Front Burner - Why the China-U.S. trade war matters

Episode Date: August 9, 2019

Today on Front Burner, we sit down with the CBC’s Peter Armstrong to talk about the escalating U.S.-China trade war, and how it could affect the global financial market.

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Like, yep, I'm disabled. Google it, bitch. You can find Chosen Family wherever you get your podcasts. Welcome to the family. Hello, I'm Jamie Poisson. For the past year, we've been hearing a ton about a growing trade war between China and the United States. It was yet another rocky day when it comes to the trade war. The trade war fears are very real and the president is stoking them. He wrote, trade wars are good and easy to win. Well, this week things really ratcheted up.

Both countries announced a series of retaliatory measures. We have rebuilt China. So now it's time that we change things around. If they don't want to trade with us anymore, that would be fine with me. China says it will not be blackmailed, nor is the country afraid of fighting a trade war with the U.S. For his part, Trump announced he would put a 10% tax on everything he hasn't already taxed by September. China is responding by stopping Chinese companies from buying American agricultural products.

And oh, the U.S. also accused China of allowing the value of their currency to fall. It's complicated, but essentially they're calling them, quote, a currency manipulator, and those are fighting words. So China is devaluing their currency, and they're also pouring money in. Their currency is going to hell. Some experts are calling this the biggest trade war of all time. Today, I'm talking with Peter Armstrong, the CBC's national business correspondent and a friend of the pod,

about what's going on and why it's such a big deal. This is FrontBurner. Peter Armstrong, how are you doing? Good morning. Nice to hear you. So I think the last time that you were on the podcast, I was complaining to you about airlines. Right. And I think today, maybe I'm going to complain to you about a possible global recession. Feels like the stakes are a little higher.

The stakes are certainly rising. There's no doubt about that. So look, can we start here? We've been hearing a lot about this trade slash currency war with China and the US and how it's really ratcheting up now. And why does this matter for people like me and you? Why should I care about this? Because it feels like it's shifting from a thing that we were watching and worried about

to a thing that's actually influencing global events. We've gone from a tit for tat, but everybody's sort of the markets and generally global economies looking at this and being like, they're going to sort this out. It would be too bad for everybody for them to really get into a trade war. And now we're actually getting pretty deep into a trade war. Somebody had to do this with China because they were taking hundreds of billions of dollars a year out of the United States. And somebody had to make a stand. And now that we're getting deep into a trade war, tell me what that looks like.

Well, so now we're not just talking about tit-for-tat measures. We're talking about global economic growth slowing, seizing up, and people sort of like running for the exits and finding safe havens for their money rather than investing it in things that will help the economy grow. We're seeing this rush into government bonds, even though yields have basically vanished and in some cases are even negative. They are buying gold, even though gold has now topped $1,500 an ounce for the first time since 2013.

And so that's the whole ballgame. I mean, that's everybody. That's our economy. That's the American economy. It's the Indian economy. I mean, the the amount of sort of secondary players that get washed up in these giant waves of trade wars between the two big global superpowers is all of us. And and if if they're willing to stay on this course at the expense of their own economic growth, then all of us will suffer. I think the market reaction is to be expected. I might have expected even more. At some point, as I just said, we have to take on China. Have we ever seen anything like this before?

Oh, yeah. And none of the various scenarios that you can draw are good. They all sort of end badly because there are so very few where somebody says, you know what? Hold on. Let's let calmer heads prevail here. Let's actually get back to the table and sort this out. And we sort of thought we had that coming at the end of June when President Trump and Xi Jinping sat down on the sidelines of the G20 and effectively negotiated a truce. The United States will not raise tariffs on $200 billion worth of Chinese goods. But the countdown is on.

Both sides will have 90 days to reach a broader agreement. China and the United States both benefit from cooperation and lose in a confrontation. It would be historic if we could do a fair trade deal. We're totally open to it, and I know you're totally open to it. And that's when markets and everybody else was like, you know, this is going to be okay. They're going to negotiate in the fall. They'll figure out some kind of a deal. Don't worry, everybody.

The party's going to live on. Well, when Trump announced a new round of tariffs, clearly the party was back off again. I think in order for me to wrap my head around what's happening now, it would be good to go back a little bit and try and figure out how we got here. Does it feel like starting in 1972 with Nixon is a good place to start? There can be no stable and enduring peace without the participation of the People's Republic of China and its 750 million people. of the People's Republic of China and its 750 million people. That is why I have undertaken initiatives in several areas to open the door for more normal relations between our two countries.

I think so. If only because it began the economic relationship that we have today. You go back to 72, Nixon shocked the world, spent eight days meeting Mao Zedong. The American people are a great people. The Chinese people are a great people. The peoples of our two countries

have always been friendly to each other. He signed what they call the Shanghai Communique. If we can find the common ground on which we can both stand, generations in the years ahead will look back and thank us for this meeting that we have held in this past week. And really set the table for eventually it was Jimmy Carter. I think everybody talks about Nixon set the table for eventually it was Jimmy Carter. I think everybody talks about Nixon was the guy who did it. Jimmy Carter was the one who granted full

diplomatic recognition in 79 and opened up those diplomatic, like full diplomatic recognition. The United States of America and the People's Republic of China will exchange ambassadors and establish embassies on March 1, 1979. And that relationship began to build through that. But then in the 90s, when Deng Xiaoping really started to talk seriously about market reforms and about an open economy and about how they were going to shift China towards a more modern economy. If China doesn't stay with its kind of socialism

and if it doesn't open up and develop its economy to improve the people's livelihood, then it's a dead end. Right. It is when the China that we think of now really began to emerge. And is it fair for me to say that this really culminated in 2001 when there was this invitation for China to join the World Trade Organization? Ministerial conference so agrees. Right. And even just leading up to that, right, like in 96 and 97, you had like 10% GDP growth in China. Even in 2000, you had 8% GDP growth in China. It had quadrupled since 1978. So the world was watching this just

explosion of economic growth in China. And some were saying, let's get them into the WTO so they can play by all the same rules. And we can have some kind of a say in this. Because right now, it was just the Wild West. They're doing their thing and everybody was on the sidelines watching. December of 2001, China officially joined the WTO. And that's when the integration to the global economy really began. That's when, you know, a lot of people would say they really began flouting the rules that they were supposed to be governed by. The funny thing is, in looking at what Trump is saying now, you hear a lot of the same complaints going back to December of 2001. That China's taking advantage of the system and somebody needs to do something to make sure that they play by the rules.

And those are the same arguments we're hearing about why they should join the WTO in the first place. And so these rules that they're apparently flouting, like what are they? And so these rules that they're apparently flouting, like what are they? Well, I mean, Trump's biggest one then and now is that they're a currency manipulator. So what it's saying there is China used to go in and manipulating the markets, we feel it's time to go in and accuse it and officially label it a currency manipulator, which I mean, it's doublespeak in the highest order because what they actually did was stop manipulating and allow market forces to bring the currency where market believes it should be. And now they're saying that it's too low? And now they're saying it's too low, that it fell below this very symbolic measure of seven to one. And the funny thing is, is since that happened, the market has actually brought it back up a little bit from where it had initially been to a place where I think,

had you asked anybody six months or eight months ago, remove all the politics from this, probably about where they felt the currency should be in the first place. So then why is the United States calling China a currency manipulator? And you're hearing a lot of people say these are fighting words. Oh, these are fighting words. And and I mean, to put that into context. So we went through, you know, 72 to 79 to the 90s to 2001, the World Trade Organization. A lot of these things happen in waves and more than waves. They kind of happen. And you know how waves come in sets.

And those individual waves within the sets kind of tell us whether we're at the beginning or the end of a set. And either the end of the last set of the beginning of the current set was this meeting on the sidelines of the G20 at the end of June, where Xi Jinping and Donald Trump sat down and negotiated this truce. They agreed to restart talks and they agreed they would impose no new tariffs. And I think at some point we are going to end up doing something which is great for China and great for the United States. Then this latest sort of development is last Thursday on the 1st of August, Trump announced new 10% tariffs on like $300 billion worth of Chinese goods. It kind of came out of nowhere.

It kind of surprised markets, but analysts and trade experts who didn't expect that to happen. They thought there was this deal. This wasn't, you know, we weren't going to see any new tariffs of the summer. We'd have talks reset in the fall and begin from there. China, their response is long planned out. They waited until Monday. And on Monday, they allowed their currency to fall below that symbolic level of seven to one. Monday night, U.S. officially names China a currency manipulator. That's when the stock market kind of went bananas. Wall Street logging its worst day of 2019 with the Dow plunging more than 750 points. And the thing that all of this, because this is really hype, right? The actual letting the currency fall, the actual labeling of an adversary currency manipulator, of introducing tariffs in

spite of a deal that had been in place. That has economic consequences. And now you've got a bunch of other central banks around the world, India, New Zealand, Thailand, I think, all cutting their interest rates because they assume a trade war is actually coming. Talking about the U.S.'s approach to China, and I do want to ask you this question in a moment, which is essentially, like, maybe Donald Trump is right here. But like, in order to get there, I know that his predecessors, Obama and Bush, were heavily criticized for being soft on China's misbehavior on trade. Throughout this process, I have always emphasized that we welcome China's peaceful rise. You know, we just talked about how they don't follow the rules.

And so, you know, what were people saying about them and what they could have done during this time of great economic growth? I think it's one of the great sort of geopolitical riddles of our time is what could anybody along this road have done? Because as soon as Western economies hitched their wagon to the Chinese economy and began buying cheap goods from them and selling stuff to them, agricultural products and raw materials, there began this symbiotic relationship where an open, uncontrolled capitalist world is dealing with this fairly, if not quite controlled, economic environment in China that was growing at a pace that just made investing there and buying from there and being involved there such a target for investors and big companies and anybody looking to make a buck or sell into a fast market.

I mean, you asked earlier, but what is it that China was accused of? What laws, what rules were they accused of breaking? Right. I mean, we did sort of keeping their currency artificially high, but there's other stuff too, right? Like stealing intellectual property. Exactly. And you and I have talked about that with Huawei and how they were known. This was like basically a state-run agency that went out and just is known throughout the world as somebody who would come in, reverse engineer stuff, and put it out on the market as their own. And there was nothing anybody did to stop that and to sanction that and to say, well, hold on a second. And part of the problem was in dealing with Huawei, you weren't

just dealing with Huawei, you're dealing with the Chinese government. And to pick a fight with one would be to pick a fight with all. And of course, you know, during all of these years where China is becoming this economic powerhouse, a lot of people in the West lost their jobs. And then in 2016, Donald Trump comes in and he makes it a point to go after China on trade. And he presents himself as the answer to the years of Bush and Obama. China has no respect for President Obama whatsoever. Whatsoever. Well, you have to take strong action. How can we compete? They continuously cut their currency. Am I right about that? Oh, 100 percent. And I think, you know, the industrial heartland, you know, when you go

through Michigan and Ohio and all these places that lost a lot of manufacturing jobs and say they lost them, you know, people there will say they lost their jobs to China and Mexico. They didn't. Of the five million manufacturing jobs that were lost in America, four million of those went to robots, went to automation. So there was a false dichotomy to that. But people and he didn't just tell them, I'm going to get you a job again. He told them, I'm going to get you your old job. I'm going to I'm going to bring that back to America and you're going to do OK again. And part of that, he said, was cracking down on China. The question is, what will it actually do for American consumers? And we know, I mean, there is so much data on this, Jamie, that tariffs are bad for consumers, but they're particularly bad for low income consumers.

People who can't afford to say, you know what, let's just put off that purchase and we'll buy it maybe when this trade war is over. One of the things that Trump has stayed with in spite of all of the evidence throughout this, he keeps making this claim that China is paying for these tariffs. No, what happens is China devalues their currency and China also is pouring money out and that will pay for the tariffs. China's not paying for these tariffs. American consumers are paying for these tariffs. Here's what I'm struggling with and what I'm hoping that you can help me with today. And essentially, I'm trying to figure out if Donald Trump and the economic nationalists that he's surrounding himself with have a point here.

The top economic advisor, Larry Kudlow, saying that the United States cannot tolerate not only currency manipulation, but also intellectual property theft. intellectual property theft. This is a transformative president who is going in many places where prior presidents in both parties have feared to tread. He's rebuilding the American economy. You did talk about a lot of jobs going to automation. And I take your point there. But a lot of jobs still went to China. And China has been able to become this economic powerhouse because of these trade relationships. And so does he not have a point here to go after this major economic power, which is now rivaling the United States as a global superpower as well? Yeah. And I mean, it's again, this is the riddle of this whole thing. And in a lot of ways, I was talking to somebody the other day who said, yeah, the Americans should go after China and try to get them to play by the same rules, much in the same way that, you know, the UK and Europe should have gone after America for not playing by the same rules after the Second World War. This is what happens when economies rise and they find their way of flouting the system.

when economies rise and they find their way of flouting the system. China became the second largest economy, I think, in 2010, when you actually got into GDP per capita and a real look at the underlying health of the Chinese economy. And these last nine years have been astronomical growth within China, right? Like we saw those like nine and 10% years of growth in the 90s. It's something different now as they're consolidating that growth and they're becoming more powerful. And as such, they're becoming more immune as they've flouted so many of these rules for so long. It's harder now to come in and say, well, hold on a second.

We need you to play by the rules that you signed off on eight years ago. But is part of the strategy also about trying to take China down a notch? You know, this is a country that has also been able to gain footholds in really important ports around the world and in other continents. You know, is part of this about trying to curtail its rising power? And this is where I think the China story hits a whole new level, right? And there's a few things going on here. One is this, it's called the Belt and Road Initiative, which is this massive infrastructure, global infrastructure plan that China's involved with right now that, you know, people I talk to say this is the most important infrastructure the

world has seen, project the world has seen since like Rome built roads. It is enormous. They're building ports, they're building airports, they're building roads, they're building high speed train in not just in China, in Africa, in South America, in Europe. It's everywhere. It's slated to improve regional cooperation on a transcontinental level. However, China has been roundly criticized for creating debt traps for smaller countries.

By that, I mean building projects that the host country will struggle to repay. Their reach is enormous, and they want nothing short of dominance, as, you know, sort of American companies wanted nothing short of dominance when they try to move into these markets. So is what you're saying that the U.S. is focusing on tariffs around agriculture and the Chinese are focusing on like a much bigger, more sophisticated technological game here?

It's that and it's not just that, though, because it's also, you know, I call up and i read and i talk to smart people on trade most days they help me try to navigate my way through this and even they these experts in trying to understand how the economy and geopolitics and trade tensions how these all sort of fit into one little healthy Venn diagram, even they have a really hard time telling you clearly and without any caveats, this is what the Americans want. But they can all tell you this is specifically what the Chinese want. And I think that's never going to be a strength. If nobody knows what you really want, and you're sort of mercurial, and you're sort of all over the place, and you're shooting from the hip, that's never going to be a positive.

The stakes are enormously high, and they're high for me and you, right? Like, if Canada's economy depends as much as it does on the U.S. economy, and the U.S. economy is saying, or the U.S. leadership is saying, it doesn't matter that this might hurt our economy, we got to go sort this thing out. And then the experts are saying, by going in and trying to sort this out, this could turn into a prolonged battle that will drag down economic growth all over the world. I mean, JPMorgan Chase had a report out that said,

if in fact they go ahead with this next round of tariffs, which is the next sort of step to all of this, that we could be in a global recession inside nine months. It sounds like a lot of the experts that you're talking to are saying, look, the United States, Trump is right to be very concerned about China, but the way that they're going about it is ill-advised. So what do they think should happen? Well, I think everybody would have preferred to have seen that deal that was made in Osaka at the G20 go through. And when that deal was broken, it's just injected so much more volatility and so many more unknowns into an

already very volatile system and situation where, you know, global growth has come a long way since 2008, but it's in a precarious state. And everybody, every economy around the world is worried about where it's headed. And so long as it is, injecting this kind of uncertainty and volatility into it, it just, it scares the pants off everybody. Okay, well, on that really positive note. I always leave you with such a happy note, don't I? Peter Armstrong,

thank you very much for explaining trade wars to me today. It was a pleasure to talk to you, as always. Well, I hope this made some sense. I'm feeling a little bit better about it. It's still very complicated. So that's all for today. So that economics lesson that you just got on FrontBurner comes to you from CBC News and CBC Podcasts. This week, the show was produced by Chris Berube, Shannon Higgins, Imogen Burchard, Matt Amah, Mark Apollonio, Jackson Weaver, and Marion Warnicka.

Special thanks this week to Sylvia Thompson and Evan Kelly. Derek Vanderwyk is our sound designer. Our music is by Joseph Shabison of Boombox Sound. This week, the executive producer of FrontBurner was Kathleen Goldhar sitting in for Nick McCabe-Locos. I'm your host, Jamie Poisson. Thanks for listening to FrontBurner. Have a wonderful weekend and see you guys on Monday. For more CBC Podcasts, go to cbc.ca slash podcasts.

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