Transcript
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Speaker: Hello and welcome to Under the Banyan Tree.
Speaker: I'm Fred Newman, chief Asia economist here in Hong Kong.
Speaker: There's really only one story front and center for markets and economics this week in Asia and that is, well, Mr. Donald Trump has delivered on the first batch of the China tariffs he's been promising and Beijing has hit back.
Speaker: I'll be giving you my thoughts on the implications of these tariffs for China and the wider Asia region.
Speaker: Plus, we're going to welcome my fellow economist Justin Feng to the podcast for his take on what China can learn from the trade war between the US and Japan in the 1980s.
Speaker: Plenty coming up on today's show from HSBC Hong Kong.
Speaker: You're listening to Under the Banyan Tree.
Speaker: Let's start with a quick recap of events this week.
Speaker: President Trump's new 10% levy on Chinese imports came into effect on Tuesday.
Speaker: That's in addition to the existing tariffs of up to 25% on some Chinese goods signed into law during his first term as US president.
Speaker: And it didn't take long for China to retaliate.
Speaker: This week, just hours later, Beijing announced tariffs of its own.
Speaker: They include an additional 10 to 15 percent levy on U.S. coal imports, crude oil and liquefied natural gas starting on February 10th, although these Chinese levies are arguably less comprehensive than the tariffs that the U.S. imposed on China.
Speaker: So fast moving headlines.
Speaker: The first thing to note is that these 10 percent tariffs on imports of goods into the United States from China applies now to all goods, whereas previously tariffs that were applied really were only targeting intermediate goods or industrial products, steel, for example, or other types of products that feed into the manufacturing process in the U.S., but not consumer goods.
Speaker: This time around, we suddenly see also tariffs on consumer goods.
Speaker: That means the average American will probably face slightly higher costs for some goods, like iPhones, for example, or other toys that are made in China.
Speaker: And that, of course, means that the average American will probably see a bit of an impact on their pocketbook.
Speaker: from these tariffs.
Speaker: So that's already the first thing to know.
Speaker: That's a difference from what we saw during the first Trump administration.
Speaker: Now, how important are these tariffs really for the Chinese economy?
Speaker: How much of a risk are they?
Speaker: Well, if you do some economic analysis, you could say 10% tariff
Speaker: all else equal, which is a term economists like to use, it is you keep all assumptions equal, would kind of shave off a few tenths of a percentage point off of China's GDP growth rates.
Speaker: Not nothing, but it's not the end of the world.
Speaker: But that's,
Speaker: Yeah, so there's something that China can deal with.
Speaker: Of course, if the tariffs rise then to from 10%, 20% to 30%, then the economic costs increase.
Speaker: And that's where we really start to see a much bigger drag on China's economy.
Speaker: But the other thing to note is that this all else equal assumption doesn't necessarily apply in the real world because partly,
Speaker: Chinese export prices have actually fallen since 2022, so the last two, two and a half years, by about 15 percent and much more than that of other economies.
Speaker: So the Chinese already have become much more competitive.
Speaker: So the 10 percent tariff really just puts them back a year, a year and a half or so in terms of gaining competitiveness vis-a-vis others.
Speaker: And that's not the end of the world.
Speaker: Why?
Speaker: Because we have
Speaker: We have a lot of excess capacity in China that lowered the average prices of manufactured goods.
Speaker: The currency was weakening as well.
Speaker: And so all of that actually means that maybe, maybe these 10 percent tariffs are not as big a drag on the Chinese economy.
Speaker: A few other points to note.
Speaker: Firstly, how important are actually exports overall to the Chinese economy?
Speaker: Well, we can use some very sophisticated trade data and analyze this.
Speaker: And it turns out that Chinese exports to the United States make up only about 2.5% of China's economy.
Speaker: This is not a huge amount.
Speaker: That means 97.5% of China's economy is really dependent on China.
Speaker: non-US market, either other export markets or domestically.
Speaker: And so if you lose that in one go, which is very unlikely because even with US tariffs, America is still going to buy some Chinese goods.
Speaker: But let's say you lose everything in one go, then you knock off 2.5% of your economy, which would hurt in the short term, but it's something you can live with in the long term.
Speaker: You just replace that with more consumer spending or more investment or other things.
Speaker: So in the long term, it's digestible.
Speaker: It just comes at a very awkward time cyclically for China because growth at the moment is weak.
Speaker: And so this just compounds the near term drag.
Speaker: But I think overall, the Chinese economy has in the last 20 years become far less dependent on the U.S. and far less dependent on exports in general than is widely perceived.
Speaker: So that's one point to note, but we should also maybe highlight that other Asian economies are much more dependent on the U.S. in terms of the GDP.
Speaker: So if you take Vietnam, for example, 11% of its GDP is dependent on the U.S. You get Singapore, if you include services, about 7% of its GDP.
Speaker: A lot of countries kind of lie in the 4% to 5% GDP range.
Speaker: China, as I said, just 2.5%.
Speaker: if tariffs were expanded on other Asian economies, that is, if the US imposed tariffs on other Asian economies, the impact on their GDP could potentially be much larger than it is on China.
Speaker: So this is just for context.
Speaker: The other thing to note is we already had trade tensions during the first Trump administration, that is, when the first Trump administration actually raised tariffs on China.
Speaker: What was the impact here?
Speaker: Well, some near-term kind of rejigging of supply chains, but ultimately it wasn't as if it kind of brought the Chinese export juggernaut to a halt.
Speaker: In fact, exports out of China continue to hit record highs, not necessarily to the US, but to the rest of the world, because China is just so competitive.
Speaker: But we did see a subtle rejigging of supply chains.
Speaker: That is, China moved some of its exports away from the U.S. to other markets.
Speaker: In fact, China's number one export market today is Southeast Asia.
Speaker: It isn't the U.S. It isn't Europe.
Speaker: It's actually Southeast Asia.
Speaker: And that also meant that Chinese companies moved more and more of their investment into Southeast Asia as well.
Speaker: integrating really the Southeast Asian economies like Vietnam, like Malaysia, like Thailand with the Chinese economy.
Speaker: And so in many ways, the US-China trade frictions in the first Trump term meant that China integrated its economy more with the rest of the world than was otherwise the case.
Speaker: And so I think that's another nuance to keep in mind here.
Speaker: So, when we hear these 10% tariffs, certainly quite disruptive for markets, a lot of volatility.
Speaker: We don't know how this case necessarily evolves.
Speaker: It looks likely that we could get more tariffs down the line.
Speaker: But I think it's sometimes important to keep some of the economic underpinnings in context here to kind of realize that ultimately the Chinese economy is going to be a little bit more.
Speaker: isn't as dependent on the U.S. market as it used to be, and at only 2.5% of its GDP, this is something that in the medium term would certainly be manageable for China.
Speaker: Now, we've plenty more to talk about, and after the break, we're going to talk to Justin Feng on his recent report on U.S.-Japan trade frictions in the 1980s and what this might imply for U.S.-China trade frictions today.
Speaker: Welcome, Justin Feng.
Speaker: Justin, thanks for joining us under the banyan tree.
Speaker: Thanks for having me, Fred.
Speaker: It's great to be here.
Speaker: So, Justin, you wrote a very interesting report recently looking at the lessons for China from the U.S.-Japan trade frictions in the 1980s.
Speaker: So, but before talking about the lessons, quickly draw a picture for us.
Speaker: What was actually, what kind of friction was there between the U.S. and Japan in the 1980s?
Speaker: Because it sounds, a lot of it sounds very familiar and what we see vis-a-vis China today.
Speaker: Sure, Fred.
Speaker: So let's go back about 60 years from now.
Speaker: It's in the 60s and Japan had just emerged out of World War II.
Speaker: Its economy was in shambles, but then it embarked on a very ambitious export-led growth miracle.
Speaker: And this was very successful for a very long time.
Speaker: But eventually, by around the 1980s, its massive trade surplus had started to lead to frictions.
Speaker: with the United States, which was now running a massive trade deficit against Japan.
Speaker: And in many industries, including autos, steel, consumer electronics, Japan started out as a bit of a technological laggard.
Speaker: So funny enough, nowadays we think of China as being a massive economy that makes many products, sometimes maybe not at the best quality, but certainly at tremendous volume.
Speaker: And actually that's what many Americans thought of Japanese exports during the 60s and 70s.
Speaker: It was considered a copycat electronics industry.
Speaker: It made many products very cheaply.
Speaker: But then by the 80s, many Americans have started to realize that in some of these high tech industries, Japanese companies were not only mashing their American counterparts in terms of technology, but even exceeding them in some ways.
Speaker: So that's a good point.
Speaker: In fact, semiconductors come into play here, right?
Speaker: The US invented semiconductors.
Speaker: It was leading in the 1970s.
Speaker: But what then happened in the 1980s when it came to semiconductors?
Speaker: Right.
Speaker: So during the 1980s, as you said, Americans, they invented the integrated circuit, the semiconductor.
Speaker: But then Japanese electronics firms such as Sony and other firms started out by copying how to make semiconductors from American companies.
Speaker: But then they themselves were then able to replicate and then innovate on top of those technologies.
Speaker: And by the 80s, in certain segments of the chip industry, for example, memory chips, Japan actually accounted for 50 percent
Speaker: of the global market, which was tremendous because considering they just started from zero a couple of decades before that.
Speaker: So we have here a picture of early 1980s.
Speaker: Japan becomes a big exporter.
Speaker: It's flooding the U.S. market with cars, with steel, with semiconductors.
Speaker: It's threatening U.S. companies.
Speaker: It's threatening American jobs in many ways.
Speaker: And so that's reminiscent of China.
Speaker: the friction with China today, which has become an economic powerhouse.
Speaker: Now, in the 1980s, the Reagan administration, Ronald Reagan, the US president, what did the US do in order to kind of rein in Japan's competitive threat?
Speaker: Right, sure.
Speaker: So in many ways, the Reagan administration actually
Speaker: It took many measures that might seem very similar to what we now see with the Trump administration, of course, with a very different style of rhetoric.
Speaker: But in terms of the pressure, right, the trade restrictions, the threat of tariffs, and in fact, the utilization of tariffs during the late 1980s, the U.S. used a host of measures to pressure Japan, which then eventually used what we call voluntary export restraints, or VERs,
Speaker: So they self-restrained their own exports towards the U.S. under the threat of U.S. tariffs.
Speaker: And the U.S. also used monetary policy realignment to appreciate the Japanese yen.
Speaker: Monetary policy alignment, let's put it aside and come back to that briefly.
Speaker: But it's interesting that rather than necessarily accept these tariffs, Japan, what you said was...
Speaker: imposing voluntary export restraints with saying, okay, we understand you have a problem with our exports.
Speaker: We're going to reduce our exports to the US market, but we're going to invest in the US instead.
Speaker: We're going to actually move foreign direct investment into the United States.
Speaker: Talk a little bit about that.
Speaker: What was the foreign direct investment implication?
Speaker: Sure.
Speaker: This is most prominent in the auto industry, right?
Speaker: Because the auto industry was one of the biggest targets of the Reagan administration's trade policies.
Speaker: The U.S. also invented the automobile, of course.
Speaker: And it was the, you know, concern the pride of the American manufacturing industry, the fact that Americans were able to make their own cars and were very successful for many decades.
Speaker: But then you had...
Speaker: the more fuel-efficient Japanese cars that entered the market, and especially considering, of course, the oil crisis at that time, you know, fuel efficiency became very important.
Speaker: And because of Japanese competitiveness, many U.S. auto plants had to close down.
Speaker: So to kind of alleviate this political pressure, many Japanese auto firms then set up their own production plants within the U.S. throughout the 80s,
Speaker: And even to this day, we think about many Japanese auto companies, actually, they have become incredibly localized within the U.S. You go to any Toyota or Honda dealership in the U.S., and there's a good chance that that car was produced entirely within the United States.
Speaker: So one of the implications was foreign direct investment actually increased as a result of these terror frictions.
Speaker: In Japan's case, more foreign direct investment by Japanese companies in the U.S. In China's case, actually, we saw an increase in foreign direct investment as well.
Speaker: as a result of the trade frictions with the US.
Speaker: But Chinese companies, of course, investing more elsewhere in the world, particularly Southeast Asia, particularly Europe, other emerging markets.
Speaker: So there's some parallels there.
Speaker: But you mentioned something that is a monetary policy realignment.
Speaker: Big words here.
Speaker: But essentially what this meant was this Plaza Accord, which was Plaza being a hotel in New York City, owned famously by Donald Trump at some point, not at the point
Speaker: in early 1980s, but a little bit later.
Speaker: But regardless, at this hotel, monetary officials, central bankers from Japan, the US, Germany met and actually hashed out a deal, the Plaza Accord, that led to weakening of the US dollar
Speaker: and a strengthening of the Japanese yen, in part to address the extraordinary competitiveness of Japanese companies, because the Americans said the Japanese yen is too weak, too competitive, so let's realign it.
Speaker: And that actually worked quite well in the sense of realigning currencies.
Speaker: Absolutely.
Speaker: And in many ways, it did have an effect on Japanese exports.
Speaker: But also, of course, then later in part led to an asset bubble in Japan and then the subsequent collapse.
Speaker: So it also had big ramifications on Japan's internal economy, not just its external exports.
Speaker: Why was it?
Speaker: Why would a currency realignment lead to an asset bubble in Japan?
Speaker: Sure.
Speaker: I mean, its currency appreciated very rapidly.
Speaker: And then, of course, its central bank moved very quickly there afterwards.
Speaker: But, you know, in many ways as well, this is also Japan itself.
Speaker: Its own economies, of course, was having structural issues as well, right?
Speaker: And, of course, we also have to think about its competitors.
Speaker: At that time, many other Asian economies, such as South Korea and Taiwan, were also rapidly industrializing.
Speaker: And that also affected Japan's export competitiveness.
Speaker: So, in many ways, yeah.
Speaker: So, Japan's export competitiveness was affected by the currency realignment.
Speaker: The central bank in Japan responds then to weaker growth by cutting interest rates, fueling an asset bubble in Japan, which was famously one of the biggest asset bubbles that we know in history.
Speaker: And that ultimately, that collapse of that asset bubble then caused Japan's multi-decade growth problems.
Speaker: There are a lot of nuances here, but that's in a nutshell what happened.
Speaker: That's why
Speaker: Japan's economic history over the last 30, 40 years relates directly to the trade frictions with the US in the 1980s.
Speaker: And we can trace through the consequences here.
Speaker: Now, there is something interesting though here for China, and that is the Chinese will have watched the Japanese experience quite closely.
Speaker: And we read a lot about this idea that China's currency is undervalued from the perspective of the US.
Speaker: Do you think, based on what you've looked at, Japan, for example, that it's quite likely we could get a big currency deal between China and the U.S., where the U.S. says you should appreciate your currency, make it less competitive, and suddenly the Chinese currency, like the Japanese currency, actually rises in value to reduce the competitiveness of Chinese exports?
Speaker: Do you think such a deal is likely?
Speaker: I don't know how we would call it.
Speaker: A plaza accord, probably not.
Speaker: Maybe a Mar-a-Lago accord.
Speaker: A Mar-a-Lago accord.
Speaker: There you go.
Speaker: Well, there certainly have been some growing voices within the domestic Chinese media and commentary landscape that have maybe even predicting a slight appreciation of the RMB.
Speaker: But our view actually is that we will likely not see this type of major currency agreement for a variety of reasons, one of which is, well, of course, the FX market has...
Speaker: changed quite a bit since 1985.
Speaker: It's grown enormously in scale and sophistication.
Speaker: So such a deal would be enormously, exorbitantly expensive.
Speaker: Of course, there's also economic fundamentals to keep in mind, right?
Speaker: It takes more than a central bank intervention nowadays to reverse a course of direction.
Speaker: And also, of course, China is not Japan, right?
Speaker: China today is very different from Japan in the 80s.
Speaker: We believe in terms of trade, it has a much stronger hand.
Speaker: And of course, there's also geopolitical implications to keep in mind.
Speaker: And also, I think the Chinese will probably look at Japan's asset bubble and do not want to necessarily repeat that.
Speaker: And that's probably a reason not to allow the currency to inflate too much because it might actually prompt an asset bubble that then has longer term consequences.
Speaker: And I think that's also something Chinese officials certainly may have studied and concluded that maybe dramatic currency
Speaker: appreciation is on the cards, although of course our FX strategists still argue that that wouldn't necessarily preclude a slight weakening, for example, of the currency over the coming year or so.
Speaker: Justin, there's tons here to unpack and tons to watch, and I'm sure with the US administration moving as fast as it has, we're going to need to revisit this issue.
Speaker: So thanks a lot for coming into the studio and talking to us here on The Banyan Tree.
Speaker: Thanks for having me.
Speaker: It's a pleasure to be here.
Speaker: We're going to leave it here, ladies and gents.
Speaker: Thanks as ever for joining us under the Banyan Tree.
Speaker: We will, of course, keep across this story for quite some time.
Speaker: In the meantime, listen, like, and subscribe to our sister podcast, The Macro Brief.
Speaker: This week's episode takes a global view on Trump's tariffs and even includes a little cameo from yours truly.
Speaker: We'll be back again next week putting Asian markets and economics in context.
Speaker: Talk to you then.
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