1 00:00:02,720 --> 00:00:07,200 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:08,280 --> 00:00:10,200 Speaker 2: I think we're going to be fine with China, but 3 00:00:10,600 --> 00:00:11,799 Speaker 2: we have to have a fair deal. 4 00:00:11,840 --> 00:00:12,600 Speaker 1: It's got to be fair. 5 00:00:22,000 --> 00:00:24,759 Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 6 00:00:25,079 --> 00:00:27,600 Speaker 3: and this is Trumpnomics, the podcast that looks at the 7 00:00:27,600 --> 00:00:30,960 Speaker 3: economic world of Donald Trump, how he's already shaped the 8 00:00:31,000 --> 00:00:34,080 Speaker 3: global economy, and what on earth is going to happen next. 9 00:00:38,240 --> 00:00:41,320 Speaker 3: Our focus this week is the big lesson from the 10 00:00:41,440 --> 00:00:45,760 Speaker 3: latest rounds of the US China trade wars. The long 11 00:00:45,840 --> 00:00:49,159 Speaker 3: term balance of power between the two economies is shifting, 12 00:00:49,600 --> 00:00:53,120 Speaker 3: and it's shifting in favor of China. Things had gone 13 00:00:53,159 --> 00:00:55,720 Speaker 3: relatively quiet for a few months, but in the past 14 00:00:55,760 --> 00:00:58,960 Speaker 3: couple of weeks the US China trade war got noisy again, 15 00:00:59,400 --> 00:01:02,800 Speaker 3: with a tit for tat over expanding US export controls 16 00:01:03,200 --> 00:01:06,760 Speaker 3: and China's then in position of more sweeping restrictions on 17 00:01:06,880 --> 00:01:10,400 Speaker 3: its exports of rare earth magnets. There's been the usual 18 00:01:10,480 --> 00:01:14,440 Speaker 3: talk of escalation and de escalation from President Trump. As 19 00:01:14,480 --> 00:01:17,679 Speaker 3: I record this on Friday, seventeenth of October, He's just 20 00:01:17,840 --> 00:01:21,120 Speaker 3: threatened one hundred percent tariffs on Chinese goods. But in 21 00:01:21,160 --> 00:01:25,040 Speaker 3: the same breath, admitted that would be unsustainable. Right now, 22 00:01:25,400 --> 00:01:28,440 Speaker 3: the President is still set to meet with his opposite number, 23 00:01:28,480 --> 00:01:32,440 Speaker 3: President Chijinping of China at the Asia Pacific Economic Cooperation 24 00:01:32,600 --> 00:01:36,119 Speaker 3: Summit in South Korea later this month. Apex, I bet 25 00:01:36,200 --> 00:01:38,760 Speaker 3: that meeting will be on and off again many more 26 00:01:38,800 --> 00:01:42,039 Speaker 3: times before you hear this, and certainly before they sit down. 27 00:01:42,440 --> 00:01:45,560 Speaker 3: But whatever happens around that table, we may already have 28 00:01:45,680 --> 00:01:49,279 Speaker 3: seen a permanent shift in the power dynamic between them 29 00:01:49,400 --> 00:01:51,360 Speaker 3: due to the simple fact that the Chinese have shown 30 00:01:51,680 --> 00:01:54,280 Speaker 3: not only that they have leverage in this trade fight 31 00:01:54,320 --> 00:01:57,560 Speaker 3: with the US, but they're prepared to use it. That's 32 00:01:57,560 --> 00:02:00,680 Speaker 3: why I very much wanted to talk to this week's guest, 33 00:02:01,040 --> 00:02:06,800 Speaker 3: Arthur Kroeber. Arthur co founded the China focused research service 34 00:02:06,920 --> 00:02:10,560 Speaker 3: Dragonomics in Beijing in two thousand and two. It's now 35 00:02:10,600 --> 00:02:14,839 Speaker 3: called Gavacao Dragonomics, and he's the research director. He's also 36 00:02:14,919 --> 00:02:17,840 Speaker 3: the author of China's Economy What Everyone Needs to Know. 37 00:02:18,680 --> 00:02:22,359 Speaker 3: I describe him as the China expert other China experts 38 00:02:22,639 --> 00:02:26,400 Speaker 3: go to for a deeper take. Arthur, thanks so much 39 00:02:26,440 --> 00:02:27,440 Speaker 3: for taking the time for us. 40 00:02:28,000 --> 00:02:36,600 Speaker 1: My pleasure. 41 00:02:38,960 --> 00:02:42,560 Speaker 3: There's, as ever, the noise and the signal, and one 42 00:02:42,600 --> 00:02:45,040 Speaker 3: reason you are so widely read on China is you're 43 00:02:45,120 --> 00:02:47,080 Speaker 3: very good at telling the difference between the two. But 44 00:02:47,520 --> 00:02:49,600 Speaker 3: maybe we should spend a little bit of time on 45 00:02:49,639 --> 00:02:52,480 Speaker 3: the noise of the past few weeks for those who 46 00:02:52,560 --> 00:02:54,400 Speaker 3: lost track who started it. 47 00:02:54,960 --> 00:02:57,000 Speaker 2: You could go back to the beginning of time in 48 00:02:57,040 --> 00:02:59,440 Speaker 2: the you know, who went first kind of thing. I 49 00:02:59,440 --> 00:03:02,040 Speaker 2: don't think that's super fruitful, but I think the sequence 50 00:03:02,080 --> 00:03:04,880 Speaker 2: of events that we've seen recently is number one. About 51 00:03:04,919 --> 00:03:08,800 Speaker 2: a month ago, negotiators meant in Madrid. They had what 52 00:03:08,880 --> 00:03:10,840 Speaker 2: seemed to be a pretty productive meeting. They seemed to 53 00:03:10,840 --> 00:03:13,280 Speaker 2: come up with a set of ideas for resolving the 54 00:03:13,320 --> 00:03:15,920 Speaker 2: ownership of TikTok, which is a big issue, and the 55 00:03:16,000 --> 00:03:19,000 Speaker 2: Chinese side seemed to indicate that there was kind of 56 00:03:19,040 --> 00:03:22,480 Speaker 2: a wire set of discussions on investment flows more generally, 57 00:03:23,040 --> 00:03:25,880 Speaker 2: and we seem to be heading towards a meeting between 58 00:03:25,919 --> 00:03:28,160 Speaker 2: Trump and She at the APEC summit at the end 59 00:03:28,200 --> 00:03:29,800 Speaker 2: of this month where they would move the ball forward. 60 00:03:30,040 --> 00:03:30,800 Speaker 1: Seemed to be good. 61 00:03:31,160 --> 00:03:33,240 Speaker 2: Then what happened is at the end of September, on 62 00:03:33,280 --> 00:03:37,440 Speaker 2: the twenty ninth, the Bureau of Industry and Security at 63 00:03:37,440 --> 00:03:42,760 Speaker 2: the US Commerce Department issued a set of rules expanding its. 64 00:03:42,960 --> 00:03:45,000 Speaker 1: So called entity list, which is a list of. 65 00:03:44,960 --> 00:03:47,880 Speaker 2: Foreign companies that if you want to sell stuff to 66 00:03:47,920 --> 00:03:50,120 Speaker 2: them you have to get an export license. It's kind 67 00:03:50,120 --> 00:03:52,720 Speaker 2: of a blacklist or a gray list or a dark list. 68 00:03:53,320 --> 00:03:54,280 Speaker 1: And this did two things. 69 00:03:54,320 --> 00:03:57,000 Speaker 2: One is it said any company that is at least 70 00:03:57,000 --> 00:03:59,880 Speaker 2: fifty percent owned by a named company on the end 71 00:04:00,280 --> 00:04:03,240 Speaker 2: list is automatically deemed to be on that list. So 72 00:04:03,280 --> 00:04:07,720 Speaker 2: it captures a whole bunch of subsidiaries that previously could 73 00:04:07,840 --> 00:04:10,640 Speaker 2: kind of fly under the radar. And you can understand 74 00:04:10,640 --> 00:04:12,960 Speaker 2: why they would want to close that loophole. It seems fairly, 75 00:04:13,080 --> 00:04:16,200 Speaker 2: fairly sensible, but as a practical matter with China, it 76 00:04:16,320 --> 00:04:20,000 Speaker 2: expands the number of companies on the list, perhaps by 77 00:04:20,000 --> 00:04:22,799 Speaker 2: as many as ten thousand according to some estimates. 78 00:04:22,800 --> 00:04:24,120 Speaker 1: It's a lot of companies, right. 79 00:04:24,440 --> 00:04:26,320 Speaker 2: Second thing it did is it said, if you are 80 00:04:26,320 --> 00:04:29,640 Speaker 2: a US company you want to sell to someone, you 81 00:04:29,800 --> 00:04:32,000 Speaker 2: have to verify. You have to do your own due 82 00:04:32,000 --> 00:04:35,800 Speaker 2: diligence to verify that they are not at least a 83 00:04:35,880 --> 00:04:39,560 Speaker 2: fifty percent subsidiary of some Chinese company, which means, if 84 00:04:39,600 --> 00:04:42,159 Speaker 2: you think about it, that requires an awful lot of 85 00:04:42,200 --> 00:04:44,560 Speaker 2: forensic due diligence on ownership, which might need to go 86 00:04:44,600 --> 00:04:47,480 Speaker 2: through several layers of ownership to get to the truth. Huge, 87 00:04:47,560 --> 00:04:50,920 Speaker 2: huge compliance burden on the company. So this was a 88 00:04:51,040 --> 00:04:55,039 Speaker 2: very consequential move. And it appears from some things that 89 00:04:55,040 --> 00:04:58,480 Speaker 2: I've heard that this move, which has been discussed for 90 00:04:58,600 --> 00:05:01,920 Speaker 2: some time within the Commerce apartment, the Chinese brought this 91 00:05:02,160 --> 00:05:04,440 Speaker 2: up at the Madrid talks and said, we hope you're 92 00:05:04,480 --> 00:05:07,760 Speaker 2: not planning to do this right away, because that would 93 00:05:07,960 --> 00:05:09,599 Speaker 2: create a lot of problems for the trade talks and 94 00:05:09,640 --> 00:05:13,159 Speaker 2: we would have to retaliate. So it happened, and so 95 00:05:13,279 --> 00:05:16,120 Speaker 2: the Chinese said, Okay, we're going to have to retaliate. 96 00:05:16,200 --> 00:05:18,919 Speaker 2: And then they came up with something that they also 97 00:05:19,000 --> 00:05:22,599 Speaker 2: had on the shelf, which was very detailed regulations on 98 00:05:23,040 --> 00:05:27,240 Speaker 2: export controls for rare earths where magnets and some things 99 00:05:27,279 --> 00:05:30,040 Speaker 2: in the battery supply chain. And again, if you look 100 00:05:30,040 --> 00:05:33,120 Speaker 2: at those rules and imagine that they were enforced fully, 101 00:05:33,600 --> 00:05:39,000 Speaker 2: they could give China the ability to really substantially restrict 102 00:05:39,040 --> 00:05:42,400 Speaker 2: the production of all kinds of products around the world 103 00:05:42,760 --> 00:05:47,480 Speaker 2: that depend even on very small trace amounts of rare 104 00:05:48,040 --> 00:05:50,360 Speaker 2: sourced from China. So we had these two different things, 105 00:05:50,760 --> 00:05:53,280 Speaker 2: and so basically what has now happened is that I 106 00:05:53,320 --> 00:05:56,480 Speaker 2: think both sides have recognized that they kind of went 107 00:05:56,600 --> 00:06:00,279 Speaker 2: too far in their efforts to gain leverage over the 108 00:06:00,320 --> 00:06:03,159 Speaker 2: other person, and now they have to dial it back. 109 00:06:03,240 --> 00:06:06,680 Speaker 2: And it seems like the signaling that we're now getting 110 00:06:06,760 --> 00:06:10,000 Speaker 2: from both sides is that they kind of want to 111 00:06:10,040 --> 00:06:13,279 Speaker 2: somehow resolve this issue in Tea a meeting between she 112 00:06:13,440 --> 00:06:15,560 Speaker 2: and Trump at the end of the month in Korea 113 00:06:15,640 --> 00:06:18,159 Speaker 2: that can allow for the trade talks to continue. So 114 00:06:18,360 --> 00:06:21,840 Speaker 2: there was a lot of noise, but the signal in 115 00:06:21,880 --> 00:06:25,080 Speaker 2: it is that both sides have pretty powerful tools that 116 00:06:25,080 --> 00:06:27,080 Speaker 2: they can use against each other. And what's new is 117 00:06:27,120 --> 00:06:29,880 Speaker 2: that general this has been one way straight. The US 118 00:06:29,920 --> 00:06:31,880 Speaker 2: has a lot of tools, it's counterparties don't have any. 119 00:06:32,120 --> 00:06:34,280 Speaker 2: China has a really powerful tool that can cause the 120 00:06:34,360 --> 00:06:35,680 Speaker 2: US a lot of problems. 121 00:06:35,839 --> 00:06:37,800 Speaker 3: And I think that's one of the things. Certainly from 122 00:06:37,920 --> 00:06:41,159 Speaker 3: talking to colleagues in China, you don't get to see 123 00:06:41,279 --> 00:06:44,240 Speaker 3: she maybe necessary enough to talk about a spring in 124 00:06:44,279 --> 00:06:47,040 Speaker 3: his step, But there's definitely this sort of feeling of 125 00:06:47,360 --> 00:06:50,640 Speaker 3: strength and confidence that's come because a lot of countries 126 00:06:51,080 --> 00:06:54,960 Speaker 3: have effectively given in to Donald Trump's tariff demands and 127 00:06:55,720 --> 00:06:57,760 Speaker 3: just decided it was easier to go along with a 128 00:06:57,800 --> 00:07:00,520 Speaker 3: certain level of tariff and not necessarily try to impose 129 00:07:00,560 --> 00:07:03,719 Speaker 3: their own and response. But China has shown that it 130 00:07:03,760 --> 00:07:05,680 Speaker 3: can go toe to toe with the US, and the 131 00:07:05,760 --> 00:07:08,080 Speaker 3: US has effectively had to back down. So in a 132 00:07:08,080 --> 00:07:09,840 Speaker 3: note that you put out, as you said in the 133 00:07:09,880 --> 00:07:12,360 Speaker 3: past few weeks, that had shown us that US and 134 00:07:12,480 --> 00:07:16,400 Speaker 3: China had now weaponized their interdependence. So just talk us 135 00:07:16,400 --> 00:07:17,880 Speaker 3: through what that means. 136 00:07:18,680 --> 00:07:20,840 Speaker 1: Yeah, well, that's not a phrase that I concocted. 137 00:07:21,080 --> 00:07:23,760 Speaker 2: That is a phrase that was coined by two very 138 00:07:23,880 --> 00:07:27,880 Speaker 2: astute political scientists, Henry Farrell and Abe Newman, who wrote 139 00:07:27,880 --> 00:07:30,680 Speaker 2: a book about this about five or six years ago, 140 00:07:31,040 --> 00:07:33,720 Speaker 2: in which they were mainly talking about what the US 141 00:07:33,920 --> 00:07:37,600 Speaker 2: was doing in its sanctions regime through financial sanctions and 142 00:07:37,680 --> 00:07:41,640 Speaker 2: controls on technology to take advantage of the fact that 143 00:07:41,720 --> 00:07:44,840 Speaker 2: other countries relied heavily on certain kinds of inputs and 144 00:07:45,000 --> 00:07:48,000 Speaker 2: networks controlled by the United States. In the United States 145 00:07:48,240 --> 00:07:54,000 Speaker 2: was weaponizing these in order to achieve certain political goals. Right, 146 00:07:54,200 --> 00:07:57,600 Speaker 2: sanctions on Iran, we've seen sanctions on Russia, the trade war, 147 00:07:58,080 --> 00:08:00,920 Speaker 2: and the technology restrictions against China, et cetera. 148 00:08:00,760 --> 00:08:01,160 Speaker 1: Et cetera. 149 00:08:01,800 --> 00:08:05,200 Speaker 2: And yeah, I think this is a very important, invalid 150 00:08:05,680 --> 00:08:08,080 Speaker 2: concept and a good description of the way that the 151 00:08:08,080 --> 00:08:11,120 Speaker 2: world has evolved over the last couple of decades. But 152 00:08:11,160 --> 00:08:13,440 Speaker 2: what's now new, and I think has really been reinforced 153 00:08:13,720 --> 00:08:17,120 Speaker 2: step by step this year, is that China is also 154 00:08:17,240 --> 00:08:20,360 Speaker 2: able to play the weaponized interdependence game because they have 155 00:08:20,440 --> 00:08:26,400 Speaker 2: this massive chokehold on the whole rarer is complex and 156 00:08:26,480 --> 00:08:28,360 Speaker 2: these elements are very important for a whole bunch of 157 00:08:28,600 --> 00:08:32,319 Speaker 2: high tech industries for defense products notably, and they also 158 00:08:32,360 --> 00:08:36,960 Speaker 2: have significant controls within the battery supply chain. So China 159 00:08:37,120 --> 00:08:40,760 Speaker 2: is able is in principle able to make use of 160 00:08:40,800 --> 00:08:45,000 Speaker 2: this to put pressure on people that it has political 161 00:08:45,280 --> 00:08:48,560 Speaker 2: problems with, and we've seen this from time to time, 162 00:08:48,640 --> 00:08:52,119 Speaker 2: but now it's very visible in terms of its relationship 163 00:08:52,120 --> 00:08:54,199 Speaker 2: with the United States, and I think it's very powerful. 164 00:08:54,240 --> 00:08:55,920 Speaker 2: And this is something that people don't really talk about 165 00:08:55,920 --> 00:08:58,720 Speaker 2: that much. There are a lot of commercial applications for 166 00:08:58,800 --> 00:09:01,960 Speaker 2: rare earth that are quite important, but the defense supply 167 00:09:02,080 --> 00:09:05,240 Speaker 2: chain depends upon them quite a lot. And I think 168 00:09:05,520 --> 00:09:08,440 Speaker 2: what is underneath the US sort of concern on this 169 00:09:08,760 --> 00:09:13,160 Speaker 2: is that their defense production supply chain actually is quite 170 00:09:13,320 --> 00:09:18,160 Speaker 2: vulnerable to restrictions on these elements by China, so they 171 00:09:18,160 --> 00:09:19,280 Speaker 2: have to step pretty carefully. 172 00:09:19,720 --> 00:09:21,559 Speaker 3: And we should say, actually, because you've reminded me. I 173 00:09:21,559 --> 00:09:24,040 Speaker 3: mean that that book Underground Empire. We've actually talked about 174 00:09:24,040 --> 00:09:26,520 Speaker 3: it in the past. I think it's a really excellent guide, 175 00:09:26,760 --> 00:09:28,600 Speaker 3: has stood the test of time in terms of thinking 176 00:09:28,640 --> 00:09:31,280 Speaker 3: about the economic dynamics of this time. I recommend it 177 00:09:31,280 --> 00:09:34,760 Speaker 3: to people. But people do often say, what's the big 178 00:09:34,800 --> 00:09:37,120 Speaker 3: deal about rare earth or rare earth magnets? You know, 179 00:09:37,160 --> 00:09:39,840 Speaker 3: the value of the imports that to the US and 180 00:09:39,880 --> 00:09:42,959 Speaker 3: other countries is very small, But as you're pulling out, 181 00:09:42,960 --> 00:09:45,400 Speaker 3: I mean, it's this, It's like it's the weakest link 182 00:09:45,760 --> 00:09:50,240 Speaker 3: in some of these very important global supply chains defense, 183 00:09:50,960 --> 00:09:52,920 Speaker 3: consumer electronics, cars. 184 00:09:53,679 --> 00:09:55,440 Speaker 2: Yeah, I think this is worth exploring. So there are 185 00:09:55,440 --> 00:09:56,480 Speaker 2: a couple of things that people say. 186 00:09:56,520 --> 00:09:59,200 Speaker 1: One is, you know, the values are very small. 187 00:09:59,240 --> 00:10:02,720 Speaker 2: These are very small proportional inputs into various things, which 188 00:10:02,760 --> 00:10:06,280 Speaker 2: is true. And the other thing they say is, you know, famously. 189 00:10:05,880 --> 00:10:07,960 Speaker 1: Rarers are not rare. You can dig them up, you know, 190 00:10:08,000 --> 00:10:09,280 Speaker 1: in lots of places around. 191 00:10:09,000 --> 00:10:11,760 Speaker 2: The world, So what's the big deal? And I've had 192 00:10:11,800 --> 00:10:14,880 Speaker 2: people who spend a fair amount of time working on 193 00:10:14,920 --> 00:10:18,800 Speaker 2: export controls as recently as a year ago, who said, oh, well, 194 00:10:19,000 --> 00:10:22,199 Speaker 2: you know, trying to export controls rarest is dumb because 195 00:10:22,200 --> 00:10:24,240 Speaker 2: it's just a commodity. And then all you do is 196 00:10:24,320 --> 00:10:27,520 Speaker 2: you create incentives for mining. And both of these arguments 197 00:10:27,559 --> 00:10:29,719 Speaker 2: are flawed. So the first one is flawed because, as 198 00:10:29,760 --> 00:10:33,280 Speaker 2: you say, it's not that these are a huge part 199 00:10:33,320 --> 00:10:35,120 Speaker 2: of the value of the finished product. 200 00:10:35,480 --> 00:10:37,400 Speaker 1: It is that they are things that. 201 00:10:37,320 --> 00:10:39,400 Speaker 2: You need, and if you don't have them, you cannot 202 00:10:39,400 --> 00:10:41,280 Speaker 2: make the rest of the product. So it might only 203 00:10:41,320 --> 00:10:43,920 Speaker 2: be one percent or half a percent of the bill 204 00:10:43,960 --> 00:10:47,760 Speaker 2: of materials, but it's the one or half percent without 205 00:10:47,760 --> 00:10:50,280 Speaker 2: which you can't make use of the other ninety nine percent. 206 00:10:50,400 --> 00:10:53,880 Speaker 3: But like looking at the utilities value share of GDP, yet, 207 00:10:53,880 --> 00:10:55,360 Speaker 3: if you don't have electricity, you can't do. 208 00:10:55,720 --> 00:10:59,680 Speaker 2: Exactly exactly except maybe even more so than that. And 209 00:10:59,720 --> 00:11:02,960 Speaker 2: then on the second point, the issue is that it's 210 00:11:03,040 --> 00:11:05,000 Speaker 2: not the raw. 211 00:11:04,800 --> 00:11:06,080 Speaker 1: Ores that are an issue. 212 00:11:06,120 --> 00:11:10,959 Speaker 2: Here is the refined ores and products, notably permanent magnets 213 00:11:11,320 --> 00:11:15,280 Speaker 2: that are made from them. And these, both the refining 214 00:11:15,440 --> 00:11:22,000 Speaker 2: and the products require pretty sophisticated technology processes which now 215 00:11:22,120 --> 00:11:26,080 Speaker 2: basically only exist in China. The technologies for refining are 216 00:11:26,080 --> 00:11:29,040 Speaker 2: in fact also export controlled by China. So if you 217 00:11:29,120 --> 00:11:32,440 Speaker 2: set up a mine elsewhere and you want to refine them, 218 00:11:32,480 --> 00:11:34,400 Speaker 2: you have two choices. One is you can send the 219 00:11:34,440 --> 00:11:36,679 Speaker 2: ores to China to get refined, which is a lot 220 00:11:36,720 --> 00:11:39,040 Speaker 2: of what happens, or you can try and get the 221 00:11:39,080 --> 00:11:42,560 Speaker 2: Chinese to issue a license for the technology, or you 222 00:11:42,600 --> 00:11:45,280 Speaker 2: can try and recreate the technology on your own. 223 00:11:45,320 --> 00:11:46,400 Speaker 1: It's non trivial. 224 00:11:47,080 --> 00:11:50,120 Speaker 2: And then when you look at the magnets, that has 225 00:11:50,120 --> 00:11:53,480 Speaker 2: an additional manufacturing process on top of that which is 226 00:11:53,520 --> 00:11:57,679 Speaker 2: distinct from rare. It's refining specifically, also pretty technical, also 227 00:11:57,720 --> 00:12:00,120 Speaker 2: something where the Chines have a huge cost advantage. And 228 00:12:00,160 --> 00:12:02,199 Speaker 2: so there are many layers here, which means that it 229 00:12:02,280 --> 00:12:04,760 Speaker 2: is these are things that are quite important. They are 230 00:12:04,840 --> 00:12:07,360 Speaker 2: quite important not only fence industries, but to a lot 231 00:12:07,400 --> 00:12:10,520 Speaker 2: of new green technologies that people want to develop. 232 00:12:11,280 --> 00:12:13,920 Speaker 1: And it is very there's a big. 233 00:12:13,760 --> 00:12:17,360 Speaker 2: Technology component, so the export controls have real bite and 234 00:12:17,400 --> 00:12:21,760 Speaker 2: there's no quick way to extricate yourself from their vulnerability. 235 00:12:22,679 --> 00:12:26,000 Speaker 3: The more we talk about this, it sounds like those 236 00:12:26,640 --> 00:12:29,000 Speaker 3: debates one would have or the sort of theories of 237 00:12:29,120 --> 00:12:32,000 Speaker 3: nuclear deterrence from the Cold War days. It's very flawed 238 00:12:32,040 --> 00:12:35,079 Speaker 3: the comparison between the Cold War and the situation with 239 00:12:35,200 --> 00:12:37,480 Speaker 3: US and China. But this does feel a bit like 240 00:12:37,520 --> 00:12:39,880 Speaker 3: the sort of mutually assured destruction that people used to 241 00:12:39,960 --> 00:12:43,240 Speaker 3: talk about in that time. Both sides have built up 242 00:12:43,640 --> 00:12:46,880 Speaker 3: things that could blow up the other countries supply chains 243 00:12:46,880 --> 00:12:48,600 Speaker 3: in one way or another, or at least make things 244 00:12:48,640 --> 00:12:53,720 Speaker 3: extremely difficult for them and their companies. It's obviously somewhat 245 00:12:53,840 --> 00:12:56,480 Speaker 3: extreme example, But is that sort of a sensible way 246 00:12:56,520 --> 00:12:57,400 Speaker 3: of thinking about it? 247 00:12:57,920 --> 00:13:01,120 Speaker 2: Yeah, I think that's kind of the flavor of it. 248 00:13:01,360 --> 00:13:02,760 Speaker 2: I wouldn't want to push it too far. I mean, 249 00:13:02,960 --> 00:13:05,920 Speaker 2: the metaphor that I've used is I just borrowed a 250 00:13:05,960 --> 00:13:08,960 Speaker 2: phrase from Scott Bessen, who rather notoriously said in the 251 00:13:08,960 --> 00:13:13,240 Speaker 2: speech a year ago talking about Trump's then prospective tariff 252 00:13:13,600 --> 00:13:17,000 Speaker 2: strategy that, as you recall, the idea was to escalate 253 00:13:17,040 --> 00:13:19,880 Speaker 2: to de escalate, and his phrase was, the tariff gun 254 00:13:19,920 --> 00:13:23,040 Speaker 2: will always be on the table, cocked and loaded, but 255 00:13:23,080 --> 00:13:25,920 Speaker 2: it will be rarely fired. And now there are two 256 00:13:25,920 --> 00:13:28,439 Speaker 2: guns on the table, right. There's the US tariff and 257 00:13:28,480 --> 00:13:31,280 Speaker 2: Export control gun pointed at China, and there's the China 258 00:13:31,960 --> 00:13:34,160 Speaker 2: rare earth a control gun that's pointed at the US. 259 00:13:34,160 --> 00:13:36,920 Speaker 2: They are both on the table, they are both loaded. 260 00:13:37,360 --> 00:13:40,120 Speaker 2: They could be used. But in fact, I think the 261 00:13:40,240 --> 00:13:43,119 Speaker 2: Chinese point on this, and I actually take them seriously 262 00:13:43,160 --> 00:13:43,400 Speaker 2: on this. 263 00:13:43,520 --> 00:13:44,400 Speaker 1: In their public. 264 00:13:44,080 --> 00:13:47,080 Speaker 2: Statements, they say, yeah, we could do this, but not 265 00:13:47,120 --> 00:13:49,000 Speaker 2: only is it not in your interest, it's not in 266 00:13:49,080 --> 00:13:52,520 Speaker 2: our interest to do this. Because we're globally integrated economy. 267 00:13:53,240 --> 00:13:57,280 Speaker 2: We depend on being able to trade freely. We want 268 00:13:57,320 --> 00:14:00,000 Speaker 2: to be able to sell this stuff to people who 269 00:14:00,080 --> 00:14:02,880 Speaker 2: are going to use it for non defense purposes that 270 00:14:03,080 --> 00:14:06,240 Speaker 2: is actually good for us too. So we don't really 271 00:14:06,320 --> 00:14:09,040 Speaker 2: want to use this weapon, but we have to pull 272 00:14:09,080 --> 00:14:11,920 Speaker 2: it out because this is the only way to prevent 273 00:14:12,040 --> 00:14:14,240 Speaker 2: you from using this other weapon, which is going to 274 00:14:14,240 --> 00:14:15,199 Speaker 2: be really bad for us. 275 00:14:15,800 --> 00:14:19,560 Speaker 1: And I think that should be taken very seriously. 276 00:14:20,080 --> 00:14:23,880 Speaker 3: But it sounds like what economists might think of as 277 00:14:23,880 --> 00:14:26,160 Speaker 3: a stable equilibrium, right, I mean that is supposed to be. 278 00:14:26,320 --> 00:14:30,400 Speaker 3: That was even what the traditional destruction were sold as 279 00:14:30,720 --> 00:14:35,080 Speaker 3: a stable equilibrium because both sides were assured of real 280 00:14:35,120 --> 00:14:36,320 Speaker 3: harm if anything happened. 281 00:14:36,360 --> 00:14:40,480 Speaker 2: Well, yeah, so economists call it stable equilibrium because they're economists, 282 00:14:40,480 --> 00:14:43,480 Speaker 2: and other people call it a balance of terror, right, which. 283 00:14:43,240 --> 00:14:46,480 Speaker 3: Is but there's a balance, right, you know, it sounds 284 00:14:46,520 --> 00:14:47,880 Speaker 3: better than imbalance. 285 00:14:47,480 --> 00:14:49,240 Speaker 1: Right, No, no, no, no, it is a balance. 286 00:14:49,320 --> 00:14:51,520 Speaker 2: And I think this is why the US China trade 287 00:14:51,560 --> 00:14:54,080 Speaker 2: negotiations have gone on for so long, is the Chines 288 00:14:54,120 --> 00:14:56,080 Speaker 2: are very clear that they want to get something out 289 00:14:56,080 --> 00:14:57,080 Speaker 2: of these negotiations. 290 00:14:57,080 --> 00:14:59,400 Speaker 1: It's not going to be just a capitulation. 291 00:14:59,440 --> 00:15:02,280 Speaker 2: And they have the tools to force the US to 292 00:15:02,320 --> 00:15:06,720 Speaker 2: stay at the table and do something that they might want. 293 00:15:07,200 --> 00:15:10,040 Speaker 2: So I think if you look at this from a 294 00:15:10,080 --> 00:15:14,320 Speaker 2: broader standpoint, I think the net effect of this for 295 00:15:14,560 --> 00:15:19,160 Speaker 2: now is probably beneficial because it is useful for the 296 00:15:19,200 --> 00:15:22,720 Speaker 2: world to have some constraints on the ability of the 297 00:15:22,800 --> 00:15:27,440 Speaker 2: US unilaterally just to impose whatever conditions it wants and everybody, 298 00:15:27,840 --> 00:15:30,360 Speaker 2: you know, just as it's useful to have those constraints 299 00:15:30,360 --> 00:15:32,760 Speaker 2: in China. They've done plenty of economic bullying of their 300 00:15:32,800 --> 00:15:35,240 Speaker 2: own over the years when they can get away with it, 301 00:15:35,640 --> 00:15:38,960 Speaker 2: So having some kind of balance there I think is 302 00:15:39,080 --> 00:15:42,400 Speaker 2: potentially helpful. The problem is we also have some fairly 303 00:15:42,480 --> 00:15:45,280 Speaker 2: volatile leadership, particularly in the US side, and so you 304 00:15:45,320 --> 00:15:48,320 Speaker 2: can imagine things going wrong, and that was always the 305 00:15:48,720 --> 00:15:53,040 Speaker 2: worry with the mad during the Cold Wars, yeah, it 306 00:15:53,080 --> 00:15:55,720 Speaker 2: was great, but we were one step away from this 307 00:15:56,160 --> 00:15:59,760 Speaker 2: really bad. 308 00:16:10,200 --> 00:16:11,920 Speaker 3: Going back a little bit to the sort of real 309 00:16:11,920 --> 00:16:18,000 Speaker 3: world implications of the network of different export controls and 310 00:16:18,200 --> 00:16:21,440 Speaker 3: potential guns that could be used at various times. I know, 311 00:16:21,520 --> 00:16:25,760 Speaker 3: you talk to a lot of multinationals and businesses active 312 00:16:25,880 --> 00:16:28,920 Speaker 3: in China but also operating around the world. What's the 313 00:16:28,960 --> 00:16:32,360 Speaker 3: implications for a multinational that's actually still got very much 314 00:16:32,560 --> 00:16:35,400 Speaker 3: caught up in the US and China both as a 315 00:16:35,440 --> 00:16:39,560 Speaker 3: market and as a manufacturing base. It seems like it 316 00:16:39,600 --> 00:16:42,320 Speaker 3: may be useful to have a balance of terror, but 317 00:16:42,360 --> 00:16:44,360 Speaker 3: in the meantime as a hell of a lot of paperwork, right. 318 00:16:44,720 --> 00:16:47,720 Speaker 2: I think the short answer is that in a minimum, 319 00:16:47,760 --> 00:16:50,600 Speaker 2: your compliance burden goes way up, right, because you now 320 00:16:50,640 --> 00:16:52,920 Speaker 2: have to satisfy regulators in the US, you have to 321 00:16:52,920 --> 00:16:56,400 Speaker 2: satisfy regulators in China, and various things. Just the friction 322 00:16:56,480 --> 00:17:00,400 Speaker 2: and the transaction costs of doing things a lot of 323 00:17:00,520 --> 00:17:02,680 Speaker 2: cross border activities, they have gone up quite a lot. 324 00:17:02,760 --> 00:17:07,600 Speaker 2: So that's your kind of most benign baseline scenario is 325 00:17:07,960 --> 00:17:09,840 Speaker 2: that has occurred. And you know, I think the other 326 00:17:09,840 --> 00:17:12,800 Speaker 2: thing that people talk about a lot, very hard to quantify, 327 00:17:13,000 --> 00:17:16,600 Speaker 2: is the uncertainty premium goes up, You're constantly kept guessing, 328 00:17:16,680 --> 00:17:19,720 Speaker 2: you know, will these things be imposed, if so, when, 329 00:17:20,000 --> 00:17:23,040 Speaker 2: if so, will I be you know, victimized? 330 00:17:23,160 --> 00:17:25,160 Speaker 1: Or are the ways to work around it? 331 00:17:25,600 --> 00:17:28,119 Speaker 2: So that requires there's sort of an additional cost in 332 00:17:28,200 --> 00:17:32,439 Speaker 2: terms of strategy planning, hedging, planning for how. 333 00:17:32,320 --> 00:17:32,719 Speaker 1: You do this. 334 00:17:32,960 --> 00:17:37,120 Speaker 2: I think at the moment, that's where we are. And frankly, 335 00:17:37,200 --> 00:17:40,560 Speaker 2: both Trump and She at the leadership level, have in 336 00:17:40,600 --> 00:17:43,440 Speaker 2: fact made it pretty clear repeatedly over the course last 337 00:17:43,480 --> 00:17:45,480 Speaker 2: year that they want an agreement, they want a deal, 338 00:17:45,960 --> 00:17:50,680 Speaker 2: They want to set up some kind of regime under 339 00:17:50,720 --> 00:17:55,119 Speaker 2: which people can trade and invest. And the Chinese, i 340 00:17:55,119 --> 00:17:57,400 Speaker 2: think fortunately in this case, have leveraged to make sure 341 00:17:57,400 --> 00:17:59,359 Speaker 2: that deal is somewhat real rather than. 342 00:17:59,240 --> 00:17:59,960 Speaker 1: Just a fake deal. 343 00:18:00,880 --> 00:18:03,680 Speaker 2: So if we get there, that will be I think 344 00:18:03,760 --> 00:18:06,360 Speaker 2: somewhat helpful. But even if we do get a deal, 345 00:18:06,440 --> 00:18:09,119 Speaker 2: the reality is that the US and China really have 346 00:18:09,160 --> 00:18:12,720 Speaker 2: this extremely adversarial relationship. You can create a deal that 347 00:18:12,800 --> 00:18:15,320 Speaker 2: sort of creates a Dayton if you will, to use 348 00:18:15,320 --> 00:18:18,439 Speaker 2: another Cold War metaphor, but if you're thinking about the 349 00:18:18,440 --> 00:18:22,240 Speaker 2: long run, five, ten, fifteen year timeline investments, you have 350 00:18:22,320 --> 00:18:24,560 Speaker 2: to do a lot of hedging, and you have to 351 00:18:24,880 --> 00:18:29,399 Speaker 2: figure out ways that you can forestall or live through 352 00:18:30,240 --> 00:18:32,720 Speaker 2: situations where there might be a huge escalation in the 353 00:18:32,800 --> 00:18:35,920 Speaker 2: tensions between the US and China, and many more decouplex 354 00:18:35,960 --> 00:18:38,639 Speaker 2: It makes this strategic planning process a lot more difficult, 355 00:18:38,680 --> 00:18:39,119 Speaker 2: more crossly. 356 00:18:39,240 --> 00:18:40,919 Speaker 3: But if you think of the goals that the government, 357 00:18:40,960 --> 00:18:43,840 Speaker 3: the Chinese authorities are pursuing in many ways, they are 358 00:18:43,840 --> 00:18:49,120 Speaker 3: trying just as they try and advertise and strengthen US 359 00:18:49,119 --> 00:18:53,480 Speaker 3: dependence on certain things from China, China is obviously actively 360 00:18:53,480 --> 00:18:56,280 Speaker 3: trying to reduce the degree of dependence it has on 361 00:18:56,320 --> 00:18:58,440 Speaker 3: the US. And that seems to be going pretty well. 362 00:18:58,480 --> 00:19:01,320 Speaker 3: I mean, we're not it's not far. Yeah, it is. 363 00:19:01,359 --> 00:19:03,399 Speaker 2: And so if you look at there's a bunch of 364 00:19:03,400 --> 00:19:06,480 Speaker 2: work that you can do looking at sort of the 365 00:19:06,520 --> 00:19:09,880 Speaker 2: OECD databases on trade and value added that shows if 366 00:19:09,920 --> 00:19:12,879 Speaker 2: you just break down US supply chain supply chains for 367 00:19:12,920 --> 00:19:16,119 Speaker 2: physical goods within the US, they are about two to 368 00:19:16,200 --> 00:19:21,040 Speaker 2: three times more reliant on inputs from China as the 369 00:19:21,080 --> 00:19:21,920 Speaker 2: other way around. 370 00:19:22,520 --> 00:19:25,040 Speaker 1: And this is partly the result. 371 00:19:24,800 --> 00:19:28,600 Speaker 2: Of differential industrial development, but partly the result of deliberate 372 00:19:28,720 --> 00:19:33,919 Speaker 2: Chinese efforts to de americanize, specifically there's supply chains, and 373 00:19:33,920 --> 00:19:36,800 Speaker 2: they have made good progress there now some areas it's 374 00:19:36,840 --> 00:19:41,240 Speaker 2: really tough. So the semiconductor industry good luck trying to 375 00:19:41,320 --> 00:19:46,119 Speaker 2: de americanize because the US position at various nodes in 376 00:19:46,160 --> 00:19:51,600 Speaker 2: that is extremely extremely strong, and despite huge investments, Chinese 377 00:19:51,840 --> 00:19:56,600 Speaker 2: have made some progress there, but not a ton. Frankly, 378 00:19:57,280 --> 00:19:59,800 Speaker 2: so again, it's very difficult to build an alternative ar 379 00:20:00,040 --> 00:20:03,439 Speaker 2: supply chain, probably even more difficult to build a fully 380 00:20:03,600 --> 00:20:08,280 Speaker 2: autonomous semiconductor supply chain. These interdependencies both countries would like 381 00:20:08,320 --> 00:20:11,399 Speaker 2: there to be less of them, but in fact it 382 00:20:11,520 --> 00:20:14,360 Speaker 2: is very difficult to untangle them, which is why I've 383 00:20:14,359 --> 00:20:17,679 Speaker 2: always been skeptical of sort of like the easy decoupling story. 384 00:20:17,920 --> 00:20:19,880 Speaker 1: Oh, the China and the US and decoupling. 385 00:20:19,920 --> 00:20:23,640 Speaker 2: It's like, yeah, you can try, and in individual sectors 386 00:20:23,680 --> 00:20:27,680 Speaker 2: you can get reasonably far, but on a macro basis, 387 00:20:27,800 --> 00:20:31,000 Speaker 2: untangling the interconnections that have been built up in the 388 00:20:31,000 --> 00:20:36,200 Speaker 2: global economy over the last forty five years is extremely difficult. 389 00:20:36,400 --> 00:20:38,520 Speaker 2: And the other thing I would say is that as 390 00:20:38,600 --> 00:20:42,480 Speaker 2: China has tried to decrease its dependency on the rest 391 00:20:42,480 --> 00:20:45,280 Speaker 2: of the world from a supply side, it has increased 392 00:20:45,280 --> 00:20:46,800 Speaker 2: its dependency in the rest of the world. On the 393 00:20:46,800 --> 00:20:50,280 Speaker 2: demand side, because it's now basically an export driven economy, 394 00:20:50,760 --> 00:20:54,360 Speaker 2: they depend very heavily on markets being open to them, 395 00:20:54,400 --> 00:20:58,680 Speaker 2: and this dependency has increased substantially over the last five years, 396 00:20:58,760 --> 00:21:03,879 Speaker 2: is not decreased, and their own sort of supply side 397 00:21:03,880 --> 00:21:09,160 Speaker 2: obsession at home creates a deflationary, weak consumption environment, which 398 00:21:09,240 --> 00:21:14,640 Speaker 2: just intensifies this dependency on international markets. And I think 399 00:21:14,680 --> 00:21:18,119 Speaker 2: this is something that's not sufficiently appreciated in the world. 400 00:21:18,200 --> 00:21:21,919 Speaker 2: Is that, Yeah, on a producer basis, China is kind 401 00:21:21,960 --> 00:21:25,639 Speaker 2: of self sufficient, but they have really exposed themselves to 402 00:21:25,800 --> 00:21:30,439 Speaker 2: a lot of potential economic downside if export markets close up, 403 00:21:30,560 --> 00:21:32,640 Speaker 2: or if just there's a global recession and people can't 404 00:21:32,640 --> 00:21:35,080 Speaker 2: buy as much, and that is a real problem for them. 405 00:21:34,920 --> 00:21:37,439 Speaker 1: To which they have no very clear solution. 406 00:21:38,240 --> 00:21:39,600 Speaker 3: I was going to ask you about that. I mean, 407 00:21:39,600 --> 00:21:42,520 Speaker 3: we have fact we've calculated down that our economists that 408 00:21:42,680 --> 00:21:45,960 Speaker 3: China's manufactured goods trade set plus is the largest now 409 00:21:46,000 --> 00:21:49,159 Speaker 3: relative to global GDP of any country since the US 410 00:21:49,240 --> 00:21:52,720 Speaker 3: after World War Two. And we've also shown how the 411 00:21:52,760 --> 00:21:55,280 Speaker 3: amount of sort of trade diversion that's happened, just the 412 00:21:55,320 --> 00:21:59,720 Speaker 3: sort of wave of exports going across Asian economies and 413 00:22:00,200 --> 00:22:02,639 Speaker 3: extent to Europe that might otherwise have gone to the 414 00:22:02,720 --> 00:22:04,480 Speaker 3: US due to these tariffs. And as you said, you 415 00:22:04,480 --> 00:22:07,640 Speaker 3: know that itself produces a vulnerability because we see countries 416 00:22:07,680 --> 00:22:12,680 Speaker 3: potentially reacting to that wave of imports. And it's funny 417 00:22:12,680 --> 00:22:14,560 Speaker 3: because it's kind of the weakness on the other side 418 00:22:14,560 --> 00:22:16,760 Speaker 3: of the strength, right. You know, we tend to say 419 00:22:17,160 --> 00:22:21,000 Speaker 3: China politically has an ability to withstand pain that the 420 00:22:21,119 --> 00:22:23,040 Speaker 3: US doesn't have, and that means it can sort of 421 00:22:23,080 --> 00:22:27,200 Speaker 3: hold its ground against Donald Trump. But to your point, 422 00:22:27,359 --> 00:22:30,239 Speaker 3: ignoring quite a lot of domestic economic pain, I mean, 423 00:22:30,280 --> 00:22:32,160 Speaker 3: do you see I know, you're not one of those 424 00:22:32,160 --> 00:22:35,679 Speaker 3: people who is continually kind of announcing there's going to 425 00:22:35,680 --> 00:22:38,240 Speaker 3: be a crisis or you know, an end of China's 426 00:22:38,359 --> 00:22:42,160 Speaker 3: growth story. But do you think they are underestimating the 427 00:22:42,200 --> 00:22:43,400 Speaker 3: costs of this strategy? 428 00:22:43,960 --> 00:22:45,199 Speaker 1: Yeah, that's a good question. 429 00:22:45,520 --> 00:22:48,720 Speaker 2: It seems to me that the government over the last 430 00:22:48,720 --> 00:22:51,480 Speaker 2: several years they've adopted a very very sort of a 431 00:22:51,560 --> 00:22:56,000 Speaker 2: techno fetishist supply side growth model, and basically they've said, 432 00:22:56,160 --> 00:23:00,760 Speaker 2: all of our problems productivity, income, growth, whatever, they will 433 00:23:00,800 --> 00:23:05,119 Speaker 2: be solved by just investing massively in the technologies the 434 00:23:05,119 --> 00:23:08,399 Speaker 2: future which will create this productivity miracle, which will then 435 00:23:08,720 --> 00:23:11,520 Speaker 2: drive future incomes of growth. It's a little bit like 436 00:23:12,200 --> 00:23:14,600 Speaker 2: the people who are now going around saying AI is 437 00:23:14,640 --> 00:23:18,240 Speaker 2: going to solve all known economic problems because of these 438 00:23:18,400 --> 00:23:20,879 Speaker 2: productivity magic and the Chinese view is that this is 439 00:23:21,600 --> 00:23:24,640 Speaker 2: the result of sort of physical technologies at least as much, 440 00:23:24,720 --> 00:23:25,880 Speaker 2: if not more so than AI. 441 00:23:26,000 --> 00:23:27,240 Speaker 1: But it's similar kind of thinking. 442 00:23:27,280 --> 00:23:29,800 Speaker 3: They haven't been doing too badly on these technologies. Oh no, 443 00:23:30,280 --> 00:23:31,800 Speaker 3: you know, but the thing we've thought that we've think 444 00:23:31,840 --> 00:23:35,240 Speaker 3: they've glabal leadership position in five of the thirteen key 445 00:23:35,280 --> 00:23:37,359 Speaker 3: technology but touching up in all the others. 446 00:23:37,400 --> 00:23:37,920 Speaker 1: No, for sure. 447 00:23:38,040 --> 00:23:41,040 Speaker 2: So they've done very well on the production side. And meanwhile, 448 00:23:41,480 --> 00:23:43,879 Speaker 2: nominal growth in China is less than half of what 449 00:23:43,960 --> 00:23:45,959 Speaker 2: it was five years ago. Right, so they used to 450 00:23:46,200 --> 00:23:49,000 Speaker 2: very reliably be able to count on nominal growth of 451 00:23:49,000 --> 00:23:51,840 Speaker 2: eight nine percent very consistently. 452 00:23:51,880 --> 00:23:52,960 Speaker 1: It's now down to four. 453 00:23:53,920 --> 00:23:58,520 Speaker 2: And these things are linked because they basically say the 454 00:23:58,560 --> 00:24:00,639 Speaker 2: supply side will solve all problem is we don't need 455 00:24:00,680 --> 00:24:02,480 Speaker 2: to have a demand side strategy. We don't need to 456 00:24:02,480 --> 00:24:05,880 Speaker 2: support consumers if they're hammered by a pandemic. We can 457 00:24:05,920 --> 00:24:11,240 Speaker 2: impose a gigantic compression of their balance sheets by crushing 458 00:24:11,240 --> 00:24:14,520 Speaker 2: the properties five years in a row. And that's fine 459 00:24:15,119 --> 00:24:18,960 Speaker 2: because capital will move to the correct places. And that's 460 00:24:19,000 --> 00:24:22,200 Speaker 2: a very very one sided and incomplete view of the economy. 461 00:24:22,240 --> 00:24:25,240 Speaker 2: So they are paying a price for this that is material, 462 00:24:26,040 --> 00:24:29,879 Speaker 2: and I guess the question is are they unaware of 463 00:24:29,880 --> 00:24:33,480 Speaker 2: that price. Do they say, well, we know that's the price, 464 00:24:33,560 --> 00:24:36,280 Speaker 2: but it's fine, or do they think, actually, you, mister Krober, 465 00:24:36,320 --> 00:24:37,439 Speaker 2: you're wrong about the price. 466 00:24:37,520 --> 00:24:39,000 Speaker 1: Actually this is a short term thing. 467 00:24:39,320 --> 00:24:41,320 Speaker 2: That's a harder thing to read, and I think you 468 00:24:41,320 --> 00:24:44,000 Speaker 2: can make multiple different interpretations. But what I would say 469 00:24:44,160 --> 00:24:47,240 Speaker 2: is they don't look like they are changing their minds 470 00:24:47,280 --> 00:24:50,040 Speaker 2: anytime soon. They may be right, they may be wrong, 471 00:24:50,480 --> 00:24:51,560 Speaker 2: but they're staying the course. 472 00:24:52,240 --> 00:24:54,879 Speaker 3: And everything we've said, i'm pretty sure is going to 473 00:24:54,880 --> 00:24:57,400 Speaker 3: stand the test of time because we're talking fairly long term. 474 00:24:57,400 --> 00:24:59,320 Speaker 3: But obviously it is dangerous these days to have a 475 00:24:59,320 --> 00:25:02,200 Speaker 3: conversation which you then don't publish for a few days 476 00:25:02,520 --> 00:25:06,400 Speaker 3: talking about trade issues. And as I've said at the start, 477 00:25:06,440 --> 00:25:08,639 Speaker 3: it's likely that the meeting with she is going to 478 00:25:08,680 --> 00:25:10,520 Speaker 3: be on and off and on and off several times 479 00:25:10,600 --> 00:25:13,720 Speaker 3: before we get there. But I guess one way of 480 00:25:13,760 --> 00:25:15,480 Speaker 3: thinking about this or that people could have in the 481 00:25:15,480 --> 00:25:18,440 Speaker 3: back of the minds when, if, and when that meeting happens, 482 00:25:18,640 --> 00:25:21,200 Speaker 3: and then they assess the results of that meeting, which 483 00:25:21,240 --> 00:25:24,439 Speaker 3: maybe Donald Trump announcing some great deal or maybe not. 484 00:25:25,240 --> 00:25:26,920 Speaker 3: Is it at the heart of what you were just saying, 485 00:25:26,920 --> 00:25:29,040 Speaker 3: you know, short term, it actually does matter, even though 486 00:25:29,080 --> 00:25:31,359 Speaker 3: they're pretending it doesn't matter, and they can put up 487 00:25:31,359 --> 00:25:34,440 Speaker 3: with the pain. China's facing a pretty high tariff sort 488 00:25:34,440 --> 00:25:37,800 Speaker 3: of forty percent ish. It does actually matter to them 489 00:25:38,080 --> 00:25:39,960 Speaker 3: that they bring this down, and it seems to matter 490 00:25:40,000 --> 00:25:42,919 Speaker 3: to them a bit more than it matters to Donald Trump. 491 00:25:43,680 --> 00:25:45,320 Speaker 1: Well, this is an interesting question. 492 00:25:45,400 --> 00:25:48,040 Speaker 2: So if I look at the Chinese side on this, yeah, 493 00:25:48,080 --> 00:25:50,359 Speaker 2: I think they would like lower tariffs, But actually I 494 00:25:50,359 --> 00:25:53,240 Speaker 2: don't think that is the top of their list, frankly, 495 00:25:53,240 --> 00:25:53,600 Speaker 2: because the. 496 00:25:53,600 --> 00:25:55,400 Speaker 1: Reality is they are enduring very high. 497 00:25:55,240 --> 00:25:57,720 Speaker 2: Terriffs right now relative to the past and relative to 498 00:25:57,720 --> 00:25:58,480 Speaker 2: anyone else in the. 499 00:25:58,400 --> 00:25:59,760 Speaker 1: World and their experts. 500 00:25:59,760 --> 00:26:03,040 Speaker 2: You fine, right, and some of that is front loading, 501 00:26:03,080 --> 00:26:04,760 Speaker 2: but I think most of it is not. Some of 502 00:26:04,760 --> 00:26:08,320 Speaker 2: it is transhipment. They're routing things through third countries that 503 00:26:08,359 --> 00:26:11,000 Speaker 2: wind up in the US. But most of it seems 504 00:26:11,040 --> 00:26:13,840 Speaker 2: to be that they've actually been very successful at developing 505 00:26:13,880 --> 00:26:17,800 Speaker 2: other export markets Southeast Asia, Europe, Latin America, you name it, 506 00:26:18,480 --> 00:26:22,119 Speaker 2: and yeah, there's some protectionist concerns there, but in most cases, 507 00:26:22,160 --> 00:26:25,160 Speaker 2: in most product lines, there really aren't great alternatives at 508 00:26:25,160 --> 00:26:27,280 Speaker 2: a comparable cost to what you're buying from China, and 509 00:26:27,720 --> 00:26:30,360 Speaker 2: most countries don't have the same kind of security concerns 510 00:26:30,359 --> 00:26:31,280 Speaker 2: that the US has. 511 00:26:31,200 --> 00:26:32,800 Speaker 1: So they're doing fine. 512 00:26:33,119 --> 00:26:37,119 Speaker 2: So I think they've concluded, yeah, we would like lower tariffs, 513 00:26:38,280 --> 00:26:41,560 Speaker 2: but if we have to live with the current tariff level, 514 00:26:42,280 --> 00:26:45,200 Speaker 2: we've shown that we can, which also means that they 515 00:26:45,200 --> 00:26:48,000 Speaker 2: can walk away if they think if all we're getting 516 00:26:48,119 --> 00:26:50,560 Speaker 2: is a few points off tariffs, that's not enough. We 517 00:26:50,640 --> 00:26:53,000 Speaker 2: need more in a deal, and if that's all you're 518 00:26:53,000 --> 00:26:55,520 Speaker 2: going to give us, sorry, then there's no deal. We'll 519 00:26:55,560 --> 00:26:57,840 Speaker 2: just do our thing and we'll see how you like it, 520 00:26:57,880 --> 00:26:59,680 Speaker 2: because we think that we can bear more pain. 521 00:27:00,080 --> 00:27:03,960 Speaker 1: I think what they really want is they would really. 522 00:27:03,720 --> 00:27:06,840 Speaker 2: Like to see some scaling back of the US export 523 00:27:06,880 --> 00:27:10,160 Speaker 2: controls on technology. That is a number one on their list, 524 00:27:10,240 --> 00:27:12,080 Speaker 2: and I think that will be very interesting to see 525 00:27:12,720 --> 00:27:16,200 Speaker 2: whether they can dislodge the US on that point, because 526 00:27:16,320 --> 00:27:20,480 Speaker 2: historically the US position has been export controls are sacrosanct. 527 00:27:20,800 --> 00:27:23,600 Speaker 2: Once we put them on they are tablets from Sinai, 528 00:27:23,600 --> 00:27:25,960 Speaker 2: they are the word of God. They cannot be altered 529 00:27:26,000 --> 00:27:29,200 Speaker 2: in any way. So that's, you know, that's a big ask. 530 00:27:29,480 --> 00:27:31,479 Speaker 2: My view would be, I think the US has overdone 531 00:27:31,520 --> 00:27:33,800 Speaker 2: it on export controls, and it would be very possible 532 00:27:33,840 --> 00:27:36,639 Speaker 2: to go through and do some culling and say, here 533 00:27:36,640 --> 00:27:38,400 Speaker 2: are the things that are important that we really need, 534 00:27:38,440 --> 00:27:41,000 Speaker 2: and here's some stuff actually that was overreach, and we 535 00:27:41,040 --> 00:27:43,159 Speaker 2: could pull back. But there's a people don't want to 536 00:27:43,200 --> 00:27:45,120 Speaker 2: go there because of the principle. I think the other 537 00:27:45,160 --> 00:27:48,520 Speaker 2: thing that the Chinese would like is, as we saw 538 00:27:48,600 --> 00:27:50,679 Speaker 2: with the TikTok deal, some kind of a pathway that 539 00:27:50,720 --> 00:27:54,640 Speaker 2: would make it easier for Chinese tech companies to invest 540 00:27:54,800 --> 00:27:57,840 Speaker 2: in the United States because they see this as coming. 541 00:27:58,240 --> 00:28:01,280 Speaker 2: They see it's important for their companies to nationalize. As 542 00:28:01,320 --> 00:28:03,639 Speaker 2: you grow, you can't do everything through exports. You have 543 00:28:03,680 --> 00:28:07,120 Speaker 2: to get closer to your customers, build up distribution networks, 544 00:28:07,200 --> 00:28:07,680 Speaker 2: build up. 545 00:28:07,640 --> 00:28:08,600 Speaker 1: Branding, et cetera. 546 00:28:09,240 --> 00:28:11,280 Speaker 2: Every country in the world, once it gets to a 547 00:28:11,280 --> 00:28:15,840 Speaker 2: certain point, it's companies start to multi nationalize. China is 548 00:28:15,880 --> 00:28:18,520 Speaker 2: the same. The US is the world's biggest single market. 549 00:28:19,080 --> 00:28:21,400 Speaker 2: They like to see a pathway there, and I think 550 00:28:21,440 --> 00:28:23,840 Speaker 2: they also think that this would be a stabilizer in 551 00:28:23,880 --> 00:28:26,800 Speaker 2: the relationship. But obviously there are a lot of political problems 552 00:28:26,800 --> 00:28:26,960 Speaker 2: with that. 553 00:28:27,040 --> 00:28:29,919 Speaker 1: On the US side. People are very nervous about that. 554 00:28:30,000 --> 00:28:33,040 Speaker 2: So I think those are the asks on the US side. 555 00:28:33,040 --> 00:28:35,119 Speaker 2: I find it very hard to understand what it is 556 00:28:35,200 --> 00:28:38,200 Speaker 2: that the US is negotiating for. I'm perplexed. It is 557 00:28:38,280 --> 00:28:40,240 Speaker 2: very clear that Trump wants something that he can call 558 00:28:40,280 --> 00:28:45,320 Speaker 2: a deal, okay, and because he wants a deal, and 559 00:28:45,360 --> 00:28:47,360 Speaker 2: the Chinese feel that they can walk away if they 560 00:28:47,360 --> 00:28:49,840 Speaker 2: don't get a satisfactory deal, that gives them a slight 561 00:28:49,960 --> 00:28:52,800 Speaker 2: edge in their stations. And it would be interesting to 562 00:28:52,840 --> 00:28:55,000 Speaker 2: see if we get something out of this, what the 563 00:28:55,200 --> 00:29:02,280 Speaker 2: US obtains other than additional agricultural purchases we started Boeing sales, 564 00:29:02,280 --> 00:29:04,760 Speaker 2: et cetera. Is the US after any kind of bigger 565 00:29:05,200 --> 00:29:07,440 Speaker 2: game here, It's not at all clear that they are. 566 00:29:08,160 --> 00:29:11,600 Speaker 2: It's quite hard to understand what the purpose of the 567 00:29:11,640 --> 00:29:15,280 Speaker 2: negotiations is. The purpose of the other US trade negotiations 568 00:29:15,360 --> 00:29:17,800 Speaker 2: was basically to demonstrate to other countries how powerful the 569 00:29:17,880 --> 00:29:22,200 Speaker 2: US is and how we can push you around. That 570 00:29:22,720 --> 00:29:27,400 Speaker 2: was essentially the purpose of negotiations. China has said, we're 571 00:29:27,400 --> 00:29:28,800 Speaker 2: strong enough to not play that game. 572 00:29:28,960 --> 00:29:30,120 Speaker 3: So that ship has sailed. 573 00:29:30,720 --> 00:29:31,480 Speaker 1: What's your plan B? 574 00:29:33,000 --> 00:29:35,080 Speaker 2: And it's maybe some things are being talked about there 575 00:29:35,160 --> 00:29:37,720 Speaker 2: that we don't know about, but it's a little obscure. 576 00:29:37,800 --> 00:29:40,240 Speaker 3: You've reminded me. I mean, of course, there's the grand 577 00:29:40,280 --> 00:29:42,440 Speaker 3: story of why things are happening, and then often with 578 00:29:42,520 --> 00:29:46,120 Speaker 3: this administration especially, there's the sort of slightly lower story. 579 00:29:46,240 --> 00:29:48,880 Speaker 3: And you talked about the export controls being a really 580 00:29:48,960 --> 00:29:51,800 Speaker 3: kind of fawny aspect of this that's causing quite a 581 00:29:51,840 --> 00:29:54,640 Speaker 3: lot of problems. The Commas Secretary is obviously the one. 582 00:29:54,680 --> 00:29:57,640 Speaker 3: It's his office, the Commerce Department that's responsible for the 583 00:29:57,680 --> 00:30:00,760 Speaker 3: export controls, and it's obviously the Treasury set that's been 584 00:30:00,920 --> 00:30:04,000 Speaker 3: in leading a lot of these negotiations on the core 585 00:30:04,280 --> 00:30:06,280 Speaker 3: trade issues. There is a theory that just says that 586 00:30:06,320 --> 00:30:08,080 Speaker 3: I would love I think wants to make things as 587 00:30:08,120 --> 00:30:08,800 Speaker 3: hard as possible. 588 00:30:09,640 --> 00:30:10,680 Speaker 1: I've heard that theory. 589 00:30:10,880 --> 00:30:14,000 Speaker 2: You know, all of these stories are slightly unverifiable. What 590 00:30:14,040 --> 00:30:16,280 Speaker 2: I think you can say with high confidence is that 591 00:30:16,920 --> 00:30:21,200 Speaker 2: the Bureau of Industry and security within Commerce, which supervises 592 00:30:21,280 --> 00:30:25,120 Speaker 2: the export controls, has pretty hawkish leadership, and that they 593 00:30:25,160 --> 00:30:27,640 Speaker 2: basically feel that it's the right thing for the US 594 00:30:27,680 --> 00:30:30,960 Speaker 2: to tighten the screws on export controls. And I think 595 00:30:30,960 --> 00:30:34,000 Speaker 2: they have a reasonable point in the sense that if 596 00:30:34,000 --> 00:30:35,960 Speaker 2: you have an export control regime and you think it 597 00:30:36,000 --> 00:30:37,360 Speaker 2: is valuable. 598 00:30:37,480 --> 00:30:38,720 Speaker 1: You don't want it to do on the table. 599 00:30:39,160 --> 00:30:41,600 Speaker 2: You should not have a lot of loopholes that undermine 600 00:30:41,640 --> 00:30:43,040 Speaker 2: what you're trying to do, and that, you know, I 601 00:30:43,040 --> 00:30:45,440 Speaker 2: think that was clearly their view on these latest regulations. 602 00:30:45,480 --> 00:30:49,360 Speaker 2: But for them to issue these regulations essentially goes against 603 00:30:49,360 --> 00:30:53,440 Speaker 2: the policy that Trump had laid down as early as May, 604 00:30:53,560 --> 00:30:55,720 Speaker 2: saying Okay, let's not have any more export controls until 605 00:30:55,720 --> 00:31:00,200 Speaker 2: our trade negotiations are through. So they violated what everyone 606 00:31:00,320 --> 00:31:02,760 Speaker 2: understood to be the president's wishes there. 607 00:31:03,520 --> 00:31:04,800 Speaker 1: And I guess what you could say is. 608 00:31:04,720 --> 00:31:09,400 Speaker 2: That Lutnik, given his well advertised problems with Bess and 609 00:31:09,640 --> 00:31:12,800 Speaker 2: he didn't really have much of an incentive to stop 610 00:31:12,880 --> 00:31:15,920 Speaker 2: them from going rogue. If that's what they chose to do, 611 00:31:16,040 --> 00:31:17,280 Speaker 2: I think that's we can say that. 612 00:31:17,760 --> 00:31:20,320 Speaker 3: Arthur Kroeger, thank you so much for doing my pleasure. 613 00:31:24,600 --> 00:31:26,960 Speaker 3: Thanks for listening to Trumpnomics from Bloomberg. It was hosted 614 00:31:26,960 --> 00:31:28,960 Speaker 3: by me Stephanie Flanders, and I was joined by the 615 00:31:29,040 --> 00:31:33,120 Speaker 3: founder and director of research at Gavical Dragonomics, Arthur Kroeber. 616 00:31:33,640 --> 00:31:37,120 Speaker 3: Trumpnomics was produced by Samasadi and Moses and with help 617 00:31:37,160 --> 00:31:40,000 Speaker 3: from Amy Key and special thanks this week to Rachel 618 00:31:40,080 --> 00:31:43,560 Speaker 3: Lewis Chrisky. Sound design is by Blake Maples and Kelly 619 00:31:43,640 --> 00:31:47,360 Speaker 3: Gary and Sage Bowman is Bloomberg's head of podcasts, and 620 00:31:47,440 --> 00:31:50,800 Speaker 3: please to help others find us, rate and review it highly. 621 00:31:50,880 --> 00:31:52,520 Speaker 3: Wherever you listen to podcasts 622 00:32:00,560 --> 00:32:00,720 Speaker 2: From