Who Has the Upper Hand in US-China Relations?

Bloomberg

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00:00We start with China and a story about the two biggest economies in the world trying to come

00:05to trade terms. Who has the upper hand? And is it possible for both to win?

00:12President Trump wants to rebalance the American economy back to a manufacturing economy with

00:21high precision manufacturing. I think everyone agrees, including Chinese leadership,

00:27that they need to rebalance towards more of a consumption and consumer economy.

00:33And the dream scenario would be if somehow we could do that together.

00:37Turning first to our special contributor, Larry Summers of Harvard.

00:43So, Larry, this week we heard about the tentative agreement for 90 days at least

00:48between the United States and China dialing back on the tariffs.

00:52Was this a step forward for the Trump administration?

00:54I salute Secretary Besant. The avoidance of value subtracted is value added.

01:02And by that standard, we added value. The United States backed off of what were

01:08extremely imprudent and potentially economically very damaging prohibitive tariffs to the point

01:16of embargo on China. That was a good thing for the US economy. And as a consequence, the US stock market

01:26rose substantially in recognition of that. It was not an increase due to Chinese concessions.

01:35You could see that from the internals of the market. Companies like toy companies that were dependent

01:41on imports. Retailers performed particularly well. But look, when you make a mistake, when you've done

01:51something imprudent, it's a good idea to salvage what pride you can and to retreat. And that's what the

01:59Trump administration did. And I salute Secretary Besant for his leadership in doing that.

02:06Part of any high stakes negotiation is trying to assess the pressure points on the two sides.

02:11One of the things we've heard from President Trump is he believes there's a lot of pressure on China

02:15right now because it is a manufacturing economy. And as he says, a lot of factories have gone quiet.

02:20Is he right? Is there a lot of pressure on China right now to come to terms?

02:24I think there's some pressure on China, but I think there's more pressure on us because we're the one

02:31that's a democratic country that's responsive to our people. We're the one that has a highly

02:39inflation conscious population and prohibitive tariffs, raise price levels. We're the one that's

02:48the active player here. So I think there was a lot of pressure on us to which we responded.

02:57I think it's a very important part of governing to be willing to recognize when you push things too far

03:05and to pull back. But let's not be confused about what the path here was. It was an overly aggressive,

03:14overly truculent, erroneous approach from which there has been a significant but still not total

03:22retreat. Larry, take a step back from the particulars of balance of trade and fairness

03:28in trade. As a macroeconomist, we do have the second largest economy in the world, by most measures,

03:35by some even largest economy in the world, that is not market driven fundamentally. It is centrally

03:41planned and they've built up a huge productive capacity. How does one deal with that? I don't

03:48think we ever had to do that in the past. How do you deal with that in terms of trade terms and making

03:52sure that it doesn't distort things in our country? Well, I think what you do is you focus on your own

03:59economic interests. And if others want to subsidize your consumers, if others want to subsidize your

04:08more producers, that can very easily be a good thing. And so you try to define what your core

04:16interests are. We have a core interest in national security and in everything that's national security

04:22sensitive. We need to be trying to pivot away from China. We need to be very attentive to the security

04:31risks of Chinese presence in the United States. That's issues like TikTok. We need to be very focused

04:41on preventing China from getting access to intellectual property in ways that's going to enable them to

04:52surpass us. But you have to focus on your core interests. And when you're worried about the export of

05:00Barbie dolls, you're not focusing on your core interests. When you're worried about trying to get jobs

05:08here, putting together the different components of an iPhone, you're not worried about your core

05:15interests. So yeah, we do need a strategy with respect to China, a strategy directed at getting them to

05:24follow rules of the road where that's important for our core national security interests. But this kind of

05:34broad indiscriminate attack that has been launched that mostly serves to cause Americans to feel poorer,

05:44mostly serves to increase our inflation. That's not the right way forward. So I'm glad to see the

05:53adjustments that the Trump administration has entered into. The tentative agreement reached in

05:58Geneva was just that, tentative, leaving a lot of work to be done before the United States and China

06:04can reach a long-term solution to their trade conflicts. Elizabeth Economy is a China expert at the

06:10Hoover Institution who keeps careful track of the relative strengths and weaknesses of the world's two

06:16largest economies. I think both countries have economic vulnerabilities. I think the assessment on the part of

06:22the Trump administration was that China was more vulnerable because it exports much more to the

06:27United States than the U.S. does to China. Its economy has also been struggling. It's been in a prolonged

06:32economic slowdown for at least three years now. But I think there was a fundamental miscalculation on the

06:37part of the administration. They didn't appreciate that we have a much greater sort of sole or near sole source

06:44reliance on a number of critical products from China. Critical minerals, rare earth elements, active

06:51pharmaceutical ingredients. These are all things that are essential for our economic security, our

06:55national security, our human security, and will devastate, quite frankly, our pharmaceutical

07:00industries and our defense and technology industries. So there's a balance, I think, between, you know, the

07:06Chinese vulnerabilities and U.S. vulnerabilities. Both of us, I think, have serious vulnerabilities

07:10in the space of this tariff war.

07:13Does the rest of the world give one side between the United States and China an advantage over the other?

07:18I mean, both sides historically have tried to recruit the rest of the world.

07:22I think for the advanced market democracies, what we've seen has been, in some respects,

07:28somewhat surprising. I think there was a belief on the part of the Chinese government that given

07:34this tariff war, this global tariff war that President Trump has launched, that it would be easy

07:40pickings, that China would walk in and basically say, we are a stabilizing force in the global economy,

07:45we're a stabilizing force in the international system. And they've, you know, they've gone

07:48around saying, let's join hands and work together to push back against President Trump and this

07:53tariff war. I think what they found is that really nobody's that interested in buying what

07:59they're selling. There's an entire world now emerging that is set to support the current

08:05rules-based order that doesn't include the United States, but also doesn't include China.

08:09One destination of Chinese goods that otherwise might be exported would be domestically. Increased

08:15domestic consumption, which has been talked about for years now. What are the prospects? In fact,

08:21Xi Jinping might say, okay, we're going to stimulate the consumer.

08:25I mean, Chinese economists have been saying for years now that the government needs to do more to

08:30support the consumer economy. And part of that would be, you know, investing more in the healthcare

08:36system, the education system, the pension system, giving the Chinese people a sense that they don't

08:41need to continue to save in the case of an emergency. But Xi Jinping is allergic to what he

08:46calls social welfarism. He doesn't want to give the Chinese people any incentive not to work. At least

08:53that's how he looks at it. So again, we've seen President Xi over the course of this tariff war take a

08:58few steps, you know, in the form of raising wages for civil servants, notwithstanding the fact that a year

09:04ago, or a year and a half ago, he actually cut those same wages. So I don't know whether this is

09:09actually increased or it's just taking them back to where they were. And also, again, having this

09:13massive goods trade in program. But mostly what he's done, I think, is, you know, encourage banks

09:19to loan to small and medium-sized enterprises. You've seen Alibaba, for example, reduce the cost of

09:27companies putting their goods on its platform to encourage small and medium-sized enterprises to be

09:32able to export. So there are steps that are being taken, but there's nothing in the way of sort of a

09:37massive boost to the consumer economy that I think Chinese economists would like to see.

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