It’s China’s turn

0:00We borrow money from Chinese peasants to buy the things those Chinese peasants manufacture. That is not a recipe for economic prosperity. Vice President J.D. Vance defending the Trump administration's tariffs on China hit China squarely below the belt. And China hit back with memes. Cue music.

0:22Americans on assembly lines at sewing machines in fields, eating chips, drinking Coke, looking ill prepared for factory work, to put it politely, which the memes are not. China's argument since this trade war began is that America cannot win it. China is tougher, more resilient, and better prepared.

0:44On Today Explained, as this trade war escalates, we ask, what if that's true?

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2:24You're listening to Today Explained. First came the Liberation Day tariffs and nine days of chaos, market swings, Howard Lutnick trying to explain stuff, maybe even to himself, and frantic attempts to calm things down by pausing the biggest tariffs on most countries. But not on China. Dimitri Savustapulo, the U.S.-China correspondent for the Financial Times, picks it up as the trade war roared into last weekend. On Friday night, the Customs and Border Protection Bureau put out a memo late at night that nobody seemed to see in Washington, but it was floating around in China on Saturday morning and Saturday afternoon, which said that cell phones, smartphones, laptops, computers, certain other kind of consumer electronic devices, and a whole range of goods, which are heavily imported from China, would be exempt from the tariffs.

3:23So the whole world said, okay, fantastic, Donald Trump is backing off. He's seen sense on this. You know, Americans are not going to see massive price rises in their iPhone or whatever other smartphone they use. But then on Sunday, we had more confusion when Howard Ludnick, the commerce secretary, came out on television and said, no, no, no, no, no, we're not taking tariffs off these goods. Remember, those products are going to be part of the semiconductor sectoral tariffs, which are coming. These different messages have created huge confusion as to what exactly the Trump administration is doing and why the rollout of the tariffs is so chaotic, given that they've had several months to plan how they were going to do this.

4:09Over the weekend, China actually made a move to respond to the tariffs and said it would stop exporting critical minerals. Can you tell us a bit about China's response? Yes. I mean, China has, as the U.S. does, China has a range of tools that it can employ in a trade war with the U.S. The kind of the simplest retaliatory move it could take is to put countervailing tariffs on US exports, which it has done. But one of the areas where it essentially has a stranglehold on the global market is in different kinds of critical minerals, rare earths. These are metals and minerals which are used for everything from batteries for electric cars to components of weapons and a whole array of products in between.

5:01And China essentially is very, very dominant in the processing of these minerals, which means that if China decided to cut off supply to countries or to the world, It would have a massive impact because the U.S. and its Western allies, Japan, South Korea and a whole range of countries at the moment are still reliant on China for processing these critical rare arts and critical minerals. President Trump has backed off on tariffs with most of the countries that he initially levied them on. But he has largely kept them, even escalated them on China. Why is that? Well, I think there's a couple of things that are going on.

5:43The first thing is when he basically launched an economic trade war against the whole world, initially, you know, the equity markets, the stocks and shares that people have in their portfolios fell and people felt that one in their 401ks. Scott Besant, the Treasury Secretary, went out on television and said, listen, it's not such a big deal because most Americans don't have everything in the market. Most Americans in a 401k have what's called a 60-40 account. Americans generally hold 60 % of their 401k in stocks and 40 % in bonds. And overall, it's not such a big hit. Well, then all of a sudden, the bond market came under attack and bond prices started falling.

6:22Typically, you would think investors might be seeking haven in an asset like U.S. Treasuries. And instead, we just saw the 10-year Treasury yield have the biggest weekly gain, as in price of bond going down since 2001. What is the bond? No, I was watching the bond market. The bond market is very tricky. I was watching it. And I think there was panic in the Trump administration that this was really going to hit the average American. Their 401ks were going to be hit. And then in several weeks or months time, the prices of goods that are imported from overseas are going to go up. So you're going to have your pension go down and your month to month costs go up.

7:03So I think that was the first thing that happened. And the second thing that happened was there was a realisation that even if 130 countries have come to Donald Trump and said we want to negotiate, which is the number the White House is putting out at the moment, the US government doesn't have enough manpower across the different agencies that deal with trade to do trade negotiations with 130 countries. It's just not feasible. Why isn't China backing down? I think for several reasons. One is China is a much more relatively powerful country compared to the US than it was in 2017 when Donald Trump first entered the White House.

7:41I think also the Chinese leadership feels that they have more ability to tolerate pain in their economy. And that's notwithstanding the fact that they are having economic headwinds right now. They have their own problems. So it's not as if they have a lot of leeway, but I think they feel like they can tolerate the pain for now and that they can tolerate the pain for longer than the U.S. can. And one of the reasons, which is looking at the way the Trump administration very quickly pivoted last week when the bond market started to fall, I think that's a signal to the Chinese that the bond market is a vulnerability that the U.S.

8:21has and that when bond prices fall, that the U.S. is going to backtrack on some of its policies. So I think that's given China more confidence as well. Now, whether all those things turn out to be accurate or not, we don't know. But I think that's the thinking in Beijing right now. If the tariffs do stay in place, what is that going to mean for the American economy? And what's it going to mean for American consumers? Well, for American consumers, broadly, it's going to mean, you know, if you go to Target or Walmart or, you know, wherever you shop to buy a whole range of products, you know, a toaster.

8:55You know, let's say you pay 30 bucks, 40 bucks for a kind of a mid-range toaster right now. You're going to find all of a sudden that toaster is 50 bucks, 60 bucks. And, you know, one of the biggest impacts in the long run, which will also be felt by consumers in the way that it was felt during the pandemic, is that this is going to have a massive impact on global supply chains. One, because, you know, companies are going to struggle to know what they can afford to import from different parts of the supply chain. And second of all, some companies are going to stop investing in certain parts of the world where they have supply chains because they don't want to pay the import costs, the tariffs.

9:36And so you're going to find that the supply chains around the world, which are massively complex, are going to become even more complex and brittle. And you will see all of a sudden that something you've ordered on Amazon that you were told was going to arrive in two weeks time, you'll get one of those notifications saying, been delayed, we'll let you know when it's ready to be shipped. So I think that's not going to happen immediately. But after a few weeks of all of these tariffs being in place, you're going to start to see signs of that. And it will build over time unless the Trump administration starts to dial back more of these tariffs, particularly on China.

10:17What about the things that China imports from the United States? So the U.S. is a service economy. We hear that again and again. What we send to China is not toasters and sneakers. It's financial services. It's tourism. It's streaming subscriptions. Could China say we don't want those things from the U.S. anymore? They could. And I think actually what's been happening in China in recent years is that China, over time, has been trying to reduce its reliance on American services, financial services, consulting services and things like that. So that trend is already there. You know, Xi Jinping, as tough a stance as he intends to take on the Trump administration, he still wants to woo foreign companies to China.

11:03because having foreign companies in China, whether they're American or Japanese or other countries, it sends a signal of confidence in the Chinese economy that this is a good place to do business. And so the Chinese are having to weigh that up as well. But in all of these cases, there's going to be a balancing act. They're going to take measures which, like I said, will to a certain extent hurt themselves. But they believe in the long run is the best approach to push back against Donald Trump. Dimitri, how do you think this is going to end? Right now, I think there's no light at the end of the tunnel.

11:40It's very difficult to tell how long the tunnel is. At the moment, you have a U.S. president who's basically saying, you know, Xi Jinping picks up the phone and calls me. I'm happy to talk. The White House has made clear that essentially Trump wants to talk to Xi Jinping. He wants to start a negotiation from the top. The Chinese system generally works the other way. You know, any components of some kind of a deal are worked out by officials in the system. And then it percolates up and eventually gets to Xi Jinping, who decides if that's what he wants to do. But the Chinese are not going to agree to some kind of a summit between Donald Trump and Xi Jinping when nothing is decided.

12:22It's very volatile. They saw how President Zelensky of Ukraine, you know, they saw the fiasco in the White House when he visited, you know, a month or two ago. And they're not willing to take a risk that Xi Jinping is subject to the same treatment. So I think the Chinese are basically dug in. There are no serious talks between the US and China on solving this trade issue right now. And there are no talks about a phone call between the presidents and no talks about a summit. There have been lots of stuff in the media about possible summits in April or the summer. In my opinion, they are all a word that I'm not allowed to say on air.

13:03They're not going to happen unless something dramatic changes. So I think right now we're stuck between a rock and a hard place and the average American and the average Chinese is going to hurt as a result of this.

13:21Dimitri Sevastopoulos is the U.S.-China correspondent for the Financial Times. Coming up, why China is so confident it can win a trade war.

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17:02You're listening to Today Explained. Hi, I'm Bill Bishop. I write a newsletter called Cynicism, S-I-N-O-C-I-S-M, whose goal is to help people get smarter about China. For people who don't speak or read Mandarin, one of the most interesting things to watch right now is the Chinese embassy in the U.S. on Twitter. It has been retweeting Pew Research data saying that Americans know the tariffs will be bad for them. It's been tweeting salty emojis kind of aimed at America's story about tariffs. It's been tweeting beautiful sunsets. What is the story that China is telling about itself right now? The story is, one, that America is effectively the great disruptor.

17:50America is blowing up the global trading system. America is blowing up the global order for hegemonic and selfish reasons. And also that China will not be cowed. They don't want to have a trade war. They say there are no winners in a trade war. But if America wants to fight, we will fight to the end, I think is one of the phrases that they use. They're trying to express this resolve. So you had, I think, a couple of days ago, the Ministry of Foreign Affairs, one of their accounts tweeted this video of a clip from a famous speech Mao Zedong gave in 1953 during the Korean War.

18:30Basically talking about China's resolve and how they will never give in. And so that is the messaging for a global audience. But then also domestically inside China, it's very much the, you know, we're not going to give in. You know, we're going to work through this. We're fine. Our economy is resilient. Our economy is massive. We can handle this. America is bad. America is the problem. And then a fair amount of mocking of America and, you know, the idea that, for example, America is going to bring back shoe factories. I think there have been some videos going around. The memes, yeah. The memes of, you know, big fat Americans making shoes.

19:11Both funny and a little offensive. But honestly, it kind of hits America where it hurts. I think there's a reason that those memes have gone viral. Yes. And I mean, frankly, if we can limit this to a meme war, that would be great. All right. So China is giving confidence right now. Why is that? Is China really prepared for a big trade war? So China does not want this trade war. It will cause some real problems in their economy. It will cause some real dislocations. They already are struggling with a pretty significant economic downturn over the last several years, triggered by, among other things, an attempt at a managed hopping of a real estate bubble that has at times gotten a little bit out of control.

19:57On the edge of the city of Changchun, row after row of apartment buildings, largely empty or unfinished. Its developer Evergrande collapsed with more than£200 billion of debt. China's housing oversupply problem is now so bad, it's estimated there are 60 million vacant homes. But since the first trade war, since the first administration, when that trade war started, they have worked extremely hard to build out capacities and diversify into other markets. They haven't been totally successful, but they've diversified a lot, reduced some reliance on the U.S. market. And so I think they do feel like they are in a better position to handle this really significant escalation of the trade war than they were, say, seven, six years ago.

20:54In China, there's the economic response. They will probably push out some stimulus packages. They will probably find ways to tax credits or subsidies to exporters who are harmed. But China has an entirely separate system around social stability where they've really rebuilt from the grassroots level up a system to be able to use both soft and hard coercive power to effectively keep people, even if they're unhappy or even if they want to go complain or they want to go protest, The costs are extremely high and they have systems at every level to mitigate or prevent those problems from bubbling up.

21:38China is the all-seeing and listening state. Today, the average Chinese citizen spends nearly every waking moment under the watchful eye of the state. The world's second largest economy had a tough year in 2023. Now, one of Beijing's answers to the challenge, ban and erase criticism of it. You've got the nationalist, the patriotic element, and then you've got this entire system of social stability, social governance, that I think will allow the government in Beijing to absorb more pain and higher costs than I think some people assume. So that's the message inside China. The story that China is telling other countries, not the United States, is you can't count on America anymore.

22:27They are messy. They're dramatic. They're destabilizing the world economy. Instead, you should count on us. Are other countries buying that message, do you think? So this is a great question. And, you know, China has trade surpluses, large trade surpluses with most of the major important economies or economic blocks in the world. And so most countries don't want to have to pick between the US and China. Where we are now is, I think, the development of this trade war, effectively the Trump administration, I think, is forcing countries to choose. Many countries, many developed economies especially, have not been happy with China and the way it trades and some of its policies.

23:11For example, the EU Chamber of Commerce in China every year puts out a report on all the things they would like the Chinese government to do, change policies to make the markets, you know, to increase market access to make the markets fair for EU companies. And, you know, it's hundreds or more than a thousand a year and the Chinese just sort of file it away and nothing ever happens. And so there is massive frustration in, for example, the EU and certain capitals about Chinese trade practices, but they've been very reticent to hit back hard because they're also quite dependent and some of their big companies are quite dependent on the Chinese market.

23:45And so now we're in a forcing moment, a forcing event from the Trump administration. This has put some of these big economies in, frankly, many countries, big and small, in a real bind. Chinese President Xi Jinping has arrived in Vietnam as he begins a tour of Southeast Asia. President Xi Jinping on Friday urged the EU to join China in defending globalization and opposing unilateral acts of bullying. In many ways, it seems what's at stake here is which one of these giant powers is going to become the economy of the future. And again, I'm relying on the Chinese embassy and U.S. Twitter feed, but there are things on that feed that I will tell you blow my mind.

24:22There are videos of bridges like you wouldn't believe. I mean, the bridge, it goes over a mountain range. It's incredible. There's one of like a runway show, like a fashion show where the models are robots. So some of this stuff honestly looks like it comes from the next century. I don't see that in the U.S. Can you talk a bit about the ways in which China is trying to position itself as truly the economy of the future? So about a decade ago, China launched a program called Made in China 2025, where they laid out 10 broad industries, future industries where they wanted to dominate. All high-tech, including EVs, electric vehicles, batteries.

25:04And now we're 10 years on, and they've been actually quite successful. This is an example of a really quite successful industrial planning. So, for example, when you look at EVs and batteries, China's a global leader. You talked about these, so what you're seeing on these various official and semi-official tweets and YouTube. That's very much part of a showing the world, basically, we are the future, right? You know, we have robots that can dance. So every year at the Lunar New Year holiday, the CCTV, the main TV network in China, has what's called the Spring Festival Gala, right? And hundreds of millions of people watch it.