Money Rehab with Nicole Lapin - How US-China Relations Reaches Into Your Wallet with Fred P. Hochberg

Episode Date: January 19, 2023

We've talked a lot about inflation on Money Rehab; but we haven't yet covered how US trade policy affects inflation. To dig into this topic, Nicole sits down with Fred P. Hochberg, who served as the Chairman and President of the Export–Import Bank of the United States under President Obama. Nicole and Fred talk about the role of the most important bank you’ve never heard of, Trump-era tariffs and the China of it all. To read more about Fred, and find his book on trade, click here: https://www.fredphochberg.com/ To learn more about the Export–Import Bank (including how to get $$$), click here: https://www.exim.gov/

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. We've talked a lot about inflation and the forces that drive it. Supply, demand, supply chain. If you're caught up on money rehab, you could probably teach an Econ 101 class at this point on these principles.

But what we haven't covered yet is how U.S. trade policy affects inflation. That's what we're talking about today with Fred Hochberg. Fred is one of the foremost experts on this topic in the world, really. And you'll hear why in a second. We talk about the role of the most important bank you've never heard of, Trump-era tariffs and the China of it all. Here's Fred. Fred Hochberg. important bank you've never heard of, Trump-era tariffs, and the China of it all. Here's Fred. Fred Hopper, welcome to Money Rehab. Good to be here. Good to see you again.

Good to keep chatting with you again and connecting again. You chaired the Export-Import Bank under Obama, which is a big deal. I read that you were the longest-serving president in the bank's history. So let's start there for folks who might not know what the heck is the Export-Import Bank. Sure thing. So the Export-Import Bank was actually started by Franklin Delano Roosevelt during the Depression. And why was it started? It was started because there was a need to put more Americans to work. And FDR recognized that one thing that puts Americans to work is producing more goods and services.

And in those days, let's be clear, it was more goods. And exporting is a way of expanding our markets. Today, we say that 5% of the world's population lives in the United States and 95% lives outside. So if you're not thinking about selling to the rest of the world, you're missing out on potentially 95% of the potential markets you could have. And what President Roosevelt realized is also that why don't people do more exporting? Sometimes it's because they can't get the financing or fear that maybe they won't get paid or the financial sort of roadblocks to it. So the Export-Import Bank was started in 1934 to try and find a way of having the government step

in by guaranteeing a loan that a bank might make to a small company or that a bank might make to a foreign buyer so that they can buy U.S. goods and services. So like advancing the money so that they're not out money, so that they're not dissuaded from doing it. That's right. So that if you may have them, you still have to compete on product and price and the characteristic of the product. But if financing is what's holding you back, there are some government solutions that can help take that off the product. But if financing is what's holding you back, there are some government solutions that can help take that off the table. That's what the Export-Import Bank does. It sounds very fancy, by the way. XM Bank, for short. It's not an actual bank. Like,

where did you work? Did you work at the White House? Did you go to a bank? We have an office right across from the White House, right on Lafayette Square. Now, we're not a bank. We don't give out toasters. We don't accept deposits. You don't get little mints? No mints. I guess that guaranteeing loans is a much bigger deal than getting little mints. So let's walk through a tangible example for somebody. Let's say they are running a shop that makes toasters and they want to start selling it overseas. And to do that, it's really expensive for tell me all the reasons why it's so expensive and people might be dissuaded from doing it. And then why they could actually get financing or help to do it from Ex-Im Bank.

Let me use a real example. There's a company right here in Miami where I am speaking to you for today called Demotech. And they make, in the early days, they made surgical sutras that would be used during surgery. Actually, during COVID, they were making masks and also test kits. And about 95% of their business was overseas. And so what the Export-Import Bank does is twofold. One, it provides them with working capital because they need to borrow money to make the product and prepare it and ship it overseas. And sometimes your local bank may say, well, it's fine if you have a customer there in

Florida, you have a customer in Texas, because we know if there's a problem, the company in Texas doesn't pay. It's not that hard to collect within the United States. It can get much harder to collect if you're selling to Egypt or the Middle East or some places in Africa or even in Western Europe. So what the Export-Import Bank does is works with a company like Demotech and said, we'll guarantee it. If for some reason your buyer overseas doesn't pay, we'll pay so the bank feels comfortable making the loan. And then we go and make sure that client pays us back. So we're providing insurance in that way. Because if you're like the suture company, you have to put money into manufacturing before you ever get paid from wherever you sold it in Egypt.

And probably those accounts receivable will take a long time. So fronting the money takes away some of the pressure, pain points. Exactly. Takes away the pressure, the pain point, and the risk. Because as I said, you might say, well, I can sell to Texas. That I'm not worried about. But if I'm selling to Egypt or India or Sub-Saharan Africa or Latin America, if they don't pay, it's not as easy to collect on that foreign receivables. Is there any guidelines around the types of companies that can get funding from the Ex-Im

Bank? Do you have to be a certain size? Can small businesses do it? How do you get that? It can be very small. There was a company early on I met called Jenny's Pickles. They made pickles and exported them overseas, as an example. They were a teeny company doing less than a million dollars a year. The only real criteria is, going back to President Roosevelt, the Export-Import Bank was about supporting U.S. jobs. So the goods have to be made here in America and shipped from America. We did a lot of work in those years with General Electric, for example. If they make power turbines in America and they need rental credit for their buyers overseas,

we can do that. If they're making them in France, where they do a lot of manufacturing, or Germany, or in Brazil, we're not about the company, we're about U.S. jobs of the American worker. Yeah, that makes sense. Anybody who wants to maybe get funding or help from the Ex-Im Bank. Is the application process stringent? Is it hard to go through? Government stuff is always hard and very red tapey. I sound like a commercial for it because I think it's so cool, but I know it's not maybe the most mainstream thing or even well-known. We tried to do a lot to simplify it. And one of the things I'm proud of that the team did at the Export and Import Bank is we really reduced how long you wait for an approval.

And we were getting better than 98% of our approvals out in less than 30 days. And the ones that really took longer than 30 days were generally multi-billion dollar deals that are just impossible to complete in 30 days. If you're helping to build a power plant or a solar or a wind farm, that takes a lot longer. So we reduce that. Mostly what we tell people to do, we, I'm not there any longer, but we would tell people to do, obviously, is first thing, you go to your bank. You should talk to your banker because she or he may have experience with the Export-Import Bank and could say, no, we can do this on our own or we'll use the Export-Import Bank. And if your bank is unfamiliar, we would tell people to go to xim.gov. Export-Import Bank has about 15, 20 regional offices around the country. And there's

also an 800 number. And we also had a chat function to help people if you had trouble filling out the application. I don't understand this, how you can do that. Yeah, that's very cool because you know that I'm like rooting for the Jenny's Pickle lady. Not so much the power plant, they can take a long time, but I root for her. So let's get back to the macro economics of it. You said that one of the focuses of your tenure was to champion the power of the U.S. exports to boost our economy by creating jobs. Now, interestingly, you now argue that imports are where we should focus. You're right. I wrote a piece in the Wall Street Journal last summer.

And in the piece I talk about, there is also a value of imports. And when I talk about imports, one, we're facing unprecedented inflation. It's thankfully beginning to slow and taper down. Our inflation has been running at a high rate. And you have to look at what's causing inflation to be such a high rate. One factor, and it's only one factor, obviously, are tariffs. President Trump put in a number of tariffs on steel and aluminum, as well as tariffs on China. And those raise the cost to American consumers, because the tariff is nothing more. It's a sales tax. It's a consumption tax. So I made the argument, we could actually reduce some of these tariffs and make it easy

on the American pocketbook and reduce the cost. When President Trump put in the tariffs, I argued against them. I thought that they were hurting the American consumer, hurting American innovation. And at that time, we estimated close to it could cost the American consumer about an average of $1,000 a year. So I've never been a big fan of tariffs. And with high inflation, it seems like an opportune time to really look at that. So where were the tariffs placed? The tariffs were placed primarily on Chinese goods.

And the problem with that is, one, we pay the tariffs. The American consumer pays the tariffs, not the Chinese, not the company that is shipping goods to America, but it's collected when the goods hit our shores or get off an airplane. And the importer has to pay that. And generally, the importer is passing that cost on to the consumer. So that's why I think tariffs are a bad idea. The other thing is that we get a lot of innovation from imports. I would argue, and some would argue against me, that American cars are far better today because they faced foreign competition in the 80s, and it made American cars better and more globally competitive.

When GM, Ford, and Chrysler had 90% of the market, they had very little incentive to improve quality and reduce costs. When they started facing companies like Toyota and Honda and others, they actually had to get their quality in line and their reliability in line. And we don't ever, you don't ever talk anymore, Nicole, about getting a lemon as a call. So I believe imports are important as party as inputs into products. The most innovative passenger jet plane we make right now, the Dreamliner, the wings come from Japan. It is important to have global, and the term people use instead of just supply chains, they call them value chains, because it's not just buying a cheaper widget or a cheaper fastener. It's what it's really is saying, if we can get the best technology and the best manufacturing on the wing assembly from Japan, let's use that.

The iPhone is the perfect example. Those components come from 43 different countries in order to make the iPhone really work. Without inputs and without those value chains coming from Switzerland, the Netherlands, raw materials from the Congo, the glass on it actually comes from Corning, New York. A lot of the displays come from Korea, actually from Samsung. But putting all that together, both reduced the cost and made it the most innovative product it is today. And that's what competition does, right? No matter where it's from, it forces companies to be better, do better, make more innovative stuff. So these tariffs that were placed on imports, I remember going while I was at CNBC and maybe at Bloomberg

to the ports out here in Los Angeles and Long Beach. They're incredible. They're just so fascinating to watch all of these containers come in to the United States. So as soon as some goods come in, that's when the tax is placed. And then the person who was essentially ordering those goods would need to pay the tax. And ultimately, that would pass on to the customer. So you're saying if we roll those back, inflation will go along with it? It is a help. The real driver of inflation is the Federal Reserve Bank and what they charge for interest rates. So the major job is frankly outside the hands of the

politicians, outside the hands of President Biden and the White House, but really with the Federal Reserve. So let's be clear about that. But reducing tariffs is one thing that can be done by the administration and can be pressured from Congress as one small step in that regard. But the major thing is for the Federal Reserve. And we have seen a slowing of inflation. And one of the things I think that we lost track of is during the pandemic, people were not traveling, not going to movies, not going to concerts, and they were home. And so people were spending more money on TVs and furniture and goods. And that partly caused a great backlog in the ports because demand for goods went way up about 15 percent

and our use of things like TV services, movies dropped. So that's a large shift to try and absorb in a very short period. This is like your Super Bowl, Fred. I don't think I've ever thought about the supply chain as much in my life as I've thought about it the last few years. This was the time that imports and exports became the most sexy and top of mind for everybody because the whole system was mucked up. So what is the supply chain? Like we talk about it so much. Right. So for example, I know, you I know if you look at your iPhone, when we talk about a supply chain, as I said, the rare earth minerals that are used so that the circuitry works well, actually, most of that comes from the Congo. And the portion of your iPhone that calculates how many steps you take a day, if you want to get your 10,000 steps in, that comes from the Netherlands.

And if you want to see whether, if you turn your phone sideways or upright so that it always knows what direction it is, that gyroscope comes from Switzerland. So when we talk about the supply chain, it's pulling all those components together to create the iPhone. And what the supply chain is doing or value chain is, we're getting the best thinking,

we're getting innovators, engineers, entrepreneurs from around the world all contributing together to make a better product. It is assembled in China. And partly because of just the way global trade works the iphone says made in china but a very small portion less than ten dollars of the value of an iphone actually is chinese it's the expense of things like the gyroscope the being a couch just steps the glass on the front the display that comes from korea that's where all the value is.

The assembly is what's done in China. And because that's where the product takes its form, it's considered a Chinese product, even though, as I said, less than 10%, probably in the range of maybe 3% of the iPhone actually is from China. Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated

if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like

a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. And now for some more money rehab. China has been a hot topic lately too. You've been talking about this for years and now it's really come to the forefront again as well. In 2020, you wrote a Medium piece called, I've been traveling to China for 40 years. It's time we get this relationship right. A few questions about it. But the first is, what's wrong with the relationship? Right now, it is one area that both Democrats and Republicans on Capitol Hill

and both the House and the Senate can agree. They all think China is a bad actor and needs to be contained. So there are not a lot of people who in government can be advocating for, let's find ways to work together. And it's very easy to say anybody is, oh, they're too soft on China. They're not tough enough on China. We need to be tough with China. We need to compete with China. And we need to find ways to work with them when it comes to climate, when it comes to global health. We need to find ways to work together. China is too big and too powerful and too rich a country for us to try and pretend we can operate and forget them or to put them in a corner and not deal with them. So it isn't easy.

One of the things that I think we see President Biden doing is saying we need to get the rest of the world with us to work together on issues around China. We cannot just isolate them. We can't do it by ourselves. But doing business with China, as you mentioned before, is really tricky, right? It's not the same as the way we would do business. I would even say it's treacherous because if you're doing business with China, there is not the same sense of what we value.

What makes our economy really so spectacular, and even when it's laboring, there's a lot of innovation. There's a lot of what we call intellectual property, whereas the innovation, we talked earlier about the iPhone, or innovations in automobile manufacturing and so forth. So in China, it's much, much harder to protect those ideas, to protect the patents and copyrights that essentially are what makes our economy really run and tick and excel to such a degree. And that's really at risk when you do business in China. Because if they own 51% of your company, it's much harder to keep your intellectual property. And what's the secret sauce, like we used to call it McDonald's.

Keep that secret. You said that the strategy of the Cold War won't work with China. We need to find a better way. Let's remember when we had a quote unquote, first of all, just the idea it's a war. A Cold War is still a war. We just don't want it to be a hot war. When we were in a Cold War with the Soviet Union, we wanted to make sure each side was trying to make sure the other side would quote unquote cry uncle and no longer be a viable country. That's where a Cold War is trying to defeat one side. We are going to defeat China.

China is not going to defeat the United States. We're going to have to find ways. And it's very, it's challenging. I'm not, it's not at all easy. Find ways where we can cooperate and where we can compete. And I think the problem today is under Xi Jinping, the president of China, there is, we've narrowed the areas they really want to work together on. And it's very hard to negotiate or find common ground when the other side is not interested. And so that's, I think, the challenge. There is no easy cookbook recipe for how to fix things, because in many ways, they're not interested in working

with the United States. They're not that interested in working with a lot of the West. They think the West is corrupt. They think the West doesn't have the kind of moral values, similar to what Putin has said about the West. And that makes it very difficult to find common ground and find things we can work on. And how do you think that's going to affect the U.S. consumer or U.S. small businesses? I think we're seeing a couple of things happening. One, some things are being reshored. The fancy term is they're making things more in America. Two, I think there are more goods that were made in China that are going to be made elsewhere. Apple is looking to assemble the iPhone in India. A lot more clothes that used to come from China coming from places like Vietnam and Bangladesh. So I think companies today, if they need to expand, they're really being very careful if they expand in China, because the political risk, which was really not such the

case five years ago, is so much more extreme. That has to factor into people's decision-making. So I think that's a major change in trade, Nicole. I think, one, just the political risk between China, Taiwan, Russia has just changed our view of globalism and the free flow of goods and services moving and people could get the best product at the best price or the best service, there are much more little barriers to that today than there were even five or 10 years ago. Yeah, I feel like just in a macro sense, there's a rolling back of this globalization or globalized economy. What do you think? I think you're absolutely right. I think the sense of

where China is coupled with the coronavirus, which put a premium when we were short of personal protective equipment, people called PPE. Now, I don't think that the problem in that case, just for a quick aside, is we didn't have any inventory. I make the analogy, if there's a bad hurricane or snowstorm, you fill the car with gas, you buy a few extra groceries to fill the freezer, we left the cupboards bare. And so that's one reason we were caught flat footed and caught without some of those essential protective equipment for health care workers. But so that won't be solved. But I think that we're in a period where there's less trust. I think there's less trust. The coronavirus, I think, made the world a little less trusting of each other. People wanted to hoard vaccines, hoard ventilators,

not share them globally. So I think we could move back on globalization, move back somewhat on the free flow of goods and services. Yeah, I feel like barring life or death or vaccines or ventilators or anything actually urgent, there's not an urgent need for dresses made in China. Right. We could do without that. We have to remember one thing China did, which people don't like to, on the positive side, they were an enormous driver of global growth, both in producing inexpensive products that kept our inflation at bay. You can buy a large flat screen TV for a couple of hundred dollars today. So one was inflation. Two, they actually bought a lot of goods and raw materials from the rest of the world. So they drove the economy. They were growing at 6%, 7%, 8%, 9%. So they were

helping to fuel global growth. Something like 400 million people in China alone came out of poverty. Those are some positives. There are also a lot of negatives. But we have to remember, there were some positives in the growth of China. And I think President Obama said once very clearly, we are better off with a stronger and a vibrant China, but one that wants to play with the rest of the world. Yeah, there's always good and bad in any relationship, of course. in any relationship, of course. And so for the American consumer, do you feel like there's an obligation to buy American? Do you think this made in the USA movement is going to come back more? Do you think there's an obligation the other way around to have things bought and sold in the

US? I think there's people who've often have often felt that way. And that is why BMW, Honda, Toyota make their cars in America. And one thing I did put in my book, when you look at the most American car on the road, it was not necessarily a GM, a Ford or Chrysler. For many years, it was a Honda or a Toyota. Just this year, it happens to be Teslasler for many years it was a honda or a toyota just this year it happens to be tesla but for many years of the top 10 six or seven were what what you and i might call a foreign car i.e made by a german car yeah german but it was made here right it was made here so it was either a honda or a toyota or a bmw there are only four cars that in the early days, as recent as two, three years ago, that you would think was America, a Chevy, a Jeep, or things like that.

Some things we don't make very much here. You mentioned dresses. We don't make a lot of clothes in America. And we actually benefit from that. We have a lot of different design and style and pricing. And frankly, it isn't really necessarily displacing American workers. We don't make shoes in America anymore. These products generally are imported. And the benefit would be a lower price, innovation, style, design. I was at a buffet and it hit me. It's a seasonal fruit. We don't have seasonal fruits. You eat

blueberries 12 months a year. They don't grow 12 months a year in America. We have raspberries. We have avocados. We have all. Our table, our diet is very much enhanced by global trade. Many years ago, for example, you'd get blueberries in sort of July, August, September. Now you get them 12 months a year. It actually did not necessarily hurt American farmers because what it did is in May, people really want to eat blueberries. And as a result, frankly, we produced more blueberries, about two times as many that we did before we imported them. So sometimes imports also spur American companies and American consumer tastes. Because it floats all boats. Sometimes.

Not always. I mean, the advantages of trade are spread far and wide, and the pain is often very localized. The benefits of trade in terms of the selection of things you have, look at your supermarket in terms of fruits, vegetables, different commodities you can buy. So we all benefit from that in terms of pricing and selection and innovation. The pain is when a factory closes, it hurts those people in that community. It hurts that town or county, reduces the tax rate, reduces the ability to earn a living in those communities. Places like Ohio, Wisconsin, Pennsylvania lost a lot of jobs due to trade. We created a lot of jobs, more jobs in the rest of the country, but they really felt the pain more acutely.

We end the show typically with a tip you can take straight to the bank. I would find it hard to believe if you were ever in a time where you needed money rehab, but would you give a tip you could take straight to the bank to help improve your money or help think about all of this for consumers? The thing I often would say is a little bit harder in an inflationary period.

If you go to a, whether you go to a Walmart or a local store and you buy clothing or groceries at a really good price, most people think I'm a really smart shopper. They don't think maybe because of trade and because we've actually importing those goods that I've got a bigger selection and I can, my dollar will go further. So if I was to say something to the bank is do what's smart and wise for your family. And if the best product happens to be an import, then you should buy it. And hopefully that will spur an American companies to make better products at better prices and satisfy consumer needs. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin.

Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at money news and TikTok at money news network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make. you