Is It Curtains for the U.S.-China Economic Relationship?

The index pulls together a whole lot of data on things like congestion, road safety, the quality of infrastructure, and the number of road rage incidents to decide which are the best and worst cities in the world for drivers. The bad news for India is that two of its cities, Mumbai and Kolkata, feature in the bottom three. If you want to find out who comes top out of a hundred world cities, well you'll have to wait till a

bit later. I'll be talking through results and the more serious lessons with Bloomberg reporter Zoe is schnave iis but first the future of China and its technology, both of which are going to feature prominently at the Bloomberg New Economy Forum, which gets underway on November twentieth in Beijing. We touched on this a little while ago. You remember

when I was in Singapore. The idea that a more antagonistic relationship between the US and China could drive a technological fault line through the global economy, with countries and businesses being forced to choose which side they were on. But of course, all that assumes that China can start developing world beating technologies that don't depend on the US.

In a minute, I'll talk to Bloomberg's chief economist, an old China hand Tom Orlick, about China's plans to dominate the technologies of the future and how they might have been affected by Donald Trump. But first, Bloomberg Economy reporter Karen and Look has this report from Beijing and Guandjong h Here in China, American ideas, brands and technology are everywhere.

Strolling down the street in my neighborhood and Beijing, I can see teenagers wearing Nike stepping out of you A minivans on their way to Starbucks while rivetted to their Apple iPhones. But will that change if the confrontation between China and the US morphs into a battle to control the technologies of the future. To help find an answer, I've come to talk to local business people at the Canton Fair. It's a massive trade show for Chinese exporters

that takes place twice a year in Guangzo. How massive, the space is equivalent to a hundred eighty five soccer fields with some exhibitors and a hundred eighty thousand foreign buyers. There's everything here, from Bluetooth earbud two, solar powered refrigerators to portable saunas. This is Mr Jong, who hails from the surrounding Guangdong province. He's a sales manager at a company that makes large led screens and smart TV's. He

would only give us his last name. All around him and his booth are his company's televisions, which rely on you guessed it, the Android operating system from American tech giant Google. We use some Google and YouTube features in some of our products, and especially for products are sold overseas. If it is cut off, it could affect our manufacturing and production. Mr Jong feels vulnerable. Earlier this year, the Trump administration blacklisted Huawei Technologies, a big Chinese maker of

telecom equipment. It means that people who buy Huawei's new smartphones won't get the latest versions of an Android. For companies lower down on the technology chain. That's also a problem. If the tech confrontation widens and draws them into they could also lose access to these high tech parts and operating systems that China can't replicate. The result could mean the end for some businesses. This is what people mean when they talk about a silicon curtain descending between the

US and China. We are very concerned about this trade war between China and the US and if it involves issues with Google, because we don't have anything better to replace it for people who need this stuff around the world, You don't have the better product that can replace it. In the worst case scenario, would China be hopelessly left behind without American technologies or could it adapt its own innovations to fill the gap. The answer to that depends

on which sector you're looking at. That's according to Nicole Pung, an expert in Hong Kong at Canalysts, a consulting firm for some emerging technologies like cloud computing and AI. China

is actually a leading player on the global stage. But when it come to some hardware, especially when it comes to chipset manufacturing, and then some key materials for some consumer devices for example, then Sho we know that US as well as some other countries they're holding UM the pattern and I P and and also don't know how as well as the capability to develop an R and D and also more importantly the human resources, the key

engineer people on this industry. They've been working on this area for a very long time, and that's a very strong foundation in certain areas. It definitely would take China and Chinese company UM many years, say five to ten years, to to be able to get to the level. Right now, the US company is at Huawei, plans are well underway to survive and grow even without access to U S technology. The company is developing its own smartphone operating system known

as Harmony OS. That may not be an ideal solution for now, but the Tech Giants founder and junk Fei doesn't seem to expect the confrontation between China and the US will last forever. Here's what he said at a Bloomberg event this month. We have the ability to survive. However, this is not what we pursue. We have no intention in that personally, don't support doing everything every innovation ourselves. But if we have to do it. Then we have

a temporary approach that we will well go on it ourselves. However, this is not our long term strategy. Now we have no problem to sustain our development. Back at the cant Unfair, we talked to business people who also offered a nuanced perspective. Tourette Muslim came to China from Syria twelve years ago. He and a business partner set up a company that makes home automation products. Their WiFi connected smart home systems help you control your air conditioning and your lighting and

even your curtains. But look inside their products and you'll find a lot of microchips and other components imported from the US to be exact. But Muslim says he's not so worried. Well, there's a lot of alternatives if we who didn't get this from the US, so from the China there is a lot of suppliers and they are ready to supply to China or any other way. Nobody could now with a bridgure or a sanction, I guess

one gay, So how much decoupling will actually happen. In the last few years, we've seen a surge and barriers that includes tariffs, foreign investments, even access to Chinese researchers and scientists in the US, but the country's economies are still extremely intertwined. Here's Scott Kennedy, an expert on the US China economic relationship at the Center for Strategic and

International Studies in Washington. If Chinese would see the negotiations with the United States is an opportunity to liberalize their economy and make it more productive and see it less as a threat that challenges their opportunity to develop and rise, they could take advantage of this and there would there'd be adjustments in the nature of supply chains and the type of relationships we have, but it wouldn't be anything close to decoupling. It be a reorganization that would benefit

China tremendously. At the same time, China's government, under President Seegin Ping, it's going to do all it can to reduce the country's rely on foreign technology suppliers. If Donald Trump's goal really is to limit China's rise, then his current approach is making them try all the harder to build the technology of tomorrow. Even Mr Jung believes that with a little bit of time, China might just be okay.

I believe that as time goes by, perhaps in ten to fifteen years, Chinese companies will be able to have business that could compete to be at the US top technology companies. That is not to say that we will replace them, but that Chinese companies will be able to compete with them in the market. Fairly. So far, I think we're a bit leg behind, and in the future I think we can be as good. Give me some

time for Bloomberg News. I'm Caroline. Look so that's the view of China and technology on the ground, But for a longer view, I thought it would be worth having a quick chat to our chief economists here at Bloomberg, Tom Orlick, who's in Washington but spent eleven years in Beijing and has published one soon to be two books on the Chinese economy. Thanks for joining us, Tom, you listen to that report there. I mean, it's an issue

we keep coming back to. How is China going to navigate this next stage of its economic development and what are the implications going to be um for the for the rest of the world. Do you think that the trade wars trade tensions we've had over the last couple of years have changed the way the Chinese leadership is thinking about that. So there's a couple of things which

are happening to China at the same time, Stephanie. So the first one is that there's drivers of growth that they've relied on traditionally, very very low cost labor, very very extensive investment in expanding the capital stock. Um. These drivers are running out of steam. Labor is expensive, the workforce is shrinking, and the capacity to grow by investment

is just much less than it used to be. Now, as that's happening, China needs to find new sources of growth, and the obvious thing to do is to rely more on the rest of the world. We were at the rest of the world economy, So as the domestic drivers dry up, China wants to export more and it wants to accelerate the process of well. Friends call it technology transfer um and enemies call it technology theft from the

rest of the world to drive increases in productivity. So the challenge for China is that just at the moment when the domestic drivers are fading, the scope to turn to the global economy for a leg up, for an acceleration in terms of growth, it's just become much weaker because of that trade war with the United States, and I mean we've we've talked, we've talked about it over over the months, and in fact, when I was in Singapore a couple of weeks ago, there was some concern

about this, I mean, the arguments with the US over Huawei, over the sort of technological side of China's development. I mean, they're not they're not going away. But when you hear as in that piece, when you hear them talking about how they're going to replicate these US technologies and become less and less dependent on them from your experience in China,

do you think they'll manage to do that? Do you think I mean, do you think they are they are really accelerating their efforts to do innovation, and do you think they will succeed? So, I think the first thing to say is that if the Silicon curtain falls, if China and the US do separate their technology sectors, there's going to be an immediate blow to both sides. You've got companies like Google, like Apple here in the United States who in one way or another are deeply in

meshed with the Chinese technology sector. And on the Chinese side, you have an entire electronics manufacturing supply chain that in one way or another is dependent on imported US technology, imported US ideas and components. So if you separated the two, there would be an immediate and crushing blow to both sides. Um. The question, looking further forwards is could China close the gap?

Could China do itself what it's currently relying on US firms to do, And in a sense it's kind of it's imponderable um or possibly the kind of question you'd really want a kind of a technology expert rather than an economists talking about yourself down. I know, I will do healthcare next, and then we'll do genetics, and I'll have an opinion on all of them. Um. But I think there's a few things which which would make me think that China's clan chances of closing the gap were

actually rather high. Um. So, firstly, China is just making absolutely enormous investments in accelerating its research and development capacity. It's investing more than anyone else in the world apart from the United States in R and D. It's graduating more science and technology graduates than anyone else in the world. If we look at how it's doing UM. There's an index called the Global Innovation Index. It's kind of the benchmark in terms of how countries are doing and broadly

understood on their innovation program. China is accelerating up the rankings on the Global Innovation Index. In the latest score, they come in at number fourteen. That's ahead of Japan. I think the idea that China is already and more innovative economy than Japan is pretty striking UM. And then the third reason why I think that they would have some hope of closing the gap is that the US is not the only show in town when it comes

to technology. Yes, in Silicon Valley, in the universities of the Ivy League, there are some world beating scientists and world beating innovators, but they're not the only ones in the world. There's also Germany, There's also Japan, there's also Career UM, there's also the United Kingdom UM. And if there's one thing which the United States has not done very well in the last two or three years, it's bring these other countries with it in a kind of

alliance of the willing or coalition of the willing. And if there's one thing that China is extremely good at doing it's taking advantage of those breaks in relations between other countries that that competitive, the competitive nature of the relationship between other countries to get deals done and make sure it continue to advance towards the technology frontier. And they also seems to be able to use its scale to its advantage in a way that other big countries

have not always been able to do. I mean, I remember, you know, one reads about the failed development strategies of the fifties and sixties, the f big effort of imports substitution in India and Brazil, where there was this kind of idea that if you if you had a big market, that was all you really needed to do, and you could close yourself off from the world and you would be able to match anything that the US achieved. I mean,

those countries famously were not able to do that. But somehow China has managed to make that it's the size of its domestic market a real springboard. Yeah. I think

that's right, Stephanie. And clearly there are examples, and you mentioned Brazil and India of big countries where size hasn't been the determining factor, but size clearly is an advantage and when you combine size with a relatively efficient government, with a relatively skilled workforce UM, and with a state owned banking system which can provide the finance businesses require, I think scale does become extremely important UM and in a sense that is why China presents the threat it

does to the United States. Because if you take an innovation, whether it's a Chinese innovation or a US innovation or a Japanese innovation, and you plug it into the Chinese business sector, then because of the scale of the Chinese market, China will be able to produce at a significantly larger

scale then it's foreign competitors. And when it does that, the risk is that whether or not that's an indigenous Chinese innovation or an innovation which has been borrowed or paid for from from the US or elsewhere, it's the Chinese firm that's going to become the global champion UM and it's the foreign rivals that that are going to

be left scrambling for scraps. We should talk a little bit about the short term because actually one of the things that striking about the slowdown in the Chinese economy UM that many people worry about is that the import growth has slowed, particularly sharply when you're just looking short term, is there a risk that China will turn out to be even weaker than we thought next year and possibly be the last straw in terms of the global recovery.

So there's always been this concern about China's growth data. I mean, to put it charitably, China's economic data represents a compromise between reality and political message management UM and, so there's always been a question about whether we can trust the GDP data or not. UM Now, import data has a kind of intuitive appeal as an alternative gauge

of what's going on in the economy. It tells us about consumers, it tells us about businesses, also tells us about the exports sector, because a lot of China's exports include substantial components and parts which they purchased from Korea and Japan and elsewhere. UM So, imports are an important alternative, alternative gauge of what's going on in China's economy, and right now they present a picture of startling weakness. They're contracting. So our view UM and we look at a broad

range of China's data. We look at GDP, we look at imports. We look at things like electricity production and rail freight and the pace of bank lending. Um Our view is that, yes, imports are extremely weak, and there are some serious problems in China's exports sector. We don't think the overall economy is anything like contract, anything close to contraction, and we don't think that's likely going forwards, in large part because China's policymakers retain the means and

the motivation to provide sufficient stimulus to keep the economy growing. Well, I'm excited to say we will get more insight into that from Chinese policymakers and others at the New Economy Forum next week, where you and I will both be tom So watch this space. Thanks definitely. Now I'm going to turn seamlessly to the twenty nineteen Driving Cities Index.

Which city in the world is best for drivers? Well, the prize goes to Calgary in Canada, with runner up rosettes for Dubai, Ottawa, burn in Switzerland, and wait for it, al Paso, Texas. So those are the winners in overall rankings, and if you look at just the individual measures, New York, Singapore, Tokyo and London all come top for public transport. Manchester in England interestingly comes top for safety with the smallest

number of road fatalities per a hundred thousand inhabitants. It's followed by Stockholm and Oslo and Vienna, maybe less surprising. The most dangerous cities on that measure of fatalities are Lagos, not surprising, and Orlando, Florida, which I guess is probably less surprising if you live in Orlando, Florida. Well, we're going to talk a bit more about this and maybe a bit more serious conclusions you can draw with Zoe schneve Ice are economy editor here in London previously of

Vienna and Zurich, relevant to this conversation. And I was struck, Zoe, when I was looking through this report. I mean, in a sense, it's not surprising, but there is a clear north south divide. I mean on the top you have Calgary, burned dustl Edorf, and then towards the bottom there's Moscow, Lagos, Mumbai. I mean, why is it that cities in developing countries are struggling on all these measures? Infrastructure here does seem

to be key. Typically, we're experiencing a substantial increased in individual wealth, and that in turn has led to an increase in car ownership. At the same time, cities haven't adapted the infrastructure to facilitate that boosting cars, and they also haven't invested in public transport to give people in

a different way of getting around. Yeah, and it sort of tells you, I guess the other thing that we and it's one of the reasons why they are going to be talking about urbanization and cities at the New Economy Forum next week that when we talk about the recipe for economic success these days, we are often talking about these super successful connurbations. You know, there's these are

parts of countries that are doing fantastically well. And so the recipe for success, if you like, is to create these very livable places and you have and you have. Competition between cities now almost more important than competition between countries. So what is it that you know, we've talked about the cities that are not doing well. What are cities doing right that we can see in this in this index, again,

infrastruct is the key measure here. Nowadays it often feels like being able to get around a city without a car is the real sign of a city's prosperity. Um My. Our colleague Justin Fox pointed out on this podcast just a month ago that the US census data suggests that public transport is now increasingly used by more affluent people.

So when I think about the cities that I've lived in, um they all have had incredible public transport systems, and in two of them, in Zurich and in London, now I'm in the luxurious position of not even having to use them. I can walk. So cities that are walkable, cities that are approachable, cities where you can afford to live near where you work, or if you work further away, where there is an easy way of getting to work. That does increasingly make cities more livable and make people

want to stay in these cities. You've got a large number of people will now hate you that they've heard that you can walk to work in the center, in the center of London, but I certainly enjoy are quite often cycle to work. It strikes me though, I mean, there's definitely a downside to having a fantastically successful city, and we have seen it in spades in the UK. There's so much concentration of wealth and economic success in

the southeast of England, and particularly around London. There is a great lot of resentment outside the southeast for that success, and a feeling not entirely unjustified that people in the southeast don't understand the struggles that people and the rest of the country have had, which I think did feed importantly into that into that Brexit vote, and of course most people in London voted Remain. It's going to be a test, isn't it, Zoe the next few years if

and when Britain does leave the EU. London still has a lot of the advantages we see in this index of infrastructure livability, but it won't to have those kind of legal advantages of being in the EU. And we see some people have already had to move because of those changes. And the reason that I can walk to work is because people have left and made flat more affordable, at least for me in this case. Um No, but London is an amazing city and I think people will

be torn whether to actually leave. Some of them, of course, will have to leave. Frankfort Luxembourg are becoming banking hubs, and that is in part because of Brexit, and because certain bank functionality will have to be conducted from within the European Union at the same time when they look at the infrastructure in those cities. I've never had to miss a flight in London, huge as it may be.

I certainly have in Frankfort. Yeah, and I'm headed to Berlin tomorrow and that's another rather challenging airport, so we shall see Zernie. Thank you, thank you very much. I did a piece once that was around the idea that Britain should let London go, that everyone will be better off if London had formed its own city state with its own priorities, and what was amazing about it was how popular it was among people outside London and inside London. Maybe it was a bit of a precursor to that

to that Brexit vote. Thanks for listening to Stephanomics. We'll be back next week and we will be in Beijing in the meantime. You can find us on the Bloomberg Terminal, website, app or wherever you get your podcasts. We'd love it if you took the time to rate and review our show so it can reach more listeners. For more news and analysis during the week from Bloomberg Economics, follow as Economics on Twitter and you can also find me on at my Stephonomics. The story in this episode was reported

by Carolyn Look, mio Han, and Yinan Zoo. It was written by Karen and Look and Jeff Black, produced by Magnus Hendrickson, and edited by Scott Lamber, who is also the executive producer of Stephanomics. Special thanks to Tom Rlick, Zoe Schnewiss, Gou Yuan, Stephen Engel, Bobby Islam, and rosslyn Chin. Francesca Levy is the head of bloombow Podcasts.