China now faces 125% US tariffs in trade war

0:05Hello and welcome to Business Matters here on the BBC World Service with me Rahul Tandon. It's been another momentous day for the global economy. A series of decisions announced by Donald Trump having huge implications for the global trading system. We're going to talk you through them to guide us through them. As always, we have two guests from opposite sides of the world. We have Emily Peck, who, of course, is co-author at Axios Markets. Emily, a busy day for you or a quiet one? Yeah, you could say it was a tad busy. Some things happened over here in the United States that we can get into. They certainly did.

0:50And Hanlon, as he's waking up there in Shanghai, China Country Director for the Asia Group, a lot for people in China to digest. Absolutely. Thanks for having me on the show and good morning from Shanghai. It just happens to be a beautiful day today. Well, it is a beautiful day in Shanghai and it has been a fascinating day in the United States. Let's just get into some of what has been taking place because Donald Trump has, of course, announced that he has suspended tariffs on a number of different countries now. Emily, what did you make of that announcement, that those reciprocal tariffs that he was putting in place, that he's now reversed those?

1:34Yes. Well, I'm not sure still what I make of it. It's very much to be decided as things go on. There's so much uncertainty right now and so much dislocation. But in the U.S., the markets, the global markets too, they liked this. They were very happy. The NASDAQ, the tech-heavy stock index here in the U.S., rose 12 percent, its biggest leap in over 20 years, I believe. The S &P rose 9.5 percent. This gets the market kind of back within where it was when this all started eight days ago. So the markets really like it, but there's a lot of still worry among investors, among companies about he still left 10 % tariffs on every country with exceptions.

2:23There are still steel and aluminum tariffs that we're placing on and auto tariffs are still in play. So it's not over by any stretch. It isn't over as yet. And whilst those tariffs have been withdrawn, Han, we know that the tariffs on China have now been increased even further. What is the sort of initial reaction you're hearing in China? Official reaction beginning to come in, but also I'm sure people on social media in China must be making comments as well. Oh, absolutely. So what you're hearing a lot more on the social media is the U.S.'s unilateralism, its bullying-ism. And one of the key challenges and frustrations for China is that, you know, despite being better prepared for this trade war than during the first Trump administration, In fact, what is unexpected is how fast U.S.-China trade relations have unraveled without a clear off-ramp or really how to communicate with the Trump administration without having to capitulate.

3:26Yeah, that is something that is not going to be easy for them to do. Let's hear a little bit of what the U.S. president has been saying. Well, I thought that people were jumping a little bit out of line. They were getting yippy, you know, they were getting a little bit yippy, a little bit afraid, unlike these champions, because we have a big job to do. No other president would have done what I did. No other president. I know the president. They wouldn't have done it. And it had to be done. What was happening to us on trade, not only with, you know, if you look at it, not only with China, but China was by far the biggest abuser in history.

4:01He also had this to say. A deal is going to be made with China. A deal is going to be made with every one of them. And there'll be fair deals. I just want fair. They will be fair deals for everybody. But they weren't fair to the United States. They were sucking us dry. And you can't do that. You know, we have 36 trillion dollars of debt for a reason. We don't have it there for fun. They have it for a reason. So some strong words from Donald Trump. Emily, do you think that he's going to be able to get those deals done in 90 days? Because in the world of trade, that's not a very long period of time.

4:40No, it's not, is it? Well, we know from the last time Trump backed off tariffs with Mexico and Canada, he also announced a pause and then negotiations just kind of continued. So if I had to make a prediction, which Rahul, I'm not saying I'm making a prediction because making a prediction right now is not a fool's game. But typically what we've seen in the past is he does a pause, negotiations happen, and the tariffs that he initially talks about don't happen. And I sort of suspect that could be possible now. Okay, I want to bring in somebody who is used to the world of trade and a familiar voice on this program, Betsy Stevenson, who, of course, was also an advisor to Donald Trump.

5:31Not Donald Trump, President Obama. Sorry, Betsy, gave you a new job for a minute there. I'm not sure you'd want to take it at the moment. Is Donald Trump, though, hasn't he been successful here in that he has got a lot of the world's biggest trading partners to begin renegotiating deals with the U.S. that could give them better terms? Okay, so, yeah, that was like the worst slip-up ever. I mean, not only am I not giving President Trump economic advice, but as far as I can tell, nobody is. And he is just getting terrible, terrible advice. You know, it's been very clear since the campaign trail that he just deeply does not understand trade.

6:14I'll tell you one small thing that always perplexes me as he keeps saying we are going to get rid of the American trade deficits and investment dollars are going to flow into the United States like never before. So somebody needs to sit him down and explain the current account and what happens if we're running a trade surplus. So that's just like one small thing, and we're starting to see that, which is why we saw the crazy thing of bond yields going up at the same time that equity markets were going down. So I don't think he's getting great advice. I do not think that there's some genius plan here that he is going to bring a bunch of people to the table and he's going to have negotiated the most beautiful deals the world has ever seen.

7:05a lot of what he did was hit countries with tariffs that they didn't deserve. And so it's going to be pretty easy for them to come to some sort of agreement for him not to put on a ridiculous tariff that they don't deserve. And that isn't going to help the United States in any way. What he's essentially doing is like a king receiving all the lobbyists of people who are telling him what he wants. It's not just the countries coming in to negotiate for the deals. It's industry all over the United States telling them what they want and what inputs they need to get cheap. And we saw this in the Trump first term.

7:41He cuts deals, deals, meaning like he gives special favored status to some companies over others. That's no way to run international policy. Well, you know, maybe you should take a job with him and you could give him what you think is some good economic advice. Hamlin, when you're sat there in China, do you think, what have the Chinese made of Trump moving all those other reciprocal tariffs away from countries? Do they look at this and think he got spooked by the markets? The way they look at it is, it is not just the U.S. against the world. It is really the U.S. just against China. And so that puts them in an awkward position.

8:23But their key reaction is, they've actually been thinking about this for some time. They've made it clear even as early as last year that in the event of a trade war, China would, number one, respond firmly but proportionately. Second, they have a more diverse and deeper toolkit to retaliate. And third, they believe they could endure pain longer than the U.S. could. Of course, we'll see that thesis tested in the next several months. We will indeed. Now, let us hear from somebody who has given economic advice to Donald Trump. That is Everett Eisenstadt. He was deputy director of the National Economic Council in Donald Trump's first term.

9:05This is what he's made of Trump's announcements. I think it's a validation that his strategy of bringing others to the table to try to reorient the global economy is working. Now, it may be an unorthodox way of approaching it, but the reality is that a lot of economies around the world are looking at both internal restructuring and also their relationships with other market that simply wouldn't have been contemplated a year ago. So we're seeing some dramatic movements. It's going to take some time to work out, but I think we're going to see some progress over the near term. Yeah, when you say it's going to take time to work out, he's set this 90-day deadline.

9:40Do you expect to see lots of deals within that period? Because it's a short period for international trade deals, isn't it? Well, deals can be done in various stages. You know, the idea that you have a completely concluded global negotiation within 90 days, that's not realistic. But I do think there is the ability to have pathways to agreement. So as I said, it'll take time, but you got to start somewhere. And this starts today. A lot of people are asking a question here. If we look at the current global trade model, which you know very well, what's wrong with it? Because the US has done very well out of it.

10:16It's the world's largest economy. It's done much better than many others over the past few years. It's a good question. I think part of the issue has been one that is not really, it's attributed to this administration, but I think it's much broader than that because the global trading system was built around a series of rules. And those rules were created and articulated, of course, through the World Trade Organization in a very different period of time. Global economy was different. The accession of China to the WTO, the fact that they came in as a special and differential treatment, they had different rates than others.

10:46They had different flexibilities that were not afforded other economies because they simply were not at the same capacity. Over time, China has clearly become a major global player, but the rules haven't kept up. Betsy, isn't that a fair comment? Rules are in place. Rules have to be changed over a period of time. People don't like the way Donald Trump goes about it. But when it comes to China, some would say they haven't played by the rules. So let's change them. so the thing i'm puzzled by is i think president trump could have gotten a lot of the globe to gang up on china if he had gone to europe and canada and mexico and india and said china is not playing by the rules of of the game let's we're going to take hard action against china but instead what he did is he attacked the entire globe so instead of turning all these countries against China, he turned them all against the United States and encouraged them to work directly with China.

11:45I think if anything, he ended up strengthening China because of the tactics that he took by rallying the rest of the globe around each other and against the United States. So, you know, none of the arguments they use make any sense. You know, another one of the arguments you hear is that he's trying to revive manufacturing, but then he has his commerce secretary in interviews saying, oh, well, yeah, I know that we're not going to have a bunch of low-wage workers assembling garments in the United States. We're going to build high-tech workerless factories. OK, so how are you rebuilding the middle class if your whole plan is to bring more capital back into the United States and not use workers?

12:34So none of their goals seem to make sense with their plan when you push on them. Emily, the fact is, though, when Donald Trump won the election, he did resonate, didn't he, with huge parts of the American working class who feel that they've been left behind. And, you know, some of them may think that a tariff, even though it's a tax on consumers in the U.S., is something that people should be prepared to pay to help them get their jobs back. Yeah, look, I mean, there are people in the United States who think that the Biden administration left tariffs in place that the Trump administration had put in place and they levied more tariffs on China.

13:21But of course, they messaged that very clearly. We understood the policy. They didn't walk it back, etc., etc. It was handled differently. But yes, there are people who feel like tariffs need to be raised because the U.S., especially this working class, has had not a fair deal over the past, you know, 30, 40 years. And I was speaking to a spokesperson from the Teamsters this week, and she said, you know, we like these tariffs. This is what we want. This is good for workers. Companies have really high profits and they can afford this and it's going to be OK. And we and we support it. And the United Auto Workers also feels that way.

14:01And I think there is a segment of Trump voters who also feel that way. And we saw it in the last Trump administration when he levied tariffs that even hurt some, you know, farmers in the Midwest. But they still supported the tariffs. They still wanted to, you know, use them to make a statement to China. And they were OK with that. So, yeah, there is a contingent of people who support the tariffs here. We have seen those tariffs on China and they go up to 125%. The World Trade Organization is forecasting that the trade of goods between the US and China could fall by 80 % because of their deteriorating relationship.

14:41We wanted to hear from someone who knows the Chinese leadership well. Professor Graham Allison is the author of Destined for War, Can America and China Escape the Thosidudis Trap? He recently returned from China after meeting key figures in the Chinese leadership. China believes in their grand narrative that China is inexorably rising and the U.S. is irreversibly declining. From a Chinese strategic perspective, this is positive. If China has to move from 4 % to 5 % growth to 2 % growth, is this a threat to their regime? I don't think so. To Xi's rule, I don't think so. So I could imagine there's some folks there saying we can deal with this pain.

15:25It's lose-lose for sure, but we can deal with the loss more easily than they can. You travel to China frequently. You meet with some of the decision makers there. How would you describe their mood on your last visit? Confident? Worried? I was quite surprised how confident the team feels. I had the chance to see the Premier, and he was very upbeat about both where the Chinese economy stood now and where he thought it would be in 2025. But China faces its own severe economic problems, doesn't it? I think you're absolutely right. So they've been struggling with their own economic issues. They wouldn't choose a trade war at this point.

16:15But if the choice is between a trade war and capitulation to American tariffs that they regard as unjust and unreasonable, my bet is Xi is prepared for a pretty tough trade war. And I think they think that Chinese are probably better at suffering than Americans are. And the Chinese Commerce Minister has been speaking in the last 15, 20 minutes, interestingly, talking about improved relations with the EU, striking better trade deals with ASEAN countries as well. It seems like China is preparing for the long haul. We heard from Graham Allison there that China thinks it can win this trade war. Is that a view that you concur with?

16:59Yeah, I think definitely what we're seeing is that China is realizing if they can't export their way to GDP growth, they really have no choice but to, number one, focus and bolster their own domestic economy And number two, try to make more friends with other aggrieved nations. Now, the fact that Trump just recently postponed the tariffs on other nations kind of cut short China's strategy of trying to pull in together alliances with other nations. But what is true is that China is utilizing many, many levers to try to support the economy going forward, whether it's fiscal stimulus of subsidies for businesses or looking to cut the interest rates for reducing borrowing.

17:42So they are playing for a long game. But the challenge for businesses, international businesses, is now they're being forced to choose between the US or China. And picking sides is never good for business or trade in any event. It certainly isn't. These shoppers in the US gave the BBC their opinion about how the steep Chinese tariffs might impact them. I'm sure I consume much more Chinese products than I realize. I have an iPhone in my pocket, which could now be$3 ,000. I don't know what's going to happen. increasingly negative relations with China, I don't see is good for the global economy or the US economy.

18:18Emily, on this program, we've been speaking to a lot of US companies who bring in a lot of Chinese products, often as part of that complicated supply chain. So when we're looking at tariffs at this level, that's going to be a big problem for a lot of US businesses and eventually for consumers? Oh, yeah. I really think it is. I mean, just to take clothing as an example, the U.S. imports about 99 percent of clothes and shoes. These tariffs are going to be painful, especially for the people who can least afford to increase spending. The people who most rely on cheap goods in the United States are really going to be hurting.

18:58And I think, I mean, And your guest had a point before. I think if Christmas starts to come, the holiday shopping season rolls around and people can't get their ornaments. I already see reporting today on worries over Christmas ornaments, things like that. I think that there's going to be outcry here. And I just I think, you know, Donald Trump is going to he's not going to like that. No, he isn't. And, you know, I'm sure there's going to be many twists and turns over the next 90 days. Many. Many, yeah. So Betsy, when you look at this, and it was interesting when Donald Trump was asked a question about the bond markets, which is obviously where governments can raise cash.

19:41He seemed to be indicating that that uncertainty in the bond markets was something that concerned him. Is it the markets that have forced him to change his policies here? I would guess so. I mean, you certainly saw, look, you saw Elon Musk ranting about the tariffs on Twitter yesterday. So he's losing some key people that advise him and that talk to him. They were losing a ton of money. You know, he probably had his secretary, Besant, probably told him that he was risking a financial crisis at this point. Do you think we would have got there? Because, you know, Thursday was a big day in the US with those, you know, 30 year bonds being up for sale.

20:31And if people if there hadn't been much demand for it, could that have precipitated a crisis? The fact that, you know, the world's biggest economy was was struggling to raise money in that way? um absolutely i think this is a risk he didn't i don't think he fully understood one of the that that was one of the things he was taking on was that the united states has uh really benefited from status as a safe harbor and so we borrow money cheaper than than the than the Brits do? Why is Britain so much less stable than the United States or Australia? It's not. And certainly Trump is making that point right now.

21:13If you had to think which government you would count on to pay you back in 20 years, would it be the British government, the Australian government or the American government? I don't see any strong reason to favor the U.S. And yet Yet the U.S. was really got a lot of benefits from that. So I think those are starting to disappear. And I think that he was being told there's a real risk here. Betsy, thank you so much for joining us, Betsy. Stevenson, former economic advisor, definitely to Barack Obama. Clearly not going to be for Donald Trump as always. Betsy, thanks for coming on the program. Han, do you think because of what we've seen that the Chinese leaders look at this and think America's weak at the moment?

21:57There is a perpetual belief in China that the U.S. is in decline and that China's time has come. And so, but we don't know how that looks from an on-the-ground perspective. So China's really stuck with its China GDP growth target of about 5%. And how it achieves that is going to be a challenge. But I think certainly front and center is how far the escalation between U.S.-China will go. I think China has utilized a number of tools to retaliate, such as export bans, such as counter tariffs or sanctions list. But there's a lot of tools they have not yet used. They have not yet depreciated the currency.

22:40They have not yet threatened to not buy U.S. Treasury bonds that finance the U.S. government budget deficit. So we've got to see. We still don't know. We don't indeed. And we'll continue this conversation after the news.

23:04Welcome back to Business Matters here on the BBC World Service. We've got Emily, who's there in the US. We've got Han there in China. Of course, those two countries now at the centre of an escalating global trade war. Asian markets have opened up in early trading. Shares in Japan, South Korea and Australia have jumped the nickel. I was just having a quick look, up around 7 % at the moment. South Korea, the cost pay index 5%. And in Sydney, well, the stock market there is up by around 3%. So that trend is continuing. A lot of people describe this as Asia's century when it comes to trade. But if there is a trade war between China and the US, how will it impact countries in Asia?

23:48And will they be forced to choose? a question for Professor Chan Hengchi, who is Singapore's ambassador at large. Countries will try to toggle still as long as they can, as far as they can. But it's going to get harder and harder to toggle. Yes, it gets harder and harder. Particularly as the US is now playing a very different role in the global economy to the one that it's traditionally played. In fact, there was some Trump proofing before even the inauguration of President Trump. Countries in my region, Southeast Asia, for instance, has been signing up free trade agreements with trying to get a free trade agreement with Europe, trying to upgrade the Asia and China free trade agreement.

24:36And Indonesia, Malaysia, you know, Thailand, they've been signing free trade agreements with what I call Global South, countries you would not think of before. Countries have been seeking free trade agreement with Bangladesh. You know, you never think of this. The diversification of trade was going on. But in truth, America is the biggest market. and you can try to diversify to soften blows, but if you're missing the largest market, it hurts. A lot of people call this Asia's century. Do you think this change in global trade could alter that? Too soon to say. We don't know how this will play out.

25:19And with the fierce trade fights between the United States and China, I think there are no winners in a trade war. Countries in the region who need both markets and both players will feel the pain. Professor Chan Hongqi, the Han, China's commerce minister, once again talking about safeguarding the multilateral trading system. He's still continuing to speak. Do you think countries will inevitably, if there's no resolution between China and the US, have to choose between the world's two great economic powers? I definitely agree with you. I think when the U.S. was tariffing all the nations and it looked like the U.S.

26:06was against the world, it gave an opportunity for China to take the high ground, to try to promote multilateralism. But the reality is, as long as U.S.-China trade issues continue to escalate, companies are basically going to start seeing a bifurcation. If you were using a China Plus strategy where you were looking to take advantage of Thailand or Vietnam to manufacture and sell to the U.S., that could very well change where it could reverse. You could start seeing supply chains start coming back to China if you're looking to sell anywhere except the U.S. because China has such an advantage in manufacturing.

26:47But if you're looking to sell to the US, you may have no choice but to start moving your China assets offshore to do so. So it's going to be a very challenging situation going forward and a very expensive one for all parties. Emily, even though we've seen the stock markets in the US rally and those in Asia now beginning to pick up as well, if we look at the US, huge damage could have been done to the economy there over the last couple of weeks. So the stock market doesn't always reflect what's happening in the economy. Do you think there's still a possibility now, even though some of these tariffs have been withdrawn, the base rate of 10 % is still there of recession in the US?

27:28Yes. Goldman today pulled back on its recession call. I think they moved from, say, 45 % to less at 30 % or something like that. But yeah, GDP growth is still supposed to be or people are predicting it will be lower than expected. And they're still pricing in a mild recession that still looks possible. I mean, these 10 % tariffs, again, are still in place. It's unclear what's going to happen with those auto tariffs. Auto manufacturers, the auto companies in the U.S. are a huge part of the economy. And in the meantime, companies are sort of frozen with uncertainty. And that's not good for growth or capital investment.

28:12the question I think that is on economists and investors and everyone's mind is where is the U.S. consumer? Because, you know, consumer spending is about 70 % of our economy. So as long as people keep buying stuff, we're going to be okay. So the question is the fear and the anxiety that these tariffs kind of shot through the country over the past eight days, is that going to lead people to pull back. And I'll tell you so far, I had a piece this week about how people were Americans doing their thing. They went shopping. They heard tariffs were coming. They were worried about prices going up. So they went to the store and grocery carts at our biggest retailers were overstuffed, bigger than last week.