Speaker 1: When it comes to trade, there are a number of
Speaker 1: ways that a country can address grievances with partners. The
Speaker 1: past century or so, that's meant a lot of negotiation
Speaker 1: and more recently the involvement of the World Trade Organization.
Speaker 1: But President Donald Trump is relying on tariffs and in
Speaker 1: a big way.
Speaker 2: Well, it may be effective from one angle, with dozens
Speaker 2: of country leaders now angling to negotiate and promise to
Speaker 2: buy more from the US, it has consequences for US
Speaker 2: businesses and global investment, and it doesn't necessarily tackle one
Speaker 2: of the administration's concerns, which is Chinese companies evading tariffs
Speaker 2: through third countries. We're all listening to Asia Centric from
Speaker 2: Bloomberg Intelligence. I'm John Lee in Hong Kong.
Speaker 1: And I'm Katadmitriyeva, also in Hong Kong. And today we're
Speaker 1: talking to Abehi Ioha. She's a trade economist and assistant
Speaker 1: professor at Harvard Business School, and she's going to help
Speaker 1: us unpack tariffs, trade policy and all this other fun stuff.
Speaker 1: Thanks for joining us today.
Speaker 3: Be Hey, thanks for having me.
Speaker 1: Now we've had a lot of news on tariffs and
Speaker 1: trade policy. I want to ask you, just as an
Speaker 1: economist in this space, can you talk a bit about
Speaker 1: your kind of initial reaction, like when tariffs come in,
Speaker 1: what are the likely outcomes in the short term and
Speaker 1: also the long term.
Speaker 4: I think there are two aspects of the current trade
Speaker 4: policy environment.
Speaker 3: That are important to focus on.
Speaker 4: So there's how high tariffs actually will be ultimately, but
Speaker 4: then there's also the uncertainty about what the tariffs are
Speaker 4: and how they will keep changing over time, and so
Speaker 4: those things actually have different impacts. So you could think,
Speaker 4: for example, there's a world in which tariffs ultimately end
Speaker 4: up being ten percent on every country, every US trade partner,
Speaker 4: and then maybe everybody retaliates and it's ten percent all round,
Speaker 4: and businesses know that in advance, and so they plan
Speaker 4: and they factor that into their projections and how they
Speaker 4: think about hiring and investment and locating and all of
Speaker 4: those decisions. And so the reaction is going to be
Speaker 4: very different from a world in which we still end
Speaker 4: up in the same ten percent tariff world. But there's
Speaker 4: a lot of uncertainty along the way about where tariffs
Speaker 4: really will be because there are changes in businesses behavior
Speaker 4: and decisions given uncertainty, right, so there's likely to be
Speaker 4: less investment because everybody's waiting to see where things will
Speaker 4: ultimately land. Potential planned expansion or growth might be paused
Speaker 4: because people are hedging against risk of things changing over
Speaker 4: time because they don't know where things will end up.
Speaker 4: So my initial reaction to the current trade policy environment
Speaker 4: is really that we're getting a double whammy of both
Speaker 4: the tariffs themselves, like the impact of the tariffs, but
Speaker 4: also the impact of the uncertainty of the business environment
Speaker 4: on what businesses are able to plan to do and
Speaker 4: what they're able to do in the short term and
Speaker 4: the medium term. And so those are two things that
Speaker 4: I don't think people often distinguish between, but for the
Speaker 4: time being, I think it's the uncertainty that's actually having
Speaker 4: a significant impacts, even on businesses that are not directly
Speaker 4: trade exposed.
Speaker 2: Asia Centric is produced by Bloomberg Intelligence. We're more than
Speaker 2: five hundred experienced analysts and strategists work around the clock
Speaker 2: to bring you timely, world class research. Our coverage spans
Speaker 2: two hundred market industries, currencies, commodities, and industries, as well
Speaker 2: as over two thousand equities and credits. To learn more
Speaker 2: about Bloomberg Intelligence, visit BI go on the Bloomberg terminal.
Speaker 2: If you like what you're hear, don't forget to subscribe
Speaker 2: and share. Abiah, you're an expert in global trade. What
Speaker 2: do you think is the current administration's goals in implementing
Speaker 2: these tariffs? Is it to reduce the trade deficit? Is
Speaker 2: it to bring jobs back to the US?
Speaker 4: So, I think explicitly, and you can tell from the
Speaker 4: way in which the reciprocal tariffs that were announced on
Speaker 4: April second, also known as Libration Day, the way those
Speaker 4: tariffs were calculated. Essentially, we're calculated not based on you know,
Speaker 4: Vietnam charges US four percent times, so we're going to
Speaker 4: charge them four percent tires, but really tariff explicitly based
Speaker 4: on the trade deficit that the US has with Vietnam.
Speaker 4: And so for that reason, I think it's pretty clear
Speaker 4: that the trade deficit is a key motivation for the
Speaker 4: tariff policies that are being put in place today, in
Speaker 4: the sense that I think the government, the current administration,
Speaker 4: really sees significant value in shrinking the overall US trade
Speaker 4: deficit in goods with its trade partners. One thing to
Speaker 4: keep in mind, I specify in goods because the US.
Speaker 5: Actually a net exporder of services but it has a
Speaker 5: trade deficit.
Speaker 1: Inputs with that point on the reducing the deficit, can
Speaker 1: you talk a bit about because there is a lot
Speaker 1: of information also misinformation, about what a trade deficit actually
Speaker 1: means for the US. Trump has said that it's a
Speaker 1: sign that the country is being taken advantage of that
Speaker 1: it's not selling its goods abroad, it's buying from other
Speaker 1: countries and helping those economies grow. Can you talk a
Speaker 1: bit about what the US trade deficit? To you as
Speaker 1: a trade economist, what does that mean?
Speaker 4: So to be perfectly transparent, lots of factors can lead
Speaker 4: to a trade deficit. I think fundamentally you can just
Speaker 4: start with comparative advantage. Right, So, for example, you have
Speaker 4: likely have a trade deficit with your yoga teacher.
Speaker 3: Do you do.
Speaker 1: Yoga y in what way?
Speaker 4: You probably pay your yoga instructor money for services rendered
Speaker 4: i e.
Speaker 3: Teaching you yoga?
Speaker 4: I don't know how much your yoga instructor buys from you,
Speaker 4: and so you probably are a net importer of yoga
Speaker 4: services from your yoga instructor unless you make stuff that
Speaker 4: your yoga instructor really loves to buy.
Speaker 3: But if you think about the bilateral yeah, exactly.
Speaker 4: But if you think of the bilateral trade deficits, those
Speaker 4: are often a function of multiple things. So of course
Speaker 4: they could be the function of trade barriers that countries
Speaker 4: might have non tariff barriers like standards or quotas, or
Speaker 4: foreign exchange restrictions, all sorts of things.
Speaker 3: But they're also likely a function of comparative advantage, i e.
Speaker 4: Some countries are better at producing some things than others.
Speaker 4: Some countries are relatively better at producing some things than others,
Speaker 4: such that there is gains from trade. And so, for example,
Speaker 4: Cambodia cannot afford most of the kinds of goods that
Speaker 4: the US produces because the US is a very rich
Speaker 4: country that produces very high quality goods, and Cambodian consumers
Speaker 4: tend to not have the high enough incomes to purchase
Speaker 4: the kinds of goods that US produces. But the US
Speaker 4: tends to purchase the kinds of goods the Cambodia produces
Speaker 4: because they produce apparel that you buy from Walmart. So
Speaker 4: those kinds of things will lead to a bilateral trade deficit.
Speaker 4: And so for some countries you might have a state
Speaker 4: surplus because of comparative advantage. And for other countries, you
Speaker 4: might have a bilateral trade deficit. US has a bilateral
Speaker 4: trade surplus in goods with Australia, for example, and so
Speaker 4: that's on the bilateral side. But I think there is
Speaker 4: a concern about the US overall trade deficit, So the
Speaker 4: aggregate trade deficit, if you add up the surpluses and
Speaker 4: the deficits across all its trading partners, that total amount
Speaker 4: and the fact that it has been a deficit over
Speaker 4: a period of time, I think is something that this
Speaker 4: administration is particularly interested in tackling, in the sense that
Speaker 4: maybe it is viewed as the result of potentially unfair
Speaker 4: trade practices across a broad set of countries, or maybe
Speaker 4: it's also a signal that somehow the US isn't as
Speaker 4: competitive as it otherwise could be in global trade and
Speaker 4: in the global economy and the global production system. But
Speaker 4: one other thing to keep in mind, and I won't
Speaker 4: go any further on this, since I'm not an international
Speaker 4: finance economist, but there is something about the balance of payments,
Speaker 4: which is just the difference in money that US residents
Speaker 4: and US it doesn't spend versus money that they receive from.
Speaker 3: Others, and that balance of payments.
Speaker 4: Part of that difference also has to do with the
Speaker 4: fact that the dollar is a global reserve currency, so
Speaker 4: people do like to hold dollars even if they're.
Speaker 3: Not necessarily like using it in the short term to
Speaker 3: do things.
Speaker 1: Just to follow up on that, so, I guess what
Speaker 1: I'm trying to get at is is a trade deficit
Speaker 1: always a bad thing? Like, is the US the fact
Speaker 1: that the US has a trade deficit? Is it necessarily
Speaker 1: a negative thing?
Speaker 4: So no, Actually, if the US was a small, open
Speaker 4: economy that was subject to, you know, the vagaries of
Speaker 4: shocks from the rest of the world, you might be
Speaker 4: a little more concerned because basically decisions that the US
Speaker 4: makes wouldn't impact the world, but the world would impact it.
Speaker 4: The US is a large, open economy, and the strength
Speaker 4: of the US dollar is so important and said that
Speaker 4: it really is like hard currency across the world. And
Speaker 4: so to that extent, it's actually not inherently a negative
Speaker 4: thing for a large open economy to have a trade deficit,
Speaker 4: because it's a function of multiple factors beyond just oh,
Speaker 4: you know, we're not producing enough or we're not competing enough.
Speaker 4: It could also be a function of people wanting to
Speaker 4: hold your currency. You could also be a function of
Speaker 4: people wanting to buy the government's bonds for example, and.
Speaker 2: Hold that maybe I wanted to bring back the discussion
Speaker 2: on something you just mentioned that was services. Now for
Speaker 2: the listener, the trade deficit basically just takes me into
Speaker 2: account the trade of goods, so final products, but not services.
Speaker 2: And isn't services where the US is really strong, Like
Speaker 2: if you think of Google, Meta, Microsoft, like Disney films,
Speaker 2: this is where the US is strong. So is this
Speaker 2: in a way distorting the competitive advantage of the US.
Speaker 3: So that's a really good question.
Speaker 4: So if you add up both the US's trade surplus
Speaker 4: in services and then the US trade deficit in goods,
Speaker 4: it is an overall test. Yeah, so the services surplus
Speaker 4: does not exceed the deficit in goods. But to talk
Speaker 4: about the services surplus, yes, the US is a net
Speaker 4: exporter of services because it really does have a comparative
Speaker 4: advantage in services, and not just you know, thinking about
Speaker 4: services in terms of like tourism, but as you point out,
Speaker 4: in terms of like intellectual property in terms of innovation.
Speaker 4: One of the interesting things is people always talk about,
Speaker 4: you know, where the screws are put into iPhones and
Speaker 4: how much of that value is being captured by the US.
Speaker 4: But a lot of the value of an iPhone accrues
Speaker 4: to Apple.
Speaker 3: Apple is not a manufacturer.
Speaker 4: All of the iPhone manufacturing is done by foxcon right,
Speaker 4: Apple does not manufacture physical goods. Yet most of the
Speaker 4: value of Apple is in the design, is in intellectual
Speaker 4: property en case within that iPhone, and most of that
Speaker 4: value actually accrues to the United States through the fact
Speaker 4: that there's essentially that's an export of services as an
Speaker 4: export of intellectual property. And so that's something that I
Speaker 4: think is left out of this conversation about treating goods.
Speaker 4: Because the US does have a significant comparative advantage in
Speaker 4: knowledge production, in innovation, and whatever is being done on
Speaker 4: the goods side, one always needs to take into account, well,
Speaker 4: what could be the effects and the tradeoffs in terms
Speaker 4: of how innovation will continue to happen in the US
Speaker 4: and how the US will still be able to be
Speaker 4: a leader in innovating and producing these high value knowledge goods.
Speaker 2: Yeah, that's exactly why on the Apple iPhone cases is
Speaker 2: designed in California, right, rather than made in China.
Speaker 3: Yes, precisely, But tell us.
Speaker 2: What's the impact on us small businesses. Can they pass
Speaker 2: on these tariffs in terms of higher prices.
Speaker 3: Yeah.
Speaker 1: Aberhei recently did a survey of about four thousand small businesses,
Speaker 1: and a lot of the findings were around kind of
Speaker 1: a lack of knowledge of tariffs, but also the inability
Speaker 1: of these companies potentially to pass on some of these costs.
Speaker 1: So we'd love to hear some of the other findings.
Speaker 3: Yeah.
Speaker 4: So interestingly enough, the survey was done shortly before the
Speaker 4: April second announcement, and the reason was we actually wanted
Speaker 4: to capture the full range, the full variation in the
Speaker 4: leafs and expectations about what would happen after April second.
Speaker 3: We're planning to do a follow up.
Speaker 4: But essentially, one of the key things that I think
Speaker 4: people forget is that compared to a large company, you
Speaker 4: should actually expect to see impacts of tires on small
Speaker 4: businesses sooner than you see on large firms. So people
Speaker 4: often have this perception that, you know, international trade is
Speaker 4: a large business game, and so small businesses aren't really
Speaker 4: that connected to the international economy in any direct sense.
Speaker 4: But what we were able to see in our survey
Speaker 4: is that actually there was a good share of small
Speaker 4: businesses that potentially could benefit because they compete with foreign
Speaker 4: products in the US market, but then could be affected
Speaker 4: on the cost side because they import foreign products, some
Speaker 4: from China, some from other parts of the world. And
Speaker 4: one key thing you always want to figure out when
Speaker 4: tariffs are implemented is that it's not always obvious who's
Speaker 4: going to pay for tariffs just because the tariff has
Speaker 4: been increased because them give you an example, if I
Speaker 4: have lots of substitute suppliers, right, I could go to
Speaker 4: a lot of other suppliers, and for example, there were
Speaker 4: one hundred US suppliers who could give me the same
Speaker 4: thing I was important from China, and so tires go
Speaker 4: up twenty five percent one hundred and forty five percent.
Speaker 4: I could essentially get negotiate with my form supplier to
Speaker 4: eat some of that cost because they know I can
Speaker 4: go somewhere else. So in that case, just because the
Speaker 4: tariff increases doesn't mean my cost.
Speaker 1: Increases, right, your supplier could end up paying that exactly.
Speaker 4: So how do you actually get at that like the
Speaker 4: measure of how much of those costs you'd have to eat?
Speaker 4: So one question the business owners were asked was, well,
Speaker 4: if things were twenty five percent more expensive, like how
Speaker 4: much of a discount will your supplier give you? And
Speaker 4: for a large air of them, no discount, So they
Speaker 4: would have to eat the additional cost of the tariff
Speaker 4: because they don't have you know, good alternatives and not
Speaker 4: that much bargaining power with their suppliers, which is not
Speaker 4: surprising because they're small firms, right, and so how are
Speaker 4: they able to pass on those costs? Again, you might
Speaker 4: be able to pass on those costs if everybody around
Speaker 4: you is raising their costs then raising their prices rather
Speaker 4: on their customers, then actually maybe you might be able
Speaker 4: to get away with them without losing market share. Again,
Speaker 4: not to get too into the leads, but essentially you
Speaker 4: can always think of two things. So think of whatever
Speaker 4: industry there is. You can think of the overall size
Speaker 4: of the pie in the industry, whether that's shrinking or expanding,
Speaker 4: And then you could also think about slices of the pie,
Speaker 4: how much market share you have within that industry. And so,
Speaker 4: for example, if everybody has to raise your prices and
Speaker 4: it's something that's non essential good, it's likely that the
Speaker 4: industry will shrink, right, because it's got to be more expensive.
Speaker 4: So people can spend less on that thing, but then
Speaker 4: maybe your market share won't increase that much. But if
Speaker 4: you know you're competing with large companies who have that
Speaker 4: are negotiating power with their suppliers can eat some of
Speaker 4: those costs and not increase their prices. Whereas you're the
Speaker 4: only one who has to increase your price, then you're
Speaker 4: probably going to do some customers to your competitors. And
Speaker 4: so for small businesses, that's the serious copy that they're
Speaker 4: having to do, which is that even if I try
Speaker 4: to pass this on to my customers, how much will
Speaker 4: I be losing to my competitors on this end? And
Speaker 4: I think you see a little bit in the media.
Speaker 4: People are getting creative with how they will communicate this
Speaker 4: to the customers. Some people are adding a little line
Speaker 4: to their invoices and we see its showing this is
Speaker 4: the tariff's surcharge right on.
Speaker 3: So this is why your price is highed.
Speaker 4: It's just because there's a thirty five percent extra charge
Speaker 4: because steel is more expensive or something.
Speaker 2: We're starting to do that already.
Speaker 4: Oh yes, actually, and it's not even small businesses alone.
Speaker 4: I think fabletics also started doing that as well.
Speaker 2: But yes, I wanted to shift the discussion to Asia.
Speaker 2: Under Trump's first administration, one of the big impact was
Speaker 2: a lot of companies leaving production away from China to
Speaker 2: Southeast Asia, and some of these countries, like Vietnam, were
Speaker 2: considered big winners. Is that going to be the case
Speaker 2: this time around?
Speaker 4: So, well, the reciprocal tariffs that are now postponed at
Speaker 4: least for the next ninety days on Vietnam. Vietnam is
Speaker 4: facing one of the higher tariff increases because the US
Speaker 4: has by a lot of oral trade deficit with Vietnam,
Speaker 4: and so will Vietnam be another winner in this new
Speaker 4: round of tariff increases. It's not clear that that's the case,
Speaker 4: which is a big problem for the multinational companies who
Speaker 4: invested a lot of money in setting up manufacturing in Vietnam. Well,
Speaker 4: we might see other winners, So it's not the case
Speaker 4: that overall you won't see maybe new winners emerged. So,
Speaker 4: for example, I think the Philippines has been actually quite excited.
Speaker 4: So their reciprocal tariff rate was I think about seven
Speaker 4: teen percent if I recall correctly, but they viewed as well,
Speaker 4: it's still significantly lower than most of the countries in
Speaker 4: Southeast Asia. It's lower than Thailand, it's lower than Vietnams,
Speaker 4: and so maybe there's scope for moving some of that
Speaker 4: production and some of that manufacturing over to the Philippines
Speaker 4: to take advantage of now the more favorable tax treatment.
Speaker 4: The key thing though, is that because we are in
Speaker 4: an error that's so uncertain, and there have been so
Speaker 4: many changes to TIFT policies that have been announced, it's
Speaker 4: likely that businesses will probably do some scouting.
Speaker 3: Right, Multinationals will do scouting, and.
Speaker 4: They have entire departments that are trying to lay out
Speaker 4: what their optimal strategies are. But it will be some
Speaker 4: time to actually see anything manifest because people don't want
Speaker 4: to sink in, you know, hundreds of billions of dollars
Speaker 4: in capital investments in locations that might end up being
Speaker 4: hit with high tiers after all.
Speaker 1: And there's also, of course, you know, just in terms
Speaker 1: of small businesses, you probably have supply chains that have
Speaker 1: been carved over many years and those relationships that have
Speaker 1: been developed, and you know, how easy is it for
Speaker 1: companies to switch to a country a different country.
Speaker 3: Yeah, it's not easy.
Speaker 4: So actually, one strand of research that has emerged over
Speaker 4: and actually was I think motivated by COVID actually, but
Speaker 4: I think applies here as well, is folks like Benklob
Speaker 4: who basically study these if you think of them like
Speaker 4: the scarring effects of shocks to supply change, right, so
Speaker 4: in the sense that some trade relationship are very kind
Speaker 4: of market based, so in the sense that like I
Speaker 4: really could buy my widget from a broad set of people,
Speaker 4: or I could buy if you think about goods that
Speaker 4: are considered like commodities, it's essentially like one.
Speaker 3: Supply is as good as the other.
Speaker 4: The issue is that when you're producing differentiated goods, so
Speaker 4: goods that kind of require a lot more customization, that
Speaker 4: a little more specialized that it's really important. That requires
Speaker 4: like precision manufacturing for example, where it's really important you
Speaker 4: get those specs.
Speaker 3: Right and you do the QA.
Speaker 4: Then those relationship specific investments are really important, and it
Speaker 4: takes some time to switch because on the one hand,
Speaker 4: you of course care about cost, right cost including the tariffs,
Speaker 4: but then on the other hand there are costs of
Speaker 4: not getting it right. So for example, I switch to
Speaker 4: a new supplier even if the tariffs are you know,
Speaker 4: because I'm trying to save something on like a twenty
Speaker 4: five percent or even one hundred percent tiff, but then
Speaker 4: my quality control declines by fifty percent. It's not clear
Speaker 4: how much I'm actually saving, right, So that's a key
Speaker 4: factor here in that some of these, especially like consumer electronics,
Speaker 4: which is potentially why they have that carve out because
Speaker 4: consumer electronics, some of these can be quite complex to
Speaker 4: produce and require these relationship specific investments. And even if
Speaker 4: the goal for the US to ultimately bring some of
Speaker 4: that manufacturing back, it will take a lot of time
Speaker 4: to build in terms of kind of reorganizing those very intricate,
Speaker 4: very complex supply chains that are able to deliver these
Speaker 4: these electronic goods.
Speaker 2: And I think Kim Cook from Apple has gone on
Speaker 2: record a number of times saying that they produce iPhones
Speaker 2: in China, not because it's the low cost producer, but
Speaker 2: a lot of the workers have skills you can't find
Speaker 2: anywhere else.
Speaker 1: Precisely, we've talked so far in this conversation about trade
Speaker 1: in goods and services with sort of official trade, but
Speaker 1: one of the things that the Trump administration has cited
Speaker 1: as a reason for these tariffs, but also area of
Speaker 1: concern is sort of transshipments or rerouting of goods, which
Speaker 1: is actually different from normal trade, where you sort of
Speaker 1: take an item, add some value, ship it from that location.
Speaker 1: And there's this sense that Chinese companies in particular might
Speaker 1: be trying to avoid teriffs. Can you talk a bit
Speaker 1: about the different is between like regular trade and then
Speaker 1: this sort of transshipment trade.
Speaker 4: Yes, so transhipment is and or rerouting, however you might
Speaker 4: choose to call it rerouting relabeling transhipment. So this activity
Speaker 4: is essentially illegal activity in the sense that people who
Speaker 4: engage in that activity are mislabeling the true country of.
Speaker 3: Origin of the good in order to avoid tariffs.
Speaker 4: So it would be something like I fully produced that
Speaker 4: good in China and then I ship it to location A,
Speaker 4: and there we change the label on the box to
Speaker 4: make it say made in country A. We you know,
Speaker 4: lie on the certificate of origin saying this was made
Speaker 4: in country A. And the reason we do that is
Speaker 4: because you know, US tariffs on Chinese goods are much
Speaker 4: higher than US tariffs on country as goods, and therefore
Speaker 4: we do that to get access to the law.
Speaker 3: Or tariff rate.
Speaker 4: So the key difference between transhipment and what could otherwise
Speaker 4: be just like a normal global value chain activity where
Speaker 4: maybe some of it is done in China, but then
Speaker 4: it gets shipped elsewhere and some value is added there
Speaker 4: and then it gets shipped to the US. And so
Speaker 4: those are two very different activities. And anytime you have
Speaker 4: for the same product differential tariff rates for different countries,
Speaker 4: then there's that incentive to do transhipment because there's basically
Speaker 4: a window of arbitrage right now. The bigger that gap is,
Speaker 4: the greater there is an incentive to do that for listeners.
Speaker 1: So basically like in twenty eighteen, which is what we
Speaker 1: saw twenty eighteen, twenty nineteen, which is like China high tariffs,
Speaker 1: where can we get lower costs, Vietnam, Indonesia, Thailand right precisely.
Speaker 3: Now.
Speaker 4: The interesting thing is this time around, so we're not
Speaker 4: in reciprocal tariff land yet because those have been paused.
Speaker 4: The rest of the world is facing something like ten
Speaker 4: percent have Chinese goods are facing one hundred and forty
Speaker 4: five per certain lavely on average, and so that gap
Speaker 4: is quite large, and so the scope for transshipment is
Speaker 4: actually much bigger now than it was in twenty eighteen
Speaker 4: twenty nineteen, because then we were talking about differences of
Speaker 4: you know, ten twenty five percent versus five percent or
Speaker 4: four percent, and so that is a huge window in
Speaker 4: which you can absorb some know, costs of shipping things
Speaker 4: through other countries. You can you know, split the difference
Speaker 4: with all the collaborators involved in this legal activity and
Speaker 4: still mix them back.
Speaker 2: You said that this re routing is illegal, but it
Speaker 2: must be hard for the US to track, Like what
Speaker 2: happens if you just get this box it says made
Speaker 2: in China and you just instead of you delete that
Speaker 2: and say made in Philippines or made in Vietnam. It's
Speaker 2: can they do anything about it?
Speaker 3: Yeah?
Speaker 1: And how much is this actually happening?
Speaker 3: That's a great question. So the interesting thing is in
Speaker 3: the Vietnam's case.
Speaker 4: So what we studied in our paper was that we
Speaker 4: actually were able to use Vietnamese customs data and we
Speaker 4: could actually track what looked like suspicious flows where all
Speaker 4: of a sudden, you see relatively high imports of a
Speaker 4: specific product from China into Vietnam by like the same company,
Speaker 4: and then you see that same company in a short
Speaker 4: period of time export.
Speaker 3: The same product to the US.
Speaker 4: And you're seeing that as a pattern that's not necessarily
Speaker 4: happening with their exports anywhere else or their imports from
Speaker 4: anywhere else, and so that's suggestive of what looks like
Speaker 4: childie shipment. So of course, you know CBP Customs on
Speaker 4: Border Patrol could do some data analysis to kind of
Speaker 4: track that, and they do do some of this in
Speaker 4: the sense that they do analyze data to see what
Speaker 4: looks like suspicious trade flows.
Speaker 3: But for the most part, the enforcement.
Speaker 4: Actually happens a lot of time after the good is
Speaker 4: already in the country.
Speaker 3: So what happens is.
Speaker 4: CBP will see what they suspect to have been evaded
Speaker 4: tariffs and then go to the importer and try to
Speaker 4: recover some of those gvs, saying, we think some of
Speaker 4: the goods you imported were actually made elsewhere and you
Speaker 4: lied to us about where they were made, and so
Speaker 4: we're going to charge with the tariffs that you should
Speaker 4: have been charged in the first place.
Speaker 3: Part of how they get that information is.
Speaker 4: There's a reporting system that people can So let's say
Speaker 4: I am a competitor with the Chinese firm that's opposed
Speaker 4: to all of a sudden this be subject to these
Speaker 4: high tariffs, and I'm seeing that these goods are still
Speaker 4: somehow ending up in the country. Really niarly, and I
Speaker 4: suspect that there's some TIFFs circunvention going on, so I
Speaker 4: can go on the CVP's website and actually report that
Speaker 4: I suspect that this particular country is abating TARSK. So
Speaker 4: that's part of how they get the information. Part of
Speaker 4: it is by analyst in data. But how much actually happened.
Speaker 4: So the interesting thing is for Vietnam specifically, which we
Speaker 4: study in our paper, we actually find that between twenty
Speaker 4: eighteen and twenty twenty two, Vietnam's exports to the US
Speaker 4: grew by about eighty billion, so something around seventy eight
Speaker 4: billion dollars, and only like ten percent of that by
Speaker 4: like our benchmark measures could be attributed. We could attribute
Speaker 4: towards rerouting or transhipment, and so you could think ninety
Speaker 4: percent of that was actually because there were a lot
Speaker 4: of multinationals that had made the investment to do actual
Speaker 4: production in Vietnam, even if they might be using some
Speaker 4: Chinese inputs, and so it wasn't as large a share
Speaker 4: as I think people.
Speaker 3: Perceived it to be.
Speaker 4: Where people really perceived that, like, you know, more than
Speaker 4: half of what was coming from Vietnam was really made
Speaker 4: in China. Will that be the case now with the
Speaker 4: higher you know, the larger wedge and this kind of gap,
Speaker 4: and what other locations might be potential rerouting or transhipment hubs.
Speaker 4: It's going to be an empirical question that I'm excited
Speaker 4: to dig into, because every time you have this disparity,
Speaker 4: you always create this incentive.
Speaker 1: It kind of sounds like the US might be shooting
Speaker 1: itself in the foot with these terraffs. So like to
Speaker 1: your point, I mean, if there's a bigger gap between
Speaker 1: the Chinese tariffs and Vietnamese tariffs, then that would only
Speaker 1: to your point, encourage more transhipments now or more rerouting.
Speaker 2: Yes.
Speaker 4: So actually, from a policy like to minimize implementation costs perspective,
Speaker 4: something like the steel and aluminum tariffs actually make more
Speaker 4: sense in the sense that you have a uniform tariff
Speaker 4: across all locations. There's no incentive for transhipment in that case. Right,
Speaker 4: everybody's anything regardless of where it comes from. It's twenty
Speaker 4: five percent, So who cares whether I ship it from
Speaker 4: China or from Vietnam or from Thailand. So product specific
Speaker 4: uniform TIFFs are not going to be subject to chair
Speaker 4: shipment in the way that country specific tariffs will be,
Speaker 4: and so you end up playing this game of whack
Speaker 4: a mole. And the sad part about the enforcement is
Speaker 4: that every time you create this disparity with policy, you
Speaker 4: essentially run the risk in your enforcement activities of peneli
Speaker 4: seeing legitimate producers abroad and potentially missing in your thirst
Speaker 4: to like catch in your quest to catch the transhippers.
Speaker 4: And the sad part is the legitimate producers actually have
Speaker 4: made capital investments and made these, you know, investments in production,
Speaker 4: whereas the rerounters don't need to make those investments, and
Speaker 4: they can kind of just like hop from So of
Speaker 4: course there's some costs of setting up an operation and
Speaker 4: finding collaborators and invading the authorities, but like they can
Speaker 4: kind of hop from place to place and you could
Speaker 4: be playing Wapamo with them for a long time. But
Speaker 4: the legitimate producers do have those fixed investments. So one
Speaker 4: thing CBP does do when when, especially in cases where
Speaker 4: it thinks it's particularly egregious, is that CBP will go
Speaker 4: to locations abroad, whether the factory supposedly is to inspect
Speaker 4: it to see whether it looks like there's actual production
Speaker 4: going on there. Now, you can imagine that's very expensive
Speaker 4: and it's very happy to do when you have, you know,
Speaker 4: hundreds of millions of dollars worth of goods flowing into
Speaker 4: the country on a regular basis. But to the extent
Speaker 4: that they can use sophisticated data intelligence tools.
Speaker 3: Now, with the.
Speaker 4: Access of data that we have, it might be possible
Speaker 4: to at least pinpoint likely candidate and go inspect some
Speaker 4: of these facilities.
Speaker 2: Has it ever been a successful case of tariffs being
Speaker 2: used by a country to, you know, bring jobs back
Speaker 2: to the country.
Speaker 4: So I think there's been this broad set of import
Speaker 4: substitution policies right in the sense that you use tariffs
Speaker 4: to essentially protect an industry such that it woke grow.
Speaker 4: Has there been a case in recent history of using
Speaker 4: tariffs in this way to bring back an industry that
Speaker 4: had previously existed and left through our shoring. Not to
Speaker 4: my knowledge, although I might be wrong because I'm not
Speaker 4: CHATGPI don't have the full breath of the entire existence
Speaker 4: of the world. But I will say that in the
Speaker 4: history of like us, the current advanced economies, you know, Japan,
Speaker 4: et cetera, like multiple stages.
Speaker 3: Tariffs have been used to protect.
Speaker 4: Industries from declining or to allow some industries grow. So
Speaker 4: usually the interesting thing is countries often need to do
Speaker 4: like three key things if you're going to be doing
Speaker 4: something like this, which is it's not enough to reduce competition,
Speaker 4: because what happens when you reduce competition is that companies
Speaker 4: have less of an incentive to innovate or be very
Speaker 4: efficient or productive. So if all you do is just
Speaker 4: have a barrier to foreign competition, you're not necessarily going
Speaker 4: to lead.
Speaker 3: To a thriving industry domestically.
Speaker 4: So what a lot of countries have done in the past,
Speaker 4: and I'm pretty sure like Korea and Japan actually used
Speaker 4: some form of infant industry protection when they were building
Speaker 4: out their own manufacturing capabilities, is that there's both the
Speaker 4: carrot and the stick, right, So, yes, you're protecting those
Speaker 4: industries from foreign competitions such that they grow and they expand,
Speaker 4: But then there also has to be the stick and
Speaker 4: kind of incentives to make sure that these industries have
Speaker 4: some incentive to be competitive, to be efficient, to innovate.
Speaker 4: And what that looks like from like a domestic policy
Speaker 4: perspective is, yes, we might give you, you know, subsidies,
Speaker 4: et cetera.
Speaker 3: And we might give you some of this protection, but
Speaker 3: you have.
Speaker 4: To reach some goal of exporting to this extent within
Speaker 4: the next few years, or you have to reach some
Speaker 4: level of like R and D spend that actually shows
Speaker 4: us that you're really investing in growing your productivity and
Speaker 4: growing your efficiency and growing your innovation rather than just
Speaker 4: sitting on your laurels and you know, getting fat off
Speaker 4: the benefits and the profit margins from having little competition.
Speaker 4: I will say one area in which actually you do
Speaker 4: see a lot of trade barriers to make sure some
Speaker 4: production is done in industries is in agricultural goods. So
Speaker 4: if you go, for example, just go check like WT
Speaker 4: or tiret schedules.
Speaker 3: I do that for fun. I don't know if you
Speaker 3: like to do that over your weeks.
Speaker 4: But you always see, you always see this distinction between
Speaker 4: agricultural and non agricultural goods and kind of the tires
Speaker 4: that countries have.
Speaker 3: And part of the reason is countries generally tend to.
Speaker 4: Have higher tires on agricultural sector, so in parts of
Speaker 4: agricultural goods than they do on non agricultural goods. And
Speaker 4: the reason for that is there is this kind of
Speaker 4: like natural security self sufficiency argument for we need to
Speaker 4: make sure at least we retain some of our.
Speaker 3: Food production within this country because.
Speaker 4: In the event of whatever might happen geopolitically, we want
Speaker 4: to make sure that our citizens can be fed. Among
Speaker 4: other reasons, but that's one of them.
Speaker 1: So we have talked about a lot in trade world
Speaker 1: ape Hey, what is on your mind these days?
Speaker 4: So I think just overall, the most interesting aspect actually
Speaker 4: of the current changes in US trade policy is that
Speaker 4: it's really challenging. You know, what has seemed like a
Speaker 4: pretty stable global trading system, you know, since GAT and
Speaker 4: the WTO, and so here is the United States taking
Speaker 4: unilateral action relative to a lot of its trading partners
Speaker 4: in ways that many of them would argue are not
Speaker 4: consistent with being part of the WTO. And so I
Speaker 4: think one key question in everyone's mind is, well, what
Speaker 4: will happen not just with US China relations, or US
Speaker 4: Canada or US Mexico or U s relations, but whether
Speaker 4: we're really in an age where that period of free
Speaker 4: trade consensus, globalization consensus is really over.
Speaker 3: Whether this marks kind of a pivotal moment.
Speaker 5: In the overall global trading system, where countries might be
Speaker 5: a lot more protectionists, maybe even pmtive B that they
Speaker 5: used to be and that they have been for the
Speaker 5: last few decades.
Speaker 1: Yeah, there's sort of an ending of an era and
Speaker 1: entering potentially a more protectionist one, something we hope to
Speaker 1: unpack over future episodes for sure. Thanks so much for
Speaker 1: joining us today.
Speaker 3: No, thank you, This was a lot of fun.
Speaker 1: You've been listening to the Asia Centric podcast from Bloomberg
Speaker 1: Intelligence and Cutting me Treva in Hong Kong, and I'm
Speaker 1: John Lee.
Speaker 2: You can listen to all our episodes on Apple Podcasts, Spotify,
Speaker 2: or wherever you listen. This podcast was also produced and
Speaker 2: edited by Clara Chen and thanks for listening.