WEBVTT - Evading US Tariffs Becomes a Game of Whack-a-Mole 0:00:00.720 --> 0:00:02.960 When it comes to trade, there are a number of 0:00:02.960 --> 0:00:06.240 ways that a country can address grievances with partners. The 0:00:06.280 --> 0:00:09.320 past century or so, that's meant a lot of negotiation 0:00:10.080 --> 0:00:12.920 and more recently the involvement of the World Trade Organization. 0:00:13.800 --> 0:00:17.320 But President Donald Trump is relying on tariffs and in 0:00:17.360 --> 0:00:18.279 a big way. 0:00:19.000 --> 0:00:22.160 Well, it may be effective from one angle, with dozens 0:00:22.160 --> 0:00:25.680 of country leaders now angling to negotiate and promise to 0:00:25.720 --> 0:00:29.080 buy more from the US, it has consequences for US 0:00:29.200 --> 0:00:33.519 businesses and global investment, and it doesn't necessarily tackle one 0:00:33.520 --> 0:00:37.920 of the administration's concerns, which is Chinese companies evading tariffs 0:00:37.960 --> 0:00:43.239 through third countries. We're all listening to Asia Centric from 0:00:43.280 --> 0:00:45.959 Bloomberg Intelligence. I'm John Lee in Hong Kong. 0:00:46.159 --> 0:00:49.879 And I'm Katadmitriyeva, also in Hong Kong. And today we're 0:00:49.880 --> 0:00:54.560 talking to Abehi Ioha. She's a trade economist and assistant 0:00:54.560 --> 0:00:57.720 professor at Harvard Business School, and she's going to help 0:00:57.760 --> 0:01:01.440 us unpack tariffs, trade policy and all this other fun stuff. 0:01:02.120 --> 0:01:03.480 Thanks for joining us today. 0:01:03.240 --> 0:01:04.680 Be Hey, thanks for having me. 0:01:05.560 --> 0:01:09.640 Now we've had a lot of news on tariffs and 0:01:10.240 --> 0:01:13.399 trade policy. I want to ask you, just as an 0:01:13.400 --> 0:01:17.200 economist in this space, can you talk a bit about 0:01:17.840 --> 0:01:21.600 your kind of initial reaction, like when tariffs come in, 0:01:21.760 --> 0:01:24.680 what are the likely outcomes in the short term and 0:01:24.760 --> 0:01:25.840 also the long term. 0:01:26.480 --> 0:01:30.520 I think there are two aspects of the current trade 0:01:30.520 --> 0:01:31.919 policy environment. 0:01:31.640 --> 0:01:34.240 That are important to focus on. 0:01:34.760 --> 0:01:39.319 So there's how high tariffs actually will be ultimately, but 0:01:39.360 --> 0:01:42.839 then there's also the uncertainty about what the tariffs are 0:01:42.959 --> 0:01:47.120 and how they will keep changing over time, and so 0:01:47.840 --> 0:01:51.440 those things actually have different impacts. So you could think, 0:01:51.440 --> 0:01:55.400 for example, there's a world in which tariffs ultimately end 0:01:55.480 --> 0:01:59.760 up being ten percent on every country, every US trade partner, 0:02:00.120 --> 0:02:03.200 and then maybe everybody retaliates and it's ten percent all round, 0:02:04.000 --> 0:02:08.040 and businesses know that in advance, and so they plan 0:02:08.200 --> 0:02:12.680 and they factor that into their projections and how they 0:02:12.720 --> 0:02:16.000 think about hiring and investment and locating and all of 0:02:16.040 --> 0:02:20.240 those decisions. And so the reaction is going to be 0:02:20.360 --> 0:02:22.440 very different from a world in which we still end 0:02:22.520 --> 0:02:26.519 up in the same ten percent tariff world. But there's 0:02:26.560 --> 0:02:28.720 a lot of uncertainty along the way about where tariffs 0:02:28.720 --> 0:02:32.359 really will be because there are changes in businesses behavior 0:02:32.440 --> 0:02:37.040 and decisions given uncertainty, right, so there's likely to be 0:02:37.160 --> 0:02:41.080 less investment because everybody's waiting to see where things will 0:02:41.160 --> 0:02:46.359 ultimately land. Potential planned expansion or growth might be paused 0:02:46.720 --> 0:02:50.239 because people are hedging against risk of things changing over 0:02:50.280 --> 0:02:52.280 time because they don't know where things will end up. 0:02:52.919 --> 0:02:57.840 So my initial reaction to the current trade policy environment 0:02:57.919 --> 0:03:01.800 is really that we're getting a double whammy of both 0:03:02.160 --> 0:03:05.680 the tariffs themselves, like the impact of the tariffs, but 0:03:05.840 --> 0:03:10.040 also the impact of the uncertainty of the business environment 0:03:10.120 --> 0:03:13.000 on what businesses are able to plan to do and 0:03:13.080 --> 0:03:14.560 what they're able to do in the short term and 0:03:14.600 --> 0:03:17.160 the medium term. And so those are two things that 0:03:17.360 --> 0:03:21.280 I don't think people often distinguish between, but for the 0:03:21.320 --> 0:03:24.200 time being, I think it's the uncertainty that's actually having 0:03:24.320 --> 0:03:27.680 a significant impacts, even on businesses that are not directly 0:03:27.720 --> 0:03:28.560 trade exposed. 0:03:30.200 --> 0:03:33.520 Asia Centric is produced by Bloomberg Intelligence. We're more than 0:03:33.560 --> 0:03:37.400 five hundred experienced analysts and strategists work around the clock 0:03:37.480 --> 0:03:40.960 to bring you timely, world class research. Our coverage spans 0:03:41.000 --> 0:03:45.280 two hundred market industries, currencies, commodities, and industries, as well 0:03:45.320 --> 0:03:48.360 as over two thousand equities and credits. To learn more 0:03:48.360 --> 0:03:52.560 about Bloomberg Intelligence, visit BI go on the Bloomberg terminal. 0:03:53.120 --> 0:03:55.600 If you like what you're hear, don't forget to subscribe 0:03:55.640 --> 0:04:00.240 and share. Abiah, you're an expert in global trade. What 0:04:00.280 --> 0:04:04.320 do you think is the current administration's goals in implementing 0:04:04.400 --> 0:04:07.400 these tariffs? Is it to reduce the trade deficit? Is 0:04:07.440 --> 0:04:09.080 it to bring jobs back to the US? 0:04:10.360 --> 0:04:13.000 So, I think explicitly, and you can tell from the 0:04:13.040 --> 0:04:16.479 way in which the reciprocal tariffs that were announced on 0:04:16.560 --> 0:04:20.400 April second, also known as Libration Day, the way those 0:04:20.440 --> 0:04:24.520 tariffs were calculated. Essentially, we're calculated not based on you know, 0:04:25.240 --> 0:04:27.720 Vietnam charges US four percent times, so we're going to 0:04:27.800 --> 0:04:31.400 charge them four percent tires, but really tariff explicitly based 0:04:31.480 --> 0:04:35.000 on the trade deficit that the US has with Vietnam. 0:04:35.800 --> 0:04:39.279 And so for that reason, I think it's pretty clear 0:04:39.360 --> 0:04:45.040 that the trade deficit is a key motivation for the 0:04:45.080 --> 0:04:48.479 tariff policies that are being put in place today, in 0:04:48.520 --> 0:04:51.440 the sense that I think the government, the current administration, 0:04:51.520 --> 0:04:56.200 really sees significant value in shrinking the overall US trade 0:04:56.240 --> 0:04:59.640 deficit in goods with its trade partners. One thing to 0:04:59.720 --> 0:05:03.359 keep in mind, I specify in goods because the US. 0:05:03.240 --> 0:05:06.360 Actually a net exporder of services but it has a 0:05:06.400 --> 0:05:07.080 trade deficit. 0:05:07.200 --> 0:05:11.520 Inputs with that point on the reducing the deficit, can 0:05:11.560 --> 0:05:14.279 you talk a bit about because there is a lot 0:05:14.440 --> 0:05:19.080 of information also misinformation, about what a trade deficit actually 0:05:19.120 --> 0:05:22.680 means for the US. Trump has said that it's a 0:05:22.720 --> 0:05:25.560 sign that the country is being taken advantage of that 0:05:25.600 --> 0:05:28.920 it's not selling its goods abroad, it's buying from other 0:05:28.920 --> 0:05:32.080 countries and helping those economies grow. Can you talk a 0:05:32.080 --> 0:05:35.120 bit about what the US trade deficit? To you as 0:05:35.160 --> 0:05:37.200 a trade economist, what does that mean? 0:05:38.600 --> 0:05:43.480 So to be perfectly transparent, lots of factors can lead 0:05:43.520 --> 0:05:46.240 to a trade deficit. I think fundamentally you can just 0:05:46.240 --> 0:05:50.840 start with comparative advantage. Right, So, for example, you have 0:05:51.360 --> 0:05:54.480 likely have a trade deficit with your yoga teacher. 0:05:55.440 --> 0:05:55.800 Do you do. 0:05:55.839 --> 0:05:59.400 Yoga y in what way? 0:05:59.800 --> 0:06:04.760 You probably pay your yoga instructor money for services rendered 0:06:04.760 --> 0:06:04.920 i e. 0:06:05.040 --> 0:06:06.000 Teaching you yoga? 0:06:06.279 --> 0:06:09.479 I don't know how much your yoga instructor buys from you, 0:06:10.240 --> 0:06:14.600 and so you probably are a net importer of yoga 0:06:14.680 --> 0:06:17.960 services from your yoga instructor unless you make stuff that 0:06:17.960 --> 0:06:19.720 your yoga instructor really loves to buy. 0:06:20.000 --> 0:06:23.880 But if you think about the bilateral yeah, exactly. 0:06:25.600 --> 0:06:28.479 But if you think of the bilateral trade deficits, those 0:06:28.480 --> 0:06:30.400 are often a function of multiple things. So of course 0:06:30.440 --> 0:06:34.640 they could be the function of trade barriers that countries 0:06:34.720 --> 0:06:40.520 might have non tariff barriers like standards or quotas, or 0:06:40.920 --> 0:06:43.080 foreign exchange restrictions, all sorts of things. 0:06:43.080 --> 0:06:46.400 But they're also likely a function of comparative advantage, i e. 0:06:46.560 --> 0:06:49.520 Some countries are better at producing some things than others. 0:06:50.000 --> 0:06:54.320 Some countries are relatively better at producing some things than others, 0:06:54.320 --> 0:06:58.880 such that there is gains from trade. And so, for example, 0:06:59.279 --> 0:07:02.359 Cambodia cannot afford most of the kinds of goods that 0:07:02.400 --> 0:07:04.880 the US produces because the US is a very rich 0:07:04.920 --> 0:07:09.320 country that produces very high quality goods, and Cambodian consumers 0:07:09.720 --> 0:07:12.080 tend to not have the high enough incomes to purchase 0:07:12.080 --> 0:07:14.440 the kinds of goods that US produces. But the US 0:07:14.800 --> 0:07:17.240 tends to purchase the kinds of goods the Cambodia produces 0:07:17.280 --> 0:07:20.040 because they produce apparel that you buy from Walmart. So 0:07:20.560 --> 0:07:23.400 those kinds of things will lead to a bilateral trade deficit. 0:07:24.160 --> 0:07:25.840 And so for some countries you might have a state 0:07:25.880 --> 0:07:28.640 surplus because of comparative advantage. And for other countries, you 0:07:28.720 --> 0:07:32.040 might have a bilateral trade deficit. US has a bilateral 0:07:32.240 --> 0:07:35.440 trade surplus in goods with Australia, for example, and so 0:07:36.240 --> 0:07:38.840 that's on the bilateral side. But I think there is 0:07:39.160 --> 0:07:43.200 a concern about the US overall trade deficit, So the 0:07:43.280 --> 0:07:47.560 aggregate trade deficit, if you add up the surpluses and 0:07:47.640 --> 0:07:51.120 the deficits across all its trading partners, that total amount 0:07:51.720 --> 0:07:54.760 and the fact that it has been a deficit over 0:07:54.800 --> 0:07:57.960 a period of time, I think is something that this 0:07:58.040 --> 0:08:02.200 administration is particularly interested in tackling, in the sense that 0:08:02.720 --> 0:08:07.680 maybe it is viewed as the result of potentially unfair 0:08:07.720 --> 0:08:12.040 trade practices across a broad set of countries, or maybe 0:08:12.080 --> 0:08:14.840 it's also a signal that somehow the US isn't as 0:08:14.880 --> 0:08:19.800 competitive as it otherwise could be in global trade and 0:08:19.840 --> 0:08:22.800 in the global economy and the global production system. But 0:08:22.880 --> 0:08:25.239 one other thing to keep in mind, and I won't 0:08:25.240 --> 0:08:28.400 go any further on this, since I'm not an international 0:08:28.440 --> 0:08:32.040 finance economist, but there is something about the balance of payments, 0:08:32.200 --> 0:08:37.360 which is just the difference in money that US residents 0:08:37.360 --> 0:08:40.640 and US it doesn't spend versus money that they receive from. 0:08:40.480 --> 0:08:42.599 Others, and that balance of payments. 0:08:43.200 --> 0:08:45.800 Part of that difference also has to do with the 0:08:45.800 --> 0:08:48.720 fact that the dollar is a global reserve currency, so 0:08:49.000 --> 0:08:52.760 people do like to hold dollars even if they're. 0:08:52.559 --> 0:08:54.640 Not necessarily like using it in the short term to 0:08:54.679 --> 0:08:55.040 do things. 0:08:55.280 --> 0:08:56.800 Just to follow up on that, so, I guess what 0:08:56.800 --> 0:08:59.760 I'm trying to get at is is a trade deficit 0:09:00.200 --> 0:09:03.160 always a bad thing? Like, is the US the fact 0:09:03.200 --> 0:09:05.280 that the US has a trade deficit? Is it necessarily 0:09:05.320 --> 0:09:06.040 a negative thing? 0:09:07.240 --> 0:09:10.640 So no, Actually, if the US was a small, open 0:09:10.679 --> 0:09:14.240 economy that was subject to, you know, the vagaries of 0:09:15.280 --> 0:09:17.640 shocks from the rest of the world, you might be 0:09:17.679 --> 0:09:20.760 a little more concerned because basically decisions that the US 0:09:20.960 --> 0:09:24.040 makes wouldn't impact the world, but the world would impact it. 0:09:24.679 --> 0:09:27.679 The US is a large, open economy, and the strength 0:09:27.720 --> 0:09:29.680 of the US dollar is so important and said that 0:09:29.720 --> 0:09:32.920 it really is like hard currency across the world. And 0:09:32.960 --> 0:09:37.559 so to that extent, it's actually not inherently a negative 0:09:37.640 --> 0:09:41.079 thing for a large open economy to have a trade deficit, 0:09:41.559 --> 0:09:47.360 because it's a function of multiple factors beyond just oh, 0:09:47.559 --> 0:09:50.360 you know, we're not producing enough or we're not competing enough. 0:09:50.360 --> 0:09:52.840 It could also be a function of people wanting to 0:09:52.840 --> 0:09:54.800 hold your currency. You could also be a function of 0:09:55.120 --> 0:09:59.199 people wanting to buy the government's bonds for example, and. 0:09:59.160 --> 0:10:02.040 Hold that maybe I wanted to bring back the discussion 0:10:02.080 --> 0:10:04.960 on something you just mentioned that was services. Now for 0:10:05.000 --> 0:10:08.440 the listener, the trade deficit basically just takes me into 0:10:08.440 --> 0:10:13.320 account the trade of goods, so final products, but not services. 0:10:13.600 --> 0:10:17.240 And isn't services where the US is really strong, Like 0:10:17.280 --> 0:10:21.120 if you think of Google, Meta, Microsoft, like Disney films, 0:10:21.679 --> 0:10:23.800 this is where the US is strong. So is this 0:10:24.320 --> 0:10:27.160 in a way distorting the competitive advantage of the US. 0:10:28.320 --> 0:10:29.560 So that's a really good question. 0:10:29.640 --> 0:10:34.160 So if you add up both the US's trade surplus 0:10:34.160 --> 0:10:37.360 in services and then the US trade deficit in goods, 0:10:37.679 --> 0:10:41.640 it is an overall test. Yeah, so the services surplus 0:10:41.679 --> 0:10:45.760 does not exceed the deficit in goods. But to talk 0:10:45.800 --> 0:10:48.920 about the services surplus, yes, the US is a net 0:10:48.920 --> 0:10:52.360 exporter of services because it really does have a comparative 0:10:52.360 --> 0:10:55.800 advantage in services, and not just you know, thinking about 0:10:55.800 --> 0:10:58.719 services in terms of like tourism, but as you point out, 0:10:58.760 --> 0:11:02.520 in terms of like intellectual property in terms of innovation. 0:11:03.400 --> 0:11:06.880 One of the interesting things is people always talk about, 0:11:06.880 --> 0:11:09.840 you know, where the screws are put into iPhones and 0:11:09.880 --> 0:11:12.600 how much of that value is being captured by the US. 0:11:13.040 --> 0:11:17.800 But a lot of the value of an iPhone accrues 0:11:17.840 --> 0:11:18.400 to Apple. 0:11:18.840 --> 0:11:20.480 Apple is not a manufacturer. 0:11:21.400 --> 0:11:24.360 All of the iPhone manufacturing is done by foxcon right, 0:11:25.280 --> 0:11:29.080 Apple does not manufacture physical goods. Yet most of the 0:11:29.240 --> 0:11:32.959 value of Apple is in the design, is in intellectual 0:11:33.000 --> 0:11:37.040 property en case within that iPhone, and most of that 0:11:37.120 --> 0:11:41.400 value actually accrues to the United States through the fact 0:11:41.400 --> 0:11:44.400 that there's essentially that's an export of services as an 0:11:44.400 --> 0:11:47.679 export of intellectual property. And so that's something that I 0:11:47.720 --> 0:11:50.560 think is left out of this conversation about treating goods. 0:11:50.559 --> 0:11:54.120 Because the US does have a significant comparative advantage in 0:11:54.400 --> 0:11:58.680 knowledge production, in innovation, and whatever is being done on 0:11:58.720 --> 0:12:02.120 the goods side, one always needs to take into account, well, 0:12:02.360 --> 0:12:05.160 what could be the effects and the tradeoffs in terms 0:12:05.200 --> 0:12:08.200 of how innovation will continue to happen in the US 0:12:08.200 --> 0:12:10.600 and how the US will still be able to be 0:12:10.640 --> 0:12:15.160 a leader in innovating and producing these high value knowledge goods. 0:12:15.480 --> 0:12:18.880 Yeah, that's exactly why on the Apple iPhone cases is 0:12:18.960 --> 0:12:22.000 designed in California, right, rather than made in China. 0:12:22.120 --> 0:12:24.280 Yes, precisely, But tell us. 0:12:25.120 --> 0:12:29.040 What's the impact on us small businesses. Can they pass 0:12:29.080 --> 0:12:31.360 on these tariffs in terms of higher prices. 0:12:32.120 --> 0:12:32.320 Yeah. 0:12:32.920 --> 0:12:38.120 Aberhei recently did a survey of about four thousand small businesses, 0:12:38.559 --> 0:12:40.960 and a lot of the findings were around kind of 0:12:40.960 --> 0:12:43.960 a lack of knowledge of tariffs, but also the inability 0:12:44.520 --> 0:12:48.120 of these companies potentially to pass on some of these costs. 0:12:48.360 --> 0:12:50.240 So we'd love to hear some of the other findings. 0:12:51.120 --> 0:12:51.480 Yeah. 0:12:51.520 --> 0:12:57.240 So interestingly enough, the survey was done shortly before the 0:12:57.280 --> 0:13:01.560 April second announcement, and the reason was we actually wanted 0:13:01.559 --> 0:13:05.800 to capture the full range, the full variation in the 0:13:05.880 --> 0:13:09.840 leafs and expectations about what would happen after April second. 0:13:10.000 --> 0:13:11.440 We're planning to do a follow up. 0:13:11.840 --> 0:13:15.320 But essentially, one of the key things that I think 0:13:15.320 --> 0:13:19.400 people forget is that compared to a large company, you 0:13:19.400 --> 0:13:22.040 should actually expect to see impacts of tires on small 0:13:22.080 --> 0:13:25.319 businesses sooner than you see on large firms. So people 0:13:25.360 --> 0:13:28.920 often have this perception that, you know, international trade is 0:13:28.960 --> 0:13:33.360 a large business game, and so small businesses aren't really 0:13:33.400 --> 0:13:36.320 that connected to the international economy in any direct sense. 0:13:37.000 --> 0:13:39.319 But what we were able to see in our survey 0:13:39.400 --> 0:13:42.080 is that actually there was a good share of small 0:13:42.120 --> 0:13:45.600 businesses that potentially could benefit because they compete with foreign 0:13:45.679 --> 0:13:49.320 products in the US market, but then could be affected 0:13:49.360 --> 0:13:53.000 on the cost side because they import foreign products, some 0:13:53.040 --> 0:13:56.079 from China, some from other parts of the world. And 0:13:56.760 --> 0:14:00.120 one key thing you always want to figure out when 0:14:00.200 --> 0:14:03.840 tariffs are implemented is that it's not always obvious who's 0:14:03.880 --> 0:14:06.400 going to pay for tariffs just because the tariff has 0:14:06.440 --> 0:14:10.400 been increased because them give you an example, if I 0:14:10.600 --> 0:14:14.440 have lots of substitute suppliers, right, I could go to 0:14:14.480 --> 0:14:16.800 a lot of other suppliers, and for example, there were 0:14:16.840 --> 0:14:18.920 one hundred US suppliers who could give me the same 0:14:18.920 --> 0:14:22.560 thing I was important from China, and so tires go 0:14:22.680 --> 0:14:24.920 up twenty five percent one hundred and forty five percent. 0:14:25.040 --> 0:14:28.760 I could essentially get negotiate with my form supplier to 0:14:28.800 --> 0:14:31.040 eat some of that cost because they know I can 0:14:31.080 --> 0:14:33.640 go somewhere else. So in that case, just because the 0:14:33.640 --> 0:14:35.320 tariff increases doesn't mean my cost. 0:14:35.120 --> 0:14:38.120 Increases, right, your supplier could end up paying that exactly. 0:14:38.520 --> 0:14:40.320 So how do you actually get at that like the 0:14:40.360 --> 0:14:42.680 measure of how much of those costs you'd have to eat? 0:14:43.000 --> 0:14:46.680 So one question the business owners were asked was, well, 0:14:46.800 --> 0:14:49.560 if things were twenty five percent more expensive, like how 0:14:49.640 --> 0:14:52.520 much of a discount will your supplier give you? And 0:14:52.840 --> 0:14:55.760 for a large air of them, no discount, So they 0:14:55.760 --> 0:14:57.920 would have to eat the additional cost of the tariff 0:14:58.400 --> 0:15:01.800 because they don't have you know, good alternatives and not 0:15:01.880 --> 0:15:04.600 that much bargaining power with their suppliers, which is not 0:15:04.640 --> 0:15:08.640 surprising because they're small firms, right, and so how are 0:15:08.680 --> 0:15:12.240 they able to pass on those costs? Again, you might 0:15:12.280 --> 0:15:14.880 be able to pass on those costs if everybody around 0:15:14.920 --> 0:15:18.360 you is raising their costs then raising their prices rather 0:15:18.520 --> 0:15:21.280 on their customers, then actually maybe you might be able 0:15:21.320 --> 0:15:23.800 to get away with them without losing market share. Again, 0:15:23.840 --> 0:15:27.200 not to get too into the leads, but essentially you 0:15:27.240 --> 0:15:29.600 can always think of two things. So think of whatever 0:15:29.680 --> 0:15:32.720 industry there is. You can think of the overall size 0:15:32.720 --> 0:15:36.440 of the pie in the industry, whether that's shrinking or expanding, 0:15:36.640 --> 0:15:39.200 And then you could also think about slices of the pie, 0:15:39.240 --> 0:15:42.800 how much market share you have within that industry. And so, 0:15:42.920 --> 0:15:45.520 for example, if everybody has to raise your prices and 0:15:45.560 --> 0:15:48.000 it's something that's non essential good, it's likely that the 0:15:48.120 --> 0:15:51.600 industry will shrink, right, because it's got to be more expensive. 0:15:51.640 --> 0:15:53.840 So people can spend less on that thing, but then 0:15:53.880 --> 0:15:57.080 maybe your market share won't increase that much. But if 0:15:57.200 --> 0:16:00.120 you know you're competing with large companies who have that 0:16:00.120 --> 0:16:02.840 are negotiating power with their suppliers can eat some of 0:16:02.880 --> 0:16:06.320 those costs and not increase their prices. Whereas you're the 0:16:06.320 --> 0:16:09.080 only one who has to increase your price, then you're 0:16:09.080 --> 0:16:11.640 probably going to do some customers to your competitors. And 0:16:11.680 --> 0:16:14.440 so for small businesses, that's the serious copy that they're 0:16:14.480 --> 0:16:16.240 having to do, which is that even if I try 0:16:16.280 --> 0:16:19.960 to pass this on to my customers, how much will 0:16:20.000 --> 0:16:23.000 I be losing to my competitors on this end? And 0:16:23.240 --> 0:16:25.440 I think you see a little bit in the media. 0:16:25.480 --> 0:16:28.880 People are getting creative with how they will communicate this 0:16:28.920 --> 0:16:31.240 to the customers. Some people are adding a little line 0:16:31.280 --> 0:16:33.880 to their invoices and we see its showing this is 0:16:33.920 --> 0:16:35.640 the tariff's surcharge right on. 0:16:36.200 --> 0:16:37.800 So this is why your price is highed. 0:16:37.800 --> 0:16:40.400 It's just because there's a thirty five percent extra charge 0:16:40.440 --> 0:16:42.240 because steel is more expensive or something. 0:16:42.240 --> 0:16:43.440 We're starting to do that already. 0:16:44.040 --> 0:16:47.440 Oh yes, actually, and it's not even small businesses alone. 0:16:47.480 --> 0:16:50.880 I think fabletics also started doing that as well. 0:16:51.560 --> 0:16:55.560 But yes, I wanted to shift the discussion to Asia. 0:16:55.880 --> 0:17:00.560 Under Trump's first administration, one of the big impact was 0:17:00.600 --> 0:17:03.840 a lot of companies leaving production away from China to 0:17:03.960 --> 0:17:07.200 Southeast Asia, and some of these countries, like Vietnam, were 0:17:07.240 --> 0:17:10.080 considered big winners. Is that going to be the case 0:17:10.160 --> 0:17:10.959 this time around? 0:17:11.760 --> 0:17:16.199 So, well, the reciprocal tariffs that are now postponed at 0:17:16.280 --> 0:17:21.119 least for the next ninety days on Vietnam. Vietnam is 0:17:21.160 --> 0:17:25.359 facing one of the higher tariff increases because the US 0:17:25.480 --> 0:17:28.600 has by a lot of oral trade deficit with Vietnam, 0:17:28.920 --> 0:17:34.359 and so will Vietnam be another winner in this new 0:17:35.080 --> 0:17:39.960 round of tariff increases. It's not clear that that's the case, 0:17:40.000 --> 0:17:42.520 which is a big problem for the multinational companies who 0:17:42.920 --> 0:17:47.440 invested a lot of money in setting up manufacturing in Vietnam. Well, 0:17:47.440 --> 0:17:50.120 we might see other winners, So it's not the case 0:17:50.160 --> 0:17:53.480 that overall you won't see maybe new winners emerged. So, 0:17:53.480 --> 0:17:56.359 for example, I think the Philippines has been actually quite excited. 0:17:56.440 --> 0:17:59.960 So their reciprocal tariff rate was I think about seven 0:18:00.080 --> 0:18:03.400 teen percent if I recall correctly, but they viewed as well, 0:18:03.440 --> 0:18:06.720 it's still significantly lower than most of the countries in 0:18:06.760 --> 0:18:09.399 Southeast Asia. It's lower than Thailand, it's lower than Vietnams, 0:18:09.720 --> 0:18:12.400 and so maybe there's scope for moving some of that 0:18:12.600 --> 0:18:15.960 production and some of that manufacturing over to the Philippines 0:18:16.320 --> 0:18:21.640 to take advantage of now the more favorable tax treatment. 0:18:22.160 --> 0:18:25.320 The key thing though, is that because we are in 0:18:25.359 --> 0:18:27.320 an error that's so uncertain, and there have been so 0:18:27.440 --> 0:18:31.240 many changes to TIFT policies that have been announced, it's 0:18:31.400 --> 0:18:34.120 likely that businesses will probably do some scouting. 0:18:34.160 --> 0:18:36.120 Right, Multinationals will do scouting, and. 0:18:36.040 --> 0:18:38.800 They have entire departments that are trying to lay out 0:18:38.840 --> 0:18:42.480 what their optimal strategies are. But it will be some 0:18:42.560 --> 0:18:45.480 time to actually see anything manifest because people don't want 0:18:45.520 --> 0:18:48.080 to sink in, you know, hundreds of billions of dollars 0:18:48.119 --> 0:18:51.760 in capital investments in locations that might end up being 0:18:51.840 --> 0:18:53.520 hit with high tiers after all. 0:18:54.320 --> 0:18:57.160 And there's also, of course, you know, just in terms 0:18:57.200 --> 0:19:01.280 of small businesses, you probably have supply chains that have 0:19:01.359 --> 0:19:04.560 been carved over many years and those relationships that have 0:19:04.600 --> 0:19:08.399 been developed, and you know, how easy is it for 0:19:08.520 --> 0:19:11.840 companies to switch to a country a different country. 0:19:12.000 --> 0:19:12.879 Yeah, it's not easy. 0:19:12.920 --> 0:19:16.640 So actually, one strand of research that has emerged over 0:19:16.840 --> 0:19:20.200 and actually was I think motivated by COVID actually, but 0:19:20.680 --> 0:19:25.680 I think applies here as well, is folks like Benklob 0:19:25.760 --> 0:19:28.960 who basically study these if you think of them like 0:19:29.000 --> 0:19:32.840 the scarring effects of shocks to supply change, right, so 0:19:32.920 --> 0:19:37.120 in the sense that some trade relationship are very kind 0:19:37.160 --> 0:19:38.840 of market based, so in the sense that like I 0:19:38.880 --> 0:19:42.800 really could buy my widget from a broad set of people, 0:19:42.920 --> 0:19:45.320 or I could buy if you think about goods that 0:19:45.400 --> 0:19:48.960 are considered like commodities, it's essentially like one. 0:19:48.800 --> 0:19:50.000 Supply is as good as the other. 0:19:50.480 --> 0:19:53.520 The issue is that when you're producing differentiated goods, so 0:19:53.560 --> 0:19:56.760 goods that kind of require a lot more customization, that 0:19:56.800 --> 0:20:00.719 a little more specialized that it's really important. That requires 0:20:00.720 --> 0:20:03.600 like precision manufacturing for example, where it's really important you 0:20:03.600 --> 0:20:04.480 get those specs. 0:20:04.320 --> 0:20:06.280 Right and you do the QA. 0:20:06.440 --> 0:20:10.439 Then those relationship specific investments are really important, and it 0:20:10.560 --> 0:20:14.879 takes some time to switch because on the one hand, 0:20:15.160 --> 0:20:20.160 you of course care about cost, right cost including the tariffs, 0:20:20.200 --> 0:20:22.400 but then on the other hand there are costs of 0:20:23.040 --> 0:20:25.520 not getting it right. So for example, I switch to 0:20:25.600 --> 0:20:28.400 a new supplier even if the tariffs are you know, 0:20:28.480 --> 0:20:30.520 because I'm trying to save something on like a twenty 0:20:30.520 --> 0:20:33.320 five percent or even one hundred percent tiff, but then 0:20:33.520 --> 0:20:38.280 my quality control declines by fifty percent. It's not clear 0:20:38.359 --> 0:20:42.440 how much I'm actually saving, right, So that's a key 0:20:42.960 --> 0:20:46.800 factor here in that some of these, especially like consumer electronics, 0:20:47.320 --> 0:20:50.160 which is potentially why they have that carve out because 0:20:50.200 --> 0:20:52.919 consumer electronics, some of these can be quite complex to 0:20:52.960 --> 0:20:57.360 produce and require these relationship specific investments. And even if 0:20:57.400 --> 0:20:59.760 the goal for the US to ultimately bring some of 0:20:59.760 --> 0:21:03.560 that manufacturing back, it will take a lot of time 0:21:03.600 --> 0:21:08.680 to build in terms of kind of reorganizing those very intricate, 0:21:08.920 --> 0:21:12.159 very complex supply chains that are able to deliver these 0:21:12.200 --> 0:21:13.240 these electronic goods. 0:21:13.640 --> 0:21:15.720 And I think Kim Cook from Apple has gone on 0:21:15.800 --> 0:21:18.320 record a number of times saying that they produce iPhones 0:21:18.320 --> 0:21:21.080 in China, not because it's the low cost producer, but 0:21:21.160 --> 0:21:22.960 a lot of the workers have skills you can't find 0:21:22.960 --> 0:21:23.560 anywhere else. 0:21:24.040 --> 0:21:27.760 Precisely, we've talked so far in this conversation about trade 0:21:28.800 --> 0:21:32.439 in goods and services with sort of official trade, but 0:21:32.480 --> 0:21:37.760 one of the things that the Trump administration has cited 0:21:38.119 --> 0:21:40.480 as a reason for these tariffs, but also area of 0:21:40.480 --> 0:21:44.680 concern is sort of transshipments or rerouting of goods, which 0:21:44.720 --> 0:21:48.239 is actually different from normal trade, where you sort of 0:21:49.240 --> 0:21:52.640 take an item, add some value, ship it from that location. 0:21:52.800 --> 0:21:55.959 And there's this sense that Chinese companies in particular might 0:21:56.000 --> 0:21:57.960 be trying to avoid teriffs. Can you talk a bit 0:21:58.000 --> 0:22:01.679 about the different is between like regular trade and then 0:22:01.680 --> 0:22:03.920 this sort of transshipment trade. 0:22:04.560 --> 0:22:09.560 Yes, so transhipment is and or rerouting, however you might 0:22:09.720 --> 0:22:14.840 choose to call it rerouting relabeling transhipment. So this activity 0:22:15.040 --> 0:22:19.000 is essentially illegal activity in the sense that people who 0:22:19.040 --> 0:22:22.960 engage in that activity are mislabeling the true country of. 0:22:23.000 --> 0:22:25.960 Origin of the good in order to avoid tariffs. 0:22:26.160 --> 0:22:30.680