00:00Let's talk with what we just heard Stephen Roach and I talk about, and that is the U.S.-China
00:05relationship through the lens of what has been six months now, six plus months of Donald
00:11Trump's tariff regime globally, but particularly the focus is on China with the Trump-Xi possible
00:18summit coming up. How do you see the impact six months on now on the global economy?
00:23So remember, the tariffs are not only on China. We're suffering from it in Europe and so on.
00:30So is the tariff policy working in the U.S.? I think the answer is no. And the idea of a tariff is it works if you succeed in getting the exporters to decrease their price so that the post-tariff price is the same, in which case they basically get less money, you get the goods cheaper, you get funds. That's just not happening.
00:53Basically, the exporters to the U.S. have continued with their old prices, so the post-tariff price is higher. It hasn't shown on consumers because the importers, the distributors have taken the hit. These are U.S. importers, U.S. distributors, so their margins have been reduced. Eventually, they have to pass it on.
01:17Right. So how sustainable is that?
01:18We're basically just seeing a delayed effect. But in the end, it will be the U.S., which is paying for the tariff. Imports to the U.S. have continued at exactly the same rate or increased.
01:32Inflation is not showing up yet much, but it will. So I think the net effect is it's a loss. And if I may just add something, this is the short-run effect. The long-run effect of destroying rules, not respecting rules, killing trust. That's incredibly costly, but doesn't show up in the quarterly numbers.
01:55Right.
01:56It will show up over the next few years. But on that, I think it's not working.
02:01So how does the specter of a stagflationary environment in the United States look like if the Fed already pretty much pricing in a couple of cuts the rest of this year? So they're dovish. But the specter of inflation is still running well higher than the Fed's target rate of 2 percent.
02:18Yeah. So the U.S. situation is half is the tariff story. The other half and maybe more than half is AI. Yeah. Right. So the net result and Trump is very lucky because I think the tariff effecting part is not doing great, not doing terribly, but not doing great.
02:36The AI part is doing superbly. So the U.S. economy is fairly strong. Right. As a result, I think the pressure for inflation to come down is very weak. So I don't think the Fed will cut rates very much.
02:51And the net impact on the global economy, not just the U.S. and China, is potentially even going further, is the disruption of supply chains like we saw during the pandemic. That's a highly inflationary environment as well.
03:05Highly inflationary, except that firms seem to be quite able to readjust faster than I thought they would. I mean, if you look at China, you know, its exports have continued to increase, despite the fact that the exports to the U.S. basically decreased.
03:22So China as a country has been able to reallocate basically fairly quickly, find new markets, right, find re-routing, find all kinds of things. I think most firms are fairly good at it. I mean, there's no question it's not good, but it's not, you know, a catastrophe that somebody would have predicted. It's not as if firms are completely unable to produce. It's not COVID.
03:46Right. But it is man-made.
03:49It is man-made.
03:50But it is not good. It is man-made. Well, COVID, there's some questions to it very much.
03:54That's a different discussion.
03:57Yes.
03:57So how much credence do you put into the argument that this potential meeting between Xi and Trump is, I wouldn't say the panacea of all their ills, but is important to find stabilization in that relationship?
04:13The markets have been wobbly, completely volatile because of the uncertainty going forward. And there's this threat of 155 percent tariffs by Trump on China. Yes, it might be a bargaining tool, leverage, but still there's that specter of even higher tariffs.
04:29I'm not sure meetings make that much of a difference. We've seen this in the context of Ukraine and Putin, right? It is up, down and so on. But I think actions do. The fact that China really has some leverage, I think is becoming fairly clear to Mr. Trump. So he's going to be more careful. There's going to be uncertainty. I don't think this meeting will solve it.
04:51Well, you know, he goes up and then he wakes up, he puts another tariff and so on. It can only help. I'm all in favor of meetings. But thinking that meetings are magic, I think, is an illusion with that guy. This is not going to happen.
05:06Let me just add something. The uncertainty, I didn't mention, but the uncertainty is really having an effect on firms' decisions and so on. And that's not going to go away anytime soon.
05:18And on that front, what's the view from Europe, obviously? Europe is kind of caught between as well being a legendary or over time the ally of the United States, but also having to pick its fights as well, whether it's the flood of EVs into the European Union from China, the spiral downward and the price competitiveness of the Chinese products.
05:40But also now on rare earths, they're trying to find and strike a response to China's actions on export controls as well.
05:48So what's the view, if you can encapsulate, from Europe?
05:52I think Europe has the opportunity to be the responsible guy in the room.
06:00So we don't want to follow the US going against China. We want to basically work with the rules as they were. Maybe we modify them. I think working with China is of the essence.
06:14Now, that doesn't mean it's easy because China really wants to export to the European Union in a way which makes it very difficult for us to react.
06:24I think sitting down, this is one of these meetings, which might actually be useful because I think they still trust on both sides. So I hope that Europe and China work together.
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