The Daily - How the U.S.-China Trade War Hurts the Rest of the World

Episode Date: August 27, 2019

At the Group of 7 summit in France, President Trump seemed determined to prove that he can wage a trade war with China without hurting the economy. But there are already signs of distress. Guest: Peter S. Goodman, an economics correspondent for The New York Times. For more information on today’s episode, visit nytimes.com/thedaily. Background coverage: President Trump can confront China or expand the economy, but he can’t do both at the same time, our economics correspondent writes in a news analysis.Mr. Trump shifted his tone on the trade war yet again on Monday, calling President Xi Jinping of China a “great leader” three days after branding him an “enemy.”

From The New York Times, I'm Michael Barbaro. This is Daily. Today, at the G7 summit in France, President Trump seemed determined to prove that he can wage a trade war with China without hurting the economy. Peter Goodman on why that is proving to be an impossibility. It's Tuesday, August 27th.

Peter, why has all the focus of the G7 been on the U.S. and China trade war, despite the fact that China isn't even in the G7? Well, the seven countries in the G7, France, the United States, Italy, Canada, Germany, Japan, and the United Kingdom. First of all, you know, these are the seven major developed economies. They view themselves as the sort of stewards for the global economy. So they see their responsibilities as going beyond their own national interests. I mean, one can debate whether that's true or not, but that's certainly how they present it. But as a simple matter of arithmetic, the U.S. and China comprise roughly 40 percent of the global economy. If you tally up the value of goods and services that are produced and sold in the world

every year, 40% of them come out of the U.S. and China. So if there's any interference in their economies that causes them to buy less from other countries or to sell less to other countries, that will have the effect of disrupting business for pretty much everyone. So, you know, take Germany, for example. I mean, this is the largest economy in Europe. There are deepening concerns about Germany's exports, Germany's factory orders, and this influences the economic situation throughout Europe. A lot of the reason why Germany is now probably headed into recession is because of the trade war and the diminishing appetite from China for products that are made in Germany and end up feeding Chinese factories. Take Italy. I mean,

Italy is chronically growing weakly. Some of that's demographics, some of it's wacky policies, but some of it is that Italy is a pretty big exporter. And there are worries now about whether any company will be able to sell its products to the world. Japan is a major exporter. Britain, a member of the G7, is now deeply immersed in year four of its torturous Brexit negotiations. There's the real prospect they could leave without a deal governing future relations. And the European Union buys almost half of Britain's exports. So the thought of a trade war between the two largest economies on Earth, the United States and China, it's not going to make anybody in

any of these countries richer. Peter, play out one of these examples for us in a bit more detail. How exactly does the trade war between the United States and China potentially send a country like Germany into recession? How does that work? Well, Germany is a major exporter. So German industry is busy making everything from cars to medical equipment to steel and putting this stuff on ships that leave Germany and head out around the globe. One of the major places a lot of those manufactured goods end up is China. Now, China is facing tariffs into its largest export market, the United States. No longer its largest export market, but traditionally its largest market. And that means that China is growing slower than it was before the trade war.

So if you're running a Chinese factory and you're looking at the likelihood that you're going to have a hard time exporting to the United States, you now have less appetite yourself for the sorts of things you were buying from Germany. You might be less likely now to place an order for German equipment that ends up in your factory. So the German factory now is looking at declining orders. And that in turn means that other countries in the European Union, in the Eurozone, who export to Germany with Germany buying supplies from other countries that end up in its exports, they now see declining demand for their goods. So all of this ripples out.

And anybody who's involved in trade is now looking at a much less robust set of opportunities than before the two largest countries on Earth started hitting each other with tariffs. So, Peter, does that mean that the U.S.-China trade war is worse for a country like Germany than it is for China or the U.S.? Yeah, it does. I mean, that's an important point for people to understand. So the advantage of being a giant economy, and both the United States and China are giant economies, is that whatever's happening in the rest of the world, you have this enormous domestic market that is giving you a certain amount of growth. I mean, whatever's going on in the world,

people in your country are going to need houses, they're going to need clothing, they're going to need food to eat. That's going to require a certain number of truck drivers and warehouse space and catering supplies and dry cleaners and insurance agents. I mean, these are all parts of economies that function domestically, even if you're not exporting. The smaller your country and the more exposed you are to world trade, the less you have that advantage. Now, Germany is a significantly sized economy, but it's very dependent on exports. And so when trade begins to diminish, when it even slows globally, Germany's got a problem. So what is the state of the trade war heading into this summit? Well, the state of the trade war is that most Chinese goods are facing some kind of tariff

with the threat that they will increase significantly. Then on Thursday, China retaliates and says that it's going to increase the tariff from 5% to 10% on $75 billion worth of U.S. goods. And at that point, all hell breaks loose. The president unloading a series of furious tweets. Our country has lost stupidly trillions of dollars with China over many years. They have stolen our intellectual property at a rate of hundreds of billions of dollars with China over many years. They have stolen our intellectual property at a rate of hundreds of billions of dollars a year. Starting on October 1st, the $250 billion of goods

and products from China currently being taxed at 25% will be taxed at 30%. Most strikingly, he issues a directive. Our great American companies are hereby ordered to immediately start looking for an alternative to China. All American companies have to stop doing business with China. They have to stop using China as a place to make their goods and come back to the United States and make their goods there. And this is especially striking because, you know, let's remember that since the late 70s, China's been on to enter the World Trade Organization, which gives China access to export markets of the world at very low tariffs. And in exchange, China is supposed

to open up its market to international competition. China is supposed to allow essentially market forces to play a much greater role in its economic life. And ever since then, American presidents have gone to China and they have criticized China for failing to live up to the terms of that deal, for continuing to run a state-dominated economy in which major Chinese companies serve the interests of the Chinese Communist Party leadership, where they get subsidies and other perks. And so here is the president of the United States essentially treating American business not unlike a Chinese state-owned company. Hey, Microsoft and Amazon and Apple and whoever else, you work for me. I'm the boss and I'm telling you it's time to get out of China.

You work for me. I'm the boss. And I'm telling you it's time to get out of China. So all of that is the backdrop for the summit, which starts on Saturday. What actually happens? So Saturday, Trump lands in France. And in between meetings, he's telling anyone who will listen that, no, he really does have the ability to force American companies to leave China. There's this obscure law that nobody's ever heard of. Well, in 1977, we had an act passed, a National Emergency Act. I have the absolute right to do that. We'll see how that goes, but I have the absolute right. 1977, check it out. Then that night, he's the last world leader to arrive at an informal dinner with the rest of the leaders.

And he's asked about the economy. He says, I think we're doing very well. We're having a little spat with China and we'll win it. And then on Sunday, we get this revealing, sort of confusing window into how Trump is thinking about this when he's asked at a press conference whether he has any regrets. Is that a second thought on escalating the trade war with China? Yeah, sure, why not? Might as well. Might as well. Do you have second thoughts about escalating the war?

I have second thoughts about everything. Are you going to declare a national war? And the world explodes with this. We begin tonight with President Trump's surprising comments about his escalating trade war with China just hours before the stock markets opened in the U.S. For a president who rarely, if ever, expresses regret, today in France, President Trump made what seemed to be a surprising admission. And there's tremendous analysis. Trump is actually backing down. Trump has second thoughts. The American

president hinted he regrets escalating his trade war with China. He told reporters he has doubts about ratcheting up his terror fight with China. Well, there's so much of this speculation that it prompts the White House to issue a clarification. White House Press Secretary Stephanie Grisham put an entirely different spin on the president's words, issuing this statement. His answer has been greatly misinterpreted. President Trump responded in the affirmative because he regrets not raising the tariffs higher. Did you find that speculation to be a little overheated? I thought one way of interpreting that was just the president saying,

yeah, sure, I second-guess myself. Who doesn't? Which is perhaps a sign of just how important this trade war is. That even the slightest hint of self-doubt or vulnerability can swing billions of dollars. Oh, that's right. That's absolutely right. And yet we're dealing with a president who is very confident about sitting in front of a bunch of reporters and just sort of musing on the dynamic. And also very big things are happening with China. You probably read the

breaking news a little while ago that they want to make a deal. So then on Monday, President Trump is back to calling Xi Jinping a great leader. One of the reasons that he's a great leader, President Xi, and one of the reasons that China is a great country is they understand how life works. He says the Chinese have reached out and have sought to reengage on trade talks. And he feeds the narrative that there's some optimism here. Maybe we'll get a deal.

I have great respect for it. I have great respect for it. This is a very positive development for the world. And predictably, the markets open and they're buoyant, as if this talk of decoupling and more trade war, for at least a day we can forget about that and just buy stock. We'll be right back. So given what you've told us about the implications of the trade war for the other members of the G7, what's the response to all this up and down at the G7 from those leaders?

Well, you know, ever since Trump came into office, world leaders have spent a lot of time puzzling over what the real policies are from this White House. They've parsed through these often contradictory statements, contradictory actions. Amongst world leaders, the sense has been that on trade, Trump is serious about trying to contain China. Trump is serious about his view that the U.S. has been somehow fleeced in the global economy, which runs contrary to what just about every mainstream economist thinks. But Trump really does seem to think that, you know, if the U.S. is buying more stuff from a country than it's selling, that's a sign that it's getting ripped off. And that's certainly the case with China.

But, you know, all of that said, the G7 leaders were pretty quiet. There was very little criticism for Trump's positions. I mean, there was this very tepid statement from the new British Prime Minister, Boris Johnson. I just want to say I congratulate the President on everything that the American economy is achieving. It's fantastic to see that. But just to register the faint sheep-like note of our view on the trade war, what do you think of the trade peace on the whole? You know, let's not get carried away. Let's be careful that we don't do any damage to the world economy.

Beyond that, the other G7 leaders were primarily in listening mode. And Peter, why do you think that is? Why are they so reluctant to criticize this? China is a complicated question for the rest of the world, and especially for Europe, where there's a sense that they may not like the means that Trump is employing to try to readjust this relationship. But they do share this sense that China presents a serious, I mean, a really profound challenge to the modern global economy. So there is a shared sense, even if there's tremendous dispute over the chosen means, that it is time for a confrontation with China. So there's a version of this where these other G7 countries, they're

being hurt by this trade war. But on some level, they welcome the U.S. confronting China over its trade policies, maybe because the U.S. is the only country, given its scale, that can actually do that. Yeah, I wouldn't go that far. They would much prefer a collective effort. And in fact, they're very worried that one of the primary dangers of Trump's trade policy is he's dramatically undermined the concept of a rules-based trading system. He's completely bypassed the World Trade Organization, which is supposed to be the referee for trade disputes. But there is a general sense that at least in picking a fight with China, Trump has taken on a fight that is everyone's fight, even if, in fact, he may well have damaged the ability of the world to marshal what might be a more effective response

to China, which would be a collective effort. I mean, he's undermined the concept of international cooperation. So, Peter, you're saying that at the G7, this collection of so-called economic allies, they might like to actually talk about how they could act as a collective. I mean, we're so past Germany and France viewing the United States as an economic ally that that's not really in the cards. I mean, they're more hoping they can get through whatever the next year brings without significant impact to the European economy, to their own national economies, and hoping that they can withstand Trump concluding that his tariffs on China are working. Why don't we try that in terms of, you know, dealing with American trade deficits with Germany, for instance? Germany's very worried that come the fall, Trump is going to stick tariffs on imports of automobiles into the United States. That would be devastating to Germany. So Germany is reluctant to go along

with, you know, anything that involves getting to say, I'm going to defend my domestic industry with steep tariffs the way Trump has done on steel. They don't like that as a precedent at all. So they're hunkered down. They're not rooting for Donald Trump in the trade war against China, but they're not rooting for China either. They're hoping that they can weather this and then eventually get to a place where they can ideally cooperate with an American president, maybe some other American president, to take on what they do view as a significant and inevitable fight with China. And Peter, what is President Trump hoping for? Ah, this is the potentially unanswerable question. I mean, Trump seems caught between conflicting impulses. He seems to want a bit of everything.

He wants to continue the trade war with China. He wants to contain China and treat China like a rival and potentially even separate American commercial interests from China. But at the same time, he wants to get reelected. He wants a strong economy. And it's difficult to see where there's a middle ground where he can truly escalate the trade war without damaging the American economy in the immediate term. He can't have both of those things. Something's got to give. The continued trade war with China, if he

actually follows through on seeking to decouple the United States and the Chinese economies, that will be so disruptive to global supply chains, not just to American companies, to all multinational companies. It will ripple out to any country that is exposed to global trade. And the result of that will be declining economic fortunes in many places, including the United States. The United States and China are too intertwined to divorce. There is simply no way that you can separate the two largest economies on Earth in an era of globalization without significant numbers of people winding up poorer in the immediate term. Look, there's an analogy that I really like about Brexit,

which is separating Britain from the European Union is like trying to like unmake an omelette. I don't know what the proper analogy would be for the US and China in terms of global supply chain, but it's a lot bigger than an omelette. If Trump continues to escalate the trade war over the next several months, we're increasing the risks of a global economic downturn

and potentially an American recession. Peter, thank you very much. Thank you. We'll be right back. Here's what else you need to know today. I think he's going to want to meet. I think Iran wants to get this situation straightened out. Now, is that based on fact or based on gut?

That's based on gut. On Monday, during the closing press conference of the G7 summit, President Trump said he was willing to meet with the Iranian president, Hassan Rouhani. And Rouhani said that he was open to such a meeting. And if I know, I will go to a meeting with someone. The statement set the stage for a possible face-to-face negotiation between the two leaders after the breakdown of the Iranian nuclear deal, harsh economic sanctions, and a military showdown over drones and oil tankers. French President Emmanuel Macron has been urging such a negotiation for months

and repeatedly raised the possibility to President Trump and representatives of Iran during the summit. And in a landmark ruling, a federal judge has ordered Johnson & Johnson to pay the state of Oklahoma $572 million for the destruction caused by opioids. Johnson & Johnson played a major role in the opioid industry, supplying much of the ingredients used for drugs like oxycodone and manufacturing opioids itself through a subsidiary. The case is being closely watched by opioid makers, distributors, and retailers, who face more than 2,000 similar lawsuits across the country. That's it for The Daily. I'm Michael Bavaro. See you tomorrow.