US and German talks

0:05Welcome to Business Matters here on the BBC World Service with me Rahul Tandum Plenty coming up on the program. We're going to be talking about how China's control of rare earths is causing problems for some European car manufacturers. Why is the US debt getting bigger and bigger and cybercrime a growing threat? We're going to hear about one of the gangs that is behind it. As always, we have two guests from opposite sides of the world. We have Karen Percy, independent journalist based in Australia. How are you, Karen? Oh, I'm very well. I'm very pleased to hear that the Australian economy is growing just ever so slightly despite everything that's going on.

0:47How much is it growing? Well, otherwise, 0.2%. So the treasurer, Jim Chalmers, has been beating his chest about, hey, we're at least going slightly forward when the rest of the world perhaps is not. But definitely lots of potential headwinds in Australia. And I know that's the case all over the world. So everybody watching and waiting to see what might happen next in the White House. And I know we'll be discussing that endlessly today. Well, it may just pop up into conversation. We've also got Walter Todd, President and Chief Investment Officer, Greenwood Capital. Go on then, Walter. What do you make of those Australian growth figures?

1:25Yeah, you know, we'll take them if we could have them. We were down. Our GDP was down 0.3%. I'm still suffering from an awful case of tariff fatigue, which was the case the last time that I was on with Karen two months ago. But yet here we are. We're still talking about tariffs. Yeah, it's not that fatigue. What is it? I don't know what happens after a fatigue, Walter. I don't know really. What's the next word? Collapse? Collapse. That's a good one. Yeah. Let us see. Well, don't collapse for the next 50 minutes or so. Right. We're going to start the programme by talking about two of the world's largest economies because their leaders are meeting on Thursday.

2:03We're talking about President Trump and Chancellor Mertz of Germany. And the German leader has in recent weeks had this to say about Donald Trump. The key message to Donald Trump is Germany is back on track. Germany will fulfil the obligations in terms of defence and Germany is willing to strengthen their own competitiveness. And that is not just Germany, that is Europe, the European Union, and Germany will be again a very strong partner within the European Union, and we will bring the European Union forward. Let's bring in Ulrike Malmendi, a member of Germany's Economic Council. She joins us from California.

2:41We've spoken to her a number of times on the programme. Delighted to have you back, Ulrike. I was reading about this and some reports said Germany, Germans were on tenterhooks about this visit. It is an extremely important visit when we look at the wider economic context, isn't it? Yes, indeed. And I do have to say I do have high hopes for our new chancellor getting through this with dignity and determination. But you never know what will happen in the Oval Office these days. I hear they're prepared for everything. But he has, I mean, he's only been in office a couple of weeks. And as far as foreign relations, connection to other leaders of European countries, non-European countries are concerned, he has been, you know, he's had a good stature.

3:28And I think he will be able to convey the message exactly along the lines of what you just shared with us. When he goes there, he's obviously representing Europe's largest economy. But he's also there, isn't he, as the key country, the key economy in the European Union. And he's going just after these increased tariffs on steel and aluminium up to 50 percent now. So it's a difficult balancing act, isn't it? Well, I love how he is framing it. Also in the little clips you shared with us before. Yes, he's going as the leader of the strongest economy within Europe, the largest economy within Europe.

4:09But he is also coming as a member of the European Union. And if anything, the economic policies of Trump has brought the European Union closer together. And I'm not quite sure that this is what President Trump intended. But the combination of our reaction to the geopolitical changes and also to, you know, the topic that came up with Australia at the beginning of the program, a lot of economies, advanced economies have been suffering in terms of growth. And the only option to play a considerable role on the global platform is to be a large market, a scalable market that attracts new technologies, new companies who want to scale up.

4:48And for that, too, the European Union has to become stronger. And I'm so pleased that he's trying to foster this development. We can stay with us. I want to bring in Walter Todd here. We are on that day, aren't we, where Donald Trump has said, everybody, give me your proposals. we're halfway through the reciprocal tariffs pause only one trade deal signed so far so that means a lot of trade deals are going to have to be signed in the next few weeks yeah one trade deal in 60 days and we've got another i don't know 90 to do in the next 30 days so we'll see um yeah i think we're you know certainly way behind and and obviously there's some urgency around you know getting some deals across the finish line and European union is a big one.

5:35So, I mean, having the German chancellor over here in, in the white house is I think a big deal. And, and, and I think the interview you just did is appropriate that you never know what to expect when you go into that, that open press conference in the, in the Oval office as we've seen so far this year in several cases. So, but I do think it'll be an important meeting and, you know, I think, I think the German chancellor has some, some things to lean on. I mean, The DAX is up 22 % this year. The S &P is flat. So Germany is doing something right. Well, it is. Karen, where are we in that Australia-US trade deal?

6:12We're trying to keep up with so many countries. Are the Australians optimistic they can get those growth figures up even more if there's a trade deal that's struck? I think they're very worried about that trade deal. At the moment, there's quite a bit of focus on a European trade deal. We've got our trade minister on the outskirts, the sidelines of the OECD summit sort of looking at that as well, trying to sort of lock in some deals with the Europeans. Now, of course, it's always agriculture and farm issues that are the sticking point for the Europeans in the Australians. You know, we want to send our lamb and our beef over there and the Europeans.

6:48So we're trying to sort of say, hey, we'll take tariffs off your luxury cars if you let our lamb and beef in. So that'll be interesting to see. But I think there's a concern more generally. I think the timetable, as Walter has alluded to and you have alluded to about, you know, how long it's taking to get these deals. So I think the Australians at the moment are looking almost everywhere else to see what they can look at. And, you know, two-way trade between the EU and Australia in goods and services was sort of$70 billion or thereabout there, but there are hundreds of billions of dollars more in investment and the like.

7:20So I think they're really wanting to kind of play that up again. And also just sort of to show the Americans I think that's what everybody's trying to do, right? We can talk to others about this. You're a big player in town, but you're not the only player in town. That is true, Ulrika, isn't it? But we know that the German economy, the new chance is going to try and revive that. In terms of removing the debt break, we could see a lot more spending taking place. But even with that, a deal with the US, the world's biggest economy, is something that Germany needs, particularly for selling cars. That is true, though I do want to emphasize what Karen just said.

7:59This was a big lesson from the COVID pandemic. You cannot just rely on one partner. There can always be supply chain issues. So diversify the risk, explore more trade deals, more free trade agreements. to avoid to just depend on one partner who might act erratically or may have national issues. Otherwise, it's a really important message. And I hope we won't forget that. I suppose everybody comes miraculously together and the whole tariff business is like off the table and we can get all of our tariff fatigue jointly. Still, I really hope this message sticks with that, that it's so worthwhile to use these new connections we have established.

8:39But yes, you are right, particularly as a country that has been heavy in automobile exports. And that's something President Trump is particularly suspicious about where, you know, the steel tariffs really hit. We really wish we can come to an agreement. It's important to notice that these tariffs don't just hurt Germany, don't just hurt the Europeans. They actually, in particular, if they're not escalating, if we implement them as is, stick to them as is, It's actually the US, which according to pretty much all models I've seen, will be harmed the most. That's to be taken into account. But I'm not 100 % sure this message will come across.

9:17Let us see. I want to get all your thoughts quickly. I know Ulrike has got to go in a few minutes. On this issue, which is rare earths because that supply, of course, is increasingly controlled by China. They are vital for many manufacturing sectors. It's causing huge problems at the moment between the US and China. but now also between the EU and China as well. Maris Sefkovic is the European Commissioner for Trade. Clearly the rare earth and permanent magnets are absolutely essential. I informed my Chinese counterpart about the alarming situation in the European car industry, but I would say industry as such, because clearly the rare earth and permanent magnets are absolutely essential essential for the industrial production.

10:04Some car manufacturing plants in Europe have now suspended car operations because these rare earths are not coming in. David Abrahams is a specialist in this area. If it's not available, yes, we'll see more shortages. It's a question of what are the resource supply lines and how much stock that individual companies have, as well as the component manufacturers. So it is a real challenge when one country slows down the export of the supplies that are needed by everybody. There is some confusion, isn't there, at the moment about this? Because the Chinese say, look, we're not slowing it down so much.

10:39Is it easy to tell if it is being slowed down or not? So when they put on these rare earth controls, they were for magnets and certain materials that go into magnets if the magnets are made outside of China. And it's a process. Anytime any government puts in a new regulatory regime, it takes a lot of process for the individual people who are working in it to understand it. How do they approve it? And then you also have people who are going to be the first ones to approve. And they get concerned in terms of, all right, well, if I approve this, is this the right time to approve? So you have just regular government inefficiencies.

11:15And so what you have is a real slowdown in exports because of all of those things. And instead of lifting these restrictions, which was an avenue China could have done after meeting with the US in Europe. They decided to continue on with the restrictions and continue working through the paperwork. And that means a slowdown. Is that regular inefficiencies or deliberate, do you think? I think they're regular inefficiencies, but they were deliberately put on at the time they were. They knew that putting on restrictions would have slowed down the exports, for sure. How much damage could this do to the US economy and the European economy?

11:57Because you get a sense of real panic in those economies developing. There is real panic. If you're a restaurant that makes pizza and you don't have yeast, that might not be the most expensive ingredient, but you're not going to be able to make pizzas. And it's the same thing with these magnets and motors and cars. It can seriously slow down the production of these vehicles. The pain points can be quite deep. Which means, I presume, that the likes of the US and the EU, because they have nowhere else to go, are going to make deals with China, with China being, at least on this issue, in a very strong position.

12:31Correct. There have to be some accommodations made. Otherwise, we will see a slowdown in manufacturing in areas that we never thought might have been using magnets or other areas. There will be a slowdown. When you say areas we didn't think would be using them, what are we talking about there? There are certain medical devices in the U.S. that rely upon certain rare earth properties. There can be coatings on other telecommunication equipment. There's often a dusting used of these materials. The color green on your iPhone screen was relying on the metal terbium. So if you don't have the right material, then you don't have the product.

13:09David Abraham's there. An indication there. We've talked a lot about Germany-US relations, haven't we, in terms of the impact of the tariffs, but also challenges when dealing with China because they control some key components in the supply chain that are vital for the German car industry. Indeed. So a message we should have long learned is that these one-sided dependencies always come back to hurt you. I mean, the Germans learned this lesson again when our access to Russian gas was cut with the attack on Ukraine and the fallout from that. And China has for a while really honed in on its dominance and monopoly on rare earth, rare metals.

13:53sometimes these materials are available, would be theoretically available from other countries, but mines have been closed. I think of Australia specifically because, you know, also sometimes with subsidizing and prices being pressed down, it became not profitable in other countries to sustain it. And now we are realizing what the consequences are. So indeed, as expressed, we will have to, you know, stay in talks with China. Otherwise, the implications would be huge. It also plays back to the US-German relationship. Like one argument has always been, look, US, if you want to have partners in your wrestling with China in the economic and otherwise competitiveness, better have us on your side.

14:40And that argument under this administration was always, you know, whatever, pushed aside, not taken very seriously. I think this will be a good showcase for whether it has more bite now. Well, listen, enjoy your Thursday. I'm sure you'll be watching events very closely, maybe offering a bit of advice as well. Thank you so much for once again joining us on the programme. Karen, we can have made that comment about, you know, Australia. You think of Australia, you think of minerals, you think of mining. Are we going to see them invest more in rare earths and critical minerals? Absolutely. And back in April, the Prime Minister, this was pre the election, who's still the Prime Minister, launched a policy to beef up the critical minerals reserve.

15:21You know, Australia has a lot of deposits of, you know, very many critical minerals, including the, you know, those rare earths and, you know, promising not just to dig it up, but to process it. But that's easier said than done. You know, and let's, you know, this was just before an election. It was when Trump's talking about Greenland and China and Ukraine in that rare earths critical minerals context. So, you know, and I have to say, I haven't heard much about it since because it's easier said than done to say we're going to start processing it. You don't just, you know, set up those kinds of processing facilities very easily.

15:56And in Australia, there's quite sensitivity at the moment around post our national election about environmental protection and those kinds of things. So I think it's going to be probably a little bit harder and he's going to have to navigate a Senate where he's going to have to, you know, do some horse trading there. So I think, yes, that would be the desire, but how far they're able to go on it. And I, you know, cynical me thinks there might have been a bit of rhetorical flourish going on at the time to leverage the US at the time, which doesn't seem to have worked much. But anyway, a lot of countries are trying that at the moment, I think.

16:31Walter, this is such an important issue, isn't it? It's really getting to the heart of what's going on, I think, at the moment, because the US car industry, the US defence industry, really needs those magnets. So they're going to be putting pressure on Donald Trump to say, hey, let's get some sort of deal with China so these restrictions are lifted. Yeah, absolutely. And the technology industry at large needs these critical and rare earths as well. So it's a very big piece of the puzzle. It gives China a lot of leverage. I don't know a ton about rare earths. I know that they're very hard to pronounce.

17:08I know they all end in IUM. And I know that China controls about 70 to 80 percent of the production of them in aggregate. So it does give them a lot of leverage. And as Karen said, these are kind of like nuclear plants or oil refineries. Everybody thinks we need more of them, but nobody wants them in their backyard because it's not a very clean business to find them or refine them. But I know Trump has made some comments in the last several days about making a push to try to have more domestic production of them. Yeah, it takes time. That does 90 percent is some of the rarest in particular that China controls.

17:45Production of a bit of a misnomer sometimes because they're actually not that rare. It's just the processing that makes them difficult to get hold of. Right. Let us now talk about U.S. debt. Breaking news. We just got the estimate on how much President Trump's legislative agenda will increase federal budget. We are talking once again about Donald Trump's landmark tax bill. The Congressional Budget Office said on Wednesday that it will add$2.4 trillion to the US debt by 2034. That would certainly make it big, but maybe not beautiful, which is how President Trump has also described that tax bill.

18:19But not everyone agrees with those figures. Here is the White House Press Secretary, Caroline Leavitt. Unfortunately, this is an institution in our country that has become partisan and political. And we are very confident in our own economic analyses of this bill. There is$1.6 trillion in savings. And our Office of Management and Budget Director, Russ Vought, is a fiscal hawk. He is well known in this city for being a well-respected fiscal hawk. He has tools at his disposal to produce even more savings. And as you know, the White House will be sending our rescissions package to Capitol Hill today.

18:53Let's get more thoughts on this. Wendy Eldebert is a fellow at the Brookings Institute in Washington, D.C. I think the number that we really should be focusing on when we look at this bill is what it commits us to borrow over the next 10 years. And that number is about$24 trillion. So that's a big number. But what upsets me most about the debate that's happening right now in Congress is that the supporters of this bill are very obviously not reckoning with that fact because they're going to hamstring the U.S. Treasury to actually only be able to borrow an additional$4 trillion,$5 trillion. And that is obviously far short of what's needed to finance the policies that they want to put in place.

19:43Can I ask you a wider question that a lot of people will look at and wonder? Those numbers that you talk about, trillions of dollars of borrowing, how long can this keep going for where the U.S. seems to be constantly borrowing money to keep paying for things that it needs? It can go on for a long time insofar as we have very low tax rates in the United States. And so investors in U.S. Treasuries, if they see that policymakers are responsible, they will know that the enormous wealth in this country can be tapped year after year to pay the principal and interest on this debt. So it's not the size of the debt so much that worries me or even its trajectory going forward.

20:32I think what would unnerve markets and put us at risk of a fiscal and thus a financial crisis is not just the size of these numbers, however big they are. It's investors in U.S. treasuries getting some new piece of information that makes them think that U.S. policymakers are, you know, not acting like grownups and no one's driving the bus. Wendy, in the end, whoever's in power over the next few decades, is that going to be the question? You either cut spending or you raise taxes. There are essentially two ways that we can finance that spending. We can finance it with tax revenues. We can finance it with borrowing.

21:12If we do it with borrowing, we are just going to be poorer in the future. It's going to make our economy smaller in the future. It's going to raise interest rates. It's going to cause some pain. Raising revenues causes some pain too, but well-designed tax policy is a lot less painful for the economy in the long run. Wendy Elder will be there now. It's the big question at the moment, isn't it, Walter, really? The size, the growing size of the debt, the growing size of the deficit is something that the market's getting quite jumpy around. Yeah, so we've seen a couple of episodes this year where you've seen all American assets sell off stocks, bonds, and the currency.

21:55The currency is still under pressure. Rates have kind of settled in. But you're correct to say that we have seen a couple of days where it looks like investors are getting jumpy. But I would note that we're seeing this around the world, not just in the U.S. So long bonds in Japan and Germany, all around the world, investors just don't have an appetite for them because a lot of countries have a lot of debt. I know we're talking about the U.S. here. But the question you asked on the interview is the right one, like when does it matter? And I know we've talked about this before on this show, and my response to that I think has been it doesn't matter until it matters.

22:30We don't know exactly when that is, but we're at about 19 % of tax revenues going towards interest payments at this point. That is reaching a record. Yeah, that's basically a record. That is a record. We're going to come back to this, Walter, after the news and get Karen's thoughts as well. U.S. debt,$36.22 trillion.

23:04Welcome back to Business Matters here on the BBC World Service. We have Karen Percy, of course, with us in Australia. Walter Todd, in the US, we were talking about debt, countries being in debt implications for long-term finances. Australia's debt's increased. I'm looking at some figures here. 49.3 % is the ratio of debt to GDP. And like many parts of the world, that debt in Australia really increased during the pandemic. Oh, absolutely. There were payments just flying out the door, you know, to ensure that people could continue to pay their mortgages, you know, with so many people out of work.

23:39And I think certainly the state I'm in, Victoria, the debt levels are, you know, are excruciating. But that was at the time, nobody batted an eyelid. Everybody needed an income. So I think there's a lot of 2020 hindsight going on. And I think we probably didn't realise at the time what the long term impacts might be or even the medium term, because we had no idea that there would be this kind of craziness happening right now that we're seeing, you know, where everything, the apple cart has been upset once again. I mean, that$36.22 trillion that you've been talking about, I just cannot fathom how big that is.

24:19And I think we've now got this normalisation and this catastrophising of these kind of numbers. And I wonder, and maybe Walter can enlighten me, is it's such a he said, she said, they said, they said. Chuck Schumer saying we're all going to die. This is what this act should be called. You know, do ordinary Americans really understand when you're talking deficit, inflation, growth? And do they care about this? I'm wondering, Walter, can you enlighten me? Because it seems a lot of us getting very kind of fixated on it. But how is it actually playing with American people who might find themselves without health care or other important benefits after this?

25:01Yeah, I mean, it's getting, I would say, to the average American, probably not as focused on it. They're focused probably more on day-to-day, but certainly on the investment side and our client base, we get a lot of questions about it. The same question that Rahul asked is, when does it matter? And so I think it is getting more focused, certainly. And this bill, because it is being scored the way it is to increase the deficit and the debt over the next 10 years, another challenge. And it is concerning, I think, for a lot of folks here. But the thing is, Walter, we have to be honest about this because debt is often associated – it's a bad thing.

25:48A lot of people think debt's a bad thing. But that isn't the case always, isn't it? Countries need to borrow. You need debt to invest to grow your economy as well. Sure. Companies do the same thing, right? But it's the sustainability of that debt and the ability to service the debt. And we were talking before we went to break about where we are in terms of tax revenues spent on interest payments. We're approaching 20%. And when does that become on an unsustainable path? Many would argue we're already there. So, yes, I agree with you. Debt's part of the balance sheet equation for a company or a country to grow.