00:00Hi, everybody. I'm Brittany Lewis, a breaking news reporter here at Forbes.
00:07Joining me now is Dan Wong, Croatia Group's Director of China Research.
00:11Dan, thanks so much for joining me.
00:13Yeah, thank you for having me again.
00:15You joined me about two and a half weeks ago, and we were talking about the trade war between
00:19the United States and China. And we have seen a seismic shift since then, particularly in recent
00:26days, because over the weekend, the two countries agreed to roll back, majorly roll back the tariffs
00:31for 90 days while they continue negotiations. When you're looking at the temporary agreement,
00:36what are some of your takeaways?
00:39Well, this is certainly an unexpected result for anyone. And the market was pleasantly surprised,
00:46and there was a rally everywhere in the world. And as far as we know, the Chinese counterparty
00:53for the U.S. is also a surprise, because within two days, that's a lot of conclusions to be made.
01:00And for Chinese exporters, they finally caught a break, especially for the SMEs. And for Trump,
01:07it can also be claimed as a win, given that China also made compromises. And it will be very
01:13interesting on what's going to happen after 90 days of truce. But at this point, it does seem
01:18like the best resolvables. And it seems like, like you said, I mean, two days, it was shocking. And
01:24there's this new tone, because both sides, up until this point, were very tough. They had harsh
01:29rhetoric for the other. The United States blamed China for the escalation. China said, we're not
01:33coming to the table under duress. Now both sides are saying there was a lot of progress made in these
01:39two weeks. There was substantial talks. There's this new tone. Are you reading into that? And what does
01:44that indicate to you? I don't think it suggested a fundamental reversal in the bilateral relationship,
01:51because China is still the same China. It will still conduct industrial policies through
01:56the state subsidies. And the U.S. will still want to coerce China, especially President Trump,
02:02into this new trade regime. It wants China to eliminate a trade surplus with the U.S.,
02:08want more Chinese companies to invest in the U.S., also re-industrialize the country.
02:12But for China, a lot of things are non-negotiable. At this point, what's negotiable is actually the
02:18magnitude of the tariffs, not how much retreat that the U.S. would do when it comes to sanctions
02:25on China. We believe there will be more non-tariff barriers coming out in the future.
02:31Export control and technology ban will still very much be in place. And the 20% of fentanyl tariffs
02:37would be on the table for negotiation. But we're not even optimistic that this part
02:42of the tariff can go away eventually. So let's talk about the numbers where
02:47they stand now. They were both slashed pretty significantly, triple-digit slashing for these
02:52tariffs. The tariffs that China had on the United States' imports are down from 25% to 10%.
02:58And the United States' tariffs on Chinese imports are down from 145% to 30%.
03:04What do you make of that number? I mean, are you surprised to see those tariffs slashed by 115%
03:11a piece? Oh yeah, absolutely. And when it comes to the tariffs on China, the 10% reciprocal tariff
03:19was capped, but the 24% was suspended. And that's very much a surprise because it's the whole logic
03:25behind Trump's tariff war. It wants China to pay, so it was not on equal footing, according to him.
03:32But at this point, it just seems China is enjoying the lowest tariffs among all trading partners,
03:38including the American allies. And that's why we believe eventually, probably by the end of this
03:44year, the China-U.S. tariff from the U.S. part on China probably will go back still to the 40% to 65%
03:51range. But currently, it is relatively low. So for China, the nominal rate is 30%, but the effective
03:59rate is about 45% in terms of the tariffs subject to different sectors and also the general tariffs.
04:06Of course, we all enjoy to see this kind of break because the recessionary pressure is real.
04:13Both sides will try very hard to win their trading partners. We can see that both presidents are
04:19talking to ASEAN countries, to Latin America. So it's going to be very interesting on what's
04:25happening in the next 90 days. Global markets really rejoiced at the news that this trade war
04:31seems to be thawing. But you warned last time that with those escalating tit-for-tat tariffs,
04:36there is a real chance for recession. There is a real possibility here of inflation. How will this
04:42pause impact the Chinese economy specifically?
04:47The market is very short-sighted. As long as there is some surprise, especially platinum surprise,
04:53then the market will rally. But for China, the biggest problem is still in the job market.
04:59The export sector, although they would enjoy a temporary break because the shipment is already
05:05being rushed, we have seen this flooding phone calls to the shipping company that exporters are
05:10trying to book new containers to ship to the US. But the new orders didn't really go up that much.
05:17It's mostly the rush of shipping before the new tariff kicks in. So for Chinese economy previously,
05:24we believe that the 100-something tariffs will knock off to a percentage point of China's GDP.
05:31And the Chinese government will respond by a bigger fiscal stimulus. So in the end,
05:36we're probably looking at a GDP growth around 4%. But now, with alleviation of so much tariffs,
05:42even if it's just for 90 days, it could boost China's export significantly in the next three
05:48months. So now, instead of knocking off the two percentage points, we believe about a 1.5 percentage
05:54point will be knocked off. We're probably looking at a 4.5% of GDP growth for China.
05:59I want to read something that US Trade Representative Ambassador Greer said regarding the negotiations.
06:06He characterized them in Switzerland as this, quote,
06:09a very constructive two days. It's important to understand how quickly we were
06:13able to come to agreement, which reflects that perhaps the differences were not so large as may
06:18be thought. That being said, there was a lot of groundwork that went into these two days.
06:23What do you think that groundwork is, A? And B, what is left to really hammer out in the next 90 days?
06:29So given how conservative Chinese leadership is, there must be tons of talk before this actual
06:38meeting took place. And we do not believe that Chinese officials just improvised on the spot.
06:44So there were the non-governmental, maybe the track two or track 1.5 talk happening between top
06:52officials and former officials on trying to make the negotiation or the contact easier.
06:59And for China, what's more important is by starting this conversation, it could really see whether
07:07there's any sincerity from the US part or whether it's just a pretext for isolating China. It turned
07:14out the result is positive. So even if the two leaders may or may not meet by the end of this year,
07:23we believe the communication channel will be more open than before. At least on the China part,
07:28they know who to talk to. It is Vincent. He's really leading this whole negotiation. And China
07:33also appointed a new trade negotiator. So things are happening towards the positive side.
07:39I'm curious, I know you said earlier in this conversation, this is a win for both sides,
07:44but you and I have talked before. And we have said that President Xi nor President Trump don't want
07:50to be viewed as the person who blinked first, who caved to the other's demands. Is there a sense that
07:55either leader, either country blinked first in these negotiations as they are right now?
07:59They probably blinked together. The pain is felt very visibly in China, because the orders were
08:08canceled, the shipment, the unemployment. They're very much a big shock to the domestic economy.
08:15But for the US, the US consumers are not used to this kind of economic situation,
08:21like possible shortages, updating necessities. In the future, they might see a lot of empty shelves,
08:27especially when it comes to those big holidays, Halloween, Christmas, towards the end of the year.
08:34So I think this timing of the meeting is also happening before that, because President Trump
08:41doesn't want to deal with this new phenomenon that the domestic consumers has to endure.
08:47And I still don't believe there's any fundamental changes, although this is a temporary win for both.
08:54There is no mutual trust between China and US. It hasn't changed. And for President Xi to be willing
09:02to talk to President Trump, there has to be more certainty from President Trump. But we know that
09:08is the one thing that he cannot offer. And President Trump characterized this on Truth Social
09:14as a total reset. That's what he said about the negotiations. And he wants to see China open up
09:20for US business. Is that a non-starter for President Xi? I mean, is there a possibility that that does
09:26happen?
09:28If there's anything to be said about this Chinese government, it's surprisingly consistent in its
09:34macro policies and in its diplomacy. So unlike President Trump, President Xi is long-term and
09:41strategic. So there wouldn't be some sudden changes overnight when it comes to the economic response.
09:47So for certain response towards extreme events like COVID, for example, the country could be opened
09:56up within one week. But still, before that, there was like one year to two years of preparation.
10:01Eventually, it would give up on certain policies. For President Trump to say that this is a total
10:07reset, it is more from the US side. The tariffs are not sustainable at this level. And the US cannot
10:15find an alternative or even a combination of countries to replace China for those consumer goods or
10:23industrial inputs. So it is a realistic or pragmatic choice for Trump. But I do think he has achieved
10:32this temporary win when it comes to what China can give to the US. So a lot of things could be on the
10:40table. For example, the negotiation on the currency, the negotiation on more investment into the US, or even
10:47opening up the domestic market more for the US companies.
10:51And we're talking about, obviously, negotiations between the world's two biggest economies. And you're saying that
10:58there's still, even though they had these productive talks in Switzerland, no trust on either side. Fundamentally,
11:04not much has moved, not much has changed. Two weeks ago, you said the relationship between the United
11:09States and China is beyond salvation. As we sit here right now, do you still see it that way? A. And B,
11:16what does this temporary truth do to US-China relations?
11:21I still believe this is the case. 90 days is a very short period of time when it comes to trade diplomacy.
11:28It could easily take years or even decades. And for China-US relationship, the long-term competition
11:35will stay in place. And if you just dive into the narratives that Chinese leaders have been sticking
11:42to, it is this high-tech transformation. It is aiming to win in the long term. So the short-term
11:49concession, maybe in terms of tariffs, can happen, but China will not change course. So the United States
11:55under Trump is a different United States. It is backing away from this globalization and partially
12:02from being the global leader. And China is not going to concede in that front. It's trying very
12:08hard to win the global south and has achieved temporarily on a lot of the fronts, like the
12:13currency arrangements with the global south, especially Latin American countries, and the
12:19investment deals with a greater Asia. So the competition will be here to stay. The real question
12:28is whether we could avoid a painful war, I mean, trade war between the two countries again before
12:36any improvement happens. I mean, to that point, they're trying to jam in these conversations
12:41that could take months and years in this 90-day period because both economies are going to feel that
12:47pain, especially with the holidays just a few months away. So in this 90 days, what specifically are
12:53you looking out for next? I think one front is on the trade talks with other trading partners.
13:01For China, US importance is going down. It has gone down in the past decade gradually, but now the speed
13:11will really pick up. Europe as the second market that yields the highest profit for China's exporters
13:19will become more important. Of course, everyone is worried about China dumping excess capacity into
13:24their market and cause a higher deflationary pressure for them. And for China, this is a real
13:30problem too. So I would follow closely on how China manages currency because packing the currency with
13:38dollar at this point is not ideal since dollar is getting weaker. If Chinese yuan is also getting
13:43weaker since it has this informal peg with the dollar, it will also get weaker against the euro,
13:49against other Asian currencies. And that means even higher pressure for those countries' domestic
13:55economy. So I think the Chinese government will make some major changes in the next year or two
14:02when it comes to the currency policies, maybe pegging to a basket of currencies rather than just with
14:09dollar. And there will also be a lot of the new trade deals with, say, Japan, Korea with other
14:16neighbors and investment deals with ASEAN countries. And for the middle power caught between China and the US,
14:26the most important thing is not to take obvious sides with either, because it's going to be a big risk
14:35losing either the support from the US or the market from China.
14:39Well, there is certainly a lot to keep our eye out for in the upcoming weeks. And I hope when we do see
14:44significant developments, you come back on, provide your perspective and break them down for us.
14:49Dan, thank you so much for joining me. You're welcome back anytime.
14:52Thank you so much.
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