity US Soviet Union. The wall came down,
Speaker 4: the Soviet Union was dismantled, and that was kind of
Speaker 4: a unipolar moment. That's over. Now that thirty year period
Speaker 4: is over. What we have now isn't multipolarity. It's not
Speaker 4: like you've got two or three camps that do everything together,
Speaker 4: a China camp, a US camp, some other camp. I
Speaker 4: think it's really more akin to like polyamorous life right
Speaker 4: in India is the prompt. India is the greatest, is
Speaker 4: the greatest example of this. India loves the United States
Speaker 4: released until recently, for technical technological cooperation, for civil nuclear cooperation,
Speaker 4: for investment, for the relationship between the Indiandia aspora and
Speaker 4: our you know, entrepreneurial ecosystem.
Speaker 1: Here.
Speaker 4: They love Russia for oil, for arms, They love Iran
Speaker 4: for oil. They love and they hate, depending on the
Speaker 4: day they've had. It's one of the countries they've gone
Speaker 4: to war with, you know, on their border. They've had skirmishes,
Speaker 4: people have died in armed conflict between India and China.
Speaker 4: But then as you saw recently, there was a conference
Speaker 4: in China where you had Mody she and putin holding hands,
Speaker 4: walking down the red carpet together. So I think India's
Speaker 4: is archetypal example of trying to play these relationships.
Speaker 2: They were during the Cold Wars too, right, they were
Speaker 2: non aligned, that's right, right.
Speaker 4: I mean it's changed now then they were non aligned.
Speaker 4: Now I think they're multi aligned, so they'd be aligned
Speaker 4: with the polyamorous and you could use the same analysis too,
Speaker 4: I think cover a lot of other countries, a lot
Speaker 4: of the other Middle countries. That makes it a much
Speaker 4: more complicated world. You know, in retrospect, the Cold War
Speaker 4: was very simple. It was black and white. You were
Speaker 4: with us, you're with the Soviet Union, you know, and
Speaker 4: there were some proxy wars in between, but it was
Speaker 4: pretty it was pretty simple. This is much more complicated,
Speaker 4: and it leads to the view that you're going to
Speaker 4: have to be very proactive and creative and creating coalitions
Speaker 4: of the willing around various issues, because sometimes India might
Speaker 4: be in it, sometimes they might not. Sometimes China might
Speaker 4: be in it, sometimes not. And I think that's the
Speaker 4: challenge for the United States to continue to exert leadership
Speaker 4: going forward.
Speaker 3: How resilient would those smaller coalitions of the willing act
Speaker 3: actually be because I can imagine maybe it's easier to
Speaker 3: negotiate with a smaller group, maybe you don't get caught
Speaker 3: up in debates over bicycles and things like that. But
Speaker 3: on the other hand, if you don't have like a
Speaker 3: big trading partner who is necessarily driving the agenda, it
Speaker 3: seems like it might be a little bit more difficult
Speaker 3: to enforce.
Speaker 4: I think you need a combination of smaller groups of
Speaker 4: like minded countries. But it does, to your point, tracy,
Speaker 4: require leadership, and in the past, the US has been
Speaker 4: a leader of it. I mean, you've got some very
Speaker 4: strong examples, like NATO. You know, a military alliance is
Speaker 4: the strongest example of a plurilateral group, so something less
Speaker 4: than the whole world, but like minded countries that have
Speaker 4: agreed to do certain things together because they have a
Speaker 4: combination to do so. I'm not sure it would exist
Speaker 4: without US leadership and US driving it going forward. That
Speaker 4: was true of the transpecific partnership as well. I think
Speaker 4: it could be true of a number of these other things.
Speaker 4: And by the way, China is very good at this.
Speaker 4: I mean the conference, the Shanghai Cooperation Organization Conference that
Speaker 4: they recently held, where Mody and others were present. That's
Speaker 4: a good example of them pointing together coalitions. Bricks is
Speaker 4: another good example. Now we can talk about the strengths
Speaker 4: and the weaknesses of bricks and where the countries actually
Speaker 4: have common interests and conflicting interests. But it's that kind
Speaker 4: of drive that you need a leader and you need
Speaker 4: a group of like minded countries.
Speaker 2: Let's talk a little bit more about some of these
Speaker 2: tensions that emerge, because it does sound like, you know,
Speaker 2: bricks is a nice acronym did Gremonial from Goldman sex
Speaker 2: As in management came up with in two thousand and one,
Speaker 2: in which may now be you know, this important geopolitical
Speaker 2: entity we'll see. We don't really know for sure yet,
Speaker 2: but it seems like one possibility is that, Okay, the
Speaker 2: US we feel that we need to have in key
Speaker 2: strategic sectors some sort of you know, capacity to build
Speaker 2: semiconductors or maybe capacity to build batteries. At least there
Speaker 2: was a big push under at under the Biden administration.
Speaker 2: Of course, China has that and it's growing. I mean,
Speaker 2: when people think about the economy going forward, is there
Speaker 2: a risk that essentially every country feels they have to
Speaker 2: make that decision that India feels it has to have
Speaker 2: its own battery making capacity, the Germany feels it has
Speaker 2: to make its own battery making capacity, and that there's
Speaker 2: a sort of domino effect and we just wind up
Speaker 2: in a much costlier, less efficient world.
Speaker 4: Well, I think we are heading towards a cost layer
Speaker 4: less efficient world. I'm not sure that's necessarily a bad
Speaker 4: outcome in that to go down the path of greatest
Speaker 4: efficiency could be at least in the short run, to
Speaker 4: become utterly dependent on China for all of this product
Speaker 4: because they can produce things cheaper, not not always because
Speaker 4: it's cheaper labor, but because they become very efficient infrastructure,
Speaker 4: massive scale. And I think the question is is it
Speaker 4: a good thing? I mean that the US have a
Speaker 4: battery industry and that Europe have a battery industry.
Speaker 2: It's probably a good thing.
Speaker 4: It may not be as efficient as relying completely on China,
Speaker 4: but having that diversification, particularly over the long run, is
Speaker 4: a positive rule number one of risk management diversification. And
Speaker 4: yet we became very complacent and very it became very
Speaker 4: complacent over the years of just relying on China as
Speaker 4: our manufacturing floor. And now I think companies have come
Speaker 4: to the conclusion, whether it's because of natural disasters, COVID
Speaker 4: or political intervention as we've seen with China, that it's
Speaker 4: to their benefit, their economic benefit, even over the longer run,
Speaker 4: to diversify, even in the short run if it's more expensive.
Speaker 3: With your trade representative, hat On, can you maybe say
Speaker 3: something about how you view military strategy and I guess
Speaker 3: trade and this idea of well, maybe we want to
Speaker 3: be independent, maybe we want to have independent capacity in
Speaker 3: something that's strategically important, like semiconductors or I don't know,
Speaker 3: making ballistic missiles or something like that. How does the
Speaker 3: US government actually think about the relationship between trade and
Speaker 3: military might.
Speaker 4: So I think over time, broadly economics and national security
Speaker 4: have converged into economic security, and we're sorting through what
Speaker 4: that means in practice. So in the case of the
Speaker 4: Biden administration, they talked about a small yard and a
Speaker 4: high fence. So take a limited number of technologies and
Speaker 4: say these technologies we refuse to export to our competitors
Speaker 4: and our adversaries. We refuse to allow them to buy
Speaker 4: US companies that specialize in those technologies, and refuse our
Speaker 4: companies to who dominate that area to invest in China
Speaker 4: and give them their capacity, but it was a relatively
Speaker 4: few sectors, relatively few technologies. The question is, is there
Speaker 4: an exorable set of pressures to expand that yard and
Speaker 4: to add more and more things to it, and where
Speaker 4: is it appropriate and where is it not appropriate? And
Speaker 4: I think that's what we're now sort of wrestling with.
Speaker 4: We're highly dependent on China for all the ingredients that
Speaker 4: go into our pharmaceuticals. Do we feel comfortable with that?
Speaker 4: China has done nothing to say they would cut it off,
Speaker 4: but they could, and we've seen recently China has used
Speaker 4: its choke point capacity rare earth's magnets to demonstrate that
Speaker 4: it has leverage too, and it worked. The Trump administration
Speaker 4: raised tariffs to one hundred and forty five percent on China,
Speaker 4: China restricted the export of certain rare earths and magnets,
Speaker 4: and suddenly there was a de escalation. And so we
Speaker 4: have to now wrestle with that and decide over the
Speaker 4: long run, what products do we actually need to be
Speaker 4: made in the United States because they're so critical to
Speaker 4: national security or our sense of national security, and which
Speaker 4: ones And this is where there's been I think in
Speaker 4: sufficient attention, which ones can we rely on our allies
Speaker 4: and partners because we probably can't produce everything at least
Speaker 4: in the short run, makes sense to produce everything ourselves.
Speaker 4: But can we rely on Canada and Europe and Japan
Speaker 4: and South Korea and Mexico for some of this production
Speaker 4: or in India? And how do we differentiate between which
Speaker 4: products fit in what group? And therefore then what do
Speaker 4: we need to do about it? To drive production here
Speaker 4: we're necessary, and to develop the relationships with the allies
Speaker 4: and partners where possible.
Speaker 2: The idea of friends shoring or whatever you want to
Speaker 2: call it sounds very intuitive, and it's like, we don't
Speaker 2: need to build a ton of shipyards. Maybe we could
Speaker 2: get the Koreans to do that for us. Or I
Speaker 2: don't know. The private fins are good at I'm not sure,
Speaker 2: et cetera.
Speaker 4: The fins are very good.
Speaker 2: Yeah, that's right, one of these facts that we've learned
Speaker 2: over the years. But is there I mean, when you
Speaker 2: look at the current administration, do you see anything other
Speaker 2: than widening a gulf between those partners? Like yeah, it
Speaker 2: sounds great to have a nice relationship with the Koreans
Speaker 2: for them to build more ships for us, and then
Speaker 2: that solves the problem of scale and redundancy, etc. But
Speaker 2: in practice, from your perspective, is going the opposite direction.
Speaker 4: Well, look, I think one of the challenges of any administration,
Speaker 4: but it's certainly evidence in this one, is the connecting
Speaker 4: of dots between one policy objective and another policy objective.
Speaker 4: And so yes, in the short run, it's going to
Speaker 4: take us a while to build up our shipbuilding industry,
Speaker 4: and it's going to require a lot of government support,
Speaker 4: and I mean it's going to require a lot of
Speaker 4: policies that we've not yet adopted. Perhaps it's something we
Speaker 4: should do, but it will take years to really build
Speaker 4: that up. In the meantime. Should we look to Korea,
Speaker 4: Should we look to Japan? Should we look to Finland
Speaker 4: for the ships that we need right now? That's one
Speaker 4: set of objectives. Then you have the raid on the
Speaker 4: Hondai plant, which was another set of objectives, objectives around migration,
Speaker 4: illegal migration, and illegal workers. I sometimes wonder whether the
Speaker 4: dots are being connected within the administration or whether there's
Speaker 4: a view and they may be right, they may be wrong,
Speaker 4: but they can have it both ways. That they can
Speaker 4: come down on Korean workers in the United States and
Speaker 4: still look to Korea and say you will deliver US chips.
Speaker 3: And share your expertise and technical knowledge and.
Speaker 4: And help US billship building here in the United States.
Speaker 3: I want to broaden out the conversation, very ambassador, of course,
Speaker 3: just to broaden out the conversation.
Speaker 2: Though.
Speaker 3: Back in March, I wrote an Odd Thoughts newsletter titled
Speaker 3: the US is looking a lot like China. I got
Speaker 3: an enormous amount of pushback on it, but you actually
Speaker 3: wrote something similar, And I don't even have a question.
Speaker 3: Just tell me that I was right.
Speaker 4: You're right, you were right.
Speaker 3: Thank you.
Speaker 4: Look, I think we spent years. We always thought there
Speaker 4: was a theory of convergence. By bringing China into the
Speaker 4: international system, we would become more alike Now. Our view
Speaker 4: was they would become more like us, like US, more open,
Speaker 4: more liberal, more market oriented. And we used to go
Speaker 4: to them and lecture them about don't be protectionists, don't
Speaker 4: restrict foreign investment in your country, don't make it impossible
Speaker 4: for our companies to invest in your company, don't engage
Speaker 4: in industrial policy and subsidization, and don't take stakes in
Speaker 4: private companies and intervene in the private sector, and now
Speaker 4: what are we doing. We are protectionists, we have restrictions
Speaker 4: on foreign investment, we are engaged in limited industrial policy,
Speaker 4: and now we're beginning to take stakes government stakes in
Speaker 4: private companies. So rather than them becoming more like us,
Speaker 4: we have become more like them. And the challenge of that,
Speaker 4: I think is that we're now competing with them on
Speaker 4: their playing field, under their set of roles. I'm not
Speaker 4: at all convinced that we can compete on their playing
Speaker 4: field as well as we can compete on ours, because
Speaker 4: we don't have unlimited We can't go to Congress and
Speaker 4: say give us unlimited resources to invest in this sector
Speaker 4: or after that sector. We can't subes you know, the
Speaker 4: commanding heights of the technology competition. And I think it's
Speaker 4: unfortunate because I think the Chinese can play that game
Speaker 4: much better than we can.
Speaker 3: Yeah, I think this is a really important point because
Speaker 3: when we're thinking about you know, choke points in terms
Speaker 3: of manufacturing or whatever, China has the most experience out
Speaker 3: of practically anyone in the world of like building up
Speaker 3: strategic capacity and doing it in a very conscious and
Speaker 3: interventionist way.
Speaker 2: Well, and also a lot of that sort of massive
Speaker 2: oversupply that people call it is maybe to some extent intentional,
Speaker 2: but maybe also just to some extent a function of
Speaker 2: their provincial versus provincial relationship, where the provinces are hypercompeting, etc.
Speaker 2: For market share. That's just a dynamic that does. Nothing
Speaker 2: like that exists in the United States. And so the
Speaker 2: idea of moving in that direction all kinds of conditions,
Speaker 2: either by design or just sort of by happenstance of
Speaker 2: the political structure of the system.
Speaker 4: It's just very different, exactly, right, Joe. I think you know,
Speaker 4: in their case, leadership says we want to be dominant
Speaker 4: in these fifteen sectors. Every provincial governor looks at that
Speaker 4: and says, all right, I'm going to take.
Speaker 3: My local stage judge to ability.
Speaker 4: And we have you know, in China, I think they're
Speaker 4: over one hundred ev companies, right, you know, and so
Speaker 4: and they're producing and they will be producing enough cars
Speaker 4: to meet the demand of the entire world. So where
Speaker 4: does that leave the US auto sector? Where does it
Speaker 4: leave the European auto sector. Now, in our case, I
Speaker 4: think you know, we have effectively kept them out. We've
Speaker 4: effectively said we're not going to have Chinese evs here,
Speaker 4: at least at the moment, Europeans have a slight you know,
Speaker 4: more schizophrenic about it. They've also adopted protectionism, but they're
Speaker 4: more open I think to having Chinese imports. What does
Speaker 4: that mean for the future of Volkswagen, for the future
Speaker 4: of now, for the future of the other auto companies,
Speaker 4: and you know, in that case it could have broad
Speaker 4: political implications in Europe as well over time.
Speaker 3: I hesitate to ask this question, but is there anything
Speaker 3: the US can learn from China in terms of you know,
Speaker 3: trade and building out strategic industries.
Speaker 4: Well, look, I think China. We shouldn't make China into
Speaker 4: more than it is. China's made huge mistakes. They've wasted
Speaker 4: hundreds of billions of dollars on bad domestic investments, and
Speaker 4: they've got, you know, tremendous challenges, including demographic challenges that
Speaker 4: the US currently it doesn't have, and so we shouldn't
Speaker 4: make them out to be twelve feet tall. I think
Speaker 4: one thing that is current is to think through, Okay,
Speaker 4: if there is an industry that you think is important
Speaker 4: for national security or otherwise, what's the best way of
Speaker 4: supporting it by the government. The Trump administration's approach I
Speaker 4: think has been based largely on tariffs. We create this
Speaker 4: wall of tariffs, companies will have to produce or have
Speaker 4: to move their supply chain to the United States, and
Speaker 4: that's how we'll build out this area. I think what
Speaker 4: we've seen in China is that yes, they've used tariffs
Speaker 4: and other restrictions, they've also used industrial policy. They've also
Speaker 4: invested in the subsidies credit free energy. They've also invested
Speaker 4: heavily in R and D in many sectors, the life sciences,
Speaker 4: obviously AI, among others, government subsidies and government investment, and
Speaker 4: it's that combination of policies that probably is more effective
Speaker 4: than tariffs alone. To me, the concern is we're approaching
Speaker 4: this from a position of tariffs are the answer to everything.
Speaker 4: We know what the cost of tariffs are, and we're
Speaker 4: taking a gamble on whether the benefits will be there
Speaker 4: and whether tariffs alone are going to re manufacture the
Speaker 4: United States economy.
Speaker 2: You mentioned that some degree of greater redundancy and higher
Speaker 2: costs is not the end of the world, particularly if
Speaker 2: there's some political it creates some political sustainability.
Speaker 4: What is it?
Speaker 2: What does the left tail risk looks look like to you?
Speaker 2: What is the scenario in which things really, the wheels
Speaker 2: really come off one.
Speaker 4: The US doesn't have a great history with industrial policy,
Speaker 4: so if we were to multiply our efforts in various
Speaker 4: ways but not do it well, that would that would
Speaker 4: be a waste of resources and costs that we didn't
Speaker 4: need to need to incur. I think if we don't
Speaker 4: go back to the point about allies and partners, if
Speaker 4: we insist on reshoring everything and not ensuring anything, I
Speaker 4: think we probably lose some of the economies of scale
Speaker 4: and some of the comparative advantage that we have. I
Speaker 4: also think if we're if the if the existential threat
Speaker 4: is competition with China, if they are the pacing challenge,
Speaker 4: working with allies and partners is our way to reach scale.
Speaker 4: We're a big economy, we're the biggest economy in the world,
Speaker 4: but when it comes to manufacturing, we're not going to
Speaker 4: be able to compete with China alone necessarily, or rather,
Speaker 4: we're gonna be able to compete with China much better
Speaker 4: if we do so with our allies and partners.
Speaker 3: I have just one more question, this is the most
Speaker 3: important one. How good are you at Tradel?
Speaker 2: Do you ever play that we do.
Speaker 4: I love these games Trade All and World a World.
Speaker 2: Oh yeah, that's the other one. I didn't get into that.
Speaker 4: Yeah, the trade all I think is a great is
Speaker 4: a great game. I don't always get it right, but
Speaker 4: I it's it's a good Uh. It's a good reminder
Speaker 4: of just how complex certain economies are.
Speaker 2: After we're done with this, could you help us find
Speaker 2: that dairy farmer who explained the five.
Speaker 4: Absolutely, it's a fascinating lesson.
Speaker 2: Michael Frohman, thank you so much for coming online.
Speaker 4: Thanks for having me.
Speaker 2: Thank you.
Speaker 3: That was great.
Speaker 2: Tracy. I'm really I'm really a fan of this neologism
Speaker 2: or wherever it came from, the polyamorous world order, because
Speaker 2: you know, people talk about the G seven and what's
Speaker 2: his name talks about the G zero Yeah, and other
Speaker 2: people talk, oh, bipolarity. But but I think this is
Speaker 2: a good one.
Speaker 3: It is kind of funny to me that there's this
Speaker 3: idea out there that just because Goldman came up with
Speaker 3: like a catchy acronym for the bricks, that somehow that's
Speaker 3: going to like create a new strategic coalition from.
Speaker 2: It's like so pretty dick, so perfect countries. We should
Speaker 2: have Jim o'neilon to talk about. We've never talked to
Speaker 2: Jimo neilon, So the thought of him coming up with
Speaker 2: this paper, these are going to be the big economies,
Speaker 2: and now they now that it's a rival. Yeah, but
Speaker 2: the West is like a really good.
Speaker 3: That would be really interesting. But I do think Okay,
Speaker 3: one thing you can say about polyamorous relationships is they
Speaker 3: tend to come with a lot of drama, right, and
Speaker 3: so it it definitely feels like we're going to have
Speaker 3: more instability, or at least like more things changing, more
Speaker 3: things in flux, more volatility.
Speaker 4: Right.
Speaker 2: So this idea that I find it compelling, this idea
Speaker 2: that the old globalization can't just be replaced with the
Speaker 2: same globalization. Except the leader is right. I mean, the
Speaker 2: US was this huge trade deficit country. China is a
Speaker 2: huge trade surplus country. That naturally means that its relationship
Speaker 2: with all of its partners on some level, even if
Speaker 2: it wants to be at the forefront of creating new
Speaker 2: terror free zones, et cetera, is going to be of
Speaker 2: a different type than the relationship that the US had.
Speaker 3: Absolutely, shall we leave it there, Let's leave it there,
Speaker 3: all right? This has been another episode of the Authoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm joll Wisenthal. You could follow me at The Stalwart.
Speaker 2: Follow our guest Michael Frowman. He's at Mike Frohman. Follow
Speaker 2: our producers Krmen Rodriguez at, Kerman armand Deshil Bennett, a Dashbot,
Speaker 2: and Kilbrooks and Kalebrooks. From our odd Lots content, go
Speaker 2: to Bloomberg dot com slash odd Lots were the daily
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