Surveillance: Trade is Not Isolated, Kaplan Says

And Secretary Minution heading to China with a big delegation to talk trade at a time when the Commist Department is wrestling with request with allies for tariff exemptions and really pleased to say that this morning, this Monday, We're joined by Peter Henry is ny U Stern School of Business Dean emeritus and economists as well. Peter, fantastic to have you with us on the program kickoff things this week. Good morning, good morning, delight to be with you. Let's

begin with a Secretary Monution going to China show. We're heading to Beijing with a big trade delegation, Allies trying to work out whether the tariffs on aluminium still applied to them and whether they'll get tariff exemptions. Extended. Do you have any clarity on on the direction to travel of this specific issue, Pisa, Well, I'm not being on the forecast how this how this negotiation is going to

turn out. I think that's probably a fool's errand but I think the big picture to remember here is that the global economy is deeply depending on the United States and China having good relations, and that's got to be the center sort of negotiating stance of both both parties, because, you know, forgetting that, we lose sight of the fact that the United States has been benefiting enormously from lower consumer goods prices from from trade with China for years,

and so trying to get a better deal in some sense for US corporations, it's imperative to remember that the US economy, the world economy is a lot better off as a result of having more not less trade. We're sort of low and side of the fact as well, that much of what is on the table is just a proposal on the table and not a real change in policy. Um, are you surprised that we're a year and change into this administration and actually haven't seen a

substantial change in policy. Had a lot of proposals, a lot of retrick, but no real change in policy as far as I could see. Yeah, I think you know, you've seen a lot of volatility in terms of what sort of come out of in terms of proposals from this administration. I mean, you saw it about a week ago now when President Trump uh indicated he wanted to be back in as part of tp TPP and then not part of TPP. I mean, I think that's the

sort of thing you're alluding to. A bigger vision around trade, which says, look, the United States is only five percent of the world's population, but we're twenty percent of global GDP, and that would never happen without a world of free trade, and in fact, we should be pushing for more of that and creating more of a positive some outcome which will be good not only for the United States, but be good for the world, but in particularly would be good for the U. S consumers and the US workers.

And now we haven't seen that. We had a day of hope on Friday between North and South Korea and the President actually congratulating President She some warm words for President She for the amount of pressure that he's put on North Korea and I guess the big question mark at this point is whether we can blend continue to blend the foreign policy effort of this administration with the international trade story as well, because the President himself has

done that, and you just wonder whether there's an open door to walk back some of this retric on trade now that some improvement has been made on the North Korea side of things. I think it's an important point. I think that anything which, if you will, sort of de escalates the rhetoric around trade wars or retaliation and recognizes the positive some nature of global trade, I think would be would be useful, would be useful from the from the point of view of not um not backing

people into corners. But also I think I think markets would welcome that as well, and I think that would reduce some of the volatively we've seen it recently. Just in terms of what Marcus are looking at this morning, deal flow really picking up another one crossing the Bloomberg Married vacations to acquire I l G in a cash and stock deal, and Tom King you add that on to Sprint t Mobile this morning, a deal with Marathon in the in the oil space, the energy space, and

over in the UK. Of course, Walmart is selling that steak in in Asta to Saintsbury's two. So a lot of deal flow this Monday morning. I wonder higher rates, like money was cheap, let's get it done now, maybe I really wonder about that. A lot of stock deal in this, and you just look at the equity as a currency, and I think some companies are trying to spend it while they can. Yeah, well let's go, let's go. We got Dean Henry with us, which is a good

reason too. I should excuse me, John Dean Emeritus Henry with us as well. I just called him Peter long before, long before you darken the door, n y you. It was one of my original sponsors, and we always thanks during School of Business for their support of bloombergun the economy, in Bloomberg Surveillance. Thank you. We've had a lot of your students over the years. They've done very well. Really,

yes they have. Yeah, I mean Tanya I think pulled a quality c you know, can we can we just can we just think of Tanya for a little while that she's been called it was a miracle she got through Stern students to listen to this. They do it's a forced podcast for the first time. I will have two books of the summer. That's how good the book

flow is. Ben Garrett Grafts The Threat Matrix is on the Federal Bureau of Investigation and on the Robert Mueller that we Don't Know And the other book took at least three seconds to decide to feature is a book of the summer. Robert call Plan Agree or Disagree has driven the debate on realist foreign policy in America for decades. His new book, The Return of Marco Polo's World, is a set of articles and new observations which is definitive.

Robert Kaplan joins us in Washington in FM Studios. He is with your Asia group, Ian Bremer Shop, among other abilities. What's your number one message to Mr Manutian going to China, Robert Kaplan. I think the number one message Tom is to preserve the relationship that um you know, that trade has the ability if you have a really you know, tumultuous trading relationship that's not well defined, that's not on board. This affects the military situation in the South and East

China Sea. It affects politics throughout the Indo Pacific in Central Asia. In other words, trade is not isolated. It's all part of a geopol clitical mix within the synthesis. And this is the heart of your book as the complexities that need to be thought through the reality as we have a president who is bilateral, he says, and many would say, my deal or the highway is the theory. How do you drag this president into a more complex discussion? Um?

I think what you do is um. You well, first of all, you have advisors, and the advisors, as extreme as some of them may be, maybe are still far more nuanced than the president is. And you, you know, you just tell him that, you know, if you do this, here are all the consequences. Here are all the second

and third and fourth order effects. And China is developing a society and a system that is going to be uh you know, that is going to be not only a great competitor of the United States it already is, but is on track to overtake the United States in the decades to come unless we're very careful and can compete with them throughout Eurasia and the rest of the world in a very sly fashion. So Robert at the moment and Jonathan by the way, speaking, and great to

have you with us on the program. Thank you for joining us. Robert Um the guest. The question for me is China sort of establishes the Silk Road strategy for the whole region. What is the geo strategic sort of aim of the United States and this administration for Asia right now? Well, I think, Um, we've had seventy five years of new of liberal world order building, and the mistake that many of us have made is to think

that that's normal. But in the long span of history, the period between nineteen and the coming to power of Donald Trump has been an historical aberration. Most of history is geopolitical jockeying, positioning, wars, competition, rivalry, and trade can be just an adjunct to geopolitical rivalry, whereas free trade is an adjunct to liberal world order building. So what Trump really signifies is a return in you know, is

you know is counterintuitive? Is this sounds Trump actually signifies a return to a more traditional form of world history. Expand on that a little bit, what were the the implications the consequence of that approach being? Robert, Well, the consequences of this The twentieth century was about ideological warfare, and that led to the deaths of tens of million, a hundred and fifty million people in two world wars, etcetera. Geopolitical conflict is less bloody, um but it but, but

it's equally tumultuous. If you look at the eighteenth century, the nineteenth century, the problems you know, you know, British Foreign Minister Castle Reay during the Napoleonic Wars. This is the period we're back to um where you have the United States, China, and Russia UH competing with each other with lesser powers like Iran, India, et cetera. Where where where a bipolar world during the Cold War was very stable. Um, but we're entering a world where it's not even multipolarity.

It's more fractured than that. Robert kapp in one final question, and these are people that have actually read your books, and no doubt we'll give a serious skim and full read of the return of Marco Polo's World. How should Republican state department types respond to this president? Many are

saying they won't serve this president. I think of Nick Burns with his public service, Richard hass with his public service, and others should they stay away from this president or with a new secretary of State, should they choose to serve as a public duty? Uh? Tom. The way it works in Washington is we have of such a vast imperial system of under secretaries, assistant secretaries, deputy under secretaries, and on and on that you decide to serve based

on whether you trust the person who's hired you. So if they trust Mike Pompeo as State, they should go to work for him. If they trust Jim Maddis at the Defense Department, they should go to work for him. If they do not trust John Bolton at National Security, they should not go to work for him. It's a very diversified system so that it you know, of course it matters who's the president, but what matters particularly is who their boss is and if they can trust their

boss both morally and philosophically. Robert Capa, thank you so much for visiting us today. His book my book of the summer, The Return of Marco Polis World. I'll feature that out on social We like to do interviews after interview where there's a theme and there is a good conversation.

We did that with Ian Bremer Thursday, Friday last week, Robert Kaplan joining us with this wonderful the Return of Marco Polos World, one of my books of the summer, and now joining us James Travitz, who had my book of the Summer a year or two ago, is leaders bookshelf, just absolutely superb. He is, of course at Fletcher School.

Admirals Tavidez, good morning. In Robert Kaplan's book, chapter after chapter he circles back to where he was with the Asia Cauldron and five years ago, which is a South China sea and submarines. Does your US Navy need a new Himan rick Over to drive forward submarine development. We've actually got a terrific Chief of Naval Operations who is a submariner, Tom Admiral John Richardson, and he's just superb.

He focuses on the connections between our submarine force, cyber technology, unmanned vehicles, and our ability to use our strategic deterrence at sea, so that that Rickover is walking the streets today and we're lucky to have them. Do we need a larger navy? Robert Keppelan says no, we need a more intelligently deployed navy. But if we're gonna have a return of Marco Polo. The span from at least the Persian Gulf across the Indian Ocean, through the Straits of

Malacca up through South China Sea up to Korea. With all the news last week that screams to be navy, Navy, Navy, it does indeed. And my latest book tom is Seapower, The History and Geopolitics of the World's Ocean, and it talks about this. What we are recognized is that Marco Polo went from east to west. What's happening now from west to east one belt, one road. China is reversing the voyages of Marco Polo and moving across that area.

And so we need a bigger navy. I don't think it has to be thousands of ships, but we're only at about two hundred and seventy. We need to be up around three twenty three d and thirty ships will get there, but we also need to deploy it more intelligently and focus. As you said, and as Robert Captain would agree, on the South China see Admirals Travitas. Has

China ever initiated a conflict with a Western power? No, they have never done so, and they have always held themselves and here's really the point, held themselves above the rest of the world. They think of themselves as that middle kingdom between heaven and Earth, and they've always felt we don't need to do that. That resulted a course

in invasions of China from Western powers. Now, what we should remember is that China has attacked other Asian nations in the past and will continue to do that as they consolidate power in the region. And if we don't want the South China Sea in the Western Pacific to turn into a Chinese lake, we're going to have to remain engaged. Having said that, would we want the Gulf of Mexico to turn into a non US lake? You know, in the nineteenth century, of course, we had the Monroe Doctrine,

which was designed for that not to happen. But I think we've matured in our geopolitics, and the idea that the United States has a desire or a need to simply declare the Gulf of Mexico territorial sea and build a nine dash line around it is preposterous, and I don't think that we should allow China to do the equivalent around the South China Sea. Having said that, are we misinformed in terms of what we believe to be

the threat from China. I think that there is a little bit of China hysteria out there to the degree that we believe China wants to dominate the world. I don't think they do. But here's what they want. They want control of the South China see because it represents hydrocarbons, which is the missing card in their strategic suite. They want the ability to dominate East Asia and move their goods in the way they want to. And they want to get into the Indian Ocean. So they're not reaching

for global hegemony, but really regional control. It would not be a good thing for the United States to see that to China at this point. Does the President understand that dialogue? I haven't seen, and I'm talking more from a military standpoint. ADDM mean, we've got the trade discussion in a bilateral slash my way or the highway dialogue. But does the President understand astra Vita's kaplan world. I don't think he does, And of course he famously is

not a great reader of books. But a lot of your listeners are Tom and on this one, I'd recommend Graham Allison. He's a brilliant his new his new book, Destined for War China in the US and the Century. And as you know, Tom, there's no question mark at the end of that title. So Graham takes a pretty aggressive view towards China. I think if you read that book, you get a pretty good understanding. Perhaps someone should summarize it for the president. Do you believe that there will

be a war between the United States and China? I do not. I believe over the long term, throughout the century, our interests converge more than they diverge. But if we are foolish about it and are either too aggressive that would lead to war, or if we're too passive that would lead to war. We have to kind of dial this one in. I'm gonna put out on Twitter, folks, Bloomberg Radio. We'll see at first see Power, James Travids.

It is just read it for the first time. The admiral went to see you don't have to read it for anything else. He's like in the smallest boat in the Davy. He's got his float, he's on his arms. He's like eighteen or nineteen years old and he's going out of San Diego Harbor, and you know it's just

that alone is worth reading. Right now, Sarah Sanator joins us with Bernstein, and we love having her on to talk about I guess our national diet and our national food and Sarah, I want to ask a basic McDonald's one oh one question, which is a butch cassidy. Who are these guys? And I do that Looking at the two thousand seventeen annual report quote, we have committed to getting more of our restaurants in the hands of our

franchise ease and developmental licensee strategic partners. There's enough ease in there for me to know that's a bunch of hot air. What does mc Who is McDonald's. Do they really own the restaurants that we're eating out of. I don't know if I would characterize that is hot air because they answer your question, Um, McDonald's is a brand owner. So their job, frankly is to do things that for

the brand. So think about marketing and menu innovation and essentially how they want their global footprint to look, and then they leave it in the hands of their partners, the franchise ease, the licensese to execute against that plan. So, yes, there are a lot of ease in there, but I don't think that that diminishes the fact that the strategy is working for them. The strategy has been brilliant with

lower revenue growth. Explain how you go from twenty seven billion of revenue down to two ish billion and that's a good thing. What does it mean that they're five billion short on revenue from where they were a couple of years ago. Yeah, in this case, one of the rare cases, we're shrinking the top line is a good thing because it reflects the fact that instead of running restaurants,

they're just collecting the royalty from them. So right, so instead of reporting acent of sales for a restaurant, they're only reporting called fifteen percent of sales. But those are very high margin. They basically have minimal costs associated with them, just the cost of owning the real estate as McDonald's tends to do um and not much else. Beautifully explained, they take cents or so down to eb Yeah. Well, Sarah,

I want to go through the menu. I want you to go through the menu if you can, because many people may not be familiar with things like turtle drinks or even being able to use your mobile app to pay for things at McDonald's. Go through the menu, force tell us what's working for them, and don't leave out the garlic. I'll try not to. I think the working for them is but we think of as the bar bill strategy, which is on the one end you have

you know, more premium products. Last year there was a real focus on these signature crafted hamburgers, which had three different builds that you could choose from, and you could choose either uh hamburger or a chicken sandwich, and you could choose different kinds of buns. So it's sort of what I would call mask customization. And they were frankly

very well received because they're pretty delicious. So you had, you know, things like a Pico de Gaio which also had guercomole which tasted like real guacamole um, and other builds, the two other builds, both of which had bacon, because

because everything tastes better with bacon. So on the one end you had that the premium, and then on the other end you had them really emphasizing being competitive in value, as cvster Brick would say, so um not necessarily being the lowest price point and every item at every time, but having an offering like the Mick Pick two for two or the dollar soda two dollar coffee that was

very compelling UM to two restaurant goers. And we're seeing that again this year with them one to three dollar value menu on the on the low end, but then also this fresh beef quarter pounder, which again UM is now available in New York area and it's it's a very good sandwich. So McDonald's is really trying to stay true to this UM for honestly being a progressive burger company UM, such that they have good food that tastes good as well sourced, but also a value price point

that can appeal broadly. Sarah, How are they able to do this so quickly? You know, I think, UM. You know, what we saw with the leadership turnover in was was really a cultural shift and that was very much the focus, which is, you know, be fast, be nimble, fail fast, as they say, UM, but make sure that that if there's a demand for a product in the market, that McDonald is going to meet it. So you know, All

day Breakfast is a good example of this. You know, that's probably the most requested and new item or menu edition, probably since they added breakfast in the seventies. And yet for a very long time the system was hesitant because the operational challenges. And I think you know, the focus this time with this management team is to make sure that things like operational challenges didn't stand in the way. Same with fresh beef quarter pounders. It's a good sandwich.

They know it tested well, people liked it, and they were going to figure out a way to bring it to market. All right. For Tom that doesn't necessarily get the mic cafe that has been so popular. He can now get it into mic Cafe in a bottle. Tell us about those kinds of ventures, because it's not only Mick Cafe in a bottle. There's Mick Cafe bags, cake cups, and canisters. That's right. I mean, this is still a

very very small piece of their business. You know, it's it's and it's always it's always going to be hard to to move the needle um. You know, in the US, when you have fourteen thousand restaurants doing you know, two and a half million dollars UH per box, you know any anything, you know, thirty five billion dollar system, it's very hard for anyone product, and yeah, but it's going to allow me to segue into Starbucks. So that's why I did it. We're talking about it, okay, So then

there's value to you. I think there's value there too to McDonald's. Mean, look, it's a testament to the fact that the brand is strong enough to be sold outside of the McDonald's restaurants, whether ever, will be hugely meaningful. Probably not, but you know, but people like the costs. So tell Tom about Starbucks and what their challenges are, you know, I think, look, Starbucks is a very good global brand. Um. You know, our view is that increasingly it may just be more mature than uh than it's

you know, the company is willing to acknowledge or let up. Um. You know, there's there's long been that joke about Starbucks and every corner um, and and that is increasingly I think part of the issue for them, there's just you know, growth, there's only so much, so many units you can add before they are to impact the existing business. Sir. Before I let you go Chipotle seven hundred down to three, I guess with an enthusiastic bounce, where are you on

CMG right now? I mean, I like this stock. I have to say, uh, you know, it's been been sort of a long suffering bowl. We saw all these opportunities for the business, and the last management team just wasn't executing against them. And I think the reason you've seen this big move is because the opportunities are very much there in terms of driving top line through basic things like marketing, you know, more effective advertising, some digital issues

and also a lot of costs. And we finally have a CEO and now a Chief Marketing Officer UM and chief restaurant officer, and I t that are that are there and capable of executing. What can they learn from Stephen j Esterbrook? I think, you know, look, I think being nimble, being flexible that and and listening to what your customers without doing, you know, going too far straight from your core value propositions. I think everybody can learn that. Sir,

just terrific. Thank you, Sarah Snatory short notice on Bernstein McDonald. There was the L word pim listen. It's just stunning. 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.