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There's no business like small business. Hiscox Small Business Insurance. Bloomberg Audio Studios. Podcasts. Radio. News. Hello and welcome to another episode of the All Thoughts Podcast. I'm Traci Alloway. And I'm Joe Wiesenthal. So, Joe, one thing I find interesting about China...
Or maybe I should say one thing I find interesting about how the world views China is it seems to be this economy that is always simultaneously a massive competitive threat, especially to the U.S. Sure. And then simultaneously, it always seems to be on the verge of some big disaster caused by too much debt or bad demographics or the collapse of the housing market and so on. So for as long as I can remember, China has been a bundle of contradictions.
No, totally. And look, there are very good reporters on China and there are very good analysts on China. But throughout my entire career, I completely agree with you. There has always been that narrative of the imminent disaster that is the Chinese economy, whether it's the housing bubble is going to collapse, which it kind of did. And maybe we'll talk about that. Or you mentioned demographics already.
or, you know, all this overcapacity that if there's a little bit of reduction in demand, they'll have mass unemployment, etc. And again, by and large, the Chinese economy, from my outside perspective, and I've never been there, continues to grow more robust. You know, there have been obvious hiccups. Yes, for sure. Okay. So speaking of hiccups,
Now that we have this new tariff regime from the Trump administration, I think we're getting even more contradictions, right? So we hear that tariffs are going to be disastrous for the Chinese economy. Sometimes we hear that they could be a good thing if they encourage Chinese citizens to actually consume more than they save. So maybe this is the impetus for actualization.
No, that's right.
We talk a lot about the U.S. economy and potential of empty shelves and market reactions, but we have not talked about this story from the perspective of the Chinese economy right now. Right. And obviously, this is important because we're talking about a potential trade war between the world's two biggest economies. But
I think it's also important because China so far is the only big country that seems to really have retaliated against the U.S. And just to make things even more complicated, we've also seen Treasury Secretary Scott Besson basically offering reduced tariffs to countries that agree to implement tougher trade restrictions on China. So.
It seems to be a special case in the overall trade crackdown. For sure. And we should talk about it. And I am very, very happy to say that we do, in fact, have the perfect guest. We're going to be speaking with Arthur Kroeber. He is the founding partner and head of research at Gavcal Dragonomics. So, Arthur, thank you so much for coming on All Thoughts. Hi there. It's great to be here.
So I guess my first question is, if we assume that China does have a lot to lose in a trade war with America, which I think is a widely held assumption, why did it choose to retaliate against the U.S.?
Yeah, that's a great question for a couple of reasons. First of all, you know, as you both know, China is a very heavily export-dependent economy. The pattern of exports has changed a little bit since the first trade war with Trump, but they still depend a lot on the U.S. market directly and indirectly. So there's a clear direct cost there. And also, the government has been struggling for the last year and a half to
to revive growth that by their standards was very sluggish. So why would you take on an additional, not necessarily required hit to the economy at this time when you're struggling? So it's a very good question. I think the basic answer is, number one, because of the first trade war in the first Trump administration and the subsequent campaign of export controls and technology constraints by the Biden administration,
They've been kind of girding themselves for a long time for more self-sufficiency to insulate themselves against external shocks. So there's a kind of a baseline of confidence that they can take a lot of pounding and they'll still be okay. But then I think the specific reason why they alone basically of all countries in the world chose to retaliate against the Liberation Day tariffs was
was they were really mad. This is very visible to me when I was in last in Beijing in late March and
I got a lot of comments from people about basically how the Chinese had been trying since the beginning of the year before Trump was inaugurated to get messages to him, to kind of lay out, you know, make it clear that they were interested in talking and suggest some things that could be on the agenda, et cetera, asking for who's the person that we should talk to. And they just hit a stone wall, basically. They were unable to establish contact with anyone in the Trump administration who would tell them anything.
And instead, what they got was 20% tariffs, remember, in February and January on the grounds that they hadn't done enough to control fentanyl flows, which they were also mad about because they'd spent a lot of time in last year negotiating an agreement with the Biden administration, which they complied with, which made a real dent in the exports of fentanyl precursors out of China. It was not complete, but they had really made a serious effort. So from their standpoint...
They'd been trying to open a conversation and the door had been shut in their face time and time again. And they'd just been whacked with stuff that they thought was completely unfair. So I think they were just kind of fed up. They had a baseline sense of security that if we hit back, we know it's going to be bad, but we'll be able to take it. Then I think the other consideration was essentially political, which is that, you know, even if they hadn't retaliated, they were still facing tariffs of over 60%.
So no matter what they did, it was going to be bad. So they had to have a story to tell their people. What are we doing about this bad thing? And it's a lot easier to mobilize domestic support if you're standing tall and pushing back.
Which actually is, you know, it's like what Mark Carney did in Canada. It's how he won that election was by being the guy who pushed back against the so-called bully. So I think it was a combination of frustration, a sense of security that they could outlast the U.S. in a war of economic attrition and in a sense that this was the best way to get people in China on board for what was going to be a tough time no matter what.
Right. So even in a one party state, there's politics and there's the requirement to maintain domestic credibility and so forth. You know, this actually gets to something I've wondered about for a long time. Rhetoric that you hear from Chinese officials will often talk about their very long history going back thousands of years.
And then Americans will parrot that and sometimes say it's like, well, you know, they have history going back a long time and they suffered a century of humiliation, etc. How real is that in the sense of like it's a government that doesn't want to see unemployment go up in the short term, etc.?
I think many Americans have really internalized this idea of they think really long term. They think in centuries. They think in millennia. Maybe that's true. How should we think about some of this rhetoric? Yeah, it's sort of half true and half not true. So, you know, I've been looking at the Chinese economy for the last 35 years basically and
And I can tell you there's plenty of short-termism and emergency thinking and ignoring problems until they catastrophically become too bad and then scrambling to come with solutions. So underneath this veneer, there's plenty of chaos. But there are, I think, a few things that are true about that. So first of all, this century of humiliation idea, that is – number one, it's something that is played up by the Chinese educational system. This is drummed into people's
starting in elementary school. That's part of the nationalist narrative that the CCP has used for a long time. But I think it's important to recognize that this is not just a Communist Party thing. This is basically Chinese elites of whatever stripe since the mid-19th century have been really distressed at the loss of standing
that China has achieved in the world. I mean, you know, up until the early 19th century, China was undisputedly this great empire and people within China had the sense of being part of a great global power. And then that was all taken away and they had a pretty catastrophic hundred years of civil war and famine and all kinds of stuff.
So it has been a theme of Chinese elites since the 1840s that they have to rebuild the nation, acquire the technological means to stand on an even footing with the West and so forth. And the current regime is just the one that has been most effective at sort of realizing that vision. But if you change the regime tomorrow –
Whatever came in its place would have the same, I think, underlying ambitions. So that, I would say, is a common theme. I think the other thing that is – I don't – I'm not a real buyer in the – like the super long-term thinking thing. But if you look at Xi Jinping's utterances, he took over in 2012 and he started laying out –
some pretty long-term stuff right away. He had these various goals that stretched out to 2035 and 2049, which is the 100th anniversary of the Communist Party and so forth. And so there is an ability of the Chinese state, because they don't have to face elections,
to organize kind of strategic plans that last a little bit longer than would typically be the case. LESLIE KENDRICK: Longer than four years, certainly. DAVID ABEL: Longer than four years. So a good example is Made in China 2025, which is their industrial policy idea, which was released in 2015. It builds on previous policies that they had. It was not some completely new thing. But they set out some 10-year goals for where we want to be, roughly, and a whole bunch of technologies. And the reality is they did a pretty good job on a lot of them.
So the planning is not – I think there's often a mystique about it, but they are able sometimes to sort of point the ship in a particular direction and then get a lot of people in society on board with steering that ship where they want to go.
So speaking of long-term strategies, one thing that is different in this current bout of trade tension, we could probably call it a trade war at this point. I think that's fair. Oh, it's a complete embargo except for a few things that we've, you know, each side is exempted about 20, 25% of what they import, but otherwise effectively it's an embargo. I definitely want to ask you about those exemptions too. But one thing that's different about this trade war to the
the tensions that we saw in the first Trump administration is that China has basically had some practice with increased tariffs. And so what we saw in sort of 2016, 2018 was China just moved a bunch of production over the border to places like Vietnam, basically rerouted a bunch of things to get around the tariffs. Is that an option this time around, given that
Trump seems to be cracking down on pretty much all of America's trading partners all at the same time? Oh, it's totally an option and I think it will definitely happen. So a couple things here. So first of all, you can describe that as kind of a government strategy, but actually it was largely just companies on their own deciding. So like the first companies that did this were the solar panel makers who got whacked by tariffs in the Obama administration 2012. Right. Very high ones.
And so they immediately moved a lot of their production to Southeast Asia. It wasn't the government saying, please do this. It was just they said, well, we want to sell to the US. We can't do it from here. Where do we go? Oh, we can go across the border and it'll be fine. And it was. And now they've diversified. They used to be just in a couple of countries. Now they're in a larger number of countries. If you try to go after this stuff, it's...
like playing a game of whack-a-mole, right? The other thing I would observe on that just beyond the solar people is China is now at a stage of development where they have very sophisticated companies that are very good at what they're doing.
increasingly have markets in a wide range of places around the world. And what do companies do when they are in that situation, be they from China or Japan or the United States or Germany? They invest abroad. They internationalize. And so what we're in right now is kind of act one, I would say, of what is clearly going to be a very long process of Chinese companies turning themselves into multinationals, just like
the companies of every other industrialized country have done. And so they don't need the government to tell them do this. They have their own reasons, not just tariff avoidance, but to be closer to different markets, et cetera. So that process, I think, is just going to continue because it has many, many drivers, not just tariff avoidance.
Right. And, you know, we've certainly talked about BYD setting up auto facilities all over the world. They're in Brazil. They're in Hungary. They're elsewhere. But it also like I mean, this is one of the things that.
I guess, confuses me about the U.S. administration policy. You know, all these other – it's like, oh, we're going to like split off Vietnam or we're going to make it – like it's hard for me to imagine that given the amount of cross-border investment that we've seen over the last years and years. Right. Well, OK. Yeah. Basically, I would describe it – there's an economics term of art for that strategy. It's loony. So – but this gives me an opportunity, I guess, to make a little bit of a comment on what I see about –
what's coming out of the Trump administration, which is basically chaos. There is not a clear strategy. There is not a clear policy. What you have basically is Trump's impulses, which are number one,
I want to sort of demonstrate dominance over everyone, and I want them to exhibit deference. And number two, I really like tariffs for some strange reason that I don't think any of us understand, but he really likes them. But he also likes them specifically because they are a tool that as the president of the United States, he has the legal authority to use without restraint. So if he wants to hurt people, he doesn't have to go to Congress. He doesn't have to ask anyone to Congress. He just does it.
So it's very useful for him. And I found a lot of the commentary over the last couple of months trying to explain the rational strategy behind this to be completely off target because it isn't. And various people in the administration like Scott Besson would like there to be a strategy and they are desperately trying to corral the stuff into the semblance of a strategy, but they have to improvise.
That's sort of my general comment on it. And then specifically in the question is, does it work? No. The reality is there are now, I believe, 140 countries in the world that trade more with China than with the United States. China is now the number two source in the world behind the United States of direct investment, and it's growing. Its economic relationships with many countries, including in Latin America, are much deeper than those in the United States.
Let alone Southeast Asia, where their economies are completely tied to China. So there's no way, no way that any sane leader of any of these countries would sign on to a deal where they would say, oh, we'll get our tariffs on the US lowered from 10% to 5%. In exchange for which we have to sacrifice our principal economic relationship, it's not going to happen.
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So you mentioned the exemptions earlier, and we've also seen some carve outs for specific things like electronics imports. And at this point, I'm actually finding it kind of difficult to keep track of what's delayed and what's exempt just because it changes so often. But my question is, how much signal should we take away from all those exemptions? Do they show that there's potentially a path forward to a U.S.-China deal or
Or is it just Trump trying to retroactively protect some pretty important industries? Yeah, it's more of the latter. And remember, there's exemptions on both sides. So Trump exempted cell phones and most consumer electronics basically because he was told that you cannot allow the prices of iPhones to double. People will revolt. And he took that seriously. So that was clearly a political move just to
alleviate the domestic political cost of this action. Similarly, if you look at what the Chinese did, they exempted a lot of imports like semiconductors and some key technology inputs. Despite all of their progress, they're still pretty dependent on global supply chains outside of China for a lot of stuff that goes into their tech ecosystem. They could not afford to have this stuff
cost a lot more. So I think in both cases, it's roughly 20% or a bit more that has been exempted. As you say, it's very hard to know exactly when this is going into effect and blah, blah, blah. But both sides have sort of picked out
the parts of their economies which are most vulnerable and said, OK, you don't have to take the pain. But it doesn't tell us anything about it's not like both sides are signaling to each other, hey, if you lower your tariffs, I'll lower mine. And then maybe we can get somewhere. They're just doing what they need to do to protect themselves. So Trump recently said that
for gifts that kids could maybe have two dolls instead of 30 dolls. And I completely agree. I spent this weekend taking out a bunch of random plastic garbage, broken toys, et cetera, from my children's room, five trash bags, and I barely made a dent in what they have. So I'm completely in agreement on that point. All that being said, two questions about that.
So let's say there's a major reduction in buying plastic stuff from China, low end stuff.
A, are we already seeing real pain in China and parts of the economy from these tariffs that's visible from what you're looking at? And B, how much of that stuff is still in China as opposed to – that's the low-margin stuff that you probably quickly have in some cheaper destination. How important is stuff, the cheap stuff, to China's economy these days?
You know, it's somewhat important, you know, for employment purposes, because a lot of that stuff is fairly labor intensive. Those lower end exports. But it certainly is not very relevant from the standpoint of Xi Jinping's grand strategic vision as China's technology superpower.
So if you look in terms of like total value of what they export, the stuff that goes into Walmart is significant, but a shrinking portion of the total. They're moving up the value chain pretty fast. So you are starting to see some softness in the industrial and manufacturing indicators. I mean, you've had an employment, a pretty weak employment market recently.
since the end of COVID, basically, that they've been struggling to address. So this is going to have some impact. You know, the Chinese export numbers have still been quite strong. Most people think that's because there's been some front loading because people were anticipating tariffs and were expecting significant weakness, you know, in the coming months. I think that will happen. It will hurt.
But I don't think any of that is going to hurt enough for China to feel like it has to make a move. They've clearly signaled Trump wants to have a deal. He has to make the first move. He has to initiate, show some good faith. They've laid out their position. They're waiting for him to pick up the phone and call, basically. So, yeah, this is going to cause some real difficulties. And I think they're going to have a real challenge meeting their growth target this year if this goes on for much longer.
But I think they're willing to wait it out. So speaking of economic transformation, in addition to being a bundle of contradictions, the other thing that has existed for as long as I've been, I guess, covering China from an economic perspective is China.
This idea that the economy needs to rebalance towards consumption. So Chinese people save too much and we really need to get them to spend on our own domestically manufactured goods. And that will help resolve some of the tensions in the economy.
What's your sense of how much Chinese people might actually be able to boost their own consumption right now to offset the trade war? Oh, there's some, not a lot. So just to back up a little bit on that. So I think it's important to clarify that when people talk about this project of rebalancing the economy from investment to consumption, this has been a project of economists, mostly outside China.
It has never been a project of the Chinese government itself. They have never really forcefully and clearly stated that it is their objective to do that. They put out various policies where they say, yeah, we want incomes to rise faster. We would like there to be, you know, stronger services consumption and so forth. But they have never said that we think we should fundamentally alter. Go out and shop.
Well, they haven't said that, but the other thing is I think it's really important to understand these people are not – they're not Americans. They're Chinese. They have a different concept of how an economy grows. So we grew up in this sort of Keynesian world where we believe that demand drives everything. And the Chinese authorities don't believe that. They believe that investment drives everything, that progress, productivity, future income growth, it all comes from investing in the right things.
So they have been very clear for as long as I've been studying it, including the last decade, on saying to secure the growth of the future that is stable, well-balanced, whatever, we need to invest in the right things. That is the principal job of government economic policy is to steer investment. So that's point one. They've never really had an agenda of substantially investing.
rebalancing. Second is up until COVID, the fastest growing consumer economy in the world by an order of magnitude was China's for 20 years. There is no economy that comes even close
to the rate of consumer spending growth that China enjoyed between 2000 and 2020. I think the total aggregate growth was more than triple what you saw in India, for example, and much faster than you saw in advanced economies that grow at slower rates. So they didn't really have, in my opinion, a consumer spending problem. And I think they look at that much the same way. They say, well, we actually don't need to rebalance. Now, I think that's changed a little bit. I think
They really, in the last few months, have started to say, oh, actually, we're going to be facing a lot of headwinds in the export economy, largely from the US, but not just the US. They're in a tariff battle with the European Union over electric vehicles. A lot of other countries are beginning to put up barriers. And I think they are beginning to realize that they need to
both for the short-term trade war issues, but also for just having a more comfortable place in the global economy that they have to do a little bit more to boost the consumer part of the economy. But they're limited in their tools for being able to do that. When I think about consumer comfort, consumer wealth, et cetera, I'm on social media all day. And so I see all the videos of these amazing futuristic cities with these incredible plazas and lights and
transportation that zips you from one place to another. And I imagine those things don't show up in consumption. You know, they're not retail consumption. Right. But it's a form of lifestyle consumption, whether your city just has greater amenities and comforts and cleanliness and so forth, et cetera. Are those all real? You know, because like, you know, you see like a 90 second video. Right. Like you've been going to you've been living and traveling to China for decades. Right.
how different outside, you know, okay, I'm sure, you know, in multiple cities around the country is the day-to-day experience of being a citizen or a consumer. Yeah, well, it's a large question. So if you had turned this around and you had said, well, you know, I look at these pictures of what life in Silicon Valley is like, is that really what it's like in America? Yeah.
you know your responsibility well america's a big country there's a lot of different things and china is an even bigger country in terms of the number of people so a huge variety the stuff that you see there is real you have a lot of first-class urban infrastructure in places like shanghai shenzhen beijing and increasingly in a couple of interior cities like chengdu and so forth and things work quite well and you have large swaths of the country where people are still living fairly
you know, modest lives, one generation removed from the family farm that their parents still live on and so forth. There's parts in the Northeast which are a, you know, a super rust belt of these old sort of 50s and 60s areas, industrial towns built around industries that really aren't that important anymore, mining or whatever. So you have an enormous variety of things. But I would say it is fair if you go around to sort of random Chinese cities in China
sort of Eastern and Central China, most people now have pretty comfortable lives. They're not as shiny as you might see in these social media videos, but things work. Their needs are taken care of pretty well. Is that true for healthcare too? That is true, increasingly true of healthcare and pensions. They went through a period where they basically had abolished the old planned economy, social safety net, and there was nothing. And it was really bad. And
It's still not terrific, but they have greatly increased the coverage of healthcare. There's universal, almost universal pensions. Even for farmers in the countryside, they get something.
People have access to facilities. The quality of care can vary quite a lot. I would say on average, the situation there is quite a bit better than it was 10 or 15 years ago with a lot of room for improvement. So you briefly mentioned the idea of tools that China can use to offset some of the impact from the trade war. Walk us through the levers that it has available. And then I guess,
Right. Right.
But arguably, the U.S. is much more developed in its capital markets and has certain advantages in global markets that China just doesn't. Sure. Yeah. Well, so I think you could sort of divide it into two buckets, right? So there are things that China is doing to retaliate against the U.S., and that's where it really runs the risk of alienating the business community because part of your retaliation has to be to make life difficult for U.S. businesses, either in China or back in the U.S.,
But then there are also response mechanisms, which are basically things that they can do to make the economy stronger and able to weather the shock. So in retaliation, clearly they have the countervailing tariffs. They have increasingly comprehensive export controls on rare earths and rare earth-based technologies, which are actually not just rare earths, but various sort of critical minerals, antimony being sort of the big example at the moment.
I've never even heard of that. People don't talk about antimony enough. It's a mineral that is used. It has a lot of applications, many of them in the defense industry. There basically is no viable source of production in the United States, and China has, I think, a 60% or 70% control of antimony.
sort of global refined supplies and they have basically banned exports of it to the United States and this is starting to create real headaches in you know defense and other kinds of technology related supply chains so they have a few things that they can do like that they've singled out a few U.S. companies operating or selling into China for various kinds of investigations
Those are more kind of shots across the bow. They're kind of gestures. I don't think they're really that serious. They don't really want to make it harder for NVIDIA to do business in China than it is already doing.
But basically what they're doing is they're picking out companies that may sell a lot to China but don't have a lot of investment on the ground in China and saying, if you don't basically help us get this guy in the White House to see reason, we might make it a little difficult for you. And they'll only do that if they think there are reasonable domestic substitutes.
So they're doing a little bit of that, but they're being very cautious because they are keenly aware that their economy still needs international businesses to participate in China at many different levels. They do not want to scare them in a way. So what they're mainly left with is response mechanisms, which is, you know, some of it is the usual stuff. They can lower interest rates and they'll probably do a bit more of that this year.
They were already planning a big fiscal expansion this year, one of the biggest budget deficits in history. They're probably going to expand that more. To gin up consumption, they have this cash for clunkers kind of trading program where you have an old appliance, you can trade it in, you can get a discount on the new one. That's for both households and for businesses. They can trade in old capital equipment and get new stuff at a cheaper price.
And then the other thing that they've been doing actually is to get more money into consumer pockets. They have started to expand pension payments, focusing on people lower in the income spectrum and just putting an extra five or 10 bucks into their accounts every month so that they have a little bit more cash to spend. And by focusing on the lower income people, those are people who basically spend most of what they have. So it has a big impact. Right.
But yeah, so they can do all of these things and they will all work to some degree. The cash for clunkers thing actually worked a lot better than I thought it was. I was very skeptical. But at the end of the day, consumer behavior is pretty sticky in any country. The job market is still not terrific. They're going to have a lot of difficulty really, really moving the needle on boosting domestic demand. They can get it up a little bit, but not a lot in the short term. ♪
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Joe, I do find it really ironic slash remarkable that China has a cash for clunkers program, which we all recognize from, you know, the post 2008 era. And meanwhile, Trump is, you know, going on TV and telling everyone to stop buying as much. And you only need two Barbie dolls instead of 15. No, Trump has...
producerist impulses on some level. He sure does. Yeah. You know, actually, since we're talking about ideology, how much continuity in your view has there been in Chinese policy pre Xi Jinping to now? Because there's debates about this and the party itself always stresses continuity and nothing ever really changes. But you've seen the country for a long time. How much of a pivot happened in 2012 that continues to this day? Yeah, that's a really great question. And
I hate to sound like Harry Truman's hated two-handed economist, but there is both continuity and change here. There's no question, right? So the things I think that are largely unchanged is – I talked earlier about this kind of view of how economies work, that they are driven by the investment cycle and that the government has an important role to play in kind of identifying the key –
top areas for investment. Not necessarily spending the money, but pointing and saying, go there. And then all the entrepreneurs in the country say, oh, we should go there. We'll go there. That has not really changed. And you can talk about people before Xi who were more, quote unquote, reformist and so forth. But if you look closely at what they were doing, they had the same objective. They wanted to increase state capacity. They wanted to strengthen the technological foundations of the economy. The first long-term investment
Science and Technology Plan actually came out in 2006, which was six years before Xi Jinping took over. It had nothing to do with him. And it was very much the product of everyone else in the government at that time. So that, I think, general orientation is
has not changed. What she has done is that he has made the coordination of that strategy much more effective. So he's increased the capacity of the central government to kind of mobilize and guide resources. He has reined in what he thought were big excesses, notably in the property market, but also in the internet sector, where he thought a lot of
Investment was going to stuff that was actually not advancing the ball technologically, and it was also creating significant social and political risks for the Communist Party, and it needed to be reined in. But a lot of the concerns that you see expressed about social media and the power of internet firms in China, totally indistinguishable from the discourse that we have here in the United States about the same problems. So part of what they were doing was try to say, "Let's have less resources to
to that kind of stuff and more to the kind of stuff that we think that will really generate long-term growth that will enhance productivity and social cohesion, right? So he hasn't changed the sort of the basic orientation, but he's made the execution of that generally much more effective. And then the other big thing that he did do that is a major change is that he overturned
the foreign policy that Deng Xiaoping had laid down, which is the idea that you stay quiet and- Stay behind. Stay quiet and hide your capabilities or bide your time or whatever. He pretty aggressively said, "No, no. China's a great power now. We have to act internationally, and so we're going to take a much more aggressive view." I think you could argue that that's a real shift.
You could argue that he moved a little bit too quickly on that. And that has, you know, created some unnecessary costs for China. He would have been wiser to hide and bide for a few years longer. But anyway, he did it. And that is a material change, I would say. So I think I just have one more question. And it's the big one, which is, do we have any idea or sense of what the off ramp for all of this actually is? And do we have a good idea of what
Trump actually wants from China? And do we have a good idea of what is palatable to China? Right. Okay. So what's the off ramp? I think the off ramp is basically that Trump and his people have to recognize that they've put themselves in an untenable position and they need to figure out a way to climb down from it as gracefully as they can. I think the Chinese have been very clear in their
communications, that they're happy to talk. And they keep saying, we are happy to talk, but we're not going to make the first move. And if you want to prolong this trade war, we think that we can sit with our deflation longer than you, United States, can stick with your stagflation, given your political system. So I think the ball is really in Trump's court to do something to figure out how to unstick this. And the difficulty is...
I think, what does he want? My theory of the case is that Trump is not really driven by specific policy outcomes. He is a guy who has very authoritarian instincts, who wants to be recognized as the boss. It is basically all about power. And so everything that he does, and I think this applies to a lot of the domestic policy too,
is to demonstrate that he has power and that other people have to show submission and deference, right? So if you really want to get on Trump's good side, that's what you do. And the Chinese will not play that game. They are too big. They are too strong. They have too much at stake domestically in terms of their own political credibility to play that. They will not do that. So that puts Trump in a bind because what he really wants, they will not give him
So then people on Trump's team need to figure out, okay, what is an agenda that we can put together of actual policy aims that could form the basis of a negotiation? And then how do we communicate that to China and how do we get them to start talking to us? And that's not an easy problem to solve, right? So what it means is that people in the administration who have actual policy aims somehow need to seize control of that process.
And they haven't done that yet. So a couple other theories on how this could unwind. So one theory is that at the end of the day, nothing is going to happen until Trump and Xi get together face to face because in both systems, no one really has the authority lower down to make a move.
And so then you have to think about, well, how could that happen? It's unlikely that you're going to have a trip of one leader to the other country. So you have to start thinking about, is there some third country that could be— Which country is exactly halfway between the U.S. and China? We'll have to figure that out. What's your guess? What's the third country? Well, somewhere in the Middle East. I don't have a good theory on that. Hmm.
But Erdogan and Turkey, they are kind of halfway between, and he sort of has these fantasies of being a broker. He tried to do that. I'm just making that up. I have no information that he actually has any interest in doing that. So that's one theory is that you need somehow to get the two leaders together, and that will probably require a third party. So that's one way of thinking about it. Another way of thinking about it is just to say, well, Trump is driven by markets to some degree, not quite the same way that he was in his first term. But
Right now, you have this weird situation where basically, if you talk to people in the markets, they are convinced that a deal will happen. I keep telling them, on what basis? Do you hold this belief? I can see none. But they are convinced that essentially because it's impossible or they think it's impossible to maintain these high tariffs for too long, therefore, something must happen. So markets actually are doing okay right now because they're essentially pricing in there will be a deal.
And if you look at this from Trump's standpoint, it's like, oh, markets are happy. I have no incentive to deal. So the only way he can have more incentive to deal is if markets are convinced that there is no deal and they tank. And then he says, oh, I really got to do something. So that's another theory. Full credit, that was suggested to me by my colleague, Andrew Batson, our
who runs our China team very effectively. And I thought that was a very good way of thinking about it. So market pressure in the US could be a forcing mechanism. You could maybe have some kind of intermediary, but I think unless you have some kind of force acting like that, or some kind of revolution within the White House where actual policymakers take over and seize command of things somehow and start to work out
How do they get a communications channel open to the Chinese, communicate some kind of mutual reduction of tariffs to a lower level as an opening thing and then a negotiation? But I think we're some ways away from any of that happening. I just have one short comment. One is I've talked to an investor who literally used that logic.
They said there is going to be a deal because there must be a deal. Right. And so therefore there will be one. Right. One last question. Our colleague Anna Wong, U.S. economist here at Bloomberg, she thought one possibility is maybe there's a deal that still leaves the sort of like Vietnam transshipment.
open that looks like something tough and that there is some third party country that could still be a route for flows, keep high nominal numbers up on China, et cetera. Could that be a path out where it looks like you've maintained a hard line, but you allow an escape valve of some sort? I think that's very plausible because as I mentioned before, I don't think it's just not realistic to think that you're going to be able to close off the trend shipment channels.
So, deal or no deal, a lot of those channels are going to remain open one way or another. So, you might as well take advantage of that and incorporate it into a deal. One other comment on that, because you then get into this question of like, okay, suppose there is a deal. Yeah. What's in it? And my view on this is most of the deal structures that seem plausible are not very meaningful, other from the standpoint of calming markets down. So, you have this situation where the US and China are very adversarial. Yeah.
Most people in Washington think we are already in another Cold War. And to me, a substantive deal would be one that makes a significant change in the quality of the relationship. And so if you have something that's like a phase one trade deal plus where the China agrees to buy more stuff and they make some gestures towards more domestic demand support and we cut tariffs a little bit, OK, that's fine. Markets will be OK with it. But it doesn't really change the underlying dynamic, which I think is really bad.
And I think the thing to look for, which is what China really wants, one of the things that they really want that could be given to them,
is the ability for their companies to invest a lot more in the United States. BYD, CATL, all of these Chinese high-tech firms, they would love to be able to invest in the United States and tap into this market more directly. They would be very happy to accept, I think, a lot of different potential structures for that investment. But effectively, Chinese companies are shut out. And Trump on the campaign trail said that he was open to this.
So the interesting thing there is that basically no one else in the administration seems very interested in this, but Trump might be.
And if you're serious about reindustrializing the United States, you cannot do that without significant participation by China. I'm sorry, China accounts for a third of global manufacturing production now, going to 40. They are close to or at the leading edge of many of the technologies of the future. It is as absurd for us to think that we can ramp up our industrialization without China
as it was 40 years ago, would have been for China to think that they could ramp up their industrialization without bringing the leaders then the US, Japan, and Germany. So there is, in principle, it seems to me there is a deal to be done there, where that's what you give to China, and then you might be able to get something for it. That could be quite transformational in terms of the basic relationship between these two big economies.
Am I betting on that? No. I think the chances of that actually happening are quite low. But I think people who are serious about thinking that there should be a deal and that the deal is economically meaningful, not just like a SOP to markets, they should be thinking about that. Are we in a Cold War with China? Is that even useful framing? I think it's not. I disagree vigorously with the people who say that we are already there. I mean, we could get there. The reason that we're not is a couple of things.
Just if you look at the substance of the economic relationship, China's trade with the US, direct trade with the United States several years ago before Trump's first term was the same as our trade was with Japan in the mid-1980s. So it was about, I think, 17% or 18% of our total global trade. Our trade with the Soviet Union and all of its successor states after the Soviet Union collapsed never was more than about 1% or 2%.
So we are linked. We have thousands of US companies that operate in China and generate somewhere between $500 and $700 billion a year of annual sales, which is triple or more the amount of exports that go from the United States to China. The global supply chains are linked. I could go on and on, but the economic linkages...
are not the linkages of countries at war. The reason you could call the Cold War a Cold War was because it wasn't direct fighting, but many of the other conditions...
particularly economic, were very, very similar to wartime conditions. And this just is not. It is a completely different beast. And I could go on, but that's, I think, the principal thing. And the reason I think that it's really not only not useful framing, but I think toxic framing is that we have this kind of view in the United States that essentially either if you're another country, you are our ally or we are at war with you. Those are the two possible states.
And I think these are conditioned by the fact that we fought these multiple wars, hot and cold, in the 20th century. And our kind of national foreign policy ethos was defined by dividing the world into good guys and bad guys, beating the fascists, beating the communists. China is not a place that can be beat. It is a large country. It's not going away. It is very integrated, not just with the US, but with the entire global economy. They're heavily invested in the global order.
So, the only solution it seems to me is that you need to figure out what is a state of coexistence with China that you don't have to define in these martial terms. It's just like, and it doesn't have to be we're friends. And it can include, we have some very serious adversarial components to the relationship and really deep competition, not just in economics, but geopolitics, that can be there.
But describing it as war, I think, is not only not useful, but I think it's really dangerous. Frenemies, the U.S. and China. Maybe we can describe it thus. Okay, Arthur Kroeber, thank you so much for coming on All Thoughts. That was great. My pleasure. Thank you.
Joe, I thought that was a really great state of play conversation. And also, you know, sort of considering where things might be headed. I realized we forgot one very important thing, which is we have to say the day that we're actually recording this, because you never know what's going to happen in between now and when we actually publish this episode. So it is May 6th,
2.59 p.m. I thought it was great. I kind of feel stupid for not having had Arthur on before because I really thought he was excellent and very clear and clear-eyed about Chinese economy and our relation. You know, just there was a lot in there that was very good.
That last point about like if we were actually serious about, quote, reindustrializing, unquote, that we would want to bring Chinese manufacturers, give them a stake in the U.S. economy, both in terms of selling into the U.S. economy, both in terms of owning assets or maybe 49 percent of assets.
various factories. Like that makes a lot of sense to me. It seems like that's distant politically, but it's certainly very intuitively logical to me. Yeah. And I also thought the point about demand driving everything in the U.S. and versus investment driving everything in China to be kind of interesting, although I would argue that those two things like they're starting to get mingled in both America and China. So you're seeing China kind of borrow a lot of
policies or thoughts that would be very familiar to anyone who's lived in the U.S. in recent decades. And meanwhile, you're starting to see the U.S. take on some Chinese characteristics in various ways. Arthur raised a good point. And I think you've written about this as well. And I think others are confused on this is like from Trump's perspective, what is a successful outcome of
look like? We know that he likes the forms of things. He likes handshakes. He likes the idea of dealmaking. Wait, he hates handshakes, doesn't he? Oh. He likes deals, not handshakes. He likes deals. He likes tariffs, etc. But what does, say, the U.S. economy look like in 10 years? Were we to take a correct
policy line, really hard to still totally understand. But again, like, yeah, maybe it's a lot more factories and maybe we should invite one of the world's, you know, some of the world's most advanced companies to set them up. Yeah. And I guess the question is, you know, he's on TV now saying that we don't need 15 Barbie dolls per child. But if we do build...
That Barbie factory in the U.S., then does that kind of consumerism become OK again? Well, you know, and this is just by the way, you know, it's like on this point. So I think a lot of people can make an intelligent rationale for more U.S. manufacturing in certain areas.
It's really unclear. You know, the White House, I think there was a tweet a few days ago talking about how much we import in terms of textiles, which is the vast majority of clothing, et cetera, we import. It's really unclear to me why it's important at all.
to have significant domestic capacity in these low value, low margin, low strategic areas and what that benefits us. I get maybe there's an aesthetic appeal. Obviously, we want to have a lot of jobs.
But this is a really difficult thing to wrap my head around, which is like you have to make decisions. Right. A worker on one line is a worker who's not on another line. And so why you want to have more clothes manufacturing or more doll manufacturing at a time when there is an impulse to sort of build up in these higher value areas is very unclear to me. Yeah, there's definitely a tension there. Yeah. All right. Shall we leave it there?
Let's leave it there. This has been another episode of the OddLots podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Arthur Krober. He's at AR Krober. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashiell Bennett at Dashbot, and Cale Brooks at Cale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots, where we have a daily newsletter and all of our episodes.
And you can chat about these topics 24-7 in our Discord, discord.gg slash oddlot. And if you enjoy Oddlots, if you like it when we check in on how China is dealing with the trade war, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. ♪
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