Trade War Footing

your regular and eponymous host, Stephanie Flanders. Back when I lived in China, the big concern amongst Chinese economists was something they call a horby jen jug, or a currency war. The fear in Beijing was that the United States was going to weaponize its financial system and the big Wall Street banks would come to China promising grace and reform, but they would deliver chaos and crisis, the kind of meltdown which China's Asian neighbors experienced in and well, it

turns out those fears were misplaced. There is a conflict between the U. S and China, but it's not about currencies. It's about trade, and that's going to be the focus of today's episode. I'll be speaking with Wendy Cutler, who spent her career as one of the most senior trade negotiators in the United States, to get her insiders take on how trade negotiations between China and the US could evolve.

And I'll be catching up with Jenny Leonard, one of Bloomberg's star trade reporters, to hear what it's like reporting from the front line of the trade war. Before we get there, though, we're going to go to a part of the world which is more familiar through the lens of security or human rights than economics. Let's go to Israel, and here from Ivan Levingstone about some interesting develops in the labor market. A few weeks ago, I visited a

coworking space in Jerusalem called biz Max. I toward the standard mix of open work areas and smaller glass in rooms, complete with minimalists, a core and an espresso machine. On first take, it could have been any we work style office, but there was a key difference. Bis Max is run for ultra Orthodox Jewish Men or in Hebrew are dem with a kosher kitchen and religious book lying in the shelves. It seeks to provide a place for them to get

businesses off the ground. I went there in late April to meet with Yetrak Meyer A Jelovski, a thirty one year old father of five who runs his own event planning business called a smata. Every day I am going home. He's a podcast told me as him unruly like each as he goes by met me wearing the traditional garb of hardy Jews, black suit, white shirt, long curls falling from the corners of his hair. He also brought a kosher iPad with some restrictive settings that he manages his

company on. He's just as busy as any small business owner making a go of it, but he also has to make time for prayer and religious obligations. I have every day about every day one and a half events, a big small ones between one twice a week. I have a wedding, a big wedding game three under portions. Portions was in the big hole, was catering. For good reason, Israel has earned the nickname startup Nation. The country has a burgeoning tech sector driving the economy, but below the

surface there's trouble. Growth is stabilizing and productivity is sluggish. Because unemployment is near record lows the country needs to find more workers ideally ones who are highly skilled. There are two groups economists have zeroed in on because they participate at a lower rate in the workforce, Ultra Orthodox

men like Eacha and Arab Israeli women. The Hardim present a particular challenge with their rapid population growth and lower productivity, helping them climb in the workforce as a priority that may only intensifying urgency, and in Israel, surrounded by enemies, economic challenges become geopolitical ones Without a first rate economy, it's hard to maintain a first rate military. Each of

success building a business came to spite some challenges. He got married at age nineteen and soon decided to work to help provide for his family, but he was locked out of some fields because of his religious education. On a visit to his home in Jerusalem, he told me what it was like getting started In the beginning. It was very hard because of the it's a low income. You have to learn everything by yourself. I didn't learn

ever about the work or any work. Just studied the town there, and then I went to start the business by seeing every even he went to do events and I was I was standing him by the entrance of the kitchen took to check out our works. Israel's Harri Deem are growing part of the population and also a rising political force. As such, they're an increasingly important block for Prime Minister Benjamin Netan yahoo in support of his

right wing governing coalitions. As their political influence rises. Where their demographics strength, that bodes well for the subsidies that benefit them, like child allowances and scholarships. In a way, the government is at odds with itself. Political leaders help protect funding that may discourage work, while others are trying to bring Haredim into the labor force, seeing it as

a long term economic issue. At the start of this decade, government targets were set with the aim of increasing the employment rate of Haredi men and Arab Israeli women. Arab women are already close to hitting their goal, but for Haredi men the story is different. While they have increasingly joined the workforce in recent years, progress is stagnating well below the hope for level. One key reason is a

cultural emphasis on religious study. I met with Av Weiss, an economist and president of the TAB Center for Social Policy Studies in Israel, to dig into the reasons for the divergence. See the difference between the the the Haredi men and the Arab women um is it's got to stem, bottom line, from desire. That the desire of the Arab pubin um really is to improve their lot, to be able to do better than than than the past, to increase your education, to increase your employment. For the Harediman,

that's just not necessarily the case. While the Haredim are interested in moving upwards spiritually, Arab Israeli women are focused on a different kind of upward mobility. Facing challenges including discrimination and higher rates of poverty, They're making strides and education and at least in high school, increasingly studying fields

like engineering that leads to more lucrative employment. Such progress has come even amid withering criticism of Israel and the West for how it treats its Arab citizens, as well as for the poor economic state of Palestinians in Gaza and the West Bank. But there are some more positive stories out there. Kuluta Uti is a twenty nine year old Arab israel woman from Jaffa with two daughters. While her parents didn't go to university and she married at the age of twenty one, she is now finishing a

degree in political science. In between managing family and studies, she's the co sea of an organization called Present Tense, which tries to reduce social gaps in marginalized communities in Israel through entrepreneurship. I met her for a morning chat at a municipal building in Jaffa where her organization host programming, and she told me about why Arab Israeli women have

been challenged joining the labor force. Have all these expectations, and you need to to meet all the expectations, and then you have to choose what exectation you can to meet, because it's so hard because you need to have a home, you need to have a get married, and you have children. You need to do all of these things and evens. And also if you can do a degree and and work, it's great, but it's hard. It's tougher for for Arab women with a tight labor market and shortages of engineers.

Israel's future growth. Henderson part on this group. If they succeed, it will be a real bright spot, but they're not there yet. A lot of women really do break the glass city, but a lot of them also stay at home, and you can see the stats and it's getting better, but still it's not in the in the correct fields that can high tech officials admit that the government's programs in this area still have a ways to go. Here's Julia Eton, head of the Employment and Diversity Administration for

Israel's Ministry of Labor, Social Affairs and Social Services. It's very clear if you're not bridging the gap these two populations and believe it to the the productivity of a general population, rates of growth of israel economy are not going to be sufficient to have a normal level of growth and living. That's why it's crucial for us to succeed. But they're not alone here. You have communities, you have their ambition, you have their beliefs, you have their way of analyzing

the reality. What early mean Israel is a tiny country that doesn't trade with its neighbors and is in a state of war with some of them. It's economic edge, particularly in the world of tech, is a crucial strategic asset. It provides incentives for countries, including the United States and those across Africa and Asia, to forge stronger ties with the Jewish state, and for Prime Minister Netan Yahoo winning on the economy increases the chances that he can keep

winning period. For Bloomberg News, I'm Ivan Levingstone. I'm delighted to be joined for this section by Wendy Cutler. Wendy is the vice president of the Asia Society Policy Institute at a former deputy at the US Trade Representative. That's a lot of words. Basically, what it means is there are a few people in the world who know more about trade negotiations than Wendy does. Wendy, thanks for joining us.

Thanks Tom So. Implicit in the Trump administration's approach to trade negotiations is the idea that the careful, consensus based multilateral approach followed by past administrations basically got it wrong and gave China a free ride. Do you agree with that assessment? Well, I think over time, various administrations tried

different approaches towards China. I think supporting China's entry into the w t O was an important move, and as a result of China joining the w t O, we saw them significantly lower their terrorists for US and other imports, as well as revived thousands of regulations and laws, and we saw an overall opening. But what didn't occur was that the reform and market opening that was so vibrant in two thousand one when China joined the w t O,

it just didn't continue, particularly in recent years. And furthermore, the w t O was unable to negotiate new rules and new terror flowering, which also led to a situation where the current WTO rules are really old rules and they don't address the challenging practices that China has brought

to the international training system. So do you think that calls for this more direct bilateral approach which the Trump administration is now taking, or if you were calling the shots, would your first call have been to Brussels and Tokyo and Seoul and to the w t O and an attempt to kind of martial a multilateral coalition to tackle

this challenge. Well. Following China's w t O accession, the administration tried different administrations trying different approaches to deal with China, including dialogues, particularly the ones led by the Treasury Department, the Special These Strategic and Economic Dialogue, as well as trade dialogues as well, and while some progress was made, the progress was incremental and the dialogues let left many frustrated the Obamba administration put a real premium on challenging

Chinese practices that were inconsistent with the w t O two dispute settlement in the w t O and scored some important victories, but still a lot of the problem problematic practices that China followed continued, so a new approach was needed, and I think in some respects, President Trump has gone it right by imposing tariffs, whether I support them or not, they have brought to China to the

newociating table. However, I think what has been really flawed in the President's approach to dealing with China is the fact that we're going it alone. We're relying on unilateral measures on bilateral negotiations without trying to bring other countries on board with our approach, who also share similar concerns

that the United States has with China. So I think we could be doing a much better job working with our allies and friends both in Asia and around the world, and together telling China that it needs to change its practices and pursue more, more market opening um measures. And unfortunately, the Trump administration has decided not only to take on China, but also to take on our friends and allies, and as a result, trying to establish a multilateral coalition to

approach China has been very hard to construct. And it's not just the muscular bilateralism or the muscular unilateralism of the Trump administration which sets it apart from past administrations. It's also the personal role which Donald Trump is taking that that positioning of I'm the only one who makes the decisions, that public approach with the tweets to declare

policy changes and the lack of predictability. Now you're someone who's really been at the center of some of the most high profile, most delicate trade negotiations which the US has has conducted in in recent years. And what's your take on that very personal approach which the president is taking. Does that strengthen the hand of his negotiators or do the costs of unpredictability outweigh the benefits. What's kind of a mixed picture. I think in every negotiation a dose

of unpredictability is useful. If your counterparts think they know your every move, they'll just game it all out, So some unpredictability could be useful. Um, but I think the President has gone way too far on that score. And as a result, our trading partners are left scratching their heads, not really knowing what they're being asked to do. Also, I think being really public UM, particularly in the final

stages of trade negotiations, is not a great approach. What I often would find at the end of trade negotiations that having private conversations would be much more useful once you're public. And we're seeing this now in the volley of words between Beijing and Washington. Both sides are are setting up high expectations for their domestic publics and what they might be able to achieve, and also they're reducing

their flexibilities to find common ground. Now, maybe this is intentional, Maybe both sides have decided that they don't want a deal because they're certainly acting like that. But again, UM, I think being too public and too hard hitting UM in the public with with strong words is not a great way to bring talks to to closure. That hardening

of rhetoric could bring some real costs to the negotiations. UM, Wendy, I want to I want to focus the conversation on one of the specific moments in the last few weeks, which was that moment where Leo her was on his way to Washington, d C. And it seemed like a deal was going to be signed, and then suddenly we heard from the US side, No, China's tried to pull back from there from their previous commitments. They're trying to pull their chips off the table, and that's not acceptable

to us. So we're not going to sign a deal. Um now. As someone who's been inside these kind of trade negotiating sans, what's your take on that. Is it common to see substantial changes in negotiating position behind the scenes from one or both sides in the final days before a deal is signed. Well, unfortunately it is. And this is not the first time a country has come to the negotiating table in the final stage and taken things off the table, or has moved goalposts and asked

the other and the other country to do more. What happens at the end of a trade negotiation is both sides and their capital as I think, look at the entire deal and try and figure out is this a deal that will garner public support? Is this deal viable, incredible? And will I be able to withstand the criticism? And I think that leads both sides at the end of a negotiation to do things like taking things off the

table or asking the other country to do more. However, given the high stakes of this negotiation, and I think these last minute moves were extremely consequential and really led the US to question whether China was acting in good faith. In the US view, China had agreed to many of the provisions already that it it, you know, took off the table in the final stages. Um. And again, I think I think these issues can I don't think they're insurmountable.

I think with creativity they can be worked through. However, Um, if both sides continued to be very public in their rhetoric and very hard line. Um, with each passing day, this deal is going to be more difficult to conclude. Wendy, let's let's let's throw it forwards. Um, how do you see this playing? The markets think maybe there's a deal at Osaka with President Trump and President She sitting down

at that G twenty meetsing. There's also, as you mentioned, and hardening rhetoric on both sides, the threat of more tariffs, the threat of sanctions on Chinese firms. It feels like if we don't get a deal in Osaka, this could be messy, extended, and expensive for both sides. Um, could you handicap those probabilities for US? Yes? So, in my view, I think both sides right now think that they can outlive the other with respect to having no trade deal.

The US feels their economy is strong and that China's economy is weak, and therefore that the US has the negotiating leverage. I think China feels that it has the political and economic tools that it needs to ensure that its citizens can survive this trade war, and in their view,

history proves that. But the other development that's going to happen soon is that on June one, China is going to impose the next round of it's tariff hikes on sixty billion dollars worth of US imports, and the full impact of the US tariff escalation on two billion dollar worth of Chinese imports will be felt by June one. And if you recall the last time the two leaders met on December one, in the lead up to that meeting, those tariffs started to have a very destructive effect on

the both both sides economies. So at last December one, both leaders when they met, agreed to launch talks for ninety days, so if you ask me now, I would My sense is that come the meeting between Presidents Trump and She on the margins of the G twenty meeting in Osaka, um perhaps they will agree that both sides need to resume the negotiations and pick up from where they where they left the talks um in early May. But I don't see the deal coming together by the

time of the G twenty meeting. I think President Trump was very clear when he said in Japan just yesterday that he's in no rush to conclude these talks. But perhaps a month from now he will feel like he's in a different position when these tariff the new tariff actions start having a real bite for US consumers, workers, farmers and businesses. Okay, no deal in Osaka, but potentially an agreement to agree. Wendy Cutler from the Asia Society, thank you very much for your time and your insights.

Thank you, Tom. The trade team at Bloomberg News is one of the scoop eest teams in the newsroom, and on that team, few are scoopia than Jenny Leonard. Jenny's joining me in the studio now to talk about her experience of reporting the trade war UM and her take on how things are going to evolve. Jenny, Thanks for joining us, Thanks for having me so. Jenny, you've been

reporting this trade war from the start. Can you give us a sense of how the mood on the U S side, the people around the president who are trying to shape policy, How is the mood in that group shifted from that first declaration from from the president that trade wars are good and easy to win to the situation we find ourselves in today. So actually, I think

it hasn't evolved that much. The people who are closest to the president, I think, would still stand by that declaration that trade wars are good and easy to win. At least they still believe that the US has the resolve to actually come out as the winner of this. UM. I would say that the advisors around the President and the Vice President and the President himself are hearing more and more from Republicans on the hill, from farmers from constituencies that this is starting to bite and they might

not want to see this go on much longer. So we might see a shift. We might start seeing a shift sometime in the near future. But at this point, I think his advisors. The mood is still very much um like it was a couple a couple of months ago, and can you help us put a bit of a structure around are thinking on who those advisors are, um who are the hawks, Who are the doves? Who are the people who see China as a kind of existential threat? Who are the people who just want to get a

deal done? So I think we've reported extensively on the sort of the two camps, the hawks and the doves, and um my sources are very adamant in pointing out that Peter Navarro, who's the trade advisor that's very far on the hawker side, is not in the same place as Ustr Lighthouser, who's also seen as a hawk. But Peter Navarre really sees China as an existential threat. He wrote books about China. Robert Lighthegh or the U s

TR is more of a trade hog. He's, for you know, decades, has fought countries unfair subsidies and training practices, and China obviously is on the forefront of that. But he's not obsessed with China as maybe Peter Navarro is. And then we have the the doves may be led by Treasury Secretary Minuchin, who obviously gets a lot of calls from Wall Street who, um, would really like to see a

deal done? Student. And then we have the National security advisors like John Bolton, who actually their voices has been elevated a lot in this administration and they have a say in trade decisions now, which wasn't the case in previous administrations. And when something like the sanctions on Huawei happened, Jenny, Um, is that coming, in your sense, from an integrated policy the trade negotiators aware that those Huawei sanctions are going to drop, or is that coming out of left field

from a different of the administration? Yeah, good question. I think it's Um, It's a little bit of both. In that the Huawei sanction sanctions have been discussed for a long time, so it shouldn't come as a surprise to anyone on the trade team that someone like John Bolton

has been pushing for that. But then when it actually happened, uh, last week or two weeks ago, you know, our reporting showed that everyone was overwhelmed with actually rolling out and implementing that those sanctions because it did come out of nowhere. Too many people who weren't involved in these discussions that John Bolton had with the President about this and which group do you put the president in? Is he an instinctive member of one group or is he moving between

them depending on circumstances. Yeah, it really depends on the day for the president. Um. You know, a good example was last week when he was in Japan, um Or when he left for Japan, he was talking about Huawei and how there's really a big national security risk and how that's really a problem, and in the next sentence he totally undermined what he had just said and what his national security advisors want him to say by saying, well, we might wrap this into some kind of trade deal

sometime soon. And so you know, he's really swinging. And we've known this about the President for a while now, that he he likes these policy debates and having them play out in front of him. Um, and he sides with whoever you know, he wants to side in that moment, and he changes his mind often, which keeps all of his advisors on their toes. For sure, that unpredictability from the president, as we heard from Wendy Cutler, um potentially an advantage at some points in the negotiation, but also

evidently coming at some costs, including to his own side. Um, Jenny, let's throw this forwards. Tell us about your expectation or how we should think about that She Trump meeting at the G twenty the mark it's right that we could get a deal there, or do you see that as excessively optimistic. I think the markets are always a little

more optimistic than reality. Uh. I think a deal might not be possible in the next month, because that would really take you know, Lightheiser and Leo Hood to sit down again, to go over you know, basically go to the status quo before China renect on on its commitments, and I don't really see that happening. At the same time, I would say anything can happen when President Trump gets in the room with President She. We've seen this multiple times.

Trump reversed his ban on on z T, the telecom equipment's maker, last year at the request of Shooting Ping. So I wouldn't rule anything out. But a deal seems a little bit too ambitious, Okay. Personalities of the two leaders crucial as we prepare for that G twenty meeting. Jenny Lennon, thank you so much. Thank you well. We toyed with renaming it Tom and Omics, but producers Scott Lamman advised me that that was a bad idea for a single episode and potentially a career ending mistake for

me personally. So thanks for listening to Stephanomics. Stephanie Flanders will return next week with more on the ground insights into the global economy. In the meantime, you can find us on the Bloomberg Terminal website, APT or wherever you get your podcasts. We would love if you took the time to rate and review our show so it can reach more listeners. For more news and analysis from Bloomberg Economics, follow at Economics on Twitter, and you can also find

me at Tom Marlick. The story in this episode was reported and written by Ivan Levingstone. It was produced by Magnus Henrickson and edited by Scott Lanman, who is also the executive producer of Stephanomics Special thanks to Wendy Cutler, Jenny Leonard, and Michael Arnold. Francesco Levi is the head of Bloomberg Podcasts. H