How Trump’s Year of Disruption Has Only Helped China

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:02Bloomberg Audio Studios, podcasts, radio, news. President Trump is taking this economy in a different direction. He ran on that, he promised it, and now he's delivering. We're in the process of imposing reciprocal tariffs. This is going to hurt our economy before we get to any possible retaliation. The big promise was that he was going to bring down prices and make America affordable again. and everything he's done is the opposite of that. What's plan B with Trump behaving like he is? And they say, well, at the end of the day, there's no plan B because there's nobody who can really take the place of the United States.

1:58I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. This week I'm in Hong Kong and it's making me think about how Trumponomics has changed the world for Xi Jinping in the past 12 months. Donald Trump came into office both times as a president who would stop China, quote, free riding on the global trading system, had to dial down its heavy dependence on exports and Xi Jinping's plan to dominate all the technologies and industries of the future.

2:36But it hasn't worked out like that. China's economy, if anything, is more dependent on exports than ever, with a record trade surplus last year higher as a share of its economy than it's been in any year since 2008. And Donald Trump has even made China's grand technological goals just a bit more attainable, potentially, by granting access to advanced semiconductor chips that were off-limits under President Trump and President Biden before. Now the EU, the UK and other so-called middle powers are no happier about China's export-led economic model than they would have been a year ago. It's actually more aggravating now because China has more than made up for lower exports to the US by exporting more to everybody else.

3:22Berlin these days, most of the cars seem to be Chinese EVs. But rather than responding to this new China shock with higher trade barriers of their own, these Western leaders in recent weeks have been reaching out to China as a hedge against the shocks coming from the US. So there we go. That's Mark Carney, Prime Minister, Canada. He has arrived in China. First state visit. Prime Minister Keir Starmer has met with Chinese President Xi Jinping in Beijing and calling for a, quote, more sophisticated relationship. President Emmanuel Macron is due to meet with China's leader, Xi Jinping, in the next hour or so as he begins a three-day...

4:05Witness Canada's recent trade deal, recent visits by President Macron, the European Commission President, and Prime Minister Sakhir Starmer. So as Donald Trump's diplomacy handed Xi Jinping the best of all possible worlds for the Middle kingdom, the capacity to build influence and alliances around the world without changing China's internationally divisive economic model, one jot? And if so, can this sweet moment of opportunity possibly last? Well, I want to get into this and also just generally take stock of how things look for China and its economy in relation to the rest of the world, since I am in Hong Kong with the man who runs all of our economics and politics coverage in Asia, our Bloomberg executive editor, Dan Tenkate.

4:52He also recently published a weekend essay on this very topic entitled An Untethered Trump is Expanding Xi's Sphere of Influence. And from Sydney, Richard McGregor joins us. Richard's a senior fellow at the Lowy Institute, and he's been a bureau chief for the Financial Times in Beijing, Shanghai and Washington, and the author, most recently, of Asia's Reckoning, China, Japan and the Fate of US Power in the Pacific Century. Richard, Dan, very nice to have you. Hi there. Thanks for having us.

5:28Dan, you sort of set the stage rather nicely in your essay, how the world has moved in Xi Jinping's direction in a rather unexpected way over the past year or so. So without regurgitating your entire essay, just give us a flavor of that. Well, I think if you start at the end of the Biden administration, October 2024, you had Rahm Emanuel, the US envoy to Japan at the time, really rallying the world against economic coercion by China. That was the big issue from Biden, the Biden White House, to get the allies on side. And they really talked about this a lot. They made China to be the bad person.

6:12Now, about 18 months later, that's completely flipped on its head where you had the EU actually considering the first use of its new anti-coercion tools, not against China, but against the US and Trump. And that was in relation to Trump's threats to take Greenland and to raise tariffs on anyone who opposed that, really. So this upside down type of world, it's kind of stunning just how quickly it all happened. But it goes back to this idea of, can you trust the United States? I mean, this is something that the world hadn't even pondered. It was sort of taken as a given for many years. And at Davos, which you were there, the Canadian Prime Minister Mark Carney's speech was quite striking in that regard, where he laid out a world in which you cannot trust in us.

7:04Every day we're reminded that we live in an era of great power rivalry, that the rules-based order is fading, that the strong can do what they can, and the weak must suffer what they must. And Carney just laid out this idea of middle powers need to band together now and work together. Otherwise, they're going to be on the menu. They're going to be in for lunch, including by the U.S. And this is a notion that a lot of countries in Asia have done for a long time, balancing the U.S. and China, but it's fairly new for the Allies to get into that world. Just because some people may not be familiar with the anti-coercion instrument, but what you reminded us of in that essay was that that tool that was supposed to be this sort of great deterrent that Europeans had, you know, it's always been very slow for Europe to respond to things, but it was going to have this economic equivalent of a nuclear weapon at its disposal, that it could just impose very sweeping constraints on countries and would hopefully never be used.

8:06And they introduced it in direct response to China's punishment of Lithuania for opening up a Taiwanese representative office and that kind of economic warfare that the Chinese had waged against countries when they did things they didn't like. They were directly trying to respond to that. So obviously it is ironic that now it seems, if you were going to guess, the most likely use by Europe of that instrument will not be against China, but against the US. Richard, you're sitting in Sydney and you've been looking at the Australian policy as well as being a close watcher of China. As Dan says, we've seen countries kind of play this dance before, and Australia in particular has been maybe ahead of the game in looking to come to a different kind of accommodation with China.

8:50Yeah, well, one of the interesting things, you were talking about the EU, it's just been reported in Australia that Mrs. van der Leyen is coming to Australia in about two weeks to sign a free trade agreement with Australia. So classic, you know, middle power sort of agency, if you like, looking for alternatives to the US. And it's certainly true that Australia had its own shock, the sort of shock that Canada's feeling now at the hands of the United States. we had at the hands of China about five years ago. And in retrospect, it was a very good thing for us because it means that the sort of middle power or hyper-middle power relations, Australia and Japan, Australia and India, Australia and Singapore, have all been rapidly intensified and thickened in the past five years.

9:36But by the same token, I wouldn't overstate the impact of them. I travel a lot in Southeast Asia and North Asia and particularly when you go to countries like Japan and Taiwan. I was in Taiwan late last year and you talk to people there and you say to them, well, what's plan B with Trump behaving like he is? And they say at the end of the day, there's no plan B because there's nobody who can really take the place of the United States. And so, yes, we can do things. Mental power agreements aren't vanity projects, but you can't get around the destabilization of global politics basically wrought by the two superpowers in their own different fashions.

10:22And Dan, you were reminding me, one of the most sort of vivid demonstrations of this last year for many people was Modi actually going to China last summer for that summit and they had previously not had those kind of relations for many years. But how has that translated into actual policies, Dan? India is probably one of the best examples of the incoherency of the Trump administration's foreign policy. For many years, they had courted India. The U.S., multiple administrations courted India as a counterweight to China. And Trump just sort of blew that up. So when he raised tariffs on India, Modi definitely wanted to send a message to Trump by heading to Beijing.

11:08Now, we saw the limits of that right away. And in fact, we have a story out that talks about how right around that time when Modi was in Beijing meeting Xi and meeting Putin, he was also dispatching his national security advisor to the U.S. to try and mend ties with America and come to a deal. Now, that took several more months, and they finally cut a trade deal this week. But on my recent trip to Delhi, it was pretty evident that India didn't see China as a major alternative. Yes, they would lean toward Beijing more. Potentially you would see BYD open a factory or they would do things that symbolically showed their strategic autonomy.

11:53But the message that I was getting, and that was pretty evident in discussions with officials, was that they still saw the U.S. as a vital source of capital and technology and just that strategic partner. So this is a challenge that many countries in Asia face, particularly those with border disputes with China or who sit right on China's border. You need someone other than China with a big stick, preferably, to kind of act as a counterweight. So yes, a lot of countries need to deal with China, will deal with China, but there is a limit to that reproach mark. And Richard, I sort of started off talking about the growth of China's exports last year, just left on its own.

12:36We would have expected to be in a very different place. We would have had lots of talk around the China shock, around countries needing to protect themselves from the massive sort of flood of exports that's happened in some countries. I would say it's in certain sectors in some countries, not all over. And instead, we've had the opposite. But if China does continue to be so heavily reliant on exports, is that another reason why it becomes harder and harder for countries to really get close to China? Absolutely. You know, the premise of this conversation, does Xi Jinping have more room to move because of Trump?

13:11Absolutely. They're also very good at sort of running the narrative that they're a developing country helping out other developing countries, even though in fact, They basically might be pulling up the ladder of industrialization from many countries because they simply can't cope with the surge of exports. But also very quietly, China is threatening these countries, don't take action against us. Perhaps we might do what Japan did in the 1980s and have some export restraint and the like. But, you know, the Chinese are struggling to turn off the tap because it means a complete remodeling of their domestic economy.

13:49and they struggle to do that and they don't want to take the decisions to do that. There's a narrative that China is going to take America's place in Asia. And let me tell you why that's so fanciful. If you think about the United States, it's a long way from Asia. The US has no territorial disputes in the region, the Asia-Pacific region. Leaving aside India, let's look at maritime Asia. China has disputes of a different kind with South Korea, Japan, Vietnam, Indonesia, the Philippines, Brunei, Malaysia, and I haven't even mentioned Taiwan. So the idea that China moves into as the new hegemon and the US disappears into sort of bourgeois decline on the other side of the Pacific doesn't make sense.

14:38Plus, China is not a market for finished goods like the US is. China processes goods and sends them out or makes them all itself. So it simply can't play the role that the US played, which is why the idea that the US might step back in Asia is so destabilising. The breathing room that we've talked about, though, or does it make it easier for Xi Jinping to continue to go extremely slowly in the sort of what they now have as a formal goal, which is to increase the consumption share of the economy? But the measures being taken to achieve that have been pretty small scale. Yeah, I don't think Xi Jinping's heart is really in that narrative.

15:21You know, I think he wants to build the most technologically dominant country. It's more focused on that than he is on lifting the incomes of Chinese and, you know, instilling the economy with the kind of confidence that would lift consumption in the way that is generally talked about. And I think the other interesting point is we're talking about how Xi Jinping has room to move with other middle powers, other developing countries because of the Trump craziness. But the most interesting thing is that the country that he has most room to move with that people didn't expect is the US. Because Trump is such a dove on China compared with the rest of the administration and Congress, their calendar is full for this year.

16:06In theory, Trump is going to Beijing in April. Xi will go to America for APEC and also Washington in October. And if the Chinese can keep Trump on side, flattery, a few big soybeans deals, this, that and the other, then they get that's the real breathing room for China is keeping the U.S. at bay.

16:36You mentioned it in passing, Richard, that it's not just that they're sending exports, but they're actually taking future development possibilities away from many countries. I mean, that has been one of the striking things about China over the last, I think, 10 or 15 years, but particularly in the last few years, that even as it's moved into these high-tech sectors, and you might have expected it to then be like every other country, that so-called kind of flying goose paradigm. You expect them to hand off to other countries for the lower value goods. You've actually had Xi Jinping seemingly very committed to the sort of all industry model, being able to make everything.

17:17All of these other countries, these middle countries, but also the African economies they're trying to get on site. I mean, it is a real threat to any kind of future development that they might have had. Yes, we have still had the flying geese model, but all the geese are Chinese, I'm afraid. So that's a big change. Xi's stated goal, he's trying to build a self-reliant economy. In many respects, and I'm sounding rather dramatic here, he's building a war economy. And he talks a lot about war and the preparedness for war. I'm not saying he's about to go to war, by the way, nor does he want to. But he wants China to be ready for anything that might come his way if there is any kind of conflict over Taiwan.

17:59He wants self-reliance. And if you're that big an economy, that's really difficult for the rest of the world to absorb. Yeah, I'd 100 % agree there. I think the self-reliance thing is necessary because Xi has seen what the U.S. can do. It's seen the financial sanctions that could be put on, how it could restrict certain things. They've been subject to export controls on advanced chips, etc., etc. So Xi's goal is to build everything he can and just be in a position where the U.S. can't push him around or deny his ability to maneuver. We even saw that in Hong Kong when they were threatening sanctions and Xi was kind of stuck in a lot of ways.

18:43But, I mean, one thing they haven't been able to be self-reliant on is demand. I mean, they are getting a huge chunk of their demand from the rest of the world. And so you can't afford to have that go away. Yeah, that is true. And that's where Trump is helping him to a large degree. And China is so efficient at manufacturing so many things that it is harder for countries to even step in there. The other piece of it is that, and this is something that officials in Beijing have told me, is that they've learned from the China shock that hit the Rust Belt in the United States. And so just from an employment perspective, they're very wary of technology going overseas and manufacturing going overseas.

19:29And they see this as the foundation of a strong country. You're able to make stuff and you could keep people employed. Now, whether they keep making money doing that is the question. They're kind of at a point where profit margins are so low that they really do need to figure out how to consolidate and spread the wealth and essentially shift to consumption. But as Richard pointed out, the feeling of this war economy is anything could make you a little bit vulnerable if you can't make everything. So how they do that, there's just no incentive right now for them to shift until the world really starts to act coherently to cut off demand or to curb demand in the form of tariffs or other trade action.

20:15And what Trump is doing is kind of pushing countries to boost relations with China and increase economic ties rather than go the other direction. I guess, I mean, one question that one might have looking at China and some of the very dramatic demographics that it's facing, where you will have a shrinking population over the next decades, rapidly aging population, struggling to get birth rates up, even having gone well past the one child policy, but actually struggling to get people to have kids. I mean, that doesn't sound like a war economy. It sounds like an economy that needs a lot of things that are domestically based, whether it's, you know, social care, health.

21:02Richard, it just that seems like the one hole in what you've described is that the actual the population is not going to look like a very tough kind of warmongering economy. And it also will need a lot of this consumption and services that at the moment is not providing. Yeah, I mean, it's a good question. Certainly, demographics used to provide an extra point of GDP to China in the 80s and 90s. Now, it's the opposite of the case, and it's happening much, much faster than the Chinese expected. Xi Jinping is a very powerful leader. The one thing he can't do is make women have more babies, and China is facing the same challenge that many other countries, including in Asia, South Korea, Japan, Taiwan, facing there.

21:44I don't think it's an immediate challenge, though. I'm not a fan of the idea that, you know, demography is destiny in this respect. But I think one of the interesting points about that, once again, that's, you know, doesn't get much coverage, it's difficult to write about, though, is the point about the services you're talking about, aged care. How do you look after more and more elderly people with fewer and fewer workers to support them? And, you know, Chinese people are very lightly taxed. Personal income tax is very low. The tax take, federal tax take, central tax take in China is very low.

22:20Let me give you one figure. If you look at countries like mine in Australia, I suspect the UK, the US, Europe is much the same. If you look at personal income tax, that provides about 30, 40 % of central government revenue. In China, it's about 7%. So when the government starts to look for extra tax, where are they going to find it? Chinese people are used to not paying much and they'll be very, very angry when the state comes to them for more. So I'm not thinking it's so much the fact the fewer people, but it's just the ability to support fewer people in the way the budget operates right now.

22:57So that will be a tremendous challenge. I mean, I'm just looking at the numbers. The medium variant forecast is that the population of China will fall by roughly a third over the next 50 years. That's true, but I guess we should be looking out to about 2035. That's when Xi Jinping, I think that's the real target date for Taiwan. Xi Jinping is still aiming to be in power by then. He'll be 81 then, about the same age as Joe Biden in his last year of office. He has excellent doctors. The Chinese leaders have organic farms to grow their vegetables. So I think that's why I'm not, you're absolutely right.

23:35It's the, you know, the slump in births in China is quite astounding, but I just figure that's a longer term rather than a near term problem. Fair enough. Of course, it's the Chinese that are used to thinking long term famously rather than short term. But I've taken this way off topic. And before we end, I do want to be looking maybe just to the next 12 months, which is nothing in a view of a long termist Chinese leader. But for President Trump, obviously, he's looking at the midterms. We've already mentioned we're looking at several meetings, three or four meetings potentially between President Trump and Xi Jinping.

24:14First, Dan, how do you think Xi Jinping will be looking at the next year and how to kind of build on the kind of unexpected advantages that have accrued from the first year of the Trump administration? I think Xi, as Richard said, this stability is giving him a window. So he'll want to keep that going. He'll want to charm Trump when he's over here and see how far he can push things. We do see that the national security restrictions that have tied up the U.S.-China economic relationship for the past couple of years, Trump is probably the best bet to roll them back, even if the consensus in D.C.

24:58isn't quite there yet. But you could very well see Trump agreeing to allow investments in Chinese EV factories into the U.S. or do other things that would be helpful for Xi ultimately as he looks to reduce trade tensions, increase markets for Chinese goods, and just bring stability on the global stage. Xi has a lot of problems at home, as we've noted. There's the economic problems. We didn't talk much, but there's also the military troubles. He just got rid of his top general and most of his top generals over the past 12 months. And he's coming up on a big year. I mean, there's the party Congress is next year.

25:37That's a once in five year leadership reshuffle. So there's going to be a lot going on domestically. And the more he can keep things stable around the world, the better it is for him at home. And a big part of that is just keeping U.S.-China ties on an even keel. Richard, what's on Xi Jinping's bingo card for 26? Yes, I think that's right. The big question is whether he can keep Trump at bay and the whole US system at bay, because Trump, in some respects, has called off the dogs because he's looking for some stability with China. And frankly, he was cornered by China over the critical minerals embargoes, and he backed off.

26:19Remember, every other country prostrated themselves before Trump. China stood up to him and in fact won in the short term, obviously. So I think China is, that's a kind of global turning point in some respects. It's a peer-to-peer competition now. But the contest between these two countries, I think, is baked into the cake. There's grand structural divide there. It's only a matter of time before they start becoming more competitive strategically, militarily, technologically, and politically. so I've got my eye on how long that lasts for and whether Trump might change his mind which of course he could do tomorrow he doesn't really like China he's just settled with them for the moment but when does that finish?

27:04We will find out my own little predictions for the summit in April that President Trump will threaten to call it off at least once if not multiple times it will be a triumph for the US according to Donald Trump and you can't help thinking China will get something very quietly that it really wanted in the meantime. But there will be very little paperwork attached. We'll see the small print. Richard McGregor, Dan Tenkate, thank you so much. Thank you. Thank you. Thanks for listening to Trumponomics from Bloomberg this week in Hong Kong. It was hosted by me, Stephanie Flanders. I was joined by Bloomberg executive editor Dan Tenkate and Richard McGregor, a senior fellow at the Lowy Institute in Australia.

27:48Trumponomics was produced by Sam Asadi and Moses Andam with special thanks to Yang Yang and Naomi Ng and Malcolm Scott Sound design is by Blake Maples To help others find the show, please rate and review us highly wherever you listen to podcasts

28:20Thank you.