What's Next For Chinese Trade Talks

co host, exactly right. So in the spirit of you know, you're in Hong Kong, I'm in the US, you know, in the spirit of reuniting, uh, the two sides of the Odd Lots Podcast. It makes sense that the topic we're going to talk about is the current state of US China trade talks, which as of right now, and I should specify when we're talking, it is, uh, Tuesday, March five. As of right now, people view that there's

a lot of progress being made on this front. Whether that will be the case by the time this comes out in a few days, we have no idea. M Well, I appreciate your thoughtfulness, Joe, but you're right. The main reason to talk about this issue right now is we have a lot of breaking news, a lot of fast moving news, and the big news over the weekend in early March the first week of March was that the US and China might be agreeing some sort of trade deal.

Still a lot of details to be hammered out, of course, but all of that happening against the backdrop of one of the biggest news events to take place in China, and that is the National People's Congress, the big political pow wow between the Chinese Communist Party members taking place in Beijing. And we're getting all sorts of news on not just the China economy but also it's policy outlook.

So both of these events combining to be a very very big week for China in particular, right And obviously people in the US, probably those who care uh somewhat plugged in and aware of the trade talks going on and the status of those. Probably for fewer people are aware of the NPC and the implications of that and the type of policies and projections to come from it. Yeah,

so we should definitely be talking about that. The big news, by the way, it has to be China ratcheting down its growth forecast to a range of six to six point five per cent and in particular, the notion that they're moving to a range as opposed to just a single figure target, which is what they had previously, is well, it sounds a little bit wonky. It's probably a detail for most people, but it's interesting. It gives policymakers a lot more fox flexibility to reach that target, and lots

of people are talking about it. And of course it's directly into the trade discussions. Does China need to eke out a trade deal to help prop up its growth at a relatively challenging time? All right, well here to discuss all of this is a prior guest on the Odd Lots podcast, and excited to have him back, we have Brad sets Are on today. He's a Senior Fellow

for International Economics that the Council on Foreign Relations. He used to be a Treasury longtime economics blogger, and longtime observer of all things trade and China and US trade relations. So very timely guest, Brad, thank you very much for joining us. It's a pleasure to be here. Uh, Brad,

let's start. Obviously we don't have a trade deal, but from what you've been able to pick up an official statements in the media, what's surprised you or hasn't surprised you about the progress that's been made between the US

and China towards the deal. I guess uh. You know, I obviously have been falling the negotiations fairly closely, and I've been following in the various ideas that China has floated UH fairly closely, and so in some sense, the surprise to me is that the US more or less was willing to accept the broad contours of a deal that China has kind of been outlining at least for the past six months, if not for a bit longer.

The center of that deal seems to be UH, a Chinese commitment that's sort of slowly being unrolled to buy a lot more agricultural products UH and to buy a lot a lot more US energy to bring the bilateral

trade deficit down. And then I would say, there's some add ons that sort of address some longstanding commercial disputes and that create a process where some of the newer UH fights could possibly be resolved or could possibly UH not be resolved the easy things that got like or that are likely to get fixed, or that some of the joint venture caps will be lifted. We have effectively already seen that in the auto sector. That's likely to

occur in the financial services sector. I think you'll see some of the retaliatory tariffs that no one remembers were put on rolled back. So you know, I think you're going to get a mix of small uh settlements of past disputes, and then some sort of process to keep talking and try to reach a more serious agreement on things like subsidies. So I'm curious if if China is agreeing basically to import more agricultural goods and energy from

the US. I mean, they were going to import those things from other countries anyway, so just shifting that to the U S seems like it might not be that big of a deal for them to do. And if we're still going to see the US and China talking about these bigger structural issue use like technology transfers and subsidies, does it mean that China is sort of getting a better deal here. China seems to be making the concessions that were easiest for China to make. That's not a shock.

I suspect the Trump administration will say that China is going to roll back all of its retaliatory measures immediately. You know, the soybean tarrofts were introduced in retaliation for the first round of US three oh one uh tariffs, where it seems like the US will in the first instance only roll back the twollion of tariffs and it will keep on the fifty billion, pending more fulsome agreement on all the all the details, and pending full implementation.

One of the things that's been observed is that from the US perspective, we know that President Trump has been very focused on that bilateral trade deficit. He thinks that a trade deficit is a sign that you're losing, whereas others in the administration take a probably more complex, nuanced view and are less concerned about that and more concerned

about the subsidies and these deeper structural issues. Is China able to get away with and again we don't have a signed deal yet, but in the we see the direction that it's going. In your view, is China, I guess exploiting these internal divisions within the United States to get the deal that's best for itself. Well, I mean that that puts everything in such a negative like, but

I just exploiting in a bad sense. Perspective, But in just like it's coming to the table and it obviously it appears there our divisions in the US perspective, and it's getting maximum benefit for itself from these divisions. I think that you know, there's there's long been a tension inside the US between different objectives. The easy way of framing that tension is between the president's focus on reducing the bilateral deficit and more structural measures. But even within

the structural measures, there are tensions. Should the US focus on those Chinese barriers that limit US exports or is what the US most interested in and the center of the negotiations shouldn't be making it easier for US firms to invest in China without giving up their technology as a price for market entry. They're related, but they're not

exactly the same thing. I think the Chinese discovered that the president was drawn to the their big commitments in agriculture and energy UH, and because he was drawn to that, that became a bigger part of the deal. The US could have taken that off the table and just been negotiating over liberalizing China's investment catalog, just been negotiating over

some of the subsidy issues related to China. You could say that's would be a more productive way of going, but it also probably would have reduced the space for a deal. Well. Joe mentioned the trade deficit there, and one of the interesting things we've seen in recent months that is that the US trade deficit with China continues to widen, even though you know, we ostensibly have all

these additional tariffs that have been enacted. And I've seen a few analysts pinning this on currency moves, and specifically that we've had a stronger dollar and a relatively weaker when over that period of time, and the FX moves have basically mitigated a lot of the impact that you would have seen from tariffs. So I'm curious if if we do get some sort of trade deal, does that leave currencies as the next sort of fighting ground between

the two sides. Probably not. One component of the deal seems to be some kind of n see peace, which broadly speaking involves a Chinese commitment, I assume not to let the yuan to appreciate further, whether that's not to appreciate further against the dollar or not depreciate further against the basket. Has been a left a little bit undefined. But as long as China is comfortable keeping the yuan at roughly as current level, within the the range it has been for the last six months, I don't think

there's going to be a significant issue. On the other hand, if China's economy weekends in China really wants a significantly weaker currency, I think that would almost certainly upset the basic framework for this deal. Something you said was that even among the people who care about the deeper structural issues,

they all have different perspectives. Something we really saw literally on display for everyone was the tension between President Trump and Robert Ledheiser, where they're literally in the Oval Office publicly disagreeing with each other about the significance of what a m o U or memorandum of understanding means. Where does Lightheiser fit in this camp? So Lightheiser is has long been focused on the more structural impediments to fair

commerce with China. He hasn't been as focused on the bilateral deficit, and he's wanted to make sure that any any deal is enforceable, and he has prioritized I guess as he should. The concerns were at that were at the center of the section three oh one complaint so concerns about the protection of U. S intellectual property. So in your estimation, you know, we've been watching these trade tensions, if not a full blown trade war play out on

either side. Who's suffered the most over this timeframe is that the US or is it China? In terms of economic fallout? Well, I think there's little doubt that an aggregate, the impact has been bigger on China. You know, as you noted, the U. S bilateral deficit has gone up. US imports from China continue to go up, so it doesn't seem like there has been a bigger impact on China.

But clearly the uncertainty created by the threat of further escalation UH played a significant role in the broader slowdown of trade that is now playing out in East Asia. On the other hand, you know, one of the joys of having a heavy state hand in your economy is that when you decide not to import something, you don't import it. So, in a narrow sense, China cut its imports from the US much more than the US cut its imports from China. Soybean exports essentially went to zero,

so did some other agricultural exports. So did energy exports. So when when China wanted to show that it could influence market outcomes, showed it could influence market outcomes very decisively. Brad, you mentioned supply chains there and the uncertainty caused up by this entire drama. I suppose if we get that trade deal between the US and China, does that mean that we are unlikely to return to the previous status quo?

Doesn't mean that there will always be an element of uncertainty hovering over supply chains, that companies will be making contingency plans, and that maybe we start to see a sort of balkanization of trading regions between Asia and the

America's well, I think that's an interesting question. In some sense, it will go to the basic question of how businesses perceive this deal and whether they perceive this deal is likely to stick or whether they think that this is going to have more the character of a truce, and they still have to plan for the possibility that broad based tariffs could be introduced into the trading relationship at some point in the future, whether by President Trump after

he feels disappointed by the outcome of his deal, or by a future president. My view would be I'm gonna have a really boring answer. To be honest, I think there will be some companies that start reconsidering their supply chain reliance on China and start to make initial moves to rejigger operations. But at the current exchange rate, and it if we go back to the old tariff rate, I think China is still a very competitive location for

most manufacturers, so that that adjustment will be modest. Let's shift gears and talk about the current state of the U. S economy and the new domestic economic goals that the Chinese government has set. Aside from the trade issue, what do you see as the sort of central problem right now the Chinese economy? Well, and the the central problem of the Chinese economy is that it to exaggerate just

a bit. Growth stalled in the fourth quarter. I think China has been stuck in cycles of leverage and cycles of de leveraging. The past few de leveraging cycles have ended in significant slowdowns. Why. I think that's because it's actually hard to manage an economy that saves for his GDP and without the stimulus provided by relatively loose off budget fiscal policies and relatively loose credit policies, the internal

engines of China's economy tend to start to sputter. So my interpretation of what happened last year is that China started a fairly broad based policy tightening and credit through the shadow financial system, so outside of the main banks was tightened. And initially early in two thousand and eight, there was a sense that wow, China had pulled off the magic de leveraging, it had reduced financial risk without

slowing the economy. But by the end of it was fairly clear that the policy tightening had led to a very significant slowdown in activity, probably a more significant slowdown in activity than was reflected in the Q four GDP data. So for now I think the policy challenge for China is to get the Chinese the internal growth engines in China restarted. So now we have this big policy meeting in Beijing, all these policy makers gathering to discuss this

very issue. Brad, you alluded to this earlier about you know, one of the benefits of having a command economy is that essentially you have a lot of levers to pull, and you're able to pull them reasonably effectively. What's your instinct telling you about which lever policymakers reach for now. Is it going back to credit creation and sort of releveraging, or is it maybe more fiscal stimulus. Well, it's it's it's not either or there is going to be more

fiscal stimulus. There's been a range of tax cuts that have been announced. The change in the central government's budget balance is actually very modest. China, for some reason which I really don't understand, seems to attach some importance to the European monstrict three percent of GDP headline fiscal deficit number. So it's going to keep the headline deficit at two point eight. But you know, there's a credible argument that the real central government fiscal deficit is a bit bigger,

which would be good. I mean, there's no read and why the central government shouldn't have a bigger fiscal deficit. But there's also been an increase in the quotas for prevent for provincial and local borrowing UH an increasing improval for a range of investment projects. So you're gonna probably see an even bigger move in the broader measure of

China's fiscal deficit. And there's been an attempt to loosen the screws a bit on the credit creation process, UH to make credit more available to private firms, but without sort of you know, to use the Chinese phrase opening the floodgates and letting the water flow freely over the planes. So it's UH an attempt to be somewhat calibrated in the credit loosening. You could argue that without the trade deal,

these more calibrated measures might have been too small. So I think China now is counting to some degree on the lifting of trade uncertainty to combine with its policy measures to help it get its growth target. I feel like pretty much ever since I've started covering economics and finance and all this stuff, there have been people warning about the so called or they're coming hard landing in China. Is there anything different? I mean, you just sort of

laid out this idea. It was like, yes, sometimes they have deleveraging cycles, sometimes they have easy cycles. We saw the leveraging cycle. Is there anything different about this one? Because it does feel like there is some anxiety about whether stimulus this time, whether it's on the credit channel or the fiscal channel, will get traction. There seems to be more concerned about whether it will work this time. I find the arguments that China is pushing on a

string a little off. It's it's hard to think that fiscal tightening led China's economy to slow significantly over the course of twenty teen and then think that fiscal loosening in nineteen will have absolutely no impact. So I think that you know, on the purely fiscal channels, uh, they basically they work, and they still work in China. Uh, they're the central government is in no way over indebted. It's got a lot of contingent liabilities. But central government

bonds are like Chinese GDP, there's scope there. I get one of the questions, and it was a good Michael Pettis piece in January about this, is like, well, sure, you can always boost GDP by building a bridge, but if it's a bridge to nowhere, it doesn't really do anything for the economy. If it's a bridge to somewhere, it will actually improve the productive capacity and actually improve things. So I guess the question in my mind and in your view, is like, Okay, they could boost the economy

with increased spending. Is their productive stuff in your view for them still to be building or will it be bridges to Nowhere, well bridges to Taibet. Look, I I don't think that the process of coastal urbanization in China is fully complete. I think the Woko process has limited, for you know, understandable policy reasons, the capacity of residents of some of the more inland or the northeastern provinces

from migrating. So I think that if you loosen some of those restrictions on migration, there is still scope for some of the bigger, more successful urban areas to expand. So in that sense, there's scope to increase investment and physical infrastructure. Productively, there is certainly scope to increase investment in kind of the soft infrastructure, more public hospitals. So I don't I don't think that China has reached the limit, uh of where it really can't find incremental projects that

have some social utility. That said, you know, the fundamental reason why China goes through the cycles and why they don't become global crises is because China saves so much. That's an advantage. It means that China goes through the cycles without really borrowing from the world. It levers up internally, it de levers internally the external debt, frankly is trivial. China still has a very small but still has a

current account surplus. It has a net for an asset position of considerable size, so it just becomes a domestic balance. Flip side, though, is that with fort of GDP and savings, it's hard to find investments that are great to accommodate all of that savings. So I've always had the view that the way for China to get out of this leveraging and de leveraging cycle in a in a durable way would be a set of policy measures that really bring down China's very high UH savings rate, So more

money on public health, a higher basic pension. China really under provides basic social services. In China under taxes personal income and there's no property tax. It's a system with very low tax on capital income. But as a result, the state is a little starved for the kinds of revenues that help boost consumption. So I mean, I think there are there are ways of that China will get

out of this trap. And each leveraging and releveraging cycle ratches up your internal debt to a somewhat higher level, so it's not entirely healthy. But I am not convinced that China is has hit the limit and can't go

through one more cycle or even two more cycles. Hm. Well, on that note, I mean just going back to the trade discussion we were having and the idea of structural reforms, Is there any way that changes on things like technology transfers or maybe opening up China's financial markets in various ways could help alleviate that savings got You know, I don't think that letting City Bank open up a branch

inside China fundamentally changes China's social insurance system. So I don't think that there's sort of an easy win by letting US financial services firms into China. I think they'll be competing at the margin. Maybe they'll set an example of more efficient intermediation without some of the crazy risk taking, But I don't think that that fundamentally will transform China's

domestic economic structure. So what if you have big you know, tech companies or multinational moles we start entering that market because they feel that, you know, the forced technology transfer isn't as much of an issue as it once was, Assuming that we do get some sort of agreement on that issue, well, I don't think big multinationals entering the Chinese market suddenly changes the incentives for low wage Chinese

workers to save. So I don't think you can solve the fundamental weaknesses in China's social insurance by liberalizing access to China's market. Now, the technology transfer issue is a complicated one. China maintains correctly that it doesn't legally require as a condition for market entry technology transfer. There's no law that says in order to get approval to make

an investment inside China, you have to transfer technology. There are sectors where you have to enter into joint ventures, and your joint venture partner may well ask you to transfer technology, but China says that's just the result of normal commercial negotiations. There are sectors where if you want to get a contract from the Chinese government, uh the Chinese governments, they say, well, you need to set up shop in China and your local joint venture needs to

have some indigenous Chinese technology. That's just kind of the way business is done. But that's technically a commercial negotiation as well. China could certainly ratchet back the pressure that has been placed on multinationals looking to invest in China to also transfer technology. It certainly helps multinationals, it doesn't obviously help US workers. One of the ironies of the informal pressure for technology transfer is that has kept some firms out of China and made them more reluctant to

use China as an export base. So if you really lifted all the requirements on technology transfer, you could imagine U S semiconductor firms with full control of their technology, perhaps wanting to set up a fab or more fabs inside China. So it's on one level, it is a it is a clear case where Chinese practices have been egregious.

They've essentially violated the spirit, though not the letter, of their w t O commitment, but ending the technology transfer requirement on its own, while leaving some of the by China preferences in place, while leaving China's state in charge of making China state meaning the big state enterprises in charge of deciding who bought it makes big capital investments.

It doesn't get rid of all the levers that China can use to tilt the playing field and in some cases to discourage imports before we go, So obviously we don't have a trade deal yet. It signs are positive. But you know, we just saw in Hanoi they thought they were going to sign something between Trump and Kim that didn't happen. Where would you be most anxious right now based on what you've heard and sort of how

this could all still fall apart? H Well, uh, from everything we've read, this deal has come together now because the President decided he wanted a deal. So there's the biggest single source of uncertainty is that the president reads or hears something that leads him to conclude this isn't the good deal, he thinks it is, and he changes his mind, and then I guess probably the biggest risk is that some of the areas of ambiguity that had to get papered over in order to strike a deal.

There's a report in Politico that China is going to commit to get rid of market distorting subsidies, which sort of sounds great, but there isn't agreement on what actually constitute a market distorting subsidy. Does China's big investment fund for the semiconductor industry constitute a market distorting subsidy or

is it just making investments on market terms? Those kinds of sort of difficult definitial issues probably haven't been sorted out, and those could come back and emerge over the next year or so as a source of significant attention. Bread. I think that's a great note to wrap it up on. We'll be following those things. I really appreciate you coming on. Always feel like I learned a lot and understand current events.

But thanks and thanks raight well Trades. As I said there, I always feel like if I want to understand current events, particularly on the trade front and all, especially on trade and China stuff, I always feel better after talking to Brad. Oh absolutely, And I should say for anyone listening that if you're interested in this issue, you should definitely follow Brad on Twitter, where he tweets quite prolifically about trade

and various other things. But I have to say, like I come away from that conversation thinking that the deal currently on the table seems like it leaves a lot of big issues still sort of out in the open, particularly some of the definitional ones that Brad mentioned at the very end of that conversation. And if you think about trade agreements that my understanding is that the bulk of the work is often about agreeing on definitions of items and various other things. So it seems like there's

a lot still to work through. Yeah, and you know, I also think, like both on the sort of trade side and on just the state of China's economy, I think journalists and observers and analysts we have this tendency to always see turning points or this is a big moment, or this is the end of the status quo, and to perhaps downplay the possibility that the status quo could exist for a lot longer. So you could imagine a big trade deal happening, but in the end, the relationship

maybe doesn't look that different than it does now. And you could imagine another Chinese releveraging or a stimulus cycle that turns out to gain teeth and gains attraction and the hard landing is put off a few years yet again, and they could sort of expand the coastal cities. So it is a good reminder, I think, to not be too quick to call the death of whatever regime we're currently looking at. Yeah, it definitely feels a lot more

nuanced than that. Well, we'll wrap it up there. This has been another episode of the Box podcast on trick Yalloway. You can follow me on Twitter at trick Yalloway and I'm Joe Why Wasn't though, you can follow me on Twitter at the Stalwart. Definitely you should follow Brad on Twitter. He's at Brad Senser. Great source of information on all this stuff, and be sure to follow our producer tofur

Foreheads on Twitter. He's at foreheads t as well as the bloomberg head of a podcast, Prancesca Levie at Francesca Today. Thanks for listening.