Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, here's something that I've thought about that's been interesting
Speaker 1: for a few years. The Trump administration obviously sort of
Speaker 1: took this hawkish line on China, introduced the tariffs on
Speaker 1: a lot of Chinese exports to the US, and then
Speaker 1: when the Biden administration took over, it kind of seems
Speaker 1: like we basically got continuity on that front. There was
Speaker 1: no roll back, yeah, anything, maybe some of the screws
Speaker 1: have been tightened even further.
Speaker 2: I think that's exactly right, and it's kind of funny,
Speaker 2: as you mentioned that it's flown a little bit under
Speaker 2: the radar. And I'm thinking back to Trump's statement trade
Speaker 2: wars are good and easy to yeah, And I mean
Speaker 2: he got a lot of flak for that, probably rightfully so.
Speaker 2: But if you think about what's been happening over the
Speaker 2: past few years, like it seems like the US is
Speaker 2: kind of winning the trade war against China in some respects.
Speaker 2: I mean, the US economy outperforming much of the rest
Speaker 2: of the world. I think GDP growth was something like
Speaker 2: three percent in twenty twenty three. China's GDP growth is
Speaker 2: still higher, I believe it was at five percent, but
Speaker 2: it's slowing a lot. And if you look at what's
Speaker 2: going on with the economy right now, it seems like
Speaker 2: it is really struggling in various ways.
Speaker 1: It's interesting that they're winning.
Speaker 3: I hadn't really winning.
Speaker 2: Might be strong, but like.
Speaker 1: Well, our country is clearly doing better. Yeah, at least too.
Speaker 1: On the other hand, China clearly has a handful of
Speaker 1: industrial powerhouses that are creating anxiety for legacy industrial powerhouses
Speaker 1: in the US and Europe. And we can say that
Speaker 1: clearly when it comes to ev first legacy automakers. We
Speaker 1: can look at, you know, the rising number of conversations
Speaker 1: like a Boeing is faltering, will Comac and the CM
Speaker 1: one nine eventually takes significant market share and commercial eers.
Speaker 1: We did an episode I think near the end of
Speaker 1: last year that actually, despite all of the restrictions on
Speaker 1: equipment imports into China for semiconductors, that the domestic semiconductor
Speaker 1: industry is making gains. So like in the GDP sense
Speaker 1: of the word, like, clearly China is struggling, but on
Speaker 1: these sort of like key industrial strategic areas of the economy.
Speaker 1: There is the word things still seem to be working out, No.
Speaker 2: Absolutely, And I think there is this overall angst in
Speaker 2: the US with this idea that China is somehow better
Speaker 2: at doing this kind of targeted industrial policy. We used
Speaker 2: to talk about the Chinese command economy. They have experience
Speaker 2: with pouring lots and lots of money into areas that
Speaker 2: they identify as strategically important. That doesn't mean they do
Speaker 2: it perfectly every time. I mean we basically saw that
Speaker 2: with some of the consumer tech companies, where there was
Speaker 2: a reversal of the government stance towards them, lots of
Speaker 2: talk of disorderly capital flowing into that space. But then
Speaker 2: what we saw is, you know, they said that they
Speaker 2: cracked down on the sector, and then they said, what
Speaker 2: we really want you to invest in is things like
Speaker 2: solar panels and electric vehicles and semiconductors, And so we
Speaker 2: saw those areas start to boom. So I think there
Speaker 2: is a real sense of concern in the US that
Speaker 2: maybe China, if they're not better at it, they certainly
Speaker 2: have done it for a longer time on a more
Speaker 2: consistent basis.
Speaker 1: Right, And so it feels like now the debate in
Speaker 1: the US is like, Okay, everyone is sort of accepted
Speaker 1: that the tariffs that Trump introduced, that the idea that
Speaker 1: the US in various ways tries to constrain Chinese exports
Speaker 1: or constrain Chinese industry. It feels like that's become conventional
Speaker 1: wisdom now, or that everyone sort of agrees we do
Speaker 1: that in Washington. And now the question is how much.
Speaker 1: And of course recently we heard Trump say that were
Speaker 1: he to be elected president, he would ratch up the
Speaker 1: tariffs even more. I think he put the number like
Speaker 1: sixty percent, which I have to imagine would like totally clobber.
Speaker 2: He did say sixty percent, But then I saw right
Speaker 2: before we came on, let's see, we're recording this on
Speaker 2: February eighth. I think there was an interview from like
Speaker 2: February six where he basically said that the tariffs could
Speaker 2: be even bigger than sixty percent. So I don't know
Speaker 2: where he's quite getting those round numbers from, but maybe
Speaker 2: more than sixty percent right now.
Speaker 1: So as much as Biden has been a continuation and
Speaker 1: extension and an expansion of Trump policies, maybe Trump, if
Speaker 1: you were to win the presidency in November would be
Speaker 1: a continuation and expansion even further. Anyway, we should talk
Speaker 1: about what a Trump victory, which is of course certainly possible,
Speaker 1: what it would mean for the US China relationship, and
Speaker 1: what it might look like, what the direction all this
Speaker 1: is heading. Let's do it all right, Well, we have
Speaker 1: two absolutely perfect guests today. We're going to be speaking
Speaker 1: to Tom Orlick, previous odd Lots guest multiple times, chief
Speaker 1: economists for Bloomberg Economics, and Mackenzie Hawkins. She's the US
Speaker 1: Industrial policy reporter for Bloomberg in DC. Both of them
Speaker 1: worked on a big new report examining this question, which
Speaker 1: everyone should go and read. But thankfully they are taking
Speaker 1: the time to speak with us. So Tom and McKenzie,
Speaker 1: thank you so much for joining us.
Speaker 3: Great to be here, Thanks Jo, Thanks Tracy, thanks.
Speaker 4: For having us on.
Speaker 1: Actually, Tom, let me just start with you with like
Speaker 1: the most vague theoretical question there is, from a purely
Speaker 1: economist standpoint, what do tariffs do?
Speaker 3: So tariffs increase the cost of imports, and when the
Speaker 3: cost goes up, the demand goes down. So in the
Speaker 3: first Trump administration, we saw twenty five percent tariffs on
Speaker 3: a swathe of Chinese exports to the United States, and
Speaker 3: we've got a bunch of data on the impact that
Speaker 3: those tariffs had, so we can kind of say what
Speaker 3: the impact was. And we're seeing Chinese sales to the
Speaker 3: US in the categories of goods that face the tariffs
Speaker 3: down more than one hundred billion dollars relative to where
Speaker 3: they would have been if no tariffs have been put
Speaker 3: in place. Now Here we are at the start of
Speaker 3: twenty twenty four, still a few months to the election,
Speaker 3: but Donald Trump clearly in the lead for the Republican nomination,
Speaker 3: running ahead of Joe Biden in the polls in some
Speaker 3: key swing states, and talking about a sixty percent tariff
Speaker 3: on all Chinese imports. Well, if twenty five percent tariffs
Speaker 3: put a bit of a hole in revenue for Chinese factories,
Speaker 3: sixty percent tariffs, I think would turn that hole into
Speaker 3: more like a crater.
Speaker 2: So Joe asked a very theoretical question, and I guess
Speaker 2: I'm going to ask something a little bit more specific,
Speaker 2: but talk to us about how targeted or I guess
Speaker 2: customized the tariffs are that we've seen from the Trump
Speaker 2: administration and then the Biden administration. Because of course Trump's
Speaker 2: export curbs did involve semiconductors when he was but then
Speaker 2: Biden came in, and I believe he targeted, you know,
Speaker 2: advanced semiconductor technology and China's access to it, and in
Speaker 2: some ways he was even more strategic in the things
Speaker 2: that he was limiting.
Speaker 4: So in the Trump administration you saw this sweeping terror
Speaker 4: review that affected a wide range of Chinese industries, and
Speaker 4: the Biden administration has held those tariffs in place. There's
Speaker 4: been sort of a quote unquote imminent tariff review for
Speaker 4: months now, and a big question in Washington is whether
Speaker 4: the administration will stay the course with the sectors that
Speaker 4: Trump targeted or have a more refined approach that might
Speaker 4: focus on key strategic sectors for the US like evs
Speaker 4: and other clean energy products, which of course the Biden
Speaker 4: administration is trying to subsidize at home. But then you
Speaker 4: saw Biden look at a whole suite of other tools
Speaker 4: of economic statecraft that have actually become his favorite mechanisms
Speaker 4: to get at the Beijing question. One of those, as
Speaker 4: you said, Tracy, is export controls on advanced semiconductors. These
Speaker 4: are the critical electronic components that power everything from your
Speaker 4: phone to your car to nuclear missiles, and there's a
Speaker 4: big fear in Washington that if China catches up with
Speaker 4: US technology that they could use AI to power weapons systems,
Speaker 4: that it could pose a significant military threat to the US.
Speaker 4: And so you saw in October twenty twenty two sweeping
Speaker 4: controls on the ability of US companies to export the
Speaker 4: most advanced semiconductor technology and ship making equipment to any
Speaker 4: Chinese company.
Speaker 1: McKenzie just as a follow up on that specifically and
Speaker 1: talking about politically, like as we said in the introduction,
Speaker 1: and as Tracy just mentioned, you know, Biden continued with
Speaker 1: a lot of these terrify views. They're ongoing, they've become
Speaker 1: even more targeted. How did this become the consensus that
Speaker 1: the idea of just dropping tariffs and sort of returning
Speaker 1: to the pre Trump status quo with regards to trade
Speaker 1: now doesn't even seem on the table anymore, and it
Speaker 1: doesn't seem like anyone advocates for that. How did this
Speaker 1: just become like the bipartisan consensus that setting aside the
Speaker 1: degree of restrictions that some restrictions must be applied.
Speaker 4: It's a great question, you know, when you talk to
Speaker 4: folks on both sides of the aisle on the hill,
Speaker 4: they say, the one thing that everyone agrees on is China,
Speaker 4: and the question is not what but how much. And
Speaker 4: you know, you really saw the Trump administration, you know,
Speaker 4: early on introduce this tariffs question and then later on
Speaker 4: towards the latter years, start to target specific Chinese firms.
Speaker 4: Like a great example is Huawei, the Chinese telecommunications giant,
Speaker 4: which you saw Trump sanction in twenty nineteen over concerns
Speaker 4: about the security of their telecommunication systems that are all
Speaker 4: over the US. And then once that sort of entered
Speaker 4: the Washington think tank sphere and people really started seeing
Speaker 4: Huawei as a security threat, it became okay, what else
Speaker 4: is Huawei doing that's a security threat? And you know,
Speaker 4: the initial sanctions sort of crippled their telecommunications business and
Speaker 4: their smartphone business for quite some time. But we saw
Speaker 4: Huawei debut a smartphone in August that's powered by its
Speaker 4: ship that's far more advanced than where the US was
Speaker 4: hoping to hamstring China's rise. And so as we've seen
Speaker 4: China sort of make incremental technological progress in these areas
Speaker 4: that Washington has decided it's quite concerned about. There doesn't
Speaker 4: really seem to be a big debate over whether should
Speaker 4: we really be doing expert controls in the first place.
Speaker 4: It's we've been on this path, We've seen China continue
Speaker 4: to make progress. What are additional measures that we can
Speaker 4: take with our allies to prevent any further progress from
Speaker 4: these firms that now, for five years have been thought
Speaker 4: of as a significant security threaten DC.
Speaker 3: I just build on that briefly and point to three
Speaker 3: big factors which I think have changed the dynamic here
Speaker 3: in Washington, DC and made anti China into a sort
Speaker 3: of broad and firm consensus. I think the first thing
Speaker 3: driving it has been China's sudden rise. Right when everyone
Speaker 3: was agreeing that China could join the WTO back in
Speaker 3: nineteen ninety nine two thousand, China's GDP was a fraction
Speaker 3: of USGDP. China's military capabilities were nowhere near US military capabilities,
Speaker 3: and so China really wasn't regarded as a threat, and
Speaker 3: it was still possible to regard China as a kind
Speaker 3: of almost like a disciple that's now clearly changed. I
Speaker 3: think the second thing, which is important is the kind
Speaker 3: of the peculiarities of the US election system, which gives
Speaker 3: a disproportionate amount of power to the votes and the
Speaker 3: voices of a constituency in a few swing states, places
Speaker 3: like Pennsylvania, which are in the US rust Belt and
Speaker 3: which have suffered disproportionately from China's rise as a manufacturing power,
Speaker 3: and so where tough on China is a very popular
Speaker 3: vote winner. And then I think the third factor which
Speaker 3: we have to acknowledge is the kind of the strange
Speaker 3: genius of Donald Trump, right, who kind of revealed in
Speaker 3: his campaign in twenty sixteen that being really tough on
Speaker 3: China was a powerful motivating factor for the voters in
Speaker 3: those swing space.
Speaker 2: Whatever happened to the sort of old simplistic argument for protectionism,
Speaker 2: which was what we want to know, reshore manufacturing, create
Speaker 2: more jobs in the US. It feels like it's sort
Speaker 2: of evolved into this very specific anti China action. And
Speaker 2: we haven't seen correct me if I'm wrong, but we
Speaker 2: certainly haven't seen as stringent actions on other countries and
Speaker 2: other manufacturing threats. I mean, we know Mexico is exporting
Speaker 2: tons to the US now, sort of filling some of
Speaker 2: the gap that China has left. But what happened to
Speaker 2: that argument that feels like it's lost a little bit popularity.
Speaker 2: In DC, everything feels very strategic, very security focused.
Speaker 3: So I think when it comes to China, these two
Speaker 3: things come together from a US policy perspective rather nicely. Right,
Speaker 3: here's China, a single party state, a state dominated economy,
Speaker 3: rising quickly one point three billion people. It's easy to
Speaker 3: see why this is regarded as a national security threat,
Speaker 3: and so why it's easy to win the argument in
Speaker 3: DC for things like banning sales of leading edge semiconductors
Speaker 3: because potentially they could fuel China's military capabilities. At the
Speaker 3: same time, China's enormous success in grabbing global market share
Speaker 3: in the manufacturing sector and the consequences of that for
Speaker 3: US manufacturing where factory towns have been hollowed out and
Speaker 3: people have lost their jobs, makes the case that this
Speaker 3: is really not just from a national security perspective, but
Speaker 3: also from a kind of social well being allowing everyone
Speaker 3: to benefit from the growth of the US economy perspective.
Speaker 3: So it's a complicated picture. Now when it comes to China,
Speaker 3: those national security arguments and those concerns about the hollowing
Speaker 3: out of the manufacturing sector come together very nicely. The
Speaker 3: messiness of it, which I think you're sort of alluding to, Tracy,
Speaker 3: is that near assuring and friendsuring. That addresses the national
Speaker 3: security piece of it, but it certainly doesn't help people
Speaker 3: who lost their manufacturing jobs here in the United States.
Speaker 3: They're not going to be super delighted to see those
Speaker 3: jobs coming back to Mexico or Vietnam or other places
Speaker 3: which don't really help them out.
Speaker 4: And the manufacturing argument still has a lot of salience
Speaker 4: in DC and on the campaign trail. You know, you
Speaker 4: can think of one tranch of Biden's China policy as
Speaker 4: sanctioned controls on outbound investment, export controls on semiconductor chips,
Speaker 4: and the continuation of tru tariffs. But you can think
Speaker 4: of the other side of the coin as the massive
Speaker 4: industrial policy effort that the US has embarked on over
Speaker 4: the past couple of years. The Chips and Science Act,
Speaker 4: the Inflation Reduction Act, which is Democrats' signature climate law,
Speaker 4: and the bipart is an infrastructure law have poured well
Speaker 4: over a trillion dollars of federal funding into revitalizing these
Speaker 4: domestic manufacturing bases in areas that lost a lot of
Speaker 4: jobs to the so called China shock.
Speaker 2: It is true also that I think Trump has talked
Speaker 2: about doing a blanket ten percent tariff on all imports
Speaker 2: to the US, so basically ring fencing the entire economy.
Speaker 1: Well, this is details with what I was about to
Speaker 1: ask next time, and it's sort of another theoretical economics question,
Speaker 1: kind of like when I asked what tariffs do? But
Speaker 1: why didn't we have inflation? Why don't they Why weren't
Speaker 1: the inflationary in the Trump period? And how do economists
Speaker 1: think about the inflation risks associated with aggressive tariffs, either
Speaker 1: on one country or blanket tariffs on everyone.
Speaker 3: So it's a really good question if we think about
Speaker 3: the kind of the big picture. Over the last thirty years,
Speaker 3: globalization and the ability of consumers in the United States
Speaker 3: to tap cheap goods made in China has been one
Speaker 3: of the factors that was pretty helpful in keeping inflation
Speaker 3: around the FEDS two percent target, at least until the
Speaker 3: post pandemic inflation surge. Now, why didn't the Trump tariffs
Speaker 3: have a more significant impact on that dynamic? I think
Speaker 3: the reason is there's a few factors at work. The
Speaker 3: first factor is goods inflation is important in the US,
Speaker 3: but it's not as important as services inflation, and services
Speaker 3: inflation doesn't really get impacted by tariffs that you put
Speaker 3: on goods. The second factor is, yes, China is a
Speaker 3: really important supplier of goods to the United States, but
Speaker 3: it's not the only supplier. And then the third factor
Speaker 3: at work is tariffs aren't the only thing going on. Yes,
Speaker 3: the Trump administration put twenty five percent tariffs on but
Speaker 3: over the same period we saw a significant depreciation of
Speaker 3: China's yuan. China's factories were able to absorb some of
Speaker 3: the shock by taking lower profit margins, and that provided
Speaker 3: a little bit of an officer.
Speaker 2: So, just on this note, have you done any number
Speaker 2: crunching on what Trump's proposal would mean for inflation? Now
Speaker 2: do you have specific numbers?
Speaker 3: So we have actually been crunching the numbers, Tracy, And
Speaker 3: here I want to give a shout out to Eleanora
Speaker 3: Mavrodi in our modeling team in Paris. She's taken a
Speaker 3: big model of the global economy and she's plugged in
Speaker 3: that Trump proposal for a sixty percent increase in tariffs
Speaker 3: on US imports from China, and what the model is
Speaker 3: telling us is that that has a pretty catastrophic impact
Speaker 3: on trade. In fact, if the US goes ahead with
Speaker 3: sixty percent tariffs and China reciprocates with sixty percent tariffs,
Speaker 3: matching the pattern of kind of tip for tat retaliation
Speaker 3: we saw during the first Trump term, that pretty much
Speaker 3: turns off trade between the world's two biggest economies. The
Speaker 3: impact on inflation, well, it's there. If import costs go up,
Speaker 3: then that's a positive impact on inflation, but it's not
Speaker 3: particularly marked. That's partly for the reasons I was just
Speaker 3: sharing services inflation is more important than goods inflation. It's
Speaker 3: also because there's an offsetting drag. Import prices go up
Speaker 3: and that directly affects the CPI. But tariffs also have
Speaker 3: a depressing effect on growth, and that means the economy
Speaker 3: is weaker, and that's an offset on inflation.
Speaker 1: If the US and China, there's two huge trading partners,
Speaker 1: suddenly stop trading, what other knock on effects do we
Speaker 1: see from there?
Speaker 3: So I can speak to the economics of that, and
Speaker 3: maybe McKenzie has some thoughts on the sort of broader
Speaker 3: policy implications. So on the economics, I think it's interesting
Speaker 3: to think about this not just at the aggregate level,
Speaker 3: but also at the sector level, and not just about
Speaker 3: the impact on the US and China, but also about
Speaker 3: the impact on other economies around the world. So at
Speaker 3: the sector level in the United States, it's kind of
Speaker 3: a policy to support the industries of the past, right, mining,
Speaker 3: production of steel. These are industries which were crucially important
Speaker 3: to the United States in an earlier stage of its development.
Speaker 3: Not so important now. Those would be the industries which
Speaker 3: would be the main beneficiary of a sixty percent tariff.
Speaker 3: Who loses out, Well, it's kind of the industries of
Speaker 3: the future, right, it's the people making the semiconductors, is
Speaker 3: the people making the advanced electronics, the people with the
Speaker 3: exposure to that East Asian electronics supply chain. And thinking
Speaker 3: about the global impact, Well, if we break the trade
Speaker 3: relationship between China and the United States, that's bad for
Speaker 3: those two countries, But there are some other countries that
Speaker 3: could well gain. Thinking about those connect to economies, places
Speaker 3: like Vietnam, places like Mexico that have a strong manufacturing base,
Speaker 3: that have low costs, and that have pretty good trade
Speaker 3: relationships with those two economies.
Speaker 4: And when you think about the bilateral relationship between Washington
Speaker 4: and Beijing. At the same time as Biden has become
Speaker 4: increasingly hawkish on China, employing sort of novel tools of
Speaker 4: economic statecraft to get at advanced industries in the country.
Speaker 4: There's also been this significant back channel effort to improve
Speaker 4: direct diplomatic ties military to military communications, culminating in a
Speaker 4: meeting between the two leaders on the sidelines of the
Speaker 4: APEC summit in San Francisco. And so you can imagine,
Speaker 4: you know, after establishing formal communication networks between the Treasury
Speaker 4: Department and their counterparts in China, formal communications networks between
Speaker 4: the Commerce Department here and MOFCOM and China, this sort
Speaker 4: of deterioration of a lot of the sort of day
Speaker 4: to day's slow working diplomatic effort that's been happening under
Speaker 4: President Biden, if the US were to sort of blow
Speaker 4: up the trade relationship between the two countries under a
Speaker 4: potential Trump administration.
Speaker 2: Mackenzie, you mentioned earlier the Infrastructure Investment Act, and the
Speaker 2: other big set piece from the Biden administration has been
Speaker 2: the Clean Energy Transition and the money that is pouring
Speaker 2: in there. And this is a question that I've asked
Speaker 2: a couple people on this podcast at this point, But
Speaker 2: it seems like the US has a desire to shift
Speaker 2: away from fossil fuels, maybe build up home capacity of
Speaker 2: clean energy technology like solar panels. But at the same time,
Speaker 2: it is also very true that China is good at
Speaker 2: producing lots of cheap solar panels and things like that.
Speaker 2: So I guess, I'm curious what you're hearing from the
Speaker 2: administration in terms of I guess the need to build
Speaker 2: up or increase some of that capability at home and
Speaker 2: make it more efficient versus the lower cost and sheer
Speaker 2: volume of production that you would get from Chinese made
Speaker 2: renewable technology or even semiconductors.
Speaker 4: It's a great question. The solar panel question is kind
Speaker 4: of the most often cited explanation of the danger that
Speaker 4: China poses to these sort of more nascent industries in
Speaker 4: the US on hydrogen, on wind, and also on electric
Speaker 4: vehicles and semiconductor ships, where the US was long the
Speaker 4: technological leader and then seated a lot of that production
Speaker 4: capability to East Asia. And so when we think about
Speaker 4: the sort of critical industries that the US is investing
Speaker 4: in right now, you identify them right off the bed.
Speaker 4: It's semiconductor ships, it's electric vehicle, it's solar, wind, hydro,
Speaker 4: a bunch of types of clean energy through the Ships
Speaker 4: and Science Act and the Inflation Reduction Act. And the
Speaker 4: worry is that the US could pour significant amounts of
Speaker 4: government capital trying to crowd in private capital to build
Speaker 4: up these industries, but if Chinese firms are not operating
Speaker 4: in the same market environment, there could be a significant
Speaker 4: dumping risk. The fear on chips, for example, is that
Speaker 4: China has been building up capacity in the sort of mature,
Speaker 4: older generation semiconductors that still power the entire global economy,
Speaker 4: even if they're not the cutting edge. Those are not
Speaker 4: the ones that the US is trying to deal with
Speaker 4: with export controls, and that's why the Biden administration is
Speaker 4: talking about tariffs. They say, we see this following this
Speaker 4: same trajectory that we saw with solar panels and on
Speaker 4: electric vehicles as well. The US is pouring billions of
Speaker 4: dollars and trying to get American auto giants to build
Speaker 4: cleaner cars in the US, but Chinese models are on
Speaker 4: offer for less than half the cost, and the only
Speaker 4: reason they haven't entered US markets yet, or the primary
Speaker 4: reason is that there's a twenty seven point five percent
Speaker 4: tariff imposed under Donald Trump, and you're hearing a lot
Speaker 4: of concern in Washington, maybe we might need to increase
Speaker 4: that number to protect these industries that we're investing in
Speaker 4: so much at home.
Speaker 1: I'm glad you went there. There's literally going to be
Speaker 1: what I ask because when you talk about the Chinese
Speaker 1: evy boom, most of the people talk about the European
Speaker 1: market specifically and how it's a threat to BMW and
Speaker 1: the various legacy automakers. But in theory, right, like if
Speaker 1: the quality continues to improve, if they continue to go down,
Speaker 1: like the sort of learning cost curve of costs, like
Speaker 1: is it only a matter of time at current rates
Speaker 1: before we start seeing bid cars in the US competing
Speaker 1: against you know, obviously Tesla, but also the EV efforts
Speaker 1: of the Detroit three and others that so far haven't
Speaker 1: gone all that great as far as I can tell.
Speaker 4: So that is one of the central questions I think
Speaker 4: the policy make in the administration are thinking about right now.
Speaker 4: You know, the EV question in the US is manifold one.
Speaker 4: There is concern that Chinese EV supply chain companies will
Speaker 4: try to take advantage of the tax credits offered for
Speaker 4: US production. There's been a lot of focus, for example,
Speaker 4: on this Ford facility in Michigan, which has a licensing
Speaker 4: agreement with Cattle, which is the pre eminent global battery maker,
Speaker 4: and a lot of China hawks on the hill, you know,
Speaker 4: in some cases on both sides of the aisle are
Speaker 4: saying we should really keep a close eye on that.
Speaker 4: Is this sort of an attempt by China to work
Speaker 4: around restrictions that say you can't take advantage of the
Speaker 4: tax credits if you have a certain threshold of Chinese
Speaker 4: investment in your supply chain, to sort of tap into
Speaker 4: this inflation Reduction Act fueled EV boom in the United States.
Speaker 4: Then there's the question of will Bid and other Chinese
Speaker 4: companies try to invest in Mexico. You know, you saw
Speaker 4: Treasury Secretary Janet Yellen in December on a trip to
Speaker 4: Mexico City saying we want to help Mexico ford a
Speaker 4: five against you know, foreign investment threats, including specifically China,
Speaker 4: and Commerce Secretary Gina Raimondo last week sort of opened
Speaker 4: the door to a little bit of a novel take
Speaker 4: on Chinese EV's coming from the administration citing data security
Speaker 4: risks so not even just talking about the market dynamics
Speaker 4: and the trade threat, which was the logic behind the
Speaker 4: Trump tariffs to begin with, and this sort of long
Speaker 4: going conversation among Biden officials about whether to adjust or
Speaker 4: potentially increase those tariffs, but also the question of you know,
Speaker 4: these cars are equipped with thousands of sensors, and she
Speaker 4: asked the question, do we really want all of that
Speaker 4: data going to Beijing? And so that was almost seating
Speaker 4: the floor a little bit to maybe this quote unquote
Speaker 4: small yard high fence approach that the Biden administration has
Speaker 4: touted for years is becoming or could become a slightly
Speaker 4: larger yard and higher fence. Looking at other forms of
Speaker 4: critical technologies that compared to sort of the market reds
Speaker 4: that Tom was talking about earlier that fueled sort of
Speaker 4: the traditional US China trade battle. Now we're thinking about
Speaker 4: information technology that lends a national security argument to some
Speaker 4: of these same products.
Speaker 2: So just thinking about things that have changed since the
Speaker 2: Trump years twenty sixteen to twenty twenty. One of the
Speaker 2: big things has to be Russia's invasion of Ukraine, and
Speaker 2: I guess the sort of economic alliance that we've seen
Speaker 2: between China and Russia emerged since then, and I'm wondering
Speaker 2: We've obviously been focused a lot on the US China
Speaker 2: relationships specifically, but could we potentially see the emergence of,
Speaker 2: for lack of a better term, East West trade blocks.
Speaker 3: I think that's a really interesting question, Tracy, and it
Speaker 3: reminds me of the kind of the miscalculation that many
Speaker 3: here in the United States made about the impact of
Speaker 3: US sanctions and European sanctions on Russia in the days
Speaker 3: after Plutin's tanks rolled across the border into Ukraine. You
Speaker 3: remember back two years ago, there was sweeping sanctions, right,
Speaker 3: Russia essentially locked out of the dollar financial market, Russian firms,
Speaker 3: with some exceptions in energy, essentially locked out of trade
Speaker 3: with the US and Europe. And at that moment there
Speaker 3: was a rush to sort of call the collapse of
Speaker 3: the Russian economy. Right, the US is sanctioning them, Europe
Speaker 3: is sanctioning them, they can't participate in the global financial system.
Speaker 3: This must be the first moment of a crisis. And
Speaker 3: in fact, two years on, we can see that the
Speaker 3: sanctions and these controls have certainly had a negative impact
Speaker 3: on Russia. But it's certainly not tipped them into crisis.
Speaker 3: Why is that, Well, I think the unfortunate reality for
Speaker 3: policymakers here in DC and in Brussels is that they
Speaker 3: no longer have the same impact that they once did.
Speaker 3: And the reason for that is because of China and
Speaker 3: to a lesser extent, India, which has also maintained more
Speaker 3: or less normal trading relations with Russia. And so what
Speaker 3: that suggests is that as China rises, and as India rises,
Speaker 3: and other major emerging markets which don't necessarily fall into
Speaker 3: line with DC start playing a bigger role in the
Speaker 3: global economy, the capacity of the United States and its
Speaker 3: allies to shape outcomes for particular countries by imposing sanctions
Speaker 3: or tariffs becomes that much less. And to your question, Tracy, yes,
Speaker 3: that possibility of an East West trade block is very
Speaker 3: much there. Bad for global growth, but a buffer for
Speaker 3: countries that find themselves at the wrong end of US
Speaker 3: economic statecraft.
Speaker 4: And China's alignment with Russia has actually lent a lot
Speaker 4: more credence to US arguments about the national security risks
Speaker 4: that a lot of European allies have been lukewarm on
Speaker 4: for some time. So you know, they've seen as a
Speaker 4: market opportunity, not necessarily the geopolitical threat that Washington sees,
Speaker 4: but they've started to pay more attention to US warnings,
Speaker 4: particularly about the risk of invasion of Taiwan, since they've
Speaker 4: felt this pressure from Russia and then the alignment between
Speaker 4: those two powers. And you know, one of the best
Speaker 4: examples of this is in order for the US to
Speaker 4: restrict China's access to advanced semiconductors, they had to get
Speaker 4: key allies with key companies in the supply chain on board.
Speaker 4: One of the best examples is ASML, the leading maker
Speaker 4: of chip making equipment, which is based in the Netherlands.
Speaker 4: And if the US is going to prevent China from
Speaker 4: developing advanced chips, they have to convince the Dutch government
Speaker 4: to block ASML from sending the most high tech machines
Speaker 4: over to China. And so this sort of increasing threat
Speaker 4: from Russia, where a company like ASML might say, we
Speaker 4: want to trade China's a fantastic customer. China just became
Speaker 4: sort of proportionally the largest share of ASML sales just
Speaker 4: a month or two ago. The alignment between China and
Speaker 4: Russia has sort of helped bring European powers around to
Speaker 4: the idea that no, China does pose a significant risk
Speaker 4: if they invade Taiwan, which houses the world pre eminent
Speaker 4: chip maker where we get all of the most advanced
Speaker 4: chips that power all of our most advanced technology. That
Speaker 4: is a threat that we need your alignment on, Tom.
Speaker 1: I know when trade deals are crafted, when people think
Speaker 1: about tariffs, the actual country of origin for a given
Speaker 1: good is always people try to figure that out essentially,
Speaker 1: so that you know, if we want to restrict Chinese
Speaker 1: exports to the US, that they can't just like land
Speaker 1: in Mexico first and then across the border and say
Speaker 1: it's to Mexican good. But we do know that imports
Speaker 1: into the US from Mexico have been surging, and as
Speaker 1: you mentioned, Mexico could be a beneficiary if they were
Speaker 1: cut off. Like, how leaky is that? And to what
Speaker 1: degree can other countries other destinations be de facto yes,
Speaker 1: we're importing from Mexico, but really this is a continuation
Speaker 1: of importing from China.
Speaker 3: Yeah, that's a really good question, Joe. It reminds me
Speaker 3: of a funny moment in a Chinese novel I read
Speaker 3: a few years ago, Shandi or Brothers, and there's a
Speaker 3: moment in the novel where there's a kind of rise
Speaker 3: in anti Japanese sentiment in China, and there's a violent
Speaker 3: mob that goes out and tries to smash Japanese products,
Speaker 3: and they're on the cusp of smashing what they think
Speaker 3: is a Japanese car, and one of the characters says, wait,
Speaker 3: this car was made of the joint venture enterprise in China,
Speaker 3: and then another protagonist says, Okay, let's just smash half
Speaker 3: of it. And I think that's kind of like that's
Speaker 3: the reality of global trade, right, I mean, the sort
Speaker 3: of the classic example is the iPhone technology and branding
Speaker 3: here in the United States. Semiconductors from Taiwan snaps together
Speaker 3: in mainland China. If there's going to be a trade war,
Speaker 3: which bit of it are you going to impact?
Speaker 4: Right?
Speaker 3: Well, the reality is that you can't impact one bit
Speaker 3: of it without impacting another. We're seeing some of that
Speaker 3: complexity playing out in different ways in the years since
Speaker 3: the Trump tariffs came into place. We're seeing Chinese companies
Speaker 3: setting up shop in Vietnam, Chinese companies attempting to set
Speaker 3: up shop in Mexico so they'd be exporting from those
Speaker 3: countries to the United States dodging the Trump tariffs, But
Speaker 3: where does the revenue go, in many cases still going
Speaker 3: to those Chinese firms. It's a complex system, and that
Speaker 3: makes it that much harder to wield these tools of
Speaker 3: economic state craft without creating some unintended collateral damage.
Speaker 4: And there's always the question of how deep in the
Speaker 4: supply chain are you going to go when you think
Speaker 4: about chips or you think about evs, down to the
Speaker 4: raw components, the minerals. I mean, China has been snapping
Speaker 4: up mines across the world. And if you say we
Speaker 4: don't want any Chinese investment anywhere in the supply chain
Speaker 4: for any of the goods that we're going to subsidize
Speaker 4: or even allow to be impoured into the US, you
Speaker 4: could end up with zero goods at all.
Speaker 2: So, on the one hand, we have Trump running on
Speaker 2: this idea of sixty percent tariffs on China, maybe more,
Speaker 2: plus perhaps a ten percent ring fence on all imports
Speaker 2: into America. On the other hand, you have the Biden administration,
Speaker 2: which is already in office and has already continued some
Speaker 2: quite stringent restrictions on China. When you talk to policymakers
Speaker 2: in China, or when you look at surveys of the
Speaker 2: domestic Chinese population, what do they say about their preferred candidate?
Speaker 2: Do they express a preference?
Speaker 4: So we cite a survey in our story, an online
Speaker 4: survey figured out trying to figure out how the Chinese
Speaker 4: public feels about the upcoming US vote, and about sixty
Speaker 4: percent of the respondent's preferred Trump. But it wasn't that,
Speaker 4: you know, his China plans stack up better for them
Speaker 4: against Biden's, but they thought that he would ease the
Speaker 4: pressure on China by bringing chaos to America.
Speaker 1: Well, we'll see what happened, mackenzie, and thank you so
Speaker 1: much for coming on. Fascinating work. Everyone should go read
Speaker 1: your Big Take article out on the Bloomberg now and
Speaker 1: we'll have to have you both back on Odd Lots
Speaker 1: maybe after the November election. We'll see what happening.
Speaker 4: Thanks so much for having us.
Speaker 5: Thanks Jay, Thanks Tracy, Tracy.
Speaker 1: I thought that was great. There was a lot interesting
Speaker 1: in there. One thing that I'll pick out that was
Speaker 1: sort of something McKenzie said about. Even as these economic
Speaker 1: constraints have grown, there has been some other progress like
Speaker 1: military to military communication, treasury to treasury communication, it reminds
Speaker 1: me of something. You know, we talked to Adam Posen
Speaker 1: generation and that was one of his concerns about trade wars,
Speaker 1: which is that trade freedom doesn't necessarily lead to peace,
Speaker 1: but trade constraints can create geopolitical problems.
Speaker 2: Right, which makes a lot of sense.
Speaker 4: Well.
Speaker 2: On that note, the other thing that both of them
Speaker 2: really emphasized was this idea of China sort of in
Speaker 2: a sweet spot for this kind of trade restriction, where
Speaker 2: you do have concerns over the loss of jobs and
Speaker 2: manufacturing that have been going on for decades, but then
Speaker 2: on the other hand, you do have the strategic concerns
Speaker 2: strategically important industries. Is the US going to be able
Speaker 2: to compete on semiconductors or clean energy tech? And also
Speaker 2: that military aspect of it. So it sort of makes
Speaker 2: sense why the US would focus on China and why
Speaker 2: it's politically appealing totally.
Speaker 1: Can I express an unpopular opinion? I don't know if
Speaker 1: it's unpopular. I just don't hear many people say it.
Speaker 1: I really believe that if there's you know, if there's
Speaker 1: one country in the world that could do true like
Speaker 1: odd tarchy, like it's obviously the US, right, like it
Speaker 1: would probably be very economically harmful to literally no longer
Speaker 1: trade with the world.
Speaker 2: Just to be clear, you are not recommended, but as
Speaker 2: a thought expert.
Speaker 1: Thought experiment, if there's one place that is all the food,
Speaker 1: all of the minerals, all the oil, all the natural gas,
Speaker 1: all the talent and companies, all of the high tech. Like,
Speaker 1: if there's one place that I think could plausibly pull
Speaker 1: it off, it's clearly the US. So like, again, this
Speaker 1: is not me making a policy recommendation. I just think,
Speaker 1: like I think we could. It would be very disruptive,
Speaker 1: and I'm not in favorite, but I think we could survive.
Speaker 2: Someone is going to take that quote completely out of
Speaker 2: context and tweet it.
Speaker 4: Well.
Speaker 2: The one other thing I was thinking, and it's a
Speaker 2: shame we didn't get into this, but maybe we should
Speaker 2: do an episode more related to this down the road.
Speaker 2: But I never quite figured out Trump's policy on currency,
Speaker 2: because he seemed to switch or vary between wanting a
Speaker 2: strong dollar because it sounds good to have a strong dollar,
Speaker 2: but then also wanting a week dollar to because it's
Speaker 2: good FORCT for it.
Speaker 1: You know, that's very funny because right like strong dollar,
Speaker 1: it sounds very trumpy. Right, but he also hit some
Speaker 1: like intuitions that it wasn't quite right, and even I
Speaker 1: remember once on the campaign trail he said something to
Speaker 1: the effect of like, yeah, i'd like want a week dollar.
Speaker 1: It's good for borrowing, it's good for exports. It's one
Speaker 1: of those things where like it's counterintuitive but also makes sense. Yeah,
Speaker 1: it's not reetorted. No one rhetorically wants to come on
Speaker 1: for a week dollar, but it's.
Speaker 2: He never quite made up his mind. Well, maybe if
Speaker 2: someone will ask him about that on the campaign trail.
Speaker 1: Maybe he'll come on odd Lots talk about his currency policy.
Speaker 2: All right. In the meantime, shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the Audthlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our guest McKenzie Hawkins, she's at Matt Hawk. Followed
Speaker 1: tom Orlick at tom Orlick. Follow our producers Carman Rodriguez
Speaker 1: at Carman Erman, dash El, Bennett at Dashbot and cal
Speaker 1: Brooks at cal Brooks. Thank you to our producer Moses
Speaker 1: Onam for more Oddlots content. Go to Bloomberg dot com
Speaker 1: slash Oddlots, where we have a blog, transcripts and a newsletter.
Speaker 1: And check out the discord discord dot gg slash odd
Speaker 1: lots where you can chat with fellow listeners. Twenty four seven.
Speaker 2: And if you enjoy Oddlots, if you like it when
Speaker 2: we examine the Trump and Biden tariffs, then please leave
Speaker 2: us a positive review on your favorite podcast platform. And
Speaker 2: don't forget. If you are a Bloomberg subscriber, you can
Speaker 2: listen to all of our episodes absolutely ad free. Just
Speaker 2: connect your Bloomberg subscription to Apple Podcasts. Thanks for listening.