Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
Speaker 2: geopolitics from our global headquarters in New York City. We
Speaker 2: are live on Bloomberg Television weekday mornings from six to
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify
Speaker 2: or anywhere else you listen, and as always on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Tiffany Wannaga Pimpos
Speaker 2: is going to join us in the meantime. Tiffany, Welcome
Speaker 2: to the program. Is the store still open for a
Speaker 2: Rake Cup in September?
Speaker 3: Yeah?
Speaker 4: I mean, I think this CPI was completely in line
Speaker 4: with expectations how we've characterized the sort of Terra related
Speaker 4: pass through. The evidence is that it's happening, but it's
Speaker 4: happening slower than I think many people expected going back
Speaker 4: to April, when when the more dramatic TERRFF announcements were
Speaker 4: first implemented or announced. It's happening more slowly and across industries,
Speaker 4: you know, it's it's more uneven, you know. So I
Speaker 4: think the broader story here that we're still seeing is
Speaker 4: that it's very concentrated within goods, it's happening slowly, and
Speaker 4: outside of that, you know, inflationary pressures look very manageable.
Speaker 4: So I think for a federal reserve, that is a
Speaker 4: very good sign.
Speaker 5: You know.
Speaker 4: In addition to that, there's I would argue, better news
Speaker 4: in terms of the so called second round effects with
Speaker 4: higher prices leading to higher wages and getting.
Speaker 3: More into the inflationary process.
Speaker 4: We've actually seen inflation expectations from various surveys start to moderate.
Speaker 4: The University of Michigan survey, which we'll get later this week,
Speaker 4: the longer term inflation expectation index for that one had
Speaker 4: accelerated more, but it's moderated more recently. So I think
Speaker 4: all of this points to, you know, a central bank
Speaker 4: that can get on with normalizing policy rates back to neutral.
Speaker 2: It's definitely something we've been exploring throughund the whole of
Speaker 2: this morning, and to be fair, over the last several months.
Speaker 2: Is whether tariff delayed. That's a taroft story is delayed
Speaker 2: by the fact that we've seen fantastic infantry management from
Speaker 2: some of the retailers at the moment, and that maybe
Speaker 2: we haven't seen the full extent of this. When would
Speaker 2: you get comfortable that we've seen the limits of it all.
Speaker 4: Yeah, I mean, I think, like you know, we expect
Speaker 4: a good portion of the pass through over the next
Speaker 4: several months. But I think the bottom line is is
Speaker 4: that companies have room. It appears that companies have room
Speaker 4: as a result of still high margins coming out of
Speaker 4: the pandemic. Companies have room to sort of more slowly
Speaker 4: pass this on to consumers. And and so what that
Speaker 4: means is that, you know, goods inflation could be a
Speaker 4: little bit more persistent over time, but you're not necessarily
Speaker 4: going to have that bigger surge that many people expected
Speaker 4: as you get that faster price level adjustment this year.
Speaker 4: So I think for the FED, I think that's all
Speaker 4: good news. You know. The other thing that we see
Speaker 4: when we look at you know, a range of data,
Speaker 4: you know, is that companies so far are absorbing we
Speaker 4: think the lions share of the additional costs of tariffs,
Speaker 4: and as I mentioned, they can do it. Their margins
Speaker 4: were elevated post pandemic. That has remained the case, and
Speaker 4: so they do have room here. You know, at least
Speaker 4: the largest companies have room to sort of manage this process,
Speaker 4: and we think that's what they're doing.
Speaker 3: You know. The other thing.
Speaker 4: Is is the tax legislation that was recently passed, the
Speaker 4: One Big Beautiful Bill, that is, you know, reducing the
Speaker 4: effective tax rates for a lot of companies, especially those
Speaker 4: companies that are capital intensive.
Speaker 3: They invest a lot.
Speaker 4: They're getting you know, upfront expensing tax credits and that
Speaker 4: will help offset the impact of the tariffs as well.
Speaker 4: A lot of those tax credits were retroactive for twenty
Speaker 4: twenty five. So all of that just means that companies
Speaker 4: do have a little bit of flexibility here and can
Speaker 4: manage the pass through rate.
Speaker 6: So, Timmy, are you basically saying that because of the
Speaker 6: One Big Beautiful Bill, companies are able to eat more
Speaker 6: of the higher terifts from this administration.
Speaker 3: Yeah, I mean, I certainly think that that's the case.
Speaker 4: You know. Now, the you know, what we estimate in
Speaker 4: terms of the tax savings in aggregate for twenty twenty
Speaker 4: five is around you know, one hundred and fifty billion.
Speaker 4: The tariff tax collections that are happening, we annualize at
Speaker 4: about three hundred and fifty billions. So the tax legislation
Speaker 4: is not completely offsetting the additional taxes paid by tariffs,
Speaker 4: but it certainly is in mitigating some of it. And
Speaker 4: so that's why, you know, we've argued you'll still see
Speaker 4: we think some pass through of higher tariffs on two prices,
Speaker 4: you'll get some price adjustment. But we think the risk
Speaker 4: here is just that it takes longer than many people
Speaker 4: are expecting, you know, the inflationary effects of this in
Speaker 4: the back half of this year somewhat less, you know,
Speaker 4: and again.
Speaker 3: That just sets the federal reserve up.
Speaker 4: To you know, to continues to restart its cutting cycle
Speaker 4: to get back ultimately to neutral policy rates.
Speaker 7: Tiffany Wold, thank you.
Speaker 2: David Kenny, a JP Mork and Asset Management with us
Speaker 2: around a table with David, good morning. Not going to
Speaker 2: ask you that question. I just want to ask you
Speaker 2: the following. When will you be comfortable that we've seen
Speaker 2: the limits of this? How many more months of data
Speaker 2: do you need?
Speaker 7: We're just getting started.
Speaker 8: I mean, what we saw today was plenty of inflation
Speaker 8: without tariff effects. We didn't have a big increase in
Speaker 8: new car prices. We never big increasing in a paro
Speaker 8: of prices. But let's look at where we did see
Speaker 8: an increase. Airline fares will come down a lot because the.
Speaker 7: Airline industry was very weak.
Speaker 8: But if you look at the recent data on people
Speaker 8: going through TSA checkpoints, it's firmed up, and so domestic
Speaker 8: airline travel is now back on a positive year over
Speaker 8: year basis. We've got a lot of fiscal stimuls going
Speaker 8: to kick into the economy early next year, but.
Speaker 7: Also in the tariffs.
Speaker 8: Even in July we saw a lot of money collected,
Speaker 8: but it still equates to about a tariff rate of
Speaker 8: about eight percent. We think this whole tariff rate is
Speaker 8: going to go up to about fourteen and a half
Speaker 8: percent measured by that later. So we've got most of
Speaker 8: this tariff increase still ahead of us in terms of
Speaker 8: just affecting the data. And then you know, people say, oh,
Speaker 8: the retailer is going to eat it.
Speaker 7: No they're not. They just wrote the check. So so
Speaker 7: of course, of course it.
Speaker 8: Looks like they're eating at Walmart writes a check, but
Speaker 8: eventually they're going to pass it on, and yes, they've
Speaker 8: got good margins, but how do they manage to sustain
Speaker 8: these margins because they're great at figuring it out and
Speaker 8: figuring out how to stiff consumers, and that's what they'll do.
Speaker 8: And so this thing will feed through. It's just a
Speaker 8: matter of a number of number of months. And you know,
Speaker 8: inflation is going up, but it's going up very steadily,
Speaker 8: and it will be above we think about three and
Speaker 8: a half percent in CPI by the end of the year.
Speaker 2: You've made some important points here. One is that you
Speaker 2: believe that goods prices will continue to affirm through the
Speaker 2: year ahead, and that you're not going to see an
Speaker 2: offset from services. Is that right?
Speaker 8: That's correct, because what's going to happen is the economy
Speaker 8: is going to be slower in the second half of
Speaker 8: this year as these this goods inflation feeds through. But
Speaker 8: the big kicker here that people are not talking about
Speaker 8: is a huge rush of income tax refunds that's going
Speaker 8: to kick in and the start of the next year.
Speaker 8: It's going to be like an extra stimulus check.
Speaker 7: And that you know, we've seen what happens.
Speaker 8: You give him as a cookie, he's going to want
Speaker 8: a glass of milk. You give an American consumer a
Speaker 8: stimulus check, they will spend it and You're going to
Speaker 8: have a surge of spending in the first half of
Speaker 8: next year with limited supply because of all these terriff
Speaker 8: and supply chain disruptions. You are going to get a
Speaker 8: second round of inflation, which is going to sustain inflation
Speaker 8: well above three percent, which begs the question of why
Speaker 8: again is a FED cutting Well that if infation's heading
Speaker 8: the wrong way slowly.
Speaker 6: That was going my next question to you, what does
Speaker 6: the FED do with this kind of data?
Speaker 7: They should stay on hold.
Speaker 8: There is I think there's very little argument that in
Speaker 8: favor of the FED cutting rates. Rates are not abnormally high.
Speaker 8: I don't know why they think three percent is a
Speaker 8: neutral rate in the long run, It doesn't equate to
Speaker 8: history before the pandemic. I think something four four and
Speaker 8: a half percent is more of a neutral rate anyway,
Speaker 8: But there is no urgency about cutting rates, and now
Speaker 8: I think they will cut rates for political reasons, which
Speaker 8: is very unfortunate. But I don't think they should based
Speaker 8: on these data.
Speaker 6: As you're talking, traders are actually adding to betts of
Speaker 6: September fed raate cup because this basically came in in
Speaker 6: line when it comes to inflation. Why for political reasons
Speaker 6: when actually we saw a trend three months of not
Speaker 6: so great unemployment numbers.
Speaker 8: Well yeah, but if you look at the overall mosaic
Speaker 8: of employment, it's still growing. And remember we've got to
Speaker 8: labor supply problem too. And one of the things that
Speaker 8: Jay Powell pointed out is he's not looking at payroll growth,
Speaker 8: he's looking at the unemployment range. If you've got fewer
Speaker 8: jobs being created, but we've got fewer workers, then you
Speaker 8: still got a certain amount of inflationary pressure. You just
Speaker 8: said that the growth potentially of the economy has gone down. Well,
Speaker 8: they can't do anything about that. So if you're not
Speaker 8: this economy is not going to spark a huge surge
Speaker 8: in unemployment. And I think the basic point is by
Speaker 8: the end of the year, we think maybe four and
Speaker 8: a half percent unemployment, we think over three percent in inflation.
Speaker 8: They're missing their inflation target by more than unemployment. Therefore
Speaker 8: they shouldn't be come just.
Speaker 2: Tanning this up, though, but you believe they will be cuttack.
Speaker 2: So you've got a federal Reserve cutting interest rates at
Speaker 2: a time when inflation is picking up. And the key
Speaker 2: phrase you used with second round effects, you don't believe
Speaker 2: this is a one off. You're actually going to see
Speaker 2: second round effects in the first half of twenty six.
Speaker 2: What's your market for you on something?
Speaker 8: Well, so I think it's the Markt view is not
Speaker 8: too bad because I think, for again, for political reasons,
Speaker 8: I think unfortunately feder will cut twice this year, maybe
Speaker 8: three times next year. They'll get going and cutting. It's
Speaker 8: not going to really change the economy that much. But
Speaker 8: if you bring long term bring short rates down enough,
Speaker 8: it does push extra liquidity into the equity market. So
Speaker 8: you could just maintain these bubbly acid markets. What we've
Speaker 8: got is a tortoise of an economy and a hair
Speaker 8: of a market, and we're just giving more sugar.
Speaker 7: To the hair.
Speaker 2: That's the stock story. What about a fixed income story
Speaker 2: for bonds? Because we've had guest staff. The guests come
Speaker 2: on this program and site get ready for speryeld curve.
Speaker 2: The guy aggressive at the front end, you're going to
Speaker 2: see yields LOWA. At the long end, you're going to
Speaker 2: say a questionable development.
Speaker 8: Well, you know it's again it's hard for a tortoise
Speaker 8: psych economy to generate a really steep yield curve. So
Speaker 8: but I think you could see rates move up a bit,
Speaker 8: I wouldn't be I wouldn't be long duration here because
Speaker 8: I don't think this economy is going to go in
Speaker 8: for a session.
Speaker 7: I think by the time that the tariffs really.
Speaker 8: Hit going to be on the verge of physical stimulus
Speaker 8: because of this income tax refund thing, and that will
Speaker 8: keep this keep this economy moving forward. And if the
Speaker 8: economy is moving forward, you got inflation printing at three,
Speaker 8: you shouldn't really have a long bond lower than four two.
Speaker 2: What do you think inflation is going to pay cat
Speaker 2: in the next twelve months.
Speaker 8: I think CPI is going to peek out about three
Speaker 8: and a half percent and then hang there between three
Speaker 8: three and a half percent through about June of next year,
Speaker 8: and then find it's going to come down again because
Speaker 8: this is sugar you know, these income tax refunds.
Speaker 7: It's a sugar rush. It's not proteine. It will wear
Speaker 7: her off.
Speaker 8: And then by the end of next year, then I
Speaker 8: think the economy is finding cuding it unless, of course,
Speaker 8: you get some more stimulus. And that's really the problem,
Speaker 8: because if the Fed keeps on cutting rates whenever, whenever,
Speaker 8: you know, the other side of Washington asks them to
Speaker 8: then it enables more and more rounds of fiscal stimulus
Speaker 8: to always keep this economy a little bit too hot.
Speaker 7: So it's not it's not you know, it's called inflammation.
Speaker 7: Doctors don't like it.
Speaker 2: David.
Speaker 7: It's got a hair from you.
Speaker 2: It's the nicest This morning, Chinese authorities urging local companies
Speaker 2: to avoid using a Video's eight twenty chip. So its
Speaker 2: just telling us here at Bloomberger the firms are being
Speaker 2: discouraged from using the chips, especially for government related purposes.
Speaker 2: Joining US snout to discuss as John Leber, if you
Speaker 2: raise a group, John malcome to the program, sir. I
Speaker 2: just wonder what the endgame has here for the Chinese
Speaker 2: and what ultimately they're trying to achieve.
Speaker 5: I think the end games that the Chinese want to
Speaker 5: have their own chip and they don't want to be
Speaker 5: dependent on the US tech stack. And that's one of
Speaker 5: the reasons that Trump allowed these H twenty exports was
Speaker 5: because he bought into the argument that if the US
Speaker 5: dominates chip technology, and if the Chinese learned to rely
Speaker 5: on that in their own technology stacks, then it brings them.
Speaker 5: It gives the US more power, not less here and
Speaker 5: if the Chinese recognized that argument, it's somewhat valid, and
Speaker 5: so what they want to do is encourage people not
Speaker 5: to use the American tech. And they know also how
Speaker 5: vulnerable they are to things like the foreign direct Product
Speaker 5: rule and the other rules that the US has used
Speaker 5: to weaponize their own technology supply chain over the past
Speaker 5: several years. And now that's the long term game here.
Speaker 5: I think the H twenty is just one part of that.
Speaker 5: But technological development is going to determine what happens here,
Speaker 5: not necessarily export controls.
Speaker 6: John when it comes to Nvidia and AMD selling these chips,
Speaker 6: getting these export licenses to go back into China.
Speaker 3: What kind of pushback have.
Speaker 6: You heard in Washington from both individuals who are questioning
Speaker 6: whether the fifteen percent revenue cash back to the United
Speaker 6: States is legal and the China Hawks as well in
Speaker 6: the Trump administration.
Speaker 5: Yeah, I mean the fifteen percent revenue take makes it
Speaker 5: look like to certain people, and I think this is
Speaker 5: a valid argument that national security is now for sale.
Speaker 5: I'm sure a lot of companies will be very happy
Speaker 5: if they had the opportunity to buy their way out
Speaker 5: of US regulations that otherwise ban them from doing business.
Speaker 5: You know, in a way, this is a version of
Speaker 5: a carbon tax, where you're selling you're purchasing the right
Speaker 5: to pollute. Here, you're purchasing the right to undermine America's
Speaker 5: national security by selling these chips to the Chinese, which
Speaker 5: a lot of China Hawks in Washington are not happy
Speaker 5: about because they believe that this is a needabling Chinese
Speaker 5: technological development. This is a contrary to the policy of
Speaker 5: the Biden administration and up until last week, the policy
Speaker 5: of the Trump administration, which was of course to deny
Speaker 5: the Chinese access to these chips. This is a very
Speaker 5: controversial move. It's never been done before as far as
Speaker 5: we're aware, and you know there's Trump's getting a lot
Speaker 5: of pushback, both from the security hawks and also people
Speaker 5: who argue this is an illegal export tax, which I'm
Speaker 5: pretty confident they'll find their way around. But this is
Speaker 5: something new we've never seen before.
Speaker 3: Do you think this is a one off or we're
Speaker 3: going to see more policy.
Speaker 5: Like this, that's a good question. I think we don't
Speaker 5: know yet. I don't think there's a lot of areas
Speaker 5: where this type of thing is doable, where you know
Speaker 5: you've got an export ban that somebody wants to that
Speaker 5: they're offering the chance to raise some revenue off of
Speaker 5: So I'm not sure where else we could see it,
Speaker 5: but we still have. You Know, one of the things
Speaker 5: that's really surprising to me to remember all the time
Speaker 5: is there's still three and a half years left in
Speaker 5: this administration, and we know Trump loves to do these
Speaker 5: types of deals. So it wouldn't surprise me to see
Speaker 5: this show up in other areas. It's just hard to
Speaker 5: predict which ones yet.
Speaker 2: Well, John, let's talk about what we learned from the
Speaker 2: first term under President Trump. In Trump Volume one, there
Speaker 2: was a coherent ideology governing trade policy. Whether you liked
Speaker 2: it or not, I happened to be sympathetic to the
Speaker 2: concerns they had about reciprocity in a country like China
Speaker 2: who had put barriers to entry up all over the place. John,
Speaker 2: Now I'm struggling with what the framework is exactly this
Speaker 2: time around.
Speaker 7: How you explaining this to people at the moment.
Speaker 5: Yeah, I mean a huge difference between this term and
Speaker 5: last term is you don't have the strong personality of
Speaker 5: Robert Leitheiser directing a lot of Trump's trade policies. What
Speaker 5: you have instead is the strong personality of Donald Trump
Speaker 5: directing these policies, and Trump is going every which way,
Speaker 5: and you know, it's obvious that in some cases he's
Speaker 5: motivated to get a deal. We saw that with all
Speaker 5: these countries pre August first, and in other cases you
Speaker 5: see personal relationships starting to sour and take over the
Speaker 5: ability for the US to cut deals, like what's happening
Speaker 5: with the US and India.
Speaker 3: Now.
Speaker 5: I think at the core of it, though Trump remains
Speaker 5: a very transactional guy. He's somebody that wants to see
Speaker 5: higher tariffs, and he's somebody that wants to do deals
Speaker 5: in order to keep those in order to get those tariffs.
Speaker 5: With China, you know, they've been able to leverage their
Speaker 5: use of rare earths and critical minerals to great effect.
Speaker 5: The US national security community is in a panic about
Speaker 5: its ability to build weapons in the United States because
Speaker 5: of the Chow points that China has been using to
Speaker 5: deny the US those critical minerals and Trump himself, and
Speaker 5: that's driving a lot of the China policy right now.
Speaker 5: So I don't think there's a consistent strain that you
Speaker 5: can pull through here, but it is worth pointing out
Speaker 5: that Trump ran on a campaign of higher tariffs, and
Speaker 5: now the US is getting them with an average effective
Speaker 5: rate somewhere in the mid to high teens. And that's
Speaker 5: a huge shift that reflects Trump's own personality and his
Speaker 5: own policy parpers.
Speaker 2: Well, let's just sit on that transactional nature. Nothing new,
Speaker 2: quite well understood. Where people struggle, is what defines whether
Speaker 2: it's a good transaction or a bad transaction, and what
Speaker 2: kind of feedback loops is the president's sensitive too.
Speaker 5: Well, Clearly he's sensitive to feedback from the private sector.
Speaker 5: I mean, the reason that the Liberation Day tariffs were
Speaker 5: paused in the first place was because of what he
Speaker 5: called the yippiness in the bond market. So that's one
Speaker 5: type of feedback. Another type of feedback he's clearly sensitive
Speaker 5: to is direct feedback from the business community. His meeting
Speaker 5: with Jensen Wong directly led to the selling of these
Speaker 5: H twenty chips into China. And I also think that
Speaker 5: he's sensitive to the positive feedback he's getting from the
Speaker 5: deals that are happening where his US trading partners aren't
Speaker 5: putting up any real resistance here, nobody's retaliating. I think
Speaker 5: that's an important point, is that he's faced virtually zero retaliation,
Speaker 5: and that's allowed him to get away with these higher tariffs.
Speaker 5: And I think going forward, the feedback that might cause
Speaker 5: him the reverse course would be economic weakness, major complaints
Speaker 5: from the US business community, big businesses who are going
Speaker 5: to have the ear of the president, and I think
Speaker 5: that that means that probably small businesses are getting left
Speaker 5: out of this because he's not necessarily hearing their voices.
Speaker 6: John, when it comes to the trade agreement, we have
Speaker 6: core have the punting of the negotiations. When it comes
Speaker 6: to China and the United States, you mentioned the victory
Speaker 6: really of Beijing using those rare earth magnets in lieu
Speaker 6: of making sure they can loosen up export controls. Would
Speaker 6: you say Beijing has the leverage going into November, Not necessarily.
Speaker 5: I mean, I think you have to be mindful of
Speaker 5: the fact that China is going to face higher tariffs.
Speaker 5: They're just comfortable their system is prepared for a level
Speaker 5: of higher tariffs and they can deal with tariffs in
Speaker 5: the thirty percent range, which is where we think tariffs
Speaker 5: on China are going to end up here. However, you know,
Speaker 5: I don't want to play down the fact that they
Speaker 5: have been able to play this critical mineral game very
Speaker 5: very well in the US is obviously very serious sensitive
Speaker 5: to it. But this is not necessarily a positive story
Speaker 5: from the Chinese economy either.
Speaker 6: When it comes to what the United States wants to
Speaker 6: see out of China. They're dealing with export controls, They're
Speaker 6: dealing with rare eergs. The President the other day was
Speaker 6: truthing about soybeans. What else is on the list before
Speaker 6: potentially she and Trump can meet and get to this
Speaker 6: grand bargain of a deal.
Speaker 5: Yeah, I mean, we don't see a grand bargain. I
Speaker 5: think we don't think a grand bargain is necessarily the
Speaker 5: right way to describe this. We're thinking about this as
Speaker 5: a very transactional deal. So the US is going to
Speaker 5: raise its tariff levels on Chinese goods. China will make
Speaker 5: some purchase commitments about market access. They're not going to
Speaker 5: fundamentally reform their economy, which was of course the goal
Speaker 5: in Trump won and the goal of some of the
Speaker 5: Chinahawks in this administration. But what they're going to do
Speaker 5: is make enough promises to buy enough time that they
Speaker 5: can live with these thirty percent tariffs and then hope
Speaker 5: to fight that out in the next presidential term. I'm
Speaker 5: not at all convinced these tariffs are going down even
Speaker 5: after President Trump's term is over. None of the China
Speaker 5: tariffs went down after his first term, and these things
Speaker 5: have a way of being enduring.
Speaker 2: John, I appreciate the update, the reaction from you, sir
Speaker 2: as always, thank you, John labor there if you write
Speaker 2: your group and listen with the economy of the Hoover
Speaker 2: Institution and the former senior advisor for China and the
Speaker 2: Commis Department under President Biden. Elizabeth, welcome back to the program.
Speaker 7: It's going to hear from you.
Speaker 2: I want to lead on your expertise here and your
Speaker 2: experience and something I know you're thinking about the moment.
Speaker 2: Are we blurring the lines between national security and trade?
Speaker 1: Yeah, I mean I think that is a question that
Speaker 1: was clearly raised over the past week or two with
Speaker 1: the President's President Trump's decision to reverse his administration's earlier
Speaker 1: decision April decision to put the export controls on in
Speaker 1: Vidia's H twenty chit. You know, typically you put an
Speaker 1: export control on technology that you believe could contribute to
Speaker 1: you know, a country or companies in that country developing
Speaker 1: military capabilities.
Speaker 9: That will undermine your national security.
Speaker 4: So that was the.
Speaker 1: Decision that the administration made just in April, and then
Speaker 1: we saw, you know, just earlier this month, that the
Speaker 1: President reversed that decision without any explanation as to why
Speaker 1: that decision was being reversed. And I think it points
Speaker 1: to a larger challenge with its administration and that they
Speaker 1: have not yet articulated a real China strategy. We don't
Speaker 1: know whether this president considers China to continue to be
Speaker 1: the greatest long term strategic threat, which is something that
Speaker 1: his first administration did put out there as part of
Speaker 1: a China strategy that helps an administration set priorities, you know,
Speaker 1: understand the trade offs that you're.
Speaker 9: Going to make or not make.
Speaker 1: But without that kind of overarching framework, we don't know,
Speaker 1: you know, where this president is coming.
Speaker 9: From, where he's going, whether everything is up for negotiation moving.
Speaker 6: Forward, Elizabeth, given your work in the Commerce Department, have
Speaker 6: you ever seen anything like this, some corporation able to
Speaker 6: get their hands on a license because they're willing to
Speaker 6: give some of the revenue back to the US government.
Speaker 1: No, I mean, that was certainly a new twist, but
Speaker 1: even taking one step back from that, it's a new
Speaker 1: twist to have the head of the Bureau of Industry
Speaker 1: and Security, Jeffick Kessler, go to London to be part
Speaker 1: of the trade negotiations with China. You know, in the
Speaker 1: Bide administration and frankly, in all previous administrations, you would
Speaker 1: never consider linking export controls with trade negotiations. Export controls
Speaker 1: deal with broad issues of foreign policy and national security.
Speaker 1: You know, tying them in some way to trade really
Speaker 1: makes no sense. But that's what this administration has opened,
Speaker 1: the sort of the door to So I think it's
Speaker 1: a it's a bigger problem, even more than just this
Speaker 1: one off decision.
Speaker 9: Is just this new, you know world that we found
Speaker 9: ourselves in.
Speaker 1: And as far as the fifteen percent revenue, you know,
Speaker 1: the sort of you know, Nvidian A and D having
Speaker 1: to give fifteen percent of their China the revenues from
Speaker 1: the sale of these chips back to the US government.
Speaker 1: Of course, that only sort of amplifieser reinforces the sense
Speaker 1: that somehow our national security is up for sale, because
Speaker 1: you know, does that mean that all chips moving forward,
Speaker 1: or even other goods that the United States you know,
Speaker 1: sells to China, can all that be subject to some
Speaker 1: kind of new tax of some sort, and the revenues
Speaker 1: will have to come back to the US government.
Speaker 9: It really is fundamentally.
Speaker 1: Changing the nature of the inter relationship between national security
Speaker 1: and trade, and frankly just trade generally.
Speaker 6: There's a number of issues brewing between these two economies. Fentanyl,
Speaker 6: China continuously buying Russian and Iranian crude, disagreements about US
Speaker 6: business operations in China when they sit down. What do
Speaker 6: you think is the US's main goal out of this relationship.
Speaker 1: I mean, I would have said in the first Trump
Speaker 1: administration that there was an emphasis placed first on, of course,
Speaker 1: securing these big purchase agreements that again President Trump seems
Speaker 1: to place as a top priority. He mentioned just yesterday
Speaker 1: or the day before, having China quadruple its purchases of soybeans.
Speaker 9: Of course, China's already diversified away from the US.
Speaker 1: It gets seventy percent or more of its soy beans
Speaker 1: for Brazil now because of the tariffs that the president began,
Speaker 1: the tariff war that he started when he first came
Speaker 1: into power.
Speaker 9: But I think number one, yes, getting more purchases from
Speaker 9: the Chinese.
Speaker 1: But I think also the US wants to secure and
Speaker 1: stable supply of rare earth elements from China, which are
Speaker 1: of course essential for both our national security and technology industries.
Speaker 1: And we saw what happened when China put the squeeze
Speaker 1: on those, you know earlier, just a month or two ago.
Speaker 1: You know, companies in the United States really began to
Speaker 1: feel the pinch. So I think that's probably the second priority.
Speaker 1: And then all of the trade adjacent issues that you
Speaker 1: just mentioned, fentanyl, you know, China's economic support for Russia
Speaker 1: in its war of aggression against Ukraine, you know, TikTok
Speaker 1: is still standing out there. But I think those fundamental
Speaker 1: issues around the Chinese economy, things like China's export of
Speaker 1: its overcapacity in many areas of core technologies, I think
Speaker 1: those are going to be very difficult for the Trump
Speaker 1: administration to make progress on. I don't think they have
Speaker 1: the leverage that they need, or maybe that they even
Speaker 1: think they have to get China to sort of fundamentally
Speaker 1: change the way that it does business.
Speaker 2: We're up against the clock, heare. But in the forty
Speaker 2: five seconds we have left, Elizabeth, why has it been
Speaker 2: so difficult to convince the Chinese they need to rebalance
Speaker 2: their economy when so many economists agree that it might
Speaker 2: be good for them.
Speaker 1: I mean, I think she Jinping has a vision of
Speaker 1: how the Chinese economy should work in which is reliant
Speaker 1: on exports and have the investment investment now into core technologies,
Speaker 1: and he believes it is working for the Chinese economy
Speaker 1: and is willing to suppress Chinese consumer demand and Chinese
Speaker 1: incomes to achieve what he believes will be will put
Speaker 1: China in a stronger long term putting moving forward.
Speaker 2: Elizabeth Economy of the Hoover Institution, Elizabeth, thank you appreciate it.
Speaker 2: As always, this is the Bloomberg Surveillance podcast, bringing you
Speaker 2: the best in markets, economics, and geopolitics. You can watch
Speaker 2: the show live on Bloomberg TV weekday mornings from six
Speaker 2: am to nine am Eastern. Subscribe to the podcast on Apple,
Speaker 2: Spotify or anywhere else you lists, and as always on
Speaker 2: the Bloomberg Terminal and the Bloomberg Business out Mm hmm