00:00I'm sure you have lots at the forefront of your mind right now, but let's talk about the upcoming possible Xi-Trump meeting on the sidelines of APEC.
00:09How high are your hopes for that to kind of stabilize the relationship?
00:14Because, again, Donald Trump is threatening tariffs upwards of 155 percent because they can't seem to find ground.
00:21While they're trying to find leverage, they can't seem to find ground on certain export controls.
00:25Well, you know, leader-to-leader summits are always important in terms of the cosmetics, the press and media coverage, but they rarely accomplish little.
00:38I've studied them back to the first summits with Mao and Nixon.
00:45We've had 22 major leader-to-leader summits between the U.S. and China since then.
00:50I'd say two or three of them have been major world-moving events.
00:57The rest have been blah, including the last one between Biden and Xi Jinping in San Francisco.
01:04So I don't expect much, but I think it's good that the two leaders will meet.
01:11What do you think could move the needle, though?
01:13Obviously, both sides are building leverage for which they could possibly make concessions.
01:19Whether it's soybean purchases from the United States, it might be too late already.
01:22The crop is, the harvest is deep into the season.
01:26But also, of course, rare earths and then semiconductors on the other side.
01:30Well, I think, you know, what we'll most likely see, you know, is another taco move on the trade threat from President Trump.
01:41He's done it once before.
01:42There's no reason to think he won't do it again.
01:45And he's already alluded to the fact that, you know, he's probably going to fall back from his threat of an additional 100 percent on top of the pre-existing 30 to 50.
01:57He can't really make up his mind on what that is.
02:00But, you know, China's got some powerful strategic options that it has deployed recently.
02:08Most importantly, I think the rare earths export controls that they've imposed,
02:15which is really causing potential pressures on global supply chains and on U.S. manufacturing.
02:23Did the U.S. underestimate the bargaining chips that China actually does have coming into this second major trade war between Trump and Xi, if you will?
02:32You can call it that.
02:33Well, I think the U.S. has always underestimated China's bargaining chips.
02:37We view in the United States as a relationship that's a one-way dependency, that China depends on us and we don't depend on China.
02:48I've written two books. I'm actually starting a third on codependency, where we both depend equally on each other.
02:55And I think China is demonstrating the two-way nature of this important economic and security relationship.
03:05Six months into, you know, since Liberation Day and the launch of all these tariffs,
03:11what does your research tell you that the net impact has been on the U.S. economy?
03:16We're baking in already a couple of Fed cuts.
03:21Where's the inflation specter going to be as we keep on going down this road?
03:27Well, I look back and, you know, what I wrote on Liberation Day,
03:31and the actual impacts have been slower and more gradual to occur than I and most others thought.
03:41But there are clear signs of goods inflation, especially in certain categories like furniture
03:50and some consumer appliances where price increases are being picking up due to tariffs.
03:58And I think what I would take away from this experience post-Liberation Day
04:03is the impact is slower, albeit it's still in the direction that most of us had expected.
04:11You care to weigh in at all what your op-ed highlighted,
04:15and that is the damage that potentially is happening to the U.S. because of the executive order process,
04:21as the tariffs have been executive orders and not through the two chambers of Congress.
04:27And what that is necessarily doing to undermine American legitimacy.
04:32Well, I think what you're referring to is I wrote an article several months ago called
04:36America's Cultural Revolution that was pretty controversial
04:40and got a lot of pushback from my former friends in the United States.
04:45They said, how dare you compare this to the most wrenching social and political upheaval the world has seen.
04:52My point is revolutions are relative compared to pre-existing norms in any system.
04:59And compared to the norms that we've had in the United States prior to Trump 1 and especially Trump 2.0,
05:07this is a dramatic shift from the standpoint of executive overreach,
05:12from the standpoint of trade policy, from the standpoint of our alliances with the rest of the world.
05:17And that's an important point that I would like to stress here.
05:22Unlike China's Cultural Revolution, which had no impact on the broader world because China was a tiny, isolated economy,
05:29America's upheaval will have a major global impact because of our role in the world.
05:35Do you find that China, though, has weathered this turmoil fairly well or better than in the past
05:40because they've found their bargaining chips, whether it's rare earths and magnets,
05:45and they've built up their own domestic AI industry and they're developing their own AI chips.
05:51They're buying soybeans from Argentina and Brazil, not the United States.
05:55They've built in those buffers, but they have troubles.
05:58They have three consecutive years of deflation.
06:00There's a race to the bottom.
06:01Some call it, Huang Yiping, who we'll talk to later, says it's a rat race to the bottom.
06:06So they have some structural issues.
06:09How do you see the need for the priorities shift in this next five-year plan,
06:14which the top Beijing leaders are concocting right now to boost consumption,
06:19to bring the imbalances back a little bit more long?
06:22I've been focusing on for longer than I care to remember,
06:25and it's more urgent now because of many of the structural problems you just alluded to, Steve.
06:31The property sector, for example, is dead money for the foreseeable future.
06:36Exports are booming, but the world is pushing back, even outside of the U.S.
06:45I think there's a protectionist backlash, and you wonder how much China can continue to diversify away.
06:52The investment sector, which has been booming, is now 40 percent of GDP.
06:57How much higher can it go?
06:58So they need a new source of growth, and the Chinese consumer is that source.
07:03They've been talking about that since 2007.
07:05I've written about it since then myself, and, you know, the debate is endless.
07:10It's tedious, and I think they have to be much more aggressive in establishing a target
07:15for what they're trying to achieve in the upcoming 15th five-year plan.
07:19They want a target that they can reach, and you're saying about 50 percent household contribution to GDP.
07:25I'm saying they need to have an explicit target of boosting household,
07:29the household consumption share of GDP, from currently around 40 to 50 by 2035.
07:34And the Chinese are good at hitting targets.
07:37They can do it.
07:38They just have to figure out a way to do it.
07:40Last question, since we're in Shanghai here.
07:43There's been a lot of talk, obviously, globally about maybe there's this trend towards de-dollarization,
07:50but very difficult to do.
07:52Are there any particular steps that you think we should be watching out for from China
07:56or that they've already done with cross-border agreements and swaps and the like
08:00to get the renminbi to be more international?
08:03How do you see Shanghai and Hong Kong playing those roles?
08:07Yeah, this is a debate we've had for a number of years.
08:10But what's different about it is that the dollar is now under significant downward pressure
08:14for many of the reasons that we were just alluding to in the United States.
08:19It's the executive overreach, the open-ended deficit spending, the high levels of U.S. debt,
08:26and the shortfall of domestic saving, which leads you to big current account balances.
08:33So there is some gradual diversification.
08:36The question has always been, if you don't like the dollar, where do you go?
08:40And the renminbi is still small in terms of its global presence, but the Chinese are putting a lot of pieces together
08:47that will probably make the renminbi more attractive over a longer period of time as a global reserve currency.
08:54Can they do it, though, with a closed capital account?
08:56They have to open the capital account, and they have to continue to build the capital reform infrastructure in China.
09:07They've made a lot of steps, especially in the equity market,
09:10but they've got a lot of work to do in terms of international currency markets.
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