Michael Froman on the New 'Polyamorous' Global Trading System

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29:03difference. Let's talk more about some of the paths that things could go, because I'm thinking about setting aside even Europe and the U.S. You know, there was the BRICS gathering recently. There are a lot of countries whose own developmental trajectory could be undermined by China's manufacturing success, right? And yet, perhaps because of the actions of this administration, etc. They don't feel that there is a sort of comfortable home or friend in D.C. and that maybe it makes more sense for them, even given the competitive challenges to be friendlier with Beijing, etc. What is your view on that?

29:46Do you believe there could be a new? I mean, one thing we've heard we were talking to, we recently interviewed Robert Kaplan, vice chairman over at Goldman Sachs. His view was globalization is alive and well. It's just that the U.S. isn't really part of it and that we're actually re-emerging sort of free trade, et cetera, except it's with China at the helm. Is that a fair characterization? Like what is happening with these massive other countries as they think about who their partners and friends are? So first of all, I think globalization is not over. Other countries continue to move ahead to integrate their economies.

30:21European Union has signed additional trade agreements with with Mercosur. They're working on one with India. Africa has a continental-wide free trade agreement signed a few years ago that they're in the process of implementing. So I think Robert Kaplan's observation that it's the U.S. that has exempted itself is to a certain degree correct. I'm not sure the next step is that this is all going to shift to China and it's going to be a China-led bloc because there's no country that's more concerned about the potential adverse impact of Chinese exports on their own manufacturing and economic aspirations than India.

30:59India, and you could add Brazil, you could add Indonesia, you could add South Africa. They're all deeply concerned that if the US and Europe begin to close their markets, all that excess capacity from China has to go somewhere, and it could well get dumped in their markets and hurt their capacity to build up their manufacturing base as well. And so I've been of the view that we had this – the Cold War was about bipolarity, U.S.-Soviet Union. The wall came down. Soviet Union was dismantled. And that was kind of a unipolar moment. That's over now. That 30-year period is over. What we have now isn't multipolarity.

31:38It's not like you've got two or three camps that do everything together, a China camp, a U.S. camp, some other camp. I think it's really more akin to like polyamorous life, right? And India is the perfect example. We got our episode title. That's right. India is the greatest example of this. India loves the United States, at least until recently, for technical, technological cooperation, for civil nuclear cooperation, for investment, for the relationship between the Indian diaspora and our entrepreneurial ecosystem here. they love Russia for oil, for arms. They love Iran for oil. They love and they hate, depending on the day, they've had, it's one of the countries they've gone to war with on their border.

32:28They've had skirmishes. People have died in armed conflict between India and China. But then, as you saw recently, there was a conference in China where you had Modi, Xi, and Putin holding hands and walking down the red carpet together. So I think India is an archetypal example of trying to play these relationships on both sides. They always were during the Cold War, too, right? They were the non-aligned country, right? I mean, it's changed now. Then they were non-aligned. Now I think they're multi-aligned. So they'll be aligned with the polyamorous. And you could use the same analysis to, I think, cover a lot of other countries, a lot of the other middle countries.

33:07That makes it a much more complicated world. In retrospect, the Cold War was very simple. It was black and white. You were with us. You're with the Soviet Union. And there were some proxy wars in between. But it was pretty simple. This is much more complicated. And it leads to the view that you're going to have to be very proactive and creative in creating coalitions of the willing around various issues because sometimes India might be in it. Sometimes they might not. Sometimes China might be in it. Sometimes not. And I think that's the challenge for the United States to continue to exert leadership going forward.

33:40How resilient would those smaller coalitions of the willing actually be? Because I can imagine maybe it's easier to negotiate with a smaller group. Maybe you don't get caught up in debates over bicycles and things like that. But on the other hand, if you don't have like a big trading partner who is necessarily driving the agenda, it seems like it might be a little bit more difficult to enforce. I think you need a combination of smaller groups of like-minded countries. But it does, to your point, Tracy, require leadership. And in the past, the U.S. has been a leader of it. I mean, you've got some very strong examples, like NATO.

34:20A military alliance is the strongest example of a plurilateral group, so something less than the whole world, but of like-minded countries that have agreed to do certain things together because they have a common interest to do so. So I'm not sure it would exist without U.S. leadership and U.S. driving it going forward. That was true of the Trans-Pacific Partnership as well. I think it could be true of a number of these other things. And by the way, China is very good at this. I mean, the conference, the Shanghai Cooperation Organization Conference that they recently held where Modi and others were present, that's a good example of them pulling together coalitions.

34:54BRICS is another good example. Now, we can talk about the strengths and the weaknesses of BRICS and where the countries actually have common interests and conflicting interests. But it's that kind of drive that you need a leader and you need a group of like-minded countries. Let's talk a little bit more about some of these tensions that emerge because it does sound like – BRICS is a nice acronym that Jim O 'Neill from Goldman Sachs Asset Management came up with in 2001 and which may now be this important geopolitical entity. We'll see. We don't really know for sure yet. But it seems like one possibility is that, OK, the U.S., we feel that we need to have in key strategic sectors some sort of capacity to build semiconductors or maybe capacity to build batteries.

35:42At least there was a big push under that under the Biden administration. Of course, China has that and it's growing. I mean, when people think about the economy going forward, is there a risk that essentially every country feels they have to make that decision, that India feels it has to have its own battery-making capacity, that Germany feels it has to make its own battery-making capacity, and that there's this sort of domino effect and we just wind up in a much costlier, less efficient world? Well, I think we are heading towards a costlier, less efficient world. I'm not sure that's necessarily a bad outcome in that to go down the path of greatest efficiency could be, at least in the short run, to become utterly dependent on China for all of this product.

36:29Because they can produce things cheaper, not always because it's cheaper labor, but because they become very efficient, infrastructure - Massive scale. Massive scale. And I think the question is, is it a good thing? I mean, is it that the US have a battery industry and that Europe have a battery industry? It's probably a good thing. It may not be as efficient as relying completely on China, but having that diversification, particularly over the long run, is a positive. Rule number one of risk management, diversification. And yet, we became very complacent over the years of just relying on China as our manufacturing floor.

37:06And now I think companies have come to the conclusion, whether it was because of natural disasters, COVID, or political intervention, as we've seen with China, that it's to their benefit, their economic benefit even, over the longer run to diversify even in the short run if it's more expensive. With your trade representative hat on, can you maybe say something about how you view military strategy and, I guess, trade and this idea of, well, maybe we want to be independent, Maybe we want to have independent capacity in something that's strategically important, like semiconductors or, I don't know, making ballistic missiles or something like that.

37:45How does the U.S. government actually think about the relationship between trade and military might? So I think over time, broadly, economics and national security have converged into economic security. And we're sorting through what that means in practice. So in the case of the Biden administration, they talked about a small yard and a high fence. So take a limited number of technologies and say, these technologies, we refuse to export to our competitors and our adversaries. We refuse to allow them to buy U.S. companies that specialize in those technologies and refuse our companies who dominate that area to invest in China and give them their capacity.

38:29but it was a relatively few sectors, relatively few technologies. The question is, is there an extra set of pressures to expand that yard and to add more and more things to it? And where is it appropriate and where is it not appropriate? And I think that's what we're now sort of wrestling with. We're highly dependent on China for all the ingredients that go into our pharmaceuticals. Do we feel comfortable with that? China's done nothing to say they would cut it off, But they could. And we've seen recently China has used its choke point capacity, rare earths, magnets, to demonstrate that it has leverage too.

39:08And it worked. The Trump administration raised tariffs to 145 % on China. China restricted the export of certain rare earths and magnets. And suddenly there was a de-escalation. And so we have to now wrestle with that and decide over the long run, what products do we actually need to be made in the United States because they're so critical to national security or our sense of national security? And which ones, and this is where there's been, I think, insufficient attention, which ones can we rely on our allies and partners? Because we probably can't produce everything, at least in the short run, or wouldn't make sense to produce everything ourselves.

39:46But can we rely on Canada and Europe and Japan and South Korea and Mexico for some of this production or in India? And how do we differentiate between which products fit in what group? And therefore, then what do we need to do about it to drive production here where necessary and to develop the relationships with the allies and partners where possible? The idea of friend shoring or whatever you want to call it sounds very intuitive. And it's like, we don't need to build a ton of shipyards. Maybe we can get the Koreans to do that for us. Or I don't know, probably the Finns are good at it. I'm not sure.

40:20Icebreakers. The Finns are very good at icebreakers. Oh, the Finns are the icebreakers. Yeah, that's right. One of these facts that we've learned over the years. But is there, I mean, when you look at the current administration, do you see anything other than widening a gulf between those partners? Like, yeah, it sounds great to have a nice relationship with the Koreans for them to build more ships for us. And then that solves the problem of scale and redundancy, et cetera. But in practice, from your perspective, is it going the opposite direction? Well, look, I think one of the challenges of any administration, but it's certainly evident in this one, is the connecting of dots between one policy objective and another policy objective.

41:03And so, yes, in the short run, it's going to take us a while to build up our shipbuilding industry. And it's going to require a lot of government support. And it's going to require a lot of policies that we've not yet adopted. Perhaps it's something we should do, but it will take years to really build that up. In the meantime, should we look to Korea? Should we look to Japan? Should we look to Finland for the ships that we need right now? That's one set of objectives. Then you have the raid on the Hyundai plant, which was another set of objectives, objectives around migration, illegal migration and illegal workers.

41:40I sometimes wonder whether the dots are being connected within the administration or whether there's a view, and they may be right, they may be wrong, but they can have it both ways. That they can come down on Korean workers in the United States and still look to Korea and say, you will deliver us chips. And share your expertise and technical knowledge and all that. And help us build shipbuilding here in the United States. I want to broaden out the conversation. I think Michael's very ambassadorial, by the way. Anyway, keep going. Of course. Just to broaden out the conversation, though, back in March, I wrote an Odd Thoughts newsletter titled, The U.S.

42:14is Looking a Lot Like China. I got an enormous amount of pushback on it, but you actually wrote something similar. And I don't even have a question. Just tell me that I was right. You're right. You were right. Thank you. Look, I think we spent years – we always thought there was a theory of convergence. By bringing China into the international system, we would become more alike. Now, our view was they would become more like us. Like us, yeah. More open, more liberal, more market-oriented. And we used to go to them and lecture them about don't be protectionist. Don't restrict foreign investment in your country.

42:52Don't make it impossible for our companies to invest in your company. Don't engage in industrial policy and subsidization. and don't take stakes in private companies and intervene in the private sector. And now what are we doing? We are protectionists. We have restrictions on foreign investment. We are engaged in limited industrial policy. And now we're beginning to take stakes, government stakes in private companies. So rather than them becoming more like us, we have become more like them. And the challenge of that, I think, is that we're now competing with them on their playing field under their set of rules, I'm not at all convinced that we can compete on their playing field as well as we can compete on ours.

43:35Because we don't have unlimited, we can't go to Congress and say, give us unlimited resources to invest in this sector after that sector. We can't subsidize the commanding heights of the technology competition. And I think it's unfortunate because I think the Chinese can play that game much better than we can. Yeah, I think this is a really important point, because when we're thinking about, you know, choke points in terms of manufacturing or whatever, China has the most experience out of practically anyone in the world of like building up strategic capacity and doing it in a very conscious and interventionist way.

44:12Well, and also a lot of that sort of massive oversupply that people call it is maybe to some extent intentional, but maybe also to some extent a function of their provincial versus provincial relationship where the provinces are hyper competing, et cetera, for market share. That's just a dynamic. Nothing like that exists in the United States. And so the idea of moving in that direction, all kinds of conditions, either by design or just sort of by happenstance of the political structure of the system, it's just very different. Exactly right, Joe. I think, you know, in their case, leadership says we want to be dominant in these 15 sectors.

45:00Every provincial governor looks at that and says, all right, I'm going to take my local state. I am now judged by my ability to produce this. And we have, you know, in China, I think there are over 100 EV companies. Right. You know, and so, and they're producing, they will be producing enough cars to meet the demand of the entire world. So where does that leave the U.S. auto sector? Where does it leave the European auto sector? Now, in our case, I think, you know, we have effectively kept them out. We've effectively said we're not going to have Chinese EVs here, at least at the moment. Europeans have a slight, you know, more schizophrenic about it.

45:35They've also adopted protectionism, but they're more open, I think, to having Chinese imports. What does that mean for the future of Volkswagen, for the future of Renault, for the future of the other auto companies? And, you know, in that case, it could have broad political implications in Europe as well over time. I hesitate to ask this question, but is there anything the U.S. can learn from China in terms of, you know, trade and building out strategic industries? Well, look, I think China, we shouldn't make China into more than it is. China's made huge mistakes. They've wasted hundreds of billions of dollars on bad domestic investments.

46:15And they've got tremendous challenges, including demographic challenges that the U.S. currently doesn't have. And so we shouldn't make them out to be 12 feet tall. I think one thing that is current is to think through, okay, if there is an industry that you think is important for national security or otherwise, what's the best way of supporting it by the government? The Trump administration's approach, I think, has been based largely on tariffs. Right. That if we create this wall of tariffs, companies will have to produce or have to move their supply chain to the United States. And that's how we'll build out this area.

46:54I think what we've seen in China is that, yes, they've used tariffs and other restrictions. They've also used industrial policy. They've also invested - Subsidies, credit. Subsidies, credit, free energy. They've also invested heavily in R &D in many sectors, the life sciences, obviously AI, among others, government subsidies and government investment. And it's that combination of policies that probably is more effective than tariffs alone. To me, the concern is we're approaching this from a position of tariffs are the answer to everything. We know what the costs of tariffs are, and we're taking a gamble on whether the benefits will be there and whether tariffs alone are going to remanufacture the United States economy.

47:40You mentioned that some degree of greater redundancy and higher costs is not the end of the world, particularly if there's some political – it creates some political sustainability. What does the left tail risk look like to you? What is the scenario in which things really – the wheels really come off? One, the US doesn't have a great history with industrial policy. So if we were to multiply our efforts in various ways but not do it well, that would be a waste of resources and costs that we didn't need to incur. I think if we don't, to go back to the point about allies and partners, if we insist on reshoring everything and not friendshoring anything, I think we probably lose some of the economies of scale and some of the comparative advantage that we have.

48:33I also think if the existential threat is competition with China, if they are the pacing challenge, working with allies and partners is our way to reach scale. We're a big economy. We're the biggest economy in the world. But when it comes to manufacturing, we're not going to be able to compete with China alone necessarily. Or rather, we're going to be able to compete with China much better if we do so with our allies and partners. I have just one more question. This is the most important one. How good are you at tradle? Do you ever play that? We do. I love these games, tradle and worldle. Oh, worldle.

49:11Yeah, that's the other one. I didn't get into that one. But the trade all, I think, is a great game. I don't always get it right, but it's a good reminder of just how complex certain economies are. After we're done with this, could you help us find that dairy farmer who explained the 500 different ways to use dairy molecule? Absolutely. It's a fascinating lesson. Michael Froman, thank you so much for coming on Odd Love. Thanks for having me. Thank you. That was great.

49:49Tracy, I'm really a fan of this neologism or wherever it came from, the polyamorous world order. Because, you know, people talk about the G7 and what's-his-name talks about the G0 and other people talk about bipolarity. But I think this is a good one. It is kind of funny to me that there's this idea out there that just because Goldman came up with like a catchy acronym for the BRICS that somehow that's going to like create a new strategic coalition from pretty disparate countries. We should have Jim O 'Neill on to talk about it. We've never talked to Jim O 'Neill. And so the thought of him coming up with this paper, these are going to be the big economies.

50:29And now it's a rival block for the West is like a really good. Oh, that would be really interesting. But I do think, okay, one thing you can say about polyamorous relationships is they tend to come with a lot of drama, right? And so it definitely feels like we're going to have more instability or at least like more things changing, more things in flux, more volatility. Right. So this idea that I find it compelling, this idea that the old globalization can't just be replaced with the same globalization except the leader has changed, right? I mean, the U.S. was this huge trade deficit country. China is a huge trade surplus country.

51:13That naturally means that its relationship with all of its partners on some level, even if it wants to be at the forefront of creating new tariff-free zones, et cetera, is going to be of a different type than the relationship that the U .S. had. Absolutely. Shall we leave it there? Let's leave it there. All right. This has been another episode of the All Thoughts Podcast. I'm Traci Alloway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our guest, Michael Froman. He's at Mike Froman. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks.

51:49For more Odd Lots content, go to Bloomberg.com slash Odd Lots. We have a daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash Odd Lots. And if you enjoy Odd Lots, if you like it when we talk about the future of global trade, 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.

52:32Thank you.

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