Milton Ezrati joins Paul Beston to discuss escalating trade tensions between the United States and China.

The Trump administration announced new tariffs on $300 billion worth of Chinese goods last week, prompting China to order its state-owned businesses to stop purchasing U.S. agricultural products. Ezrati has written on U.S.–China trade issues for City Journal previously, and he maintains that both sides want a deal of some kind—and soon.

Audio Transcript

Paul Beston: Welcome back to the 10 Blocks podcast. This is Paul Beston, the managing editor of City Journal, stepping in for Brian Anderson. Today on the show, I'll talk with Milton Ezrati. Milton writes about economic policy for City Journal and other publications, and he's here to give us an update on the trade standoff between China and the United States. The issue has heated up again, so we thought it would be a good time to bring Milton back and get some insight on what's happening and what it means. We'll take a quick break and return with Milton Ezrati after the music.

This is Paul Beston, joining me in the studio today to talk about us China trade issues is Milton Ezrati. Milton is a nationally-regarded economist who's had a successful career in the financial industry. Retiring as the chief economist for investment manager Lord Abbett in 2015, he now serves as chief economist for Vested and he always has a valuable insight on what's going on in the global economy. You can follow him on Twitter @MiltonEzrati, and this is in fact his third time on the 10 Blocks podcast and we're thrilled to have him back. Milton, thanks for being here today.

Milton Ezrati: It's a pleasure.

Paul Beston: Trade policy and monetary policy are subjects that I think most laymen understand only dimly. If I'm anything like most layman, uh, for the benefit of a general audience. Just to start us off here, could you give a kind of overview of the US China trade dispute starting from, let's make it simple from when Trump took office. So in other words, how did his policies break from the past or purport to break from the past? How have they unfolded during his tenure up to now? And where do we stand in the current situation?

Milton Ezrati: Trump actually did not invent the issues that we're dealing with now. The complaints that his administration is making against China are almost as old as the trade relationship. What Trump is doing is that--let me step back a moment. There are three issues that have plagued this relationship from the start. The first is that China sells us a lot more than we sell them, that's the trade imbalance. The other thing is that China has laws that insists that anyone doing business in China must have a Chinese partner and must be completely transparent to that partner. And the third issue, which everyone has complained about--old presidents and all administrations--is that China steals technology. Everyone does it. All countries do it. Sometimes privately, sometimes the government. But China is doing it on an industrial level. At least that's the complaint. The difference between Trump and other administrations is that Trump refuses to accept Chinese promises that they will try harder. And he's insisting, or his a negotiating team is insisting, that China change its laws about partnering in China and about the theft of technology. This is becoming a major sticking point because the Chinese see that is as an abridgment of their sovereignty. And those are the reasons these negotiations have not moved despite the fact that there are tremendous economic reasons for both sides to want them to move.

Paul Beston: There's also the matter of the Trump tariffs, right? First imposed, is 2018 the first round?

Milton Ezrati: The fall of 2018, yeah.

Paul Beston: And now, just last week, the president announced another round of new tariffs, which then seem to prompt the Chinese response this week regarding the currency. But you were suggesting to me that there may not be as much to that as meets the eye?

Milton Ezrati: Trump has used the tariffs, that's his lever. He's threatened the Chinese, but other presidents have threatened some kind of trade restrictions in order to get the Chinese to move. Trump, as is his want, is doing this more boldly, more loudly. And in fact, he's put tariffs on in the fall of 2018. He threatened tariffs then he withdrew them because the Chinese acted in a conciliatory way. And now he's threatening again and putting them on.

Paul Beston: And if the second round went into effect, how do they differ from the first round? There's more of a consumer impact, isn't there?

Milton Ezrati: There'd be more goods and higher rates.

Paul Beston: Up to now, do you see evidence that the tougher Trump trade policies have had an impact on the Chinese economy? We all know the Chinese economy's growth has slowed dramatically and that they're struggling with that. What do you see in terms of evidence of impact, if any, on the Chinese economy up to now?

Milton Ezrati: It has affected the Chinese economy. There are other reasons China's slowing, but the effects of these tariffs and the lack of clarity on the future, which is just as important as the immediate effects of the tariffs, have affected the Chinese economy. The official statistics are hard to see through, but things like oil consumption, things like auto sales where we can get independent numbers suggesting that the effect might be tremendous. There are some provinces in China, the more industrial ones, where auto sales have been cut in half as a consequence of the tariffs that went on at the end of 2018 just to today. There's also a lot of evidence, most of it is anecdotal, but it's real, of Chinese firms moving out of China to avoid the tariffs. Now they have other reasons to leave China because wages have been rising rapidly in China, certainly compared with places like Indonesia and Vietnam and Cambodia. But they're also leaving to avoid the tariffs and there's some subterfuge there. They're setting up some facility in Vietnam and shipping the Chinese goods to Vietnam to then be shipped to the United States. But it's clear if this became an ongoing thing that the Chinese firms would be actually setting up operations outside China. So there has been quite an effect on the Chinese economy.

Paul Beston: How about on the American economy? I mean, you've written for us a number of pieces over the last year, year and a half as these things have unfolded. And I think it's my assessment; you've taken a fairly skeptical view of Trump's tariffs, but at the same time a very realistic one. I think one of the phrases in your pieces was that the impact it would have would be neither positive nor catastrophic, at least the first round of them, but another round of tariffs with more of a consumer impact may have more negative effects.

Milton Ezrati: There will be a negative effect, but it will be relatively small. I think the important statistics in this regard are that the United States effectively exports about 12% of the economy and only less than 8% of that goes to China. So from an industrial side, from a production side, it's about 1%. 1% is not a small number. But it is a lot less than it is for the Chinese. On the consumer side, actually--this decline in the value of the yuan or renminbi or whatever you want to call it--this decline in the Chinese currency has actually offset not just today's movement, but the long-term decline that has actually offset a lot of the tariffs. So American consumers or business people who are paying the higher tariff on Chinese goods, aren't getting it that much cheaper in China because of the decline in the value of the currency. So it's not really affecting us in that respect. The inflationary effect and the cost of living effect just isn't there.

Paul Beston: How do you interpret this latest move that's just been in the news regarding the [yuan] that the Chinese have made, which seems to be a response, at least immediately, to Trump's tariff announcement of late last week.

Milton Ezrati: It is indeed. To say that the Chinese have devalued their currency would be misleading. The currency has come under downward pressure because of the effects on the Chinese economy because of the trade conflict. The Chinese have resisted that largely because they'd been afraid that a lot of wealth will leave the country if people see their global buying power being lost in Chinese assets,, but they allowed it to come down, the market is pushing the yuan down because China's economy is facing hard times in large part because of the tariffs. And the Chinese allowed this. They allowed it to offset the effect of the tariffs. But I think they also allowed it to, in some respects, you might say it's a sign of desperation. They've been playing a tit for tat game with the United States on tariffs. And because they buy so little from the United States and a good portion, almost a third of what they buy from the United States, are inputs to goods that they then sell the world. The Chinese really do not have capability of playing this game of you put a tariff on us, we will put a tariff on you. So this is really their only option to punish the United States.

Paul Beston: Right. And you know, the three characteristics you mentioned at the outset of this dispute, the trade imbalance, the Chinese laws, and then the IP theft, the intellectual property theft, that's another strand of this trade dispute, isn't it? Because there's a lot of argument concerning the Chinese telecom giant Huawei, if I'm pronouncing it correctly, which the administration had put on a list, as I understand it, restricting its access to American technology, particularly chips and software. And the concern on the American side was about cybersecurity, I believe, with Huawei, that the Trump administration is considering now, or has been given special licenses to US firms to allow them to sell to the Chinese company. But that's all part of this trade agreement, which up to now has not been signed. So that is hanging in the balance and it's a pretty big piece.

Milton Ezrati: It is. And I would describe it, although I don't have any connections in the White House, it would seem to me that this is a bargaining chip. This is something that Trump can give the Chinese in return for what he wants from them.

Paul Beston: I mean that's part of a whole broader concern with China regarding cyber theft though, right? I mean this is not exactly a small topic as concerns China.

Milton Ezrati: No, it's one of the big issues. And what Trump, his negotiating team has said that China, in order to get the deal with United States, actually has to change its laws. And, and that would be that this telecom company, see I'm worried about how I pronounce it too. This telecom company would be subject to Chinese law if there was this cyber theft, even if it was in the United States, right now, it isn't. Indeed, it might be actually promoted by Beijing for all we know. So, that's been one of the demands. One of the reasons the Chinese have been so resistant is because that they see as an infringement on their sovereignty.

Paul Beston: Now, another sticking point, at least one that pops up in a lot of the news stories is Trump's insistence that China purchase more American agricultural products. If you said something you've thought about, I mean, is that a big issue for the president and the administration do you think? Or is that just a small component?

Milton Ezrati: I think he wants to. First of all, it's a constituency of his. But it's also what we can sell the Chinese. This is where we have a clear advantage. They need it. We have it, we can sell it. Asking the Chinese to buy American Steel or American whatever else, appliances, is a tougher pull than the food, the agriculture. So that's where he's said, if you promise to buy so much, that will satisfy us on this negotiation.

Paul Beston: Right. In one of your earlier pieces for us, you speculated about whether Trump was, through his policies, trying to return to an older concept of free trade and older idea of free trade, through the policies he was taking. As opposed to the more recent ones where free trade was used rhetorically, but in effect it operated through agreements, preferential trade agreements or PTA's, in which there's high barriers of entry to outsiders. And you freely admitted that you weren't sure whether that was really Trump's design or not, but that that was a possibility. Do you have, after nearly three years of watching Trump on this topic, do you feel you have any clearer sense of whether he has a consistent view of this or what is your take on what his goal might be?

Milton Ezrati: And that's a great question. No, I have no clearer sense. And I'm not sure he has a consistent approach. He clearly is an economic nationalist and he will pull whatever lever he thinks will help the country. And the Trump administration. The reason I wrote about that, initially, is actually some of the remarks he made at the G7 accord. When he walked out, he said to them, I want to get rid of tariffs across the board, everywhere. You people want to play games and when you're ready to actually talk about free trade, I'll do it. And that hearkened back to the US position in the immediate post World War II period. When the United States pressured, what was then the general agreements on tariffs and trade is now the world trade organization, to reduce tariffs universally, across the world. That ended in the 80s and we started signing preferential trade agreements where we would have a special deal with a group of countries. The biggest preferential trade agreement in the world is the European Union, which of course gives all the member's preference and has a tariff wall with the rest of the world.

Paul Beston: I want to just quote you briefly, something you wrote for us last, because it may be relevant as we watch and wait and see how things are going to play out here. And you wrote "some suggest that Beijing hopes to buy time until a Democrat wins the White House, presumably someone more tractable than Trump, but that's far from assured and a long way off. Even if it happens in 2020. If China's team made a calculated error, it may have rested on the hope that Trump wanted a deal badly enough to accept Chinese conditions. If that was what Xi believed he was clearly wrong."

Milton Ezrati: And I still hold that way. I mean, he is trying to up the ante. He's trying to inflict as much pain on Trump as he can. And I do believe he's also stalling. But it's apparent that this is not going to happen. Trump knows that even though the US economy would suffer in this trade war, China will suffer that much more. He has the whip hand. He's made it clear, he knows it and the statistics support him in that contention. That doesn't mean it will be painless.

Paul Beston: Right. Well that was going to be my next question, a blunt force question in terms of which economy has the upper hand in this dispute, and it sounds like it's the United States.

Milton Ezrati: By a long shot.

Paul Beston: Right. If you were Trump's trade and economic policy point man, Milton, what would, what would you be advising the president?

Milton Ezrati: Well, I would resign for one. I would actually be saying to him that the Chinese want this deal. They need, Xi, especially with this stuff that's going on in Hong Kong, he needs some face saving. He can't appear to bow to Trump in any way. So he needs some face savings. So instead of the bluster, which Trump does so well and the threats of still more tariffs, if he would give him a bolthole somewhere or some way he could save face and give the administration what it wants. Now, I don't know what that would be, I'm not a diplomat. But, the language is infinitely flexible in how to do these things. And if I were advising him, I would be saying, don't bluster so much. Give Xi a bolthole.

Paul Beston: I realize this question is out of your particular expertise, but as you look at 2020, which we're all obviously starting to think about; how do you imagine the China trade issue playing, both for Trump and for the other side? Do you get a sense of what the public's view on this? People always see Trump as an outlier and, you know, once he's gone, everything's going to go back to what it was. But is that the way you see it or do you think this China confrontation that he has initiated is going to have lasting effects even if he did lose reelection next year?

Milton Ezrati: Well a new president could negotiate a much softer agreement and do what past presidents have done, effectively accept Chinese assurances. They have failed in the past. But accept Chinese assurances and say, "you see, we solved the problem. It was all Trump's fault." They could do that. They would not have solved the problem. Yes, the friction is Trump's fault. He started this and presumably he wants to accomplish something. As far as the campaign is concerned, I doubt they could do much about it, unless the economy suffered or people could ascribe some domestic problem, that was linked to the China trade deal. Otherwise I don't, as you say, it's outside my area of expertise, but I would be hard pressed to see how that could be a campaign issue unless people were suffering. And the farmers are a wild card.

Paul Beston: Well, don't forget to check out Milton Ezrati's work on our website, You can follow him on Twitter at @MiltonEzrati. Make sure you follow us on Twitter, at @CityJournal and on Instagram at @CityJournal_MI, and lastly, if you like our show and want to hear more of it, do us a favor and please leave ratings and reviews on iTunes. Thanks for listening and thanks a lot Milton for joining us.

Milton Ezrati: Thanks for having me.

Photo: pigphoto/iStock

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