WEBVTT - How a Second Trump Administration Could Upend US-China Relations 0:00:10.760 --> 0:00:14.080 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.120 --> 0:00:16.360 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:16.680 --> 0:00:20.200 Tracy, here's something that I've thought about that's been interesting 0:00:20.239 --> 0:00:23.759 for a few years. The Trump administration obviously sort of 0:00:23.800 --> 0:00:28.479 took this hawkish line on China, introduced the tariffs on 0:00:28.600 --> 0:00:32.120 a lot of Chinese exports to the US, and then 0:00:32.400 --> 0:00:36.080 when the Biden administration took over, it kind of seems 0:00:36.120 --> 0:00:38.839 like we basically got continuity on that front. There was 0:00:38.880 --> 0:00:41.880 no roll back, yeah, anything, maybe some of the screws 0:00:41.880 --> 0:00:42.920 have been tightened even further. 0:00:43.040 --> 0:00:45.120 I think that's exactly right, and it's kind of funny, 0:00:45.159 --> 0:00:47.600 as you mentioned that it's flown a little bit under 0:00:47.760 --> 0:00:51.440 the radar. And I'm thinking back to Trump's statement trade 0:00:51.440 --> 0:00:54.600 wars are good and easy to yeah, And I mean 0:00:54.800 --> 0:00:57.680 he got a lot of flak for that, probably rightfully so. 0:00:58.000 --> 0:01:00.600 But if you think about what's been happening over the 0:01:00.640 --> 0:01:03.200 past few years, like it seems like the US is 0:01:03.320 --> 0:01:07.440 kind of winning the trade war against China in some respects. 0:01:07.480 --> 0:01:11.040 I mean, the US economy outperforming much of the rest 0:01:11.040 --> 0:01:13.120 of the world. I think GDP growth was something like 0:01:13.160 --> 0:01:16.920 three percent in twenty twenty three. China's GDP growth is 0:01:17.000 --> 0:01:19.520 still higher, I believe it was at five percent, but 0:01:19.560 --> 0:01:21.840 it's slowing a lot. And if you look at what's 0:01:21.840 --> 0:01:24.120 going on with the economy right now, it seems like 0:01:24.200 --> 0:01:26.119 it is really struggling in various ways. 0:01:26.480 --> 0:01:28.200 It's interesting that they're winning. 0:01:28.560 --> 0:01:29.959 I hadn't really winning. 0:01:30.040 --> 0:01:31.639 Might be strong, but like. 0:01:31.840 --> 0:01:34.240 Well, our country is clearly doing better. Yeah, at least too. 0:01:34.440 --> 0:01:38.200 On the other hand, China clearly has a handful of 0:01:38.240 --> 0:01:43.400 industrial powerhouses that are creating anxiety for legacy industrial powerhouses 0:01:43.720 --> 0:01:46.759 in the US and Europe. And we can say that 0:01:46.880 --> 0:01:50.560 clearly when it comes to ev first legacy automakers. We 0:01:50.640 --> 0:01:53.560 can look at, you know, the rising number of conversations 0:01:53.600 --> 0:01:56.400 like a Boeing is faltering, will Comac and the CM 0:01:56.440 --> 0:02:00.320 one nine eventually takes significant market share and commercial eers. 0:02:00.600 --> 0:02:03.080 We did an episode I think near the end of 0:02:03.400 --> 0:02:07.160 last year that actually, despite all of the restrictions on 0:02:07.320 --> 0:02:12.160 equipment imports into China for semiconductors, that the domestic semiconductor 0:02:12.560 --> 0:02:15.919 industry is making gains. So like in the GDP sense 0:02:15.960 --> 0:02:19.000 of the word, like, clearly China is struggling, but on 0:02:19.040 --> 0:02:23.480 these sort of like key industrial strategic areas of the economy. 0:02:23.520 --> 0:02:26.200 There is the word things still seem to be working out, No. 0:02:26.280 --> 0:02:29.040 Absolutely, And I think there is this overall angst in 0:02:29.080 --> 0:02:33.360 the US with this idea that China is somehow better 0:02:33.600 --> 0:02:37.040 at doing this kind of targeted industrial policy. We used 0:02:37.080 --> 0:02:40.160 to talk about the Chinese command economy. They have experience 0:02:40.480 --> 0:02:43.280 with pouring lots and lots of money into areas that 0:02:43.320 --> 0:02:46.640 they identify as strategically important. That doesn't mean they do 0:02:46.680 --> 0:02:50.120 it perfectly every time. I mean we basically saw that 0:02:50.160 --> 0:02:53.239 with some of the consumer tech companies, where there was 0:02:53.280 --> 0:02:57.120 a reversal of the government stance towards them, lots of 0:02:57.240 --> 0:03:01.600 talk of disorderly capital flowing into that space. But then 0:03:01.800 --> 0:03:03.840 what we saw is, you know, they said that they 0:03:03.880 --> 0:03:06.120 cracked down on the sector, and then they said, what 0:03:06.160 --> 0:03:08.760 we really want you to invest in is things like 0:03:08.840 --> 0:03:12.680 solar panels and electric vehicles and semiconductors, And so we 0:03:12.760 --> 0:03:15.560 saw those areas start to boom. So I think there 0:03:15.639 --> 0:03:18.640 is a real sense of concern in the US that 0:03:18.760 --> 0:03:22.359 maybe China, if they're not better at it, they certainly 0:03:22.440 --> 0:03:24.639 have done it for a longer time on a more 0:03:24.680 --> 0:03:26.000 consistent basis. 0:03:25.880 --> 0:03:28.640 Right, And so it feels like now the debate in 0:03:28.680 --> 0:03:31.600 the US is like, Okay, everyone is sort of accepted 0:03:31.800 --> 0:03:34.280 that the tariffs that Trump introduced, that the idea that 0:03:34.320 --> 0:03:37.960 the US in various ways tries to constrain Chinese exports 0:03:38.040 --> 0:03:41.720 or constrain Chinese industry. It feels like that's become conventional 0:03:41.720 --> 0:03:43.840 wisdom now, or that everyone sort of agrees we do 0:03:43.920 --> 0:03:46.440 that in Washington. And now the question is how much. 0:03:46.720 --> 0:03:49.240 And of course recently we heard Trump say that were 0:03:49.240 --> 0:03:51.840 he to be elected president, he would ratch up the 0:03:51.880 --> 0:03:54.600 tariffs even more. I think he put the number like 0:03:54.760 --> 0:03:57.520 sixty percent, which I have to imagine would like totally clobber. 0:03:57.760 --> 0:03:59.920 He did say sixty percent, But then I saw right 0:04:00.120 --> 0:04:02.760 before we came on, let's see, we're recording this on 0:04:02.800 --> 0:04:05.920 February eighth. I think there was an interview from like 0:04:06.000 --> 0:04:09.160 February six where he basically said that the tariffs could 0:04:09.160 --> 0:04:12.480 be even bigger than sixty percent. So I don't know 0:04:12.520 --> 0:04:16.960 where he's quite getting those round numbers from, but maybe 0:04:16.960 --> 0:04:18.400 more than sixty percent right now. 0:04:18.600 --> 0:04:21.080 So as much as Biden has been a continuation and 0:04:21.240 --> 0:04:25.680 extension and an expansion of Trump policies, maybe Trump, if 0:04:25.760 --> 0:04:28.159 you were to win the presidency in November would be 0:04:28.160 --> 0:04:32.320 a continuation and expansion even further. Anyway, we should talk 0:04:32.480 --> 0:04:36.520 about what a Trump victory, which is of course certainly possible, 0:04:36.720 --> 0:04:40.240 what it would mean for the US China relationship, and 0:04:40.279 --> 0:04:42.040 what it might look like, what the direction all this 0:04:42.080 --> 0:04:43.880 is heading. Let's do it all right, Well, we have 0:04:44.040 --> 0:04:46.799 two absolutely perfect guests today. We're going to be speaking 0:04:46.800 --> 0:04:50.520 to Tom Orlick, previous odd Lots guest multiple times, chief 0:04:50.520 --> 0:04:54.560 economists for Bloomberg Economics, and Mackenzie Hawkins. She's the US 0:04:54.600 --> 0:04:58.200 Industrial policy reporter for Bloomberg in DC. Both of them 0:04:58.279 --> 0:05:02.159 worked on a big new report examining this question, which 0:05:02.200 --> 0:05:05.240 everyone should go and read. But thankfully they are taking 0:05:05.279 --> 0:05:07.600 the time to speak with us. So Tom and McKenzie, 0:05:07.760 --> 0:05:09.000 thank you so much for joining us. 0:05:09.440 --> 0:05:11.960 Great to be here, Thanks Jo, Thanks Tracy, thanks. 0:05:11.680 --> 0:05:12.320 For having us on. 0:05:12.520 --> 0:05:14.359 Actually, Tom, let me just start with you with like 0:05:14.400 --> 0:05:19.440 the most vague theoretical question there is, from a purely 0:05:19.720 --> 0:05:21.919 economist standpoint, what do tariffs do? 0:05:22.680 --> 0:05:28.800 So tariffs increase the cost of imports, and when the 0:05:28.839 --> 0:05:33.560 cost goes up, the demand goes down. So in the 0:05:33.560 --> 0:05:38.800 first Trump administration, we saw twenty five percent tariffs on 0:05:39.279 --> 0:05:44.279 a swathe of Chinese exports to the United States, and 0:05:44.320 --> 0:05:47.120 we've got a bunch of data on the impact that 0:05:47.160 --> 0:05:50.800 those tariffs had, so we can kind of say what 0:05:50.839 --> 0:05:54.880 the impact was. And we're seeing Chinese sales to the 0:05:55.040 --> 0:05:58.320 US in the categories of goods that face the tariffs 0:05:58.960 --> 0:06:03.040 down more than one hundred billion dollars relative to where 0:06:03.040 --> 0:06:05.479 they would have been if no tariffs have been put 0:06:05.480 --> 0:06:07.960 in place. Now Here we are at the start of 0:06:08.000 --> 0:06:10.919 twenty twenty four, still a few months to the election, 0:06:12.080 --> 0:06:16.360 but Donald Trump clearly in the lead for the Republican nomination, 0:06:17.080 --> 0:06:20.880 running ahead of Joe Biden in the polls in some 0:06:20.960 --> 0:06:25.120 key swing states, and talking about a sixty percent tariff 0:06:25.360 --> 0:06:29.840 on all Chinese imports. Well, if twenty five percent tariffs 0:06:30.040 --> 0:06:33.480 put a bit of a hole in revenue for Chinese factories, 0:06:34.200 --> 0:06:37.120 sixty percent tariffs, I think would turn that hole into 0:06:37.160 --> 0:06:37.880 more like a crater. 0:06:39.480 --> 0:06:42.719 So Joe asked a very theoretical question, and I guess 0:06:42.720 --> 0:06:45.480 I'm going to ask something a little bit more specific, 0:06:45.520 --> 0:06:48.960 but talk to us about how targeted or I guess 0:06:49.000 --> 0:06:52.279 customized the tariffs are that we've seen from the Trump 0:06:52.360 --> 0:06:56.000 administration and then the Biden administration. Because of course Trump's 0:06:56.000 --> 0:07:00.719 export curbs did involve semiconductors when he was but then 0:07:00.880 --> 0:07:04.240 Biden came in, and I believe he targeted, you know, 0:07:04.320 --> 0:07:08.400 advanced semiconductor technology and China's access to it, and in 0:07:08.400 --> 0:07:12.160 some ways he was even more strategic in the things 0:07:12.200 --> 0:07:13.320 that he was limiting. 0:07:13.800 --> 0:07:17.400 So in the Trump administration you saw this sweeping terror 0:07:17.480 --> 0:07:20.240 review that affected a wide range of Chinese industries, and 0:07:20.280 --> 0:07:24.040 the Biden administration has held those tariffs in place. There's 0:07:24.080 --> 0:07:27.000 been sort of a quote unquote imminent tariff review for 0:07:27.120 --> 0:07:29.680 months now, and a big question in Washington is whether 0:07:29.720 --> 0:07:33.400 the administration will stay the course with the sectors that 0:07:33.440 --> 0:07:37.000 Trump targeted or have a more refined approach that might 0:07:37.040 --> 0:07:40.240 focus on key strategic sectors for the US like evs 0:07:40.280 --> 0:07:42.880 and other clean energy products, which of course the Biden 0:07:42.880 --> 0:07:46.280 administration is trying to subsidize at home. But then you 0:07:46.320 --> 0:07:49.360 saw Biden look at a whole suite of other tools 0:07:49.360 --> 0:07:53.520 of economic statecraft that have actually become his favorite mechanisms 0:07:53.560 --> 0:07:56.440 to get at the Beijing question. One of those, as 0:07:56.440 --> 0:08:00.120 you said, Tracy, is export controls on advanced semiconductors. These 0:08:00.120 --> 0:08:03.560 are the critical electronic components that power everything from your 0:08:03.560 --> 0:08:06.720 phone to your car to nuclear missiles, and there's a 0:08:06.720 --> 0:08:10.360 big fear in Washington that if China catches up with 0:08:10.640 --> 0:08:15.040 US technology that they could use AI to power weapons systems, 0:08:15.040 --> 0:08:17.680 that it could pose a significant military threat to the US. 0:08:18.200 --> 0:08:21.800 And so you saw in October twenty twenty two sweeping 0:08:21.840 --> 0:08:24.880 controls on the ability of US companies to export the 0:08:24.880 --> 0:08:29.440 most advanced semiconductor technology and ship making equipment to any 0:08:29.520 --> 0:08:30.320 Chinese company. 0:08:30.880 --> 0:08:33.800 McKenzie just as a follow up on that specifically and 0:08:34.040 --> 0:08:36.839 talking about politically, like as we said in the introduction, 0:08:37.000 --> 0:08:39.880 and as Tracy just mentioned, you know, Biden continued with 0:08:39.920 --> 0:08:42.680 a lot of these terrify views. They're ongoing, they've become 0:08:42.760 --> 0:08:46.760 even more targeted. How did this become the consensus that 0:08:46.840 --> 0:08:49.560 the idea of just dropping tariffs and sort of returning 0:08:49.559 --> 0:08:52.720 to the pre Trump status quo with regards to trade 0:08:53.040 --> 0:08:56.040 now doesn't even seem on the table anymore, and it 0:08:56.080 --> 0:08:59.360 doesn't seem like anyone advocates for that. How did this 0:08:59.520 --> 0:09:03.360 just become like the bipartisan consensus that setting aside the 0:09:03.400 --> 0:09:06.800 degree of restrictions that some restrictions must be applied. 0:09:07.160 --> 0:09:08.840 It's a great question, you know, when you talk to 0:09:08.960 --> 0:09:10.880 folks on both sides of the aisle on the hill, 0:09:10.920 --> 0:09:13.800 they say, the one thing that everyone agrees on is China, 0:09:14.120 --> 0:09:16.920 and the question is not what but how much. And 0:09:17.040 --> 0:09:19.720 you know, you really saw the Trump administration, you know, 0:09:19.840 --> 0:09:23.720 early on introduce this tariffs question and then later on 0:09:23.840 --> 0:09:27.320 towards the latter years, start to target specific Chinese firms. 0:09:27.320 --> 0:09:30.600 Like a great example is Huawei, the Chinese telecommunications giant, 0:09:30.840 --> 0:09:34.840 which you saw Trump sanction in twenty nineteen over concerns 0:09:34.880 --> 0:09:39.040 about the security of their telecommunication systems that are all 0:09:39.080 --> 0:09:42.360 over the US. And then once that sort of entered 0:09:42.480 --> 0:09:47.040 the Washington think tank sphere and people really started seeing 0:09:47.120 --> 0:09:50.480 Huawei as a security threat, it became okay, what else 0:09:50.559 --> 0:09:53.360 is Huawei doing that's a security threat? And you know, 0:09:53.440 --> 0:09:56.920 the initial sanctions sort of crippled their telecommunications business and 0:09:57.000 --> 0:10:00.319 their smartphone business for quite some time. But we saw 0:10:00.360 --> 0:10:03.400 Huawei debut a smartphone in August that's powered by its 0:10:03.400 --> 0:10:06.040 ship that's far more advanced than where the US was 0:10:06.080 --> 0:10:10.240 hoping to hamstring China's rise. And so as we've seen 0:10:10.400 --> 0:10:13.960 China sort of make incremental technological progress in these areas 0:10:14.000 --> 0:10:18.240 that Washington has decided it's quite concerned about. There doesn't 0:10:18.240 --> 0:10:21.120 really seem to be a big debate over whether should 0:10:21.160 --> 0:10:23.360 we really be doing expert controls in the first place. 0:10:23.440 --> 0:10:26.400 It's we've been on this path, We've seen China continue 0:10:26.400 --> 0:10:28.960 to make progress. What are additional measures that we can 0:10:29.000 --> 0:10:32.839 take with our allies to prevent any further progress from 0:10:32.920 --> 0:10:36.080 these firms that now, for five years have been thought 0:10:36.080 --> 0:10:38.040 of as a significant security threaten DC. 0:10:38.559 --> 0:10:41.320 I just build on that briefly and point to three 0:10:41.480 --> 0:10:44.360 big factors which I think have changed the dynamic here 0:10:44.400 --> 0:10:48.880 in Washington, DC and made anti China into a sort 0:10:48.880 --> 0:10:52.120 of broad and firm consensus. I think the first thing 0:10:52.320 --> 0:10:56.280 driving it has been China's sudden rise. Right when everyone 0:10:56.440 --> 0:11:00.640 was agreeing that China could join the WTO back in 0:11:00.720 --> 0:11:04.960 nineteen ninety nine two thousand, China's GDP was a fraction 0:11:05.240 --> 0:11:11.520 of USGDP. China's military capabilities were nowhere near US military capabilities, 0:11:12.040 --> 0:11:14.880 and so China really wasn't regarded as a threat, and 0:11:14.920 --> 0:11:17.559 it was still possible to regard China as a kind 0:11:17.600 --> 0:11:20.880 of almost like a disciple that's now clearly changed. I 0:11:20.880 --> 0:11:23.360 think the second thing, which is important is the kind 0:11:23.360 --> 0:11:26.920 of the peculiarities of the US election system, which gives 0:11:26.960 --> 0:11:30.160 a disproportionate amount of power to the votes and the 0:11:30.240 --> 0:11:35.679 voices of a constituency in a few swing states, places 0:11:35.800 --> 0:11:39.600 like Pennsylvania, which are in the US rust Belt and 0:11:39.640 --> 0:11:44.360 which have suffered disproportionately from China's rise as a manufacturing power, 0:11:44.679 --> 0:11:47.280 and so where tough on China is a very popular 0:11:47.840 --> 0:11:50.200 vote winner. And then I think the third factor which 0:11:50.240 --> 0:11:52.360 we have to acknowledge is the kind of the strange 0:11:52.400 --> 0:11:55.720 genius of Donald Trump, right, who kind of revealed in 0:11:55.720 --> 0:11:59.600 his campaign in twenty sixteen that being really tough on 0:11:59.679 --> 0:12:03.080 China was a powerful motivating factor for the voters in 0:12:03.120 --> 0:12:03.959 those swing space. 0:12:19.600 --> 0:12:24.479 Whatever happened to the sort of old simplistic argument for protectionism, 0:12:24.520 --> 0:12:28.160 which was what we want to know, reshore manufacturing, create 0:12:28.200 --> 0:12:32.360 more jobs in the US. It feels like it's sort 0:12:32.400 --> 0:12:38.640 of evolved into this very specific anti China action. And 0:12:38.679 --> 0:12:41.280 we haven't seen correct me if I'm wrong, but we 0:12:41.400 --> 0:12:46.160 certainly haven't seen as stringent actions on other countries and 0:12:46.200 --> 0:12:50.160 other manufacturing threats. I mean, we know Mexico is exporting 0:12:50.480 --> 0:12:53.480 tons to the US now, sort of filling some of 0:12:53.520 --> 0:12:56.920 the gap that China has left. But what happened to 0:12:57.000 --> 0:13:00.920 that argument that feels like it's lost a little bit popularity. 0:13:01.080 --> 0:13:04.679 In DC, everything feels very strategic, very security focused. 0:13:05.080 --> 0:13:07.880 So I think when it comes to China, these two 0:13:07.960 --> 0:13:13.320 things come together from a US policy perspective rather nicely. Right, 0:13:13.920 --> 0:13:18.800 here's China, a single party state, a state dominated economy, 0:13:19.400 --> 0:13:24.240 rising quickly one point three billion people. It's easy to 0:13:24.360 --> 0:13:28.160 see why this is regarded as a national security threat, 0:13:28.600 --> 0:13:31.360 and so why it's easy to win the argument in 0:13:31.480 --> 0:13:36.560 DC for things like banning sales of leading edge semiconductors 0:13:36.840 --> 0:13:41.760 because potentially they could fuel China's military capabilities. At the 0:13:41.760 --> 0:13:47.280 same time, China's enormous success in grabbing global market share 0:13:47.440 --> 0:13:51.200 in the manufacturing sector and the consequences of that for 0:13:51.559 --> 0:13:55.880 US manufacturing where factory towns have been hollowed out and 0:13:56.320 --> 0:13:59.360 people have lost their jobs, makes the case that this 0:13:59.440 --> 0:14:03.160 is really not just from a national security perspective, but 0:14:03.200 --> 0:14:06.720 also from a kind of social well being allowing everyone 0:14:06.760 --> 0:14:09.960 to benefit from the growth of the US economy perspective. 0:14:10.400 --> 0:14:13.160 So it's a complicated picture. Now when it comes to China, 0:14:13.480 --> 0:14:17.160 those national security arguments and those concerns about the hollowing 0:14:17.160 --> 0:14:21.680 out of the manufacturing sector come together very nicely. The 0:14:22.520 --> 0:14:25.880 messiness of it, which I think you're sort of alluding to, Tracy, 0:14:26.600 --> 0:14:31.520 is that near assuring and friendsuring. That addresses the national 0:14:31.600 --> 0:14:34.640 security piece of it, but it certainly doesn't help people 0:14:34.680 --> 0:14:37.480 who lost their manufacturing jobs here in the United States. 0:14:37.960 --> 0:14:40.280 They're not going to be super delighted to see those 0:14:40.400 --> 0:14:44.080 jobs coming back to Mexico or Vietnam or other places 0:14:44.120 --> 0:14:45.360 which don't really help them out. 0:14:45.640 --> 0:14:48.720 And the manufacturing argument still has a lot of salience 0:14:48.760 --> 0:14:50.800 in DC and on the campaign trail. You know, you 0:14:50.800 --> 0:14:54.160 can think of one tranch of Biden's China policy as 0:14:54.320 --> 0:14:58.880 sanctioned controls on outbound investment, export controls on semiconductor chips, 0:14:58.880 --> 0:15:01.760 and the continuation of tru tariffs. But you can think 0:15:01.760 --> 0:15:03.960 of the other side of the coin as the massive 0:15:03.960 --> 0:15:06.640 industrial policy effort that the US has embarked on over 0:15:06.680 --> 0:15:09.320 the past couple of years. The Chips and Science Act, 0:15:09.560 --> 0:15:12.520 the Inflation Reduction Act, which is Democrats' signature climate law, 0:15:12.800 --> 0:15:15.640 and the bipart is an infrastructure law have poured well 0:15:15.680 --> 0:15:20.280 over a trillion dollars of federal funding into revitalizing these 0:15:20.320 --> 0:15:24.440 domestic manufacturing bases in areas that lost a lot of 0:15:24.560 --> 0:15:26.440 jobs to the so called China shock. 0:15:26.880 --> 0:15:29.520 It is true also that I think Trump has talked 0:15:29.520 --> 0:15:33.360 about doing a blanket ten percent tariff on all imports 0:15:33.400 --> 0:15:37.080 to the US, so basically ring fencing the entire economy. 0:15:37.120 --> 0:15:39.600 Well, this is details with what I was about to 0:15:39.600 --> 0:15:43.440 ask next time, and it's sort of another theoretical economics question, 0:15:43.560 --> 0:15:44.960 kind of like when I asked what tariffs do? But 0:15:45.200 --> 0:15:47.680 why didn't we have inflation? Why don't they Why weren't 0:15:47.680 --> 0:15:52.320 the inflationary in the Trump period? And how do economists 0:15:52.360 --> 0:15:56.960 think about the inflation risks associated with aggressive tariffs, either 0:15:57.000 --> 0:15:59.120 on one country or blanket tariffs on everyone. 0:16:00.120 --> 0:16:02.560 So it's a really good question if we think about 0:16:02.600 --> 0:16:06.920 the kind of the big picture. Over the last thirty years, 0:16:07.280 --> 0:16:12.400 globalization and the ability of consumers in the United States 0:16:12.480 --> 0:16:16.720 to tap cheap goods made in China has been one 0:16:16.760 --> 0:16:20.560 of the factors that was pretty helpful in keeping inflation 0:16:21.160 --> 0:16:24.280 around the FEDS two percent target, at least until the 0:16:24.280 --> 0:16:29.320 post pandemic inflation surge. Now, why didn't the Trump tariffs 0:16:29.360 --> 0:16:33.440 have a more significant impact on that dynamic? I think 0:16:33.480 --> 0:16:36.240 the reason is there's a few factors at work. The 0:16:36.280 --> 0:16:40.240 first factor is goods inflation is important in the US, 0:16:40.440 --> 0:16:44.560 but it's not as important as services inflation, and services 0:16:44.600 --> 0:16:48.040 inflation doesn't really get impacted by tariffs that you put 0:16:48.120 --> 0:16:52.040 on goods. The second factor is, yes, China is a 0:16:52.120 --> 0:16:56.720 really important supplier of goods to the United States, but 0:16:56.800 --> 0:16:59.520 it's not the only supplier. And then the third factor 0:16:59.560 --> 0:17:03.720 at work is tariffs aren't the only thing going on. Yes, 0:17:03.760 --> 0:17:06.879 the Trump administration put twenty five percent tariffs on but 0:17:07.640 --> 0:17:10.359 over the same period we saw a significant depreciation of 0:17:10.440 --> 0:17:14.159 China's yuan. China's factories were able to absorb some of 0:17:14.200 --> 0:17:17.840 the shock by taking lower profit margins, and that provided 0:17:17.920 --> 0:17:18.919 a little bit of an officer. 0:17:19.640 --> 0:17:22.480 So, just on this note, have you done any number 0:17:22.520 --> 0:17:27.000 crunching on what Trump's proposal would mean for inflation? Now 0:17:27.040 --> 0:17:28.320 do you have specific numbers? 0:17:28.840 --> 0:17:32.439 So we have actually been crunching the numbers, Tracy, And 0:17:32.480 --> 0:17:35.399 here I want to give a shout out to Eleanora 0:17:35.520 --> 0:17:39.320 Mavrodi in our modeling team in Paris. She's taken a 0:17:39.359 --> 0:17:42.840 big model of the global economy and she's plugged in 0:17:42.960 --> 0:17:48.080 that Trump proposal for a sixty percent increase in tariffs 0:17:48.080 --> 0:17:51.159 on US imports from China, and what the model is 0:17:51.200 --> 0:17:55.040 telling us is that that has a pretty catastrophic impact 0:17:55.119 --> 0:17:58.159 on trade. In fact, if the US goes ahead with 0:17:58.200 --> 0:18:02.720 sixty percent tariffs and China reciprocates with sixty percent tariffs, 0:18:02.760 --> 0:18:05.679 matching the pattern of kind of tip for tat retaliation 0:18:05.840 --> 0:18:09.119 we saw during the first Trump term, that pretty much 0:18:09.280 --> 0:18:14.000 turns off trade between the world's two biggest economies. The 0:18:14.040 --> 0:18:19.160 impact on inflation, well, it's there. If import costs go up, 0:18:19.480 --> 0:18:22.520 then that's a positive impact on inflation, but it's not 0:18:22.680 --> 0:18:25.879 particularly marked. That's partly for the reasons I was just 0:18:25.960 --> 0:18:30.240 sharing services inflation is more important than goods inflation. It's 0:18:30.240 --> 0:18:34.120 also because there's an offsetting drag. Import prices go up 0:18:34.160 --> 0:18:38.480 and that directly affects the CPI. But tariffs also have 0:18:38.520 --> 0:18:41.720 a depressing effect on growth, and that means the economy 0:18:41.800 --> 0:18:43.840 is weaker, and that's an offset on inflation. 0:18:44.320 --> 0:18:46.879 If the US and China, there's two huge trading partners, 0:18:46.920 --> 0:18:49.560 suddenly stop trading, what other knock on effects do we 0:18:49.600 --> 0:18:50.160 see from there? 0:18:50.640 --> 0:18:52.840 So I can speak to the economics of that, and 0:18:53.000 --> 0:18:55.399 maybe McKenzie has some thoughts on the sort of broader 0:18:55.440 --> 0:18:59.439 policy implications. So on the economics, I think it's interesting 0:18:59.480 --> 0:19:02.119 to think about this not just at the aggregate level, 0:19:02.400 --> 0:19:05.600 but also at the sector level, and not just about 0:19:05.600 --> 0:19:07.840 the impact on the US and China, but also about 0:19:07.880 --> 0:19:11.600 the impact on other economies around the world. So at 0:19:11.600 --> 0:19:15.080 the sector level in the United States, it's kind of 0:19:15.359 --> 0:19:20.200 a policy to support the industries of the past, right, mining, 0:19:20.640 --> 0:19:24.360 production of steel. These are industries which were crucially important 0:19:24.359 --> 0:19:27.080 to the United States in an earlier stage of its development. 0:19:27.760 --> 0:19:30.680 Not so important now. Those would be the industries which 0:19:30.680 --> 0:19:34.360 would be the main beneficiary of a sixty percent tariff. 0:19:35.040 --> 0:19:38.399 Who loses out, Well, it's kind of the industries of 0:19:38.440 --> 0:19:42.439 the future, right, it's the people making the semiconductors, is 0:19:42.440 --> 0:19:45.399 the people making the advanced electronics, the people with the 0:19:45.440 --> 0:19:50.920 exposure to that East Asian electronics supply chain. And thinking 0:19:50.960 --> 0:19:54.320 about the global impact, Well, if we break the trade 0:19:54.359 --> 0:19:57.919 relationship between China and the United States, that's bad for 0:19:57.960 --> 0:20:01.000 those two countries, But there are some other countries that 0:20:01.080 --> 0:20:05.520 could well gain. Thinking about those connect to economies, places 0:20:05.560 --> 0:20:10.520 like Vietnam, places like Mexico that have a strong manufacturing base, 0:20:10.840 --> 0:20:13.920 that have low costs, and that have pretty good trade 0:20:13.960 --> 0:20:15.720 relationships with those two economies. 0:20:16.440 --> 0:20:20.040 And when you think about the bilateral relationship between Washington 0:20:20.080 --> 0:20:23.800 and Beijing. At the same time as Biden has become 0:20:24.040 --> 0:20:28.080 increasingly hawkish on China, employing sort of novel tools of 0:20:28.080 --> 0:20:31.520 economic statecraft to get at advanced industries in the country. 0:20:31.880 --> 0:20:36.040 There's also been this significant back channel effort to improve 0:20:36.200 --> 0:20:41.439 direct diplomatic ties military to military communications, culminating in a 0:20:41.520 --> 0:20:43.960 meeting between the two leaders on the sidelines of the 0:20:43.960 --> 0:20:47.640 APEC summit in San Francisco. And so you can imagine, 0:20:47.760 --> 0:20:52.360 you know, after establishing formal communication networks between the Treasury 0:20:52.400 --> 0:20:55.680 Department and their counterparts in China, formal communications networks between 0:20:55.720 --> 0:20:59.000 the Commerce Department here and MOFCOM and China, this sort 0:20:59.000 --> 0:21:02.320 of deterioration of a lot of the sort of day 0:21:02.359 --> 0:21:05.800 to day's slow working diplomatic effort that's been happening under 0:21:05.840 --> 0:21:09.160 President Biden, if the US were to sort of blow 0:21:09.240 --> 0:21:11.639 up the trade relationship between the two countries under a 0:21:11.640 --> 0:21:12.879 potential Trump administration. 0:21:28.280 --> 0:21:32.280 Mackenzie, you mentioned earlier the Infrastructure Investment Act, and the 0:21:32.440 --> 0:21:35.720 other big set piece from the Biden administration has been 0:21:35.880 --> 0:21:39.399 the Clean Energy Transition and the money that is pouring 0:21:39.480 --> 0:21:42.359 in there. And this is a question that I've asked 0:21:42.400 --> 0:21:45.679 a couple people on this podcast at this point, But 0:21:46.240 --> 0:21:50.560 it seems like the US has a desire to shift 0:21:50.560 --> 0:21:53.840 away from fossil fuels, maybe build up home capacity of 0:21:53.920 --> 0:21:57.760 clean energy technology like solar panels. But at the same time, 0:21:57.800 --> 0:22:00.680 it is also very true that China is good at 0:22:00.720 --> 0:22:04.719 producing lots of cheap solar panels and things like that. 0:22:04.840 --> 0:22:07.560 So I guess, I'm curious what you're hearing from the 0:22:07.600 --> 0:22:12.760 administration in terms of I guess the need to build 0:22:12.840 --> 0:22:16.439 up or increase some of that capability at home and 0:22:16.520 --> 0:22:21.200 make it more efficient versus the lower cost and sheer 0:22:21.320 --> 0:22:24.840 volume of production that you would get from Chinese made 0:22:24.960 --> 0:22:27.880 renewable technology or even semiconductors. 0:22:28.600 --> 0:22:31.680 It's a great question. The solar panel question is kind 0:22:31.680 --> 0:22:36.000 of the most often cited explanation of the danger that 0:22:36.200 --> 0:22:39.600 China poses to these sort of more nascent industries in 0:22:39.640 --> 0:22:44.000 the US on hydrogen, on wind, and also on electric 0:22:44.080 --> 0:22:47.320 vehicles and semiconductor ships, where the US was long the 0:22:47.320 --> 0:22:50.000 technological leader and then seated a lot of that production 0:22:50.119 --> 0:22:53.280 capability to East Asia. And so when we think about 0:22:53.280 --> 0:22:55.800 the sort of critical industries that the US is investing 0:22:55.840 --> 0:22:58.040 in right now, you identify them right off the bed. 0:22:58.080 --> 0:23:02.080 It's semiconductor ships, it's electric vehicle, it's solar, wind, hydro, 0:23:02.600 --> 0:23:04.600 a bunch of types of clean energy through the Ships 0:23:04.600 --> 0:23:07.240 and Science Act and the Inflation Reduction Act. And the 0:23:07.320 --> 0:23:10.240 worry is that the US could pour significant amounts of 0:23:10.280 --> 0:23:13.400 government capital trying to crowd in private capital to build 0:23:13.480 --> 0:23:17.080 up these industries, but if Chinese firms are not operating 0:23:17.119 --> 0:23:20.480 in the same market environment, there could be a significant 0:23:20.600 --> 0:23:24.960 dumping risk. The fear on chips, for example, is that 0:23:25.359 --> 0:23:28.120 China has been building up capacity in the sort of mature, 0:23:28.240 --> 0:23:32.480 older generation semiconductors that still power the entire global economy, 0:23:32.520 --> 0:23:34.320 even if they're not the cutting edge. Those are not 0:23:34.400 --> 0:23:36.600 the ones that the US is trying to deal with 0:23:36.600 --> 0:23:40.720 with export controls, and that's why the Biden administration is 0:23:40.720 --> 0:23:43.520