Surveillance: Tariffs Are Attacks On Importers, Roach Says

what do your tann in clients this week? Well, I think you have to stand back for a second and take stock to the fact that Trump has never had a stronger hand in which to go at China. Was all right, he's got very stable approval ratings. He's got a market that just a week and a half ago was that fresh highs um. He has also very importantly, you know, six months ago we didn't have the Powell

put and now he does, and he can leverage that. Right, So it's an asset that he that that Trump can leverage for his policy goals um and and arguably his political goals of of really trying to come away with a with a real deal in China. So so I think that the narrative going into this a week ago and said, oh, this is just a couple more tweets here and some of the usual back and forth, and we're on the sort of slow but steady resolution to trade.

I think you have to take, uh, you know, just step back and realize that a Trump is going to push this part. Now's the time and is still far away. So can you have to ask yourself the question, can Trump a board a six percent drop in the market and a fix it stays in the twenties for a few weeks or maybe even higher. I would suggest to you that he can. Well, let's talk about that. The three areas of potential policy support that I hear so much from so many people on programs like this. Three puts.

The pound put the Trump put, the Sheep put the pound put effectively being that the Fed will be reactive to time of financial conditions. The Trump put a fact of the bank that he has market sensitive policy preferences, and that she put essentially being that she and China

is willing to offset risks with more stimulus. The reasons to doubt the deployment and all the effectiveness of all three of them, Well, you know, I think to a certain degree you can you can almost think that Trump might be for the moment sort of coloring the market, you know, um where there is some sort of Trump Trump trump put here. Um. The question is is we don't really know the Chinese reaction function. I think the working narrative or assumption is is that, hey, you know,

we've got the stronger hands. So it's just you know, you know, if everything is within our control. We don't really necessarily know that. We don't know what what what what China inks own internal um situation, at least how it BET is going to unravel there. So I think it's a little bit of a you can't necessarily assume that Trump put is is absolutely there because we don't know the Chinese reaction Punk, what are you doing on

this Monday morning? Are you deploying capital to speculation or investment? Are you under the purvous desk? You know, you were just making a point about you're not seeing the correlations across asset classes really come together. And that's absolutely true. You started to see some things pick up. You saw certainly the Chinese currency volves pick up. That must spill over to the d M currency balls. You're not seeing it. But again we're just you know, we're just we just

started with the equity move here. But the theme I really think is I've been advocating is that credit spreads have yet to back up, but that that's the replay of what happened in October equity lead. It's a little bit unusual usually creditly, so I think if you're looking, I think there's gonna be more risk of coming here. John, jump in here. This is Michael. This is really important. Credit spreads it not backed up, and I know we're weeks away from the next episode of the Real Yield John.

The bond market is pricing economic slowdown this morning. Forget about spread. Let's distinction. Let's draw a distinction between the bond market you're talking about in the high yield market, the sovereign debt market treasuries Yes, yields a lot at the front end, and the way that they are suggesting that we have a market that is still believing that the next move could be a right cut the credit markets home. We had a great week of of issuance last week for investment cred and high and it was

all sucked up and taken away pretty well. Spreads to widey yes, but I don't think the credit mark is this price for a material slowdown just yet. I don't see that, Michael, do you no? And that you know? I think if you go back to the narrative in October November, the framework back then was the credit wasn't

really seeing a big economic slowdown. It was really sort of what happened was that there was a rerating of the equity risk premium and then that persisted UM and and all of a sudden there was pan risked off into November December, and then you know, that's when the credit spread, the high yield spread started backing up. That's what I'm saying right now. If you're looking, we're hedging, you know where the vics we're where it's at. Right.

You can find cheaper hedging by simply taking a view that you know you can buy puts, for example on the h y G E t F that that tracks the high yield universe UM, which is where that ball is cheap. And that has looked a little bit, but not that much. I just think if there's more risk off coming, it will spread and you will see that

cross ass a correlation spike. Final question, Let's talk about regions globally, there is a belief quite widely how that the hierarchy of vulnerability globally speaking is China first, then Europe M, and then the United States, the United States being the most relatively it's so insulated to the trade story that was playbook any different, um, it's a very fair question. Look, and you're we're talking economics not markets here, right,

both consequentially? Okay, well, you know, just you know, economically, that would seem to be the right narrative there. I do think that there's a there's a real case though that the you know, Europe as the sort of this this UH spillover effect onto these China US focused trade that's that is very very significant here. So I'm not sure how much of a distinction throw on between China and Europe right now in terms of economic sensitivity there.

I would certainly on the market side, I do think that the US equity market is certainly going to be among the most vulnerable, only because we've you know, we've added on two pe points since UH since December, and we've had record valuations relative valuations for example, the text

sector relative to the SPX and so forth. That you have to leave it there with the market valuation and negative thirty seven and down Michael Purvis with weed this morning, John, you've got a plan, You've got a script with Stephen Roach, and then you've got tweets. What happened tweets? You just rip up the screw the tweet storm? Can you tweet? Professor? I can, but I don't. Well, you should come on. We'd love to hear from you. We would love to

hear from from Professor Stephen Roach on Twitter. Come on, of Yeah, he's joined us in the studio. Great to see you, professor, the President saying the following there was no reason for the West consumer to pay the tariffs which take effect on China today. This has been proven recently when only four points were paid by the US twenty one points by China, because China subsidize his product to such a large degree. We've of course got to draw a distinction between who pays the tariff and who

absorbs the higher cost. Mean, by definition, the importers pays the tariff, but who absorbs the higher cost? Far more nuance, wouldn't you say, professor, Not not nearly as nuanced as the President is trying to oviskate and have you believe you said it, Jonathan. Tariffs are attacks on importers. We are the importers. China is the exporter uh and um you know al to only if um uh, if there's diversion of trade away from China for a saving short US economy. Uh, those costs will go up because we'll

be importing from higher cost nations other than China. Uh. And and so the President's got it completely wrong in terms of the impact of tariffs on US businesses and consumers. But at the beginning, you can't talk it products with high valuability of substitutes. You can talk at products that have high elasticity of demand. It puts the onus then on the exports to absorb the cost. There has been several research reports that suggests that has been the case.

And the only pot that tried dispute. And I don't know what kind of research you're reading. I've seen two studies on the impact of Trump's tariffs put out by All Star casts of economists, and they have concluded that literally one of the President's tariffs have been borne by the costs of which have been born by US businesses, in US consumers by and I can give you one such report right now. ACoM polled Europe Network of Research

is in the European Union. They essentially say that four point five percent have been paid by US consumers of the tariff, twenty five percent Chinese producers. And with all due respect, it's wrong. I don't I don't know where you get your research from. You read the paper to you, Okay, well I've got one out there too. I'll bring it in and one we'd love to look at it. Yeah. I look at the partial differentials of all this and to me, Steve Roach, it's like moving from the X

y space. You're at Yale University, you're teaching, and the adults are in the x y Z space. They're in a three dimensional space. What is all the punditry missing here? What are we missing about the complexity and richness of this? William Klein oh I Adore Peterson Institute would say, the leakages, the adjacence eas here are off the chart, and nobody's talking about him Tom And that's a deep and important question. But but the you know, the the issue here is

um I think, um, you know what. The there's a perception that America is strong, and we've been um egregiously damaged by China for generations, and so at this moment of great strength, we need to put them in in their place. And its absolutely allows for no possibility that this is a two way relationship. That yes, China relies on us, but we also rely on China, and so when we take actions against somebody that we rely on,

there are consequences. That China has yet to respond to the increase in US tariffs, I can assure you they're going to UH and those responses will bear critically on our companies. Who is our biggest exporter, Tom the company it's it's Boeing Bowing is under a lot of pressure for other reasons. Do you think Wing is gonna get a uh, you know, a free pass in this next

round of UH? Very quickly here, if Apple is a big exporter, or at least a prestigious exporter, and Apple doesn't get a free pass either, no one gets a free pass. I mean, whiskey from McConnell's Kentucky doesn't get a free pass. We all get that, But what about Apple? They won't get a free pass. Um. It's it's ludicrous to think that big companies who are account for a large portion of the bilateral trade flows between these two countries. All of a sudden, I get exact dispensation. I know

you've got to go to run out of timer? How's a great inflation at yell? Are you giving out enough season? You know? You know we have we have, we have a good balance in our good bodies. And you know, not all students get, you know, the top grade that they aspired to. I just turned in my grades on Friday, and you know most of them have a small seminar, did extremely well, some of them did less well. Very good, Stephen Roach, thank you so much your university on an

important day. Were thrilled. Thank you. This is an immense joy to have Kidgin with us, who's with a London School of Economics and has just an exceptional perspective on China the US. We do this with futures at negative forty down futures a negative three and Professor, what I want to do is go to u A seven names, g Lee, another Lee, Awang, Awangao and a Han that is the Chinese Communist Party committee that the trade delegation has to go home to in Beijing. How do they

distill or respond to what they served in Washington. UM. For first of all, they have the Chinese people to to face, not just the top leadership. UM. The Chinese people UH still wants the Chinese government to stay strong against the US UM kind of demands. UH. The US tension. Trade tensions have caused a rise in the surgein nationalism in China. And the argument is also that if we if the Chinese cave in this time around, what's going to happen next? There will be in a worse position

in the future. Well, the markets down in priced down and with the correlations that we're beginning to see the two year yield in five basis points, how does an international relations expert like you correlate all this politics into market moves? Uh. There are various forces at least inside the Chinese economy that is contributing to the to the market reactions. UM. Not only the uncertainty that has been

brought about by trade war. Of course, the direct direct effects of the trade war has yet to be seen, but certainly uncertainty has caused much panic. But there is also a slowdown of the Chinese economy that has nothing to do with the trade war. And in particular more to do with the deleveraging process and in general policy uncertainty, how the Chinese businesses, the private entrepreneurs will be treated. These are all confounding elements. Just looking at the moves

in the pre market. So I'm got to bring up pop but down five percent, red headline just across the blame bog terminal down five We're going to try and talk about this a little bit later. Not great futures, futures connecative fort sm down by one point four Excuse me, Professor I will come back in with a trade related question for you. We will avoid the uber conversation. A lot of people are looking for China's next move is both in terms of retaliation and in terms of the

next move on stimulus. You've touched on that just a little bit. Talk to me about how limited the appetite is of the current government to actually reach for a full scale, large scale stimulus in a way that they had done in years previously. Why that's not happening this time around. The large stimulus in the past have created these huge credit expansions and credit cycles. That's causing a lot of the macroeconomic woes that we're observing today, So

they want to avoid over using this kind of policies. Um. And of course we still have bubbles looming in the Chinese background, in the economic background. Um. But in terms of trade tensions, they of course want to seek a solution. But on the other hand, they probably don't want to have a reach of full solutions so that they can still continue the arguments with the US, because if the trade gets resolved, what's next? Those are more intractable problems

for China to deal with. Wrestler. I brought this up with Steve Roach. It's one of the great books of the giant Jonathan Spence of Yale University that CON's great continent China in the Western mind is the thought process of modern Chinese leaders anywhere remotely near to China nine China eighty, you know, obviously not China nine fifty. But is this a modern set of leaders that were possibly

going to miscalculate on? The modern set of leaders that we're thinking about will be the next generation of leaders, possibly the one that will succeed President She Okay, he will leave his term, don't don't you worry, um. But there is a lot of similarity still in terms of the paternalism in the system, the the stability, the kind

of organization, the discipline, the outward view. And I would say that with President she Uh, there's definitely a stronger Chinese kind of a stance that China somehow not really going to sit in some global existing order, but possibly shaping it. And that's one big difference we've seen with compared to the past two leaders. Well, then let's get you out of the ivory tower in in into market tactics. What would you expect given what you just said, Is

they quote unquote retaliate or not? They will? I suspect they will do some form of retaliation, if not fully symmetric or full scale, because that's not realistic that they will have to respond. Yes, professor, just the final question for you, your base case for retaliation from the Chinese? We still wait. The market is still nervously looking to

see what it will be. You can't have accurate tip fitat of course, because China running imports so much from the United States versus what the United States imports from China. So what kind of scale are you looking for in terms of retaliation. I think they will still go for narrow UM industries, UM and agriculture, and those that will hurt the States that are political support based for President Trump. But it's really hard to say. Professor, thank you so much.

Kay gin with us with a lot of moving news this morning. She is at the London School of Economics. Professor, we really look forward to seeing you at Queen Victoria Street here soon. This is the interview of the Day on Trade. A book came out a number of years ago, two eight pages. It's a Council on Foreign Relations book, and it's one of those books you hate because it's so intelligent, so densely intelligent, intelligently written that the two

pages feels like four. But it's worth plowing through because it makes us so smart about the President's America and all of our America. Edward Alden. The book is Failure to Adjust, How Americans got left behind in the global economy. It was one of my books of the summer a few years ago. Ted Aldon. If you sat down with the President of the United States and you handed him a brief summary of Failure to Adjust, what would you

tell President Trump? Well, I'd tell him that the United States made a lot of mistakes in the first era of globalization, and his job is to make sure we don't make a whole new series of mistakes in the era that we're in right now. And I'm afraid that's exactly what he's doing. Hopefully, hopefully he'd he'd pay attention long enough for me to say that, let us go to the theory and get it out of the way first.

GLIB TV radio people like me can say it's mercantil is m The President's defenders would say, China has been cheating for years. Is it one the other? Is it both? I think it's both. I mean, I think the President's approaches clearly mercantilists, but the Chinese have been a mercantilist power for decades now, and the constraints of the w t O in a variety ways proved inadequate. I really think we didn't use the system as fully as we

should have. But the President's complaints about China are legitimate. The concern is over the tactics, and that's obviously what the markets in the world are concerned over. I don't think anybody's arguing over the diagnosis. It's the prescription that's the problem. So it ted just specifically about the most the most recent round of negotiations. What do you think went wrong that derailed the momentum that seemed to be

building up until maybe a week or two ago. Well, I mean, I I'm relying on the reporting here like everyone else, but I think it's clear that the Chinese backslided on some issues. I mean, the Chinese are tough negotiators, right, They're they're going to give as little as they can get away with. I think they thought they were in a stronger position than they were. What surprised me a little bit was the ferocity of the President's reaction to

move so quickly to impose additional tariffs. And then we've got another round them that's going to be announced, possibly today, certainly sometime this week. The issues are huge, and I think anyone who believed there was going to be an easy deal was not paying attention. But I certainly expected we would get, you know, some kind of preliminary accord and then we'd see where it went next. But but things obviously work look a lot worse right at the moment.

All Right, So China has reacted with its set of tariffs on some remaining goods. What do you think China will do next, Well, I mean China, as it actually has throughout this conflict, is behaving pretty cautiously. I mean, this is a retaliation that certainly doesn't come close to matching the dollar value of the of the U s tariffs. They're delaying in position until June one, and even then they're following the US lead and saying it's goods and transit.

So that's another couple of weeks for ocean going goods. So I think the hope is that maybe when the President and Shijing paying meet for the G twenty SMIT in Japan, that that they can call the halts in this. So I think there's there's still h some room of playout the negotiations. The Chinese have been remarkably constrained in terms of their reaction, but as you know, these things can change quickly. Right if they reach a conclusion that there's no deal to be had, we could see ramp

up pretty rapidly. Ted Alden, where this the book is failure to adjust, we are going to continue. I need to do a data check down. We go on the opening with a very nice bid to the market, and we're retesting that right now. We're a negative for eighty Now we're negative five twenty on the Dow, fifty nine SMP points down and the vix was under twenty now back above twenty, showing that new angst in the market.

What am I watching most closely? We are now at lows in yield for the two year today two point one eight eight four, well under two point one nine percent. I'm looking for a retest of yen. We're almost there, Paul Sweeney on a one o nine o nine yen. So a new retest to this market at nine fifty three Wall Street Time. Thanks so, Ted. Just I mean, one of the things I think the market was looking for, are you know, really over the last several months, is

maybe just some type of headline deal. Is that still on the table. It seems like it's certainly in both sides best interest, But even a minimalist type deal, do you think that is still a near term opportunity. I mean, I think there's still a possibility that the reality of Traine negotiations like this is they always go right to the edge of the cliff and there's always these heart stopping moments, and so I think we were never going

to get a deal unless something like this happened. Just very hard to predict with this administration because Trump likes tariffs and he's made it very clear that he's happy with the tariffs, and so I I don't want interrupt, but we just got a headline out, which is why we've come down China to raise tariffs on imports of US rare earths to We're with Ted Alden of of CFR, which is wonderful. What is the US rare earth are as as far as as far as I know, and

you guys can check quickly on your terminals. U S production rarers is very small. I mean, China is by far the world's largest rare producer. There are minds I think in Vietnam, a couple exactly Southeast Asia. The US is trying to get its capacity back in response to a Chinese export ban on rarers some years ago that we actually challenge successfully in the w t O. That was one of the places where the w t O worked.

The United States, Japan and other countries took China to the w t O said WO forbid export bands, and China relented. We am puzzled by that way. We had two thousand I'm puzzled. We're puzzled by everything right now, Ted Alden, there's twenty products. What's the banner headline across the Bloomberg that you're gonna wait for? Which product obviously soybeans, but which product matters to you within the obscure stuff

of trade? Well, I mean, you know, if you're looking at the U. S. Action, obviously the next round is gonna Co're gonna cover smartphones. Right if we go to the whole of Chinese trade, it's gonna hit Apple, and that's gonna have a major impact, even if it takes a while to be put in place. And from the Chinese and the big shoe that hasn't dropped his U S. Aerospace exports. I'm out here in Washington State. Boeing is a very important to the economy out here. That's a

big shoe that that hasn't dropped yet. So so those are the ones I'm gonna be watching. You mentioned Apple, that stock is is down five today, so entering in correction territory for that one. So, Ted, it seems like you know both sides again are incented to get a deal done. Is you have a sense of who will blink first, Well, I mean, I think that the Chinese are, in the short run, at least in the weaker position.

I think they would not have been so conciliatory sending lou Hey to Washington last week responding on a delayed timetable with its own tariffs. And the Chinese very much want to deal. But there's certainly a limit as to how far the United States can can push. Uh. There are big dangers, and Wall Street Journal is very good on that. I think over the weekend, big dangers of miscalculation, that each side thinks it's in a stronger position than

it actually is. And and so even though I do believe China is in the weaker position, it doesn't mean that the Trump administration can continue to push and push and push with the faith that China will always respond favorably. At some point it will say no and then and then things will really take a tumble. Ted, I've got another our questions. We'll have to do that later. Ted alden Uh coming to us from the West Coast this morning.

We greatly thank his attention with the Counsel on Foreign Relations. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio