How a Second Trump Administration Could Upend US-China Relations

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1:15Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, here's something that I've thought about that's been interesting for a few years. The Trump administration obviously sort of took this hawkish line on China, introduced this tariffs on a lot of Chinese exports to the U.S. And then when the Biden administration took over, it kind of seems like we basically got continuity on that front. There was no rollback. Yeah. Anything. Maybe some of the screws have been tightened even further. I think that's exactly right. And it's kind of funny, as you mentioned, that it's flown a little bit under the radar.

1:53are. And I'm thinking back to Trump's statement, trade wars are good and easy to win. And I mean, he got a lot of flack for that, probably rightfully so. But if you think about what's been happening over the past few years, it seems like the U.S. is kind of winning the trade war against China in some respects. I mean, the U.S. economy outperforming much of the rest of the world. I think GDP growth was something like 3 percent in 2023. China's GDP growth is still believe it was at 5%, but it's slowing a lot. And if you look at what's going on with the economy right now, it seems like it is really struggling in various ways.

2:31That's interesting that they're winning. I hadn't really thought about it. Well, winning might be strong, but like... Well, our economy is clearly doing better. On the other hand, China clearly has a handful of industrial powerhouses that are creating anxiety for legacy industrial powerhouses in the US and Europe. And we can say that clearly when it comes to EV versus legacy automakers. We can look at the rising number of conversations like a Boeing is faltering, will Comac and the CN19 eventually take significant market share in commercial aerospace? We did an episode, I think, near the end of last year that actually, despite all of the restrictions on equipment imports into China for semiconductors, that the domestic semiconductor industry is making gains.

3:19So like in the GDP sense of the word, like clearly China is struggling, but on these sort of like key industrial strategic areas of the economy, there is the word things still seem to be working out. No, absolutely. And I think there is this overall angst in the U.S. with this idea that China is somehow better at doing this kind of targeted industrial policy. We used to talk about the Chinese command economy. They have experience with pouring lots and lots of money into areas that they identify as strategically important. That doesn't mean they do it perfectly every time. I mean, we basically saw that with some of the consumer tech companies where there was a reversal of the government stance towards them.

4:02Lots of talk of disorderly capital flowing into that space. But then what we saw is, you know, they said that they cracked down on the sector and then And they said, what we really want you to invest in is things like solar panels and electric vehicles and semiconductors. And so we saw those areas start to boom. So I think there is a real sense of concern in the U.S. that maybe China, if they're not better at it, they certainly have done it for a longer time on a more consistent basis. Right. And so it feels like now the debate in the U.S. is like, OK, everyone is sort of accepted that the tariffs that Trump introduced, that the idea that the U.S.

4:39in various ways tries to constrain Chinese exports or constrain Chinese industry, it feels like that's become conventional wisdom now or that everyone sort of agrees we do that in Washington. And now the question is how much? And of course, recently we heard Trump say that were he to be elected president, he would ratchet up the tariffs even more. I think he put the number like 60 percent, which I have to imagine would like totally clobber. He did say 60 percent. But then I saw right before we came on, let's see, we're recording this on February 8th. I think there was an interview from like February 6th, where he basically said that the tariffs could be even bigger than 60 percent.

5:16So I don't know where he's quite getting those round numbers from, but maybe more than 60 percent. Right. So as much as Biden has been a continuation and extension and an expansion of Trump policies, maybe Trump, if he were to win the presidency in November, would be a continuation and expansion even further. Anyway, we should talk about what a Trump victory, which is, of course, certainly possible, what it would mean for the U.S.-China relationship and what it might look like, what the direction all this is heading. Let's do it. All right. Well, we have two absolutely perfect guests today. We're going to be speaking to Tom Orlick, previous odd lots guest multiple times, chief economist for Bloomberg Economics, and Mackenzie Hawkins.

5:58She is the U.S. industrial policy reporter for Bloomberg in D.C. Both of them worked on a big new report sort of examining this question, which everyone should go and read. But thankfully, they are taking the time to speak with us. So Tom and Mackenzie, thank you so much for joining us. Great to be here. Thanks, Joe. Thanks, Tracy. Thanks for having us on. Actually, Tom, let me just start with you with like the most vague theoretical question there is. From a purely like economist standpoint, what do tariffs do? So tariffs increase the cost of imports. And when the cost goes up, the demand goes down.

6:37So in the first Trump administration, we saw 25 % tariffs on a swathe of Chinese exports to the United States. And we've got a bunch of data on the impact that those tariffs had. So we can kind kind of say what the impact was. And we're seeing Chinese sales to the US in the categories of goods that face the tariffs down more than$100 billion relative to where they would have been if no tariffs have been put in place. Now, here we are at the start of 2024, still a few months to the election, but Donald Trump clearly in the lead for the Republican nomination, running ahead of Joe Biden in the polls in some key swing states and talking about a 60 % tariff on all Chinese imports.

7:32Well, if 25 % tariffs put a bit of a hole in revenue for Chinese factories, 60 % tariffs, I think, would turn that hole into more like a crater. So Joe asked a very theoretical question, and I guess I'm going to ask something a little bit more specific. But talk to us about how targeted or, I guess, customized the tariffs are that we've seen from the Trump administration and then the Biden administration. Because, of course, Trump's export curbs did involve semiconductors when he was president. But then Biden came in and I believe he targeted, you know, advanced semiconductor technology and China's access to it.

8:13And in some ways, he was even more strategic in the things that he was limiting. So in the Trump administration, you saw this sweeping tariff review that affected a wide range of Chinese industries. And the Biden administration has held those tariffs in place. There's been sort of a quote unquote imminent tariff review for months now. And a big question in Washington is whether the administration will stay the course with the sectors that Trump targeted or have a more refined approach that might focus on key strategic sectors for the U.S. like EVs and other clean energy products, which, of course, the Biden administration is trying to subsidize at home.

8:50But then you saw Biden look at a whole suite of other tools of economic statecraft that have actually become his favorite mechanisms to get at the Beijing question. One of those, as you said, Tracy, is export controls on advanced semiconductors. These are the critical electronic components that power everything from your phone to your car to nuclear missiles. And there's a big fear in Washington that if China catches up with U.S. technology, that they could use AI to power weapon systems, that it could pose a significant military threat to the U.S. And so you saw in October 2022 sweeping controls on the ability of U.S.

9:28companies to export the most advanced semiconductor technology and shipmaking equipment to any Chinese company. Mackenzie, just as a follow up on that specifically and talking about politically Like, as we said in the introduction, and as Tracy just mentioned, you know, Biden continued with a lot of these tariff reviews. They're ongoing. They've become even more targeted. How did this become the consensus that the idea of just dropping tariffs and sort of returning to the pre-Trump status quo with regards to trade now doesn't even seem on the table anymore? And it doesn't seem like anyone advocates for that.

10:03How did this just become like the bipartisan consensus that setting aside the degree of restrictions that some restrictions must be applied? It's a great question. You know, when you talk to folks on both sides of the aisle on the Hill, they say the one thing that everyone agrees on is China. And the question is not what, but how much. And, you know, you really saw the Trump administration, you know, early on introduced this tariffs question. And then later on towards the latter years, start to target specific Chinese firms. Like a great example is Huawei, the Chinese telecommunications giant, which you saw Trump sanction in 2019 over concerns about the security of their telecommunication systems that are all over the U.S.

10:45And then once that sort of entered the Washington think tank sphere and people really started seeing Huawei as a security threat, it became, OK, what else is Huawei doing that's a security threat? And, you know, the initial sanctions sort of crippled their telecommunications business and their smartphone business for quite some time. But we saw Huawei debut a smartphone in August that's powered by a chip that's far more advanced than where the U.S. was hoping to hamstring China's rise. And so as we've seen China sort of make incremental technological progress in these areas that Washington has decided it's quite concerned about, there doesn't really seem to be a big debate over whether should we really be doing export controls in the first place?

11:28It's we've been on this path. We've seen China continue to make progress. What are additional measures that we can take with our allies to prevent any further progress from these firms that now for five years have been thought of as a significant security threat in D.C.? I just build on that briefly and point to three big factors which I think have changed the dynamic here in Washington, D.C., and made anti-China into a sort of broad and firm consensus. I think the first thing driving it has been China's sudden rise, right? When everyone was agreeing that China could join the WTO back in 1999, 2000, China's GDP was a fraction of US GDP.

12:11China's military capabilities were nowhere near US military capabilities. And so China really wasn't regarded as a threat. And it was still possible to regard China as a kind of almost like a disciple, that's now clearly changed. I think the second thing which is important is the kind of the peculiarities of the US election system, which gives a disproportionate amount of power to the votes and the voices of a constituency in a few swing states, places like Pennsylvania, which are in the US Rust Belt, and which have suffered disproportionately from China's rise as a manufacturing power. And so where tough on China is a very popular vote winner.

12:53Then I think the third factor, which we have to acknowledge, is the kind of the strange genius of Donald Trump, right, who kind of revealed in his campaign in 2016, that being really tough on China was a powerful, motivating factor for the voters in those swing states.

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14:05This is LeVar Arrington from Two Pros and a Cup of Joe. The Toyota Tundra and Tacoma are designed to outlast and outlive. backed by Toyota's legendary reputation for reliability. So get in a Tundra with the available iForce Max Hybrid engine, delivering exceptional torque and towing capacity. Or check out a Tacoma with available off-road features like crawl control. It can take you beyond the trails. Toyota trucks are built to last year after year, mile after mile. So don't wait. Get yours today. Visit buyatoyota.com for deals and more. Toyota, let's go places. Whatever happened to the sort of old simplistic argument for protectionism, which was, well, we want to, you know, reshore manufacturing, create more jobs in the U.S.

14:59It feels like it sort of evolved into this very specific anti-China action. And we haven't seen, correct me if I'm wrong, but we certainly haven't seen as stringent actions on other countries and other manufacturing threats. I mean, we know Mexico is exporting tons to the U.S. now, sort of filling some of the gap that China has left. But what happened to that argument? That feels like it's lost a little bit of popularity in D.C. Everything feels very strategic, very security focused. So I think when it comes to China, these two things come together from a US policy perspective rather nicely, right?

15:42Here's China, a single party state, a state dominated economy, rising quickly, 1.3 billion people. it's easy to see why this is regarded as a national security threat. And so why it's easy to win the argument in DC for things like banning sales of leading edge semiconductors, because potentially they could fuel China's military capabilities. At the same time, China's enormous success in grabbing global market share in the manufacturing sector, and the consequences of that for U.S. manufacturing, where factory towns have been hollowed out and people have lost their jobs, makes the case that this is really important, not just from a national security perspective, but also from a kind of social well-being, allowing everyone to benefit from the growth of the U.S.

16:38economy perspective. So it's a complicated picture. Now, when it comes to China, those national security arguments and those concerns about the hollowing out of the manufacturing sector come together very nicely. The kind of the messiness of it, which I think you were sort of alluding to, Tracy, is that nearshoring and friend-shoring, that addresses the national security piece of it, but it certainly doesn't help people who lost their manufacturing jobs here in the United States. They're not going to be super delighted to see those jobs coming back to Mexico or Vietnam or other places, which don't really help them out.

17:14And the manufacturing argument still has a lot of salience in D.C. and on the campaign trail. You know, you can think of one tranche of Biden's China policy as sanctions, controls on outbound investment, export controls on semiconductor chips and the continuation of Trump tariffs. But you can think of the other side of the coin as the massive industrial policy effort that the U.S. has embarked on over the past couple of years. The Chips and Science Act, the Inflation Reduction Act, which is Democrats' signature climate law and the bipartisan infrastructure law have poured well over a trillion dollars of federal funding into revitalizing these domestic manufacturing bases in areas that lost a lot of jobs to the so-called China shock.

17:55It is true also that I think Trump has talked about doing a blanket 10 percent tariff on all imports to the U.S., so basically ring fencing the entire economy. Well, this dovetails with what I was about to ask next time, And it's sort of another theoretical economics question, kind of like when I asked what tariffs do. But why didn't we have inflation? Why don't they why weren't they inflationary in the Trump period? And how do economists think about the inflation risks associated with aggressive tariffs, either on one country or blanket tariffs on everyone? So it's a really good question. If we think about the kind of the big picture over the last 30 years, globalization and the ability of consumers in the United States to tap cheap goods made in China has been one of the factors that was pretty helpful in keeping inflation around the Fed's 2 % target, at least until the post-pandemic inflation surge.

18:55Now, why didn't the Trump tariffs have a more significant impact on that dynamic? I think the reason is there's a few factors at work. The first factor is goods inflation is important in the US, but it's not as important as services inflation. And services inflation doesn't really get impacted by tariffs that you put on goods. The second factor is, yes, China is a really important supplier of goods to the United States. But it's not the only supplier. And then the third factor at work is tariffs aren't the only thing going on. Yes, the Trump administration put 25 % tariffs on. But over the same period, we saw a significant depreciation of China's yuan.

19:41China's factories were able to absorb some of the shock by taking lower profit margins. And that provided a little bit of an offset. So just on this note, have you done any number crunching on what Trump's proposal would mean for inflation now? Do you have specific numbers? So we have actually been crunching the numbers, Tracy. And here I want to give a shout out to Eleonora Mavrodi in our modeling team in Paris. She's taken a big model of the global economy and she's plugged in that Trump proposal for a 60 % increase in tariffs on US imports from China. And what the model is telling us is that that has a pretty catastrophic impact on trade.

20:25In fact, if the US goes ahead with 60 % tariffs, and China reciprocates with 60 % tariffs, matching the pattern of kind of tit for tat retaliation we saw during the first Trump term, that pretty much turns off trade between the world's two biggest economies. The impact on inflation, well, it's there. If import costs go up, then that's a positive impact on inflation, but it's not particularly marked. That's partly for the reasons I was just sharing. Services inflation is more important than goods inflation. It's also because there's an offsetting drag. Import prices go up and that directly affects the CPI, but tariffs also have a depressing effect on growth.

21:09And that means the economy is weaker. And that's an offset on inflation. If the U.S. and China, these two huge trading partners suddenly stop trading, what other knock-on effects do we see from that? So I can speak to the economics of that. And maybe McKenzie has some thoughts on the sort of broader policy implications. So on the economics, I think it's interesting to think about this not just at the aggregate level, but also at the sector level. Yeah. And not just about the impact on the U.S. and China, but also about the impact on other economies around the world. So at the sector level in the United States, it's kind of a policy to support the industries of the past, right?

21:48Mining, production of steel. These are industries which were crucially important to the United States in an earlier stage of its development. Not so important now. Those would be the industries which would be the main beneficiary of a 60 % tariff. Who loses out? Well, it's kind of the industries of the future, right? It's the people making the semiconductors, it's the people making the advanced electronics, the people with the exposure to that East Asian electronics supply chain. And thinking about the global impact, well, if we break the trade relationship between China and the United States, that's bad for those two countries.

22:28But there are some other countries that could well gain. Thinking about those connector economies, places like Vietnam, places like Mexico that have a strong manufacturing base, that have low costs, and that have pretty good trade relationships with those two economies. And when you think about the bilateral relationship between Washington and Beijing, at the same time as Biden has become increasingly hawkish on China, employing sort of novel tools of economic statecraft to get at advanced industries in the country, there's also been this significant back channel effort to improve direct diplomatic ties, military to military communications, culminating in a meeting between the two leaders on the sidelines of the APEC summit in San Francisco.

23:15And so you can imagine, you know, after establishing formal communication networks between the Treasury Department and their counterparts in China, formal communications networks between the Commerce Department here and MoFcom in China, the sort of deterioration of a lot of the sort of day-to-day slow-working diplomatic effort that's been happening under President Biden if the U.S. were to sort of blow up the trade relationship between the two countries under a potential Trump administration.

23:56this is LeVar Arrington from two pros and a cup of joe the Toyota Tundra and Tacoma are designed to outlast and outlive backed by Toyota's legendary reputation for reliability so get in a Tundra with the available i-Force Max Hybrid engine, delivering exceptional torque and towing capacity. Or check out a Tacoma with available off-road features like crawl control. It can take you beyond the trails. Toyota trucks are built to last year after year, mile after mile. So don't wait. Get yours today. Visit buyatoyota.com for deals and more. Toyota, let's go places. Residents at Brightview Senior Living Communities enjoy enhanced possibilities, independence, and choice.

24:45Brightview Dulles Corner and Great Falls offer vibrant senior independent living, assisted living, and memory care services through various daily programs, chef-prepared meals, safety and security, transportation, resort-style amenities, and high-quality care. Take financial possession of your apartment by December 31, 2025 and save. Discover more at brightviewseniorliving.com. Equal housing opportunity. Mackenzie, you mentioned earlier the Infrastructure Investment Act and the other big set piece from the Biden administration has been the clean energy transition and the money that is pouring in there.

25:22And this is a question that I've asked a couple people on this podcast at this point. But it seems like the U.S. has a desire to shift away from fossil fuels, maybe build up home capacity of clean energy technology like solar panels. But at the same time, it is also very true that China is good at producing lots of cheap solar panels and things like that. So I guess I'm curious what you're hearing from the administration in terms of, I guess, the need to build up or increase some of that capability at home and make it more efficient versus the lower cost and sheer volume of production that you would get from Chinese made renewable technology or even semiconductors.

26:11It's a great question. The solar panel question is kind of the most often cited explanation of the danger that China poses to these sort of more nascent industries in the U.S. on hydrogen, on wind, and also on electric vehicles and semiconductor chips where the U.S. was long the technological leader and then ceded a lot of that production capability to East Asia. And so when we think about the sort of critical industries that the U.S. is investing in right now, you identify them right off the bat. It's semiconductor chips, it's electric vehicles, it's solar, wind, hydro, a bunch of types of clean energy through the Chips and Science Act and the Inflation Reduction Act.

26:49And the worry is that the U.S. could pour significant amounts of government capital trying to crowd in private capital to build up these industries. But if Chinese firms are not operating in the same market environment, there could be a significant dumping risk. The fear on chips, for example, is that China's been building up capacity in the sort of mature, older generation semiconductors that still power the entire global economy, even if they're not the cutting edge. Those are not the ones that the U.S. is trying to deal with with export controls. And that's why the Biden administration is talking about tariffs.

27:24They say, we see this following the same trajectory that we saw with solar panels. And on electric vehicles as well. The U.S. is pouring billions of dollars in trying to get American auto giants to build cleaner cars in the U.S. But Chinese models are on offer for less than half the cost. And the only reason they haven't entered U.S. markets yet, or the primary reason, is that there's a 27.5 % tariff imposed under Donald Trump. And you're hearing a lot of concern in Washington. Maybe we might need to increase that number to protect these industries that we're investing in so much at home. I'm glad you went there.