The IMF World Bank Meetings kicked off this week in Washington, and this year it feels very different. The world trade system is in chaos, and the US, usually a world leader in many ways, is now the cause of this chaos with President Donald Trump's tariffs on the world. You're
listening to Asia Centric from Bloomberg Intelligence. I'm Katy Dmitrieva and this week I'm in Washington for the IMF World Bank Meetings, where the world's economic leaders have gathered for the week, and where the global trade war is hanging over the city. Arguably, the US and China is the relationship and trade deal to get right, and so far
there don't seem to be many off ramps. Every few days it seems tariffs are escalated, heated words are exchanged, and the leaders of the world's two largest economies aren't getting any closer to actually talking. This week, we have probably the ideal person to talk to about this. We have Arthur Kroeber, co founder and head of research at gav Kal Dragonomics and author of China's Economy What Everyone needs to Know. Arthur, thank you so much for joining us.
Great to be here.
So let's kick off just as a scene setter. What's going on this week in DC? I noticed this year it's a bit more quiet in some ways. You know, there's usually kind of posters up or flags, but it's a lot more quiet this year. What does it kind of feel like?
Well, I think the difference between this year and all past years is that we have the mother of all trade wars sitting in the background. Trump, despite having back down from his most extreme tariffic proposal, still has ten percent tariffs on pretty much everyone in the world, twenty five percent tariffs on some products like Steve Will and aluminium, and anywhere between one hundred and forty and two hundred and fifty percent tariffs on China, depending on exactly how
you count them. And so I think anyone who's looking at the macro economy in any country or in the world as a whole, it just has to say, we don't really know what's going on until we see what the impact of these tariffs are. And remember the economic data that we have to work with only goes up to the end of last month. Well, we didn't have all of these tariffs. So we're in a whole new world and no one is quite sure what is in
that world. So I think that probably accounts for the feeling of amusement that you may see around here.
Yeah.
I mean, usually the IMF meetings are really more focused on macro central banks, and this year it really is arguably about not just trade, but specifically US and China or that relationship.
Yeah, and I think what the transformation that we went through at the beginning of April was that Trump initially announced these very high tariffs on essentially every country in the world, and what we were left with was much lower tariffs, still significant ones in most countries, and gigantic ones on China. And what's interesting to me is that of all of the countries that got hit with these high terrifs, China was the only country that responded to
this by direct retaliation. They ratcheted up their own teriff rates on US products to very high levels, and so you got into this tit for tat war of terrif escalation, which has left US in a very unusual spot. So two largest economies in the world tariff levels that, if they're fully enforced, basically mean that there's a trade embargo between the US and China, And we've just never been in a place like this.
Before how bad does it get before there is a deal that's to be made.
Well, if you're talking about the US and China specifically, I think the Chinese have actually made their position quite clear. They've said, we don't like trade wars. We don't think they're good for everyone. They put out a white paper saying, look, if you look at the total economic relationship between the US and China, Yeah, we have a goods trade surplus, but the US has a big services trade surplus with China. Plus, US companies make a ton of money in the Chinese
market from domestic production. By my estimates, the sales of US companies in China are about triple the value of US exports to China. So when you add all that together, according to the Chinese, actually it's a balanced economic relationship. So they think this whole thing's unreasonable. So that's their position, and they've said they're not going to raise tariffs anymore because at this level, tariffs are a joke.
That is a literal quote from the Chinese Ministry of Commerce.
And they've said, look, if you're willing to talk about real things and be reasonable, we're happy to have a discussion, but we're not going to make the first phone call.
And the US has taken the position.
That no, China has to make the first call, and I don't think that's going to happen. So they're at a stalemate now where China has laid out its position, has stated that it's open to negotiation but is waiting for the US to make the first move.
In the US is saying we're not going to make the first move.
So where do we go from here? Because you've covered China as an academic, as a journalist, analyst, So in your view, how does this play out? How does this end? You know, is it the case that she might end up making that call? You just said, probably not. But how does this I mean it has to go somewhere?
Right, Well, it's a good question, and maybe it doesn't have to go anywhere, Maybe it just stays in place. But I'll give you a few ideas about how things could play out from here. So number one, she is absolutely not going to make that first call. The Chinese have been very, very explicit and pretty i would say,
open about what their negotiating agenda is. And I think the other thing that's important to add is that they tried sending messages to the Trump administration in January February several times about specific things that could be discussed on try, including many of the things that Trump administration has talked about, like ventanyl flows and stuff like that, And each time that they sent these ideas through, they got no response, and instead they got more tariffs on ventanyl into two tranches.
So their view is, look, we've tried to negotiate, Trump has showed no interest, So we're going to stop and we're going to do our thing and we're going to protect our economy as best we can. And they have a lot of tools that they can use, and then if the US wants to negotiate, it is on them to come to us and explain what it is that they want to talk about.
Then we're happy to talk. So I don't see that they're likely to move at all.
And there's going to be a lot of pressure in the Chinese economy this year, but my sense is that the government is confident that they can handle the pressure and so there's no reason for them to make a move. Now. If you look at the Trump administration, essentially, of two things that have been said, one is President Trump has said I want Chijen Pain to make the first call.
That's not going to happen.
He said that a few times, several times.
Yeah, and him saying it more times doesn't make it any more likely to happen. So I think that's just unrealistic. And then you have the Treasury Secretary Scott Bessens, who said, look, our negotiation strategy is we're going to cut lots and lots of trade deals with other countries first, and then we're going to all gang up on China and get China to change its ways.
Or put another.
Way, what he's saying is we're going to go to countries and say, if you want lower tariffs, then the price of those lower tariffs is that you have to increase your trade and investment restrictions with China. And that is his stated open negotiating strategy. I think there is almost no chance that that can possibly work.
You mean other countries, Yeah, other countries.
Won't do it because the majority of countries in the world have China as their number one trading partner. Many of them rely quite significantly on flows of technology or investment to or from China. These are very deep, complex relationships that have been built up over de kids, and no leader in his right mind would throw that down the drain for some kind of a deal with the US administration that has shown that it doesn't really adhere to deals for more than three or six months at a time.
Even with the tariff levels where they are, though, I mean, it's going to be really painful for economies like Vietnam, Cambodia.
Yeah.
So I think there will be a few countries, you know, like Vietnam, which depends heavily on essentially being a conduit for trade from Chinese component factories through to final demand.
In the US.
But even there, you'd think that they have a big incentive to deal. But you know, a few days ago, Hijin Ping went to Hanoi, he got the red carpet treatment. They signed forty five different agreements. You know, probably some of them were, you know, not all that meaningful, but Vietnam was signaling, look, we think that this is a really important relationship. We value the Chinese relationship and the
US relationship. So I think even a country like Vietnam is going to push back pretty hard in some stance on being told to cut back trade with China because they just can't afford.
To It's literally impossible for them to do so.
I think the problem that you have here is that the United States has set out some very unrealistic expectations for what can happen, and I think basically those expectations have to be ground down and then the US has to find some other way to negotiate. And we saw a glimpse of this a while back when Trump announced that electronics imports.
Would be exempt from tariffs.
And what was interesting there is that the Chinese government the instant that that message came out, they had a statement that said, this is a good step, this is in the right direction. We'd like to see more, but we're looking with interest. So that was a very clear signal from China that they were looking at that as a possible off ramp. That you exempt a whole bunch of specific products from tariffs, you lower the temperature and then you can start to have a discuss about things.
So again, I think that the Chinese have been clear that they're looking for a way to negotiate because this is not an ideal situation for them, but they're only willing to.
Go so far.
And then the problem was after that Chinese statement, Trump and Secretary of Lucnik came out with statements saying, oh no, no, these these exemptions electronic, They're only temporary. So they backed write up that off ramp onto their tariff super highway, and they're still speeding down the road.
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The other question that comes with a potential deal or what it might look like, is whether China actually needs it. You know, we've had a lot of economists in the private sector coming out with revised estimates for China's growth this year. They're not necessarily going to be able to make the five percent target. So what's your view on that. Is it possible with these tariffs to meet that target?
Yeah, it's going to be tough. So before the tariffs, China had launched quite a lot of monetary and fiscal support, and with all of that support, we thought they might just be able to hit the five percent for this year. And then the tariffs come on, and you know, most economists estimate that they'll knock off at least a point and probably two from Chinese GDP growth this year, so they'll essentially eat up all of the stimulus that has
already been announced. So if they want to get close to five they're going to have to do a lot more, And they've talked a lot about stimulating consumer demand, et cetera. But it's going to be tough. So I think that's one of the reasons that these their preferred outcome here, that there is some kind of negotiation and the tariffs
come down. They're not trying to prolong this unnecessarily, but they also want a deal that kind of makes sense and reflects economic fundamentals, and that frankly doesn't make their government look too weak. So Xi Jinping really has to look strong, and I think this is one of the reasons that they decided to retaliate, which no other country did. But I think number one they were frustrated that all
their efforts to negotiate had been rebuffed. And then number two, they thought, well, we're going to get high tariffs no matter what we do. So politically, what's the best way for us to play this. What's the best way for us to mobilize public support at home for what we know is going to be difficult no matter what we do. And I think they came up with the answer that we're going to fight back and we're going to prove
that we're strong and we're standing up to Trump. So politically it's pretty important for them to to, you know, maintain that posture. But it's going to be tough, and you know, if there is no resolution to this within the next three or four months. I'm personally pretty skeptical of the hit five percent.
Even with the additional monetary.
Even with additional stimulus, it's just very, very hard to get consumer confidence going. Again, that's not something you can turn a switch on. But I think the point is they're willing to take that pain. Essentially, what they're saying is like, Okay, maybe we don't hit our five percent, maybe we get three and a half percent.
We'll live with that.
Because we think that we can live with that outcome more than the US public can deal with a lot lower growth and higher inflation that's going to come down the road from tariff. So if we have to, we'll just play a waiting game and we'll see who cracks first. And we bet that it's the Americans that.
Will crack first.
Yeah, So literally a game of chicken.
It's a game of chicken, or economic attrition or you know, whatever you want to call it.
Yeah.
Yeah, And you've just said that consumer in China it's not just about flipping a switch. You know, it doesn't happen overnight. This really doesn't happen in a few years. What's your read on the government's moves right now to try to stimulate the consumer is that, you know, they had this trade in program that seemed very successful, but sort of a longer term.
Well, I want to back up and just give you my theory of what ails the Chinese consumer. Please do because the reality is, I mean, if you go back to twenty nineteen, before the pandemic, Chinese consumer is in pretty good shape. It was a vibrant, fast growing consumer market, very diverse consumption of both products and services, becoming more sophisticated, doing a lot of international travel.
It was a very positive story.
And basically what we've seen in the last years is that story went off the rails. I think reason number one was that you had the pandemic and everything shut down for a few months in twenty twenty, and China was really the only major economy in the entire world that did not help out consumers and households during the pandemic. The US mailed stimulus checks, most European countries put in employment or wage guarantees. China did nothing, so there was
a big hit to consumer confidence. Then things came back a bit, and then they got the second round of the pandemic in twenty twenty two, Shanghai lockdowns.
It was really bad, and I.
Think Chinese consumers were just traumatized by that sort of double whammy of getting hit and not getting any support from the government, so they were very cautious coming out of the pandemic. And then, of course, the other thing that happened in that period is that the Chinese government decided to squash the property market, which is the main source of household wealth. They've done a very effective job of that, and they've been very determined not to reinflate
the property bubble. But what that means is that one of the key sources of household confidence, which is their rising wealth, has been knocked out. So you have kind of a bad employment market PTSD from the COVID lockdowns and a comatost property sector and you add all that stuff up, and Chinese consumers are just they do not want to spend an extra nickel if they can avoid it. And so how do you reverse that cycle because that
also feeds into business confidence business as well. Consumers aren't buying, so we're not going to hire or invest in new acqui And if business is aren't hiring, then households say, wait, if I lose my job, I'm not going to get a new one because no one's hiring. So you have a negative confidence spiral and you have to do a bunch of things to turn that around. And I think they're going to have to do quite a bit more in terms of promoting private sector business confidence, which they've
started to do with the Internet companies. They probably have to do a little bit more to support the property market than they're comfortable doing now, and they probably just have to pump a lot more government money into the system than they have done so far. And I think at the end of the day they will be willing to do all of those things, but they're doing them kind of slowly and step by step, so it's not going to be easy for them to turn.
On a dime and get consumer confidence up again.
Yeah, and for the consumer specifically, do you see these measures as sort of a shorter term, you know, trying to address the issues in the short term, or do you see this as fundamentally potentially changing the psychology of the consumers longer term? In other words, can this actually create a consumer led economy?
Well, so, I think a lot of the stuff that they've done up until now has been essentially short term, like these trade in programs, and trade in programs did work a lot better than I thought they would, frankly.
And that's the equipment and home applying.
So if you have an old appliance or an old car, you can trade it in, you can get a subsidy to buy a new one, and that's you know, been reasonably effective. But essentially what that does is says you're going to buy something in two or three years anyway, Why don't you buy it now, so that's just borrowing demand from the future. It's not really creating new sustainable demand,
so that's more of a short term fix. Similarly, you know, JD dot Com has set up a fund to buy goods from exporters for resale on the domestic market, so that's again that's kind of like a short term gimmick that's not going to really get.
You very far.
But I think the thing that has changed is that since last December, Xijionping has made it very clear that promoting consumption is a top political primary and this is very different than at any other time in his administration. So the political importance of promoting consumption has now become paramount,
and that makes a big difference. In the Chinese system and the Chinese system, a lot happens based on signals from the top government officials, and for the last five years, the signals were mainly, we have to invest a lot in high tech industry to become self sufficient. It was all a supply side strategy. Now the signal is very
clearly we need to work on demand. And so what usually happens is that they flail around for while after these signals go out and then gradually they figure out tools that help them get to.
The desired political objective.
So I think that is important, and I think over the course of a year or two, what that will mean is that you'll probably get stronger consumer activity. I don't think you're headed towards a consumer led economy because the DNA of huge and pain in the communist parties.
It's all about growth.
Comes from investment in technology. That's what they really believe at bottom. So even if they've made a pretty big pivot right now to support consumption, I think their longer term strategy is still very much all about technology investment.
Interesting because that isn't necessarily I mean quite aside from what officials in China have said. I mean, you heard Janet Yellen speak about the importance of China pivoting to the consumer. You're seeing a lot of other countries who are hoping that that happens so they don't get access stuff from China.
Yeah, and I just think that it's going to be a long, hard slog to achieve that. You know, other central bankers, trade ministers, you name it. They've been talking for decades literally about how China needed to invest less and consume more, and the Chinese have been, you know, not very interested in what these people have to say.
So I don't think that they're really going to take too many cues on their domestic policy from Janet Yellen, to be frank shocking, but I think there is a problem, which is more and more countries are running bigger and bigger trade deficits.
With China on goods.
And some countries don't care because they're never really going to have manufacturing anyway.
But a lot of countries do care.
They want to have their own manufacturing sectors and they don't want them to be hollowed out by cheap Chinese goods. So I think the way to get around that, and you've seen this, I think with some of the negotiations between China and the European Union is for countries to say, all right, if you want to export your stuff to us,
there's going to be a terif on it. But if you want to build factories in our countries to build that stuff with local employment, with local supply chains, with technology transfer, fine, so you can serve our markets, but you have to do it based on investment in this country rather than buy exports. And that is actually what the United States said to Japan in the nineteen eighties.
We're absorbing a lot of imports of Japanese cars, semiconductors, other things, and essentially we came up with a modus vivendi where the Japanese companies agreed to invest a lot more in production in the United States. Japanese companies still make a ton of money from the US market, but a lot more of it is from domestic production.
Here rather than through exports.
And that is a viable way of addressing the problems that are created by these mercantilist economies that like China or Japan, that really want to stay export driven forever. As you say, we're going to take some of those exports and we're going to compel them to turn into domestic production somewhere else.
But we're talking so much about trade these days, I feel like there might be some other risks we're missing. Is there something else investors should be thinking about?
Well, it's a fair point, because you know, if you look at the US economy, for example, imports are only about eleven or twelve percent of GDP.
In China, it's.
About the same imports around ten or eleven percent of GDP exports are you know, the high teens, but you still have a very large part of the economy. These are both gigantic economies and most of it, frankly, is domestically driven. So the multipliers of trade are very high, and that's where the change is occurring. So it makes sense to to pay attention to it. But you're right, China is a big economy, and before the trade war rolled along all of us China economists were talking about
other stuff, mainly deflation. And this gets to the consumer stuff that we were talking about a minute ago, that China for the last basically three years has had a falling price level, which is very unusual. China has had some episodes of deflation before in the last thirty years, but this is the longest.
It's the most sustained.
It's not the deepest, but it's the one that's lasts the longest, you know, And it reflects in part this lack of business confidence, lack of consumer confidence. People hoarding savings and not willing to spend it. So what winds up happening is that you have a lot of money available to invest in creating new supply, but you don't have enough demand to buy the stuff that they're making,
and so it all winds up heading into exports. And so the question that a lot of us were focusing on was how is trying to get out of this deflationary trap that it seems to be in. And some people say, well, this is like Japan in the nineteen nineties and they're really heading off the rails. And I was never in that camp. I won't bore you with a long list of reasons why China is not Japan in the nineties, but it really not.
It has a lot more growth.
Potential than Japan did at that point. They have made some mistakes and macropolicy, but if they correct those mistakes, they could certainly get back onto a much more vibrant economic growth track, you know, even with some of these trade disruptions. But what that means is Number one, I think they have to be a little bit more aggressive on fiscal policy.
Interest rates.
Real interest rates are quite high in China. They can come down. They've been reluctant to get close to the zero bound, but I think they need to do more work there.
And then the big thing is they have an over.
Regulated service sector. Because my two liner on China's economy is manufacturing is over invested and services are overregulated. So they have all this investment in making stuff, which they're ver good at, but no one in China wants to buy. But a lot of the service sectors have lots of regulation, lots of state owned enterprises that participate in them, not
enough space for entrepreneurial innovation. And so if you deregulated service sectors, you might be able to get a lot more employment opportunities for people as private entrepreneurs figure out how to do things better. In education and healthcare, in transport logistics, in tourism and entertainment, all of these things
are subject to a lot of controls. So my thesis on this was that they could do a lot more on that, and that would be sort of a key to getting more dynamic and essentially consumer oriented growth.
The problem is a lot of the.
Service sectors wind up being very close to Communist party sort of control red lines, you know, like you can think about finance, media and so forth. They don't want to deregulate these very much because it would be too dangerous politically. So they've got a bit of a problem there in terms of how do you get enough dynamism back into the economy while not crossing any of these political red.
Lines without losing control.
Yeah, essentially exactly.
So deflation, service sector deregulation question work. Yes, trade war. Where do you see China in about four years time, specifically the economy in about four years time?
Uh?
Boy, that is really hard.
Well, because you know, this trade war thing is so large and so unpredictable.
You really don't know.
Is the entire global trading system just going to be completely reconfigured over the next four years, or are we going to have this storm that abates and we go back to something like that.
We had a couple of years ago. Both are possible, you know.
I think basically what China is going to look like in four years is if you think that they're sort of a technological superpower now, they're going to be much more of a technological superpower across more sectors. You look at industrial automation robots, they're the biggest consumer, they're not the biggest producer.
They're innovating very quickly.
They're also doing a lot of innovation in new sources of green energy like hydrogen things like that. So I think the technological development at China, if anything, is only going to accelerate. But this could well happen against the backdrop of an economy as a whole that's still pretty sluggish, that's growing maybe only three percent a year, still kind
of deflationary. Both of those things can be true at the same time, essentially because China is so gigantic that they can have a very vibrant set of tech sectors that are globally competitive and leading edge and innovation, and an overall economy that's still kind of slow. And I think this is one of the things that people in the rest of the world have a hard time wrapping their minds around. They think, if China slows down that much, then the edge is going to come off its technological
gains also, and I just don't think that's true. So I think the main thing we have to think about is China as a growing technological force in many more fields than we see it today on the one hand, but also China potentially being a slower growing economy, and those two things can exist simultaneously, I think for many years.
That's maybe a good note to leave it on. Okay, thanks so much for joining us.
This week.
It was my pleasure. Thank you.
You've been listening to Asia Centric from Blueberg Intelligence. I'm Katidmitrieva in Washington. You can find our podcasts on Apple Podcasts, Spotify, or wherever you listen. This episode was produced by Clara Chen and Special help this week was given by Rachel Lewis Kriski here in Washington. Thanks so much for listening.