Dan Wang, Eurasia Group's China director, joined "Forbes Newsroom" to discuss the continuing trade war between China and the United States.
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00:00Hi, everybody. I'm Brittany Blubis, a breaking news reporter here at Forbes.
00:07Joining me now is Dan Wong, Eurasia Group's China director. Dan, thank you so much for joining me.
00:13Thank you for having me.
00:14Since he was sworn in, President Trump has repeatedly ratcheted up tariffs against China.
00:20And almost 100 days into his second term, I'm curious exactly how you would characterize this
00:25moment we're in right now, when we're seeing this giant tit-for-tat trade war continue between the
00:31world's two biggest economies, the United States and China, with seemingly no end in sight.
00:38Well, we have been anticipating the tariff war or the tariff's escalation since Trump's worn in.
00:44But the scale and the speed of these tariffs are still beyond the market expectation,
00:49especially for China. So at this point, I think it's safe to say that the China-U.S. relation
00:54is beyond salvation. And there will be a lot more that Chinese government has to do to counter
01:00the hit of this tariff. And also for the U.S. economy is also running this possibility of a
01:05recession or even inflation. So I guess for the global market, investors have to be really careful
01:12for the rest of the year.
01:15I think that's a really grim outlook that this relationship is beyond salvation. And I want to
01:20talk exactly where this relationship is, because in an interview that was published last Friday,
01:25President Trump said that President Xi did call him to talk about this escalating war. China has
01:31straight up refuted that on Monday. This is what China's Ministry of Foreign Affairs spokesperson
01:36reportedly said, quote,
01:37As far as I know, there has been no recent phone call between the two heads of state. And he also added
01:43this, quote, I want to reiterate that China and the United States are not engaged in consultations
01:49or negotiations on the tariff issue. What does this indicate to you that relations are frosty at
01:55best? Because there's not only different characterizations of what's happening. I mean,
02:00one person saying one thing and one person is saying, hey, that is not even the case,
02:03not even a little bit.
02:04Well, we know the style of President Trump quite well now. And for the two sides, they haven't been
02:13really on the same page for a number of months. And regarding this tariff issue, President Xi has
02:19been quite strategic, but President Trump has been very chaotic. So if we have to pick one side to
02:25believe, I would rather be on the China side. It doesn't matter what President Trump's endgame is.
02:33For China, this is not the right way to enter a negotiation. President Xi would never allow
02:38himself to be in a similar situation as President Zelensky, to be humiliated in front of the domestic
02:45audience and a global stage. So I don't think there is any chance for immediate talk between the two
02:53sides. But that being said, by the end of this year, given the mounting pressure coming from the
02:59tariffs, I think China and the U.S. will figure out a way to at least de-escalate from the current
03:06level of the tariffs.
03:08The United States' Treasury Secretary, Scott Besson, he said that repeatedly that where we're at right
03:14now is unsustainable. That's what you're saying, too. Can you give us a picture here of what the
03:19tariff game is doing to China's economy right now?
03:22Well, we just published a note on the tariff impact on China's economy. So even by the most
03:29conservative measure, those tariffs will shave off at least two percentage points of the GDP growth.
03:36And this year, the official target is 5%. And that means if without additional stimulus plan,
03:42China could only reach 3% of GDP growth. And that's not politically acceptable. Although to other
03:48countries, this might sound big, a big number. But for China, the main problem is that there has
03:56been a loss of confidence since the COVID lockdown. And the economy hasn't really recovered from that
04:02pessimism and also the housing downturn. So for the government, it really has to do a lot more to
04:09assure the market that it could contain the financial stability, it could contain the job market
04:14deterioration. So we expect an additional $2 trillion RMB of fiscal spending on top of the $12 trillion RMB
04:24planned. So that is a very daunting task. And it also means the local government debt will be once
04:33again piling up.
04:34I'm curious what you see are the implications for the rest of the world here, because in the same breath
04:40that President Trump slapped dozens of nations with reciprocal tariffs, just hours later, he did
04:46end up pausing those. The same moment he did turn up the heat on China. And then we saw that tip for
04:53that trade war where China has imposed the 125% tariff, the United States has imposed that 145% tariff.
05:01And it seems like President Trump is really trying to isolate China from the rest of the world.
05:07And the spokesperson for China's Commerce Ministry reportedly said this on Monday,
05:11quote, China firmly opposes any party reaching a deal at the expense of China's interests.
05:17If such a situation arises, China will not accept it and will resolutely take reciprocal countermeasures.
05:23What kind of spot do you think this puts the rest of the world in? Do they have to pick
05:27one country over the other in this trade war?
05:29It certainly seems so. And for any middle power and smaller economies that highly dependent on China,
05:38they're not in a very good spot at this point. President Xi has been toying around ASEAN countries
05:43trying to convince other countries to be on the same page. It is very difficult because U.S. is
05:49nonetheless the largest destination for a lot of those countries' goods. And for China, it is so
05:55important as a center for manufacturing. And its investment in those countries, especially its
06:01neighboring countries, ASEAN, Greater Asia, or even Latin America, is quite crucial. So for any of
06:09those countries deviating away from China or de-risking from its powerful neighbor, it's simply
06:14impossible. For the U.S., at some point, there is a limit on how far this tariff can go because the
06:22domestic pressure is real. So even for President Trump, it could drag this trade war maybe for
06:28another few months. But before the inflation ticks up and also he's pressuring the Federal Reserve to
06:34lower interest rate, that's even higher pressure for inflation. So he also needs China, he needs China
06:40exports. And I don't think this whole thing will spin out of out of proportion like this until the end of
06:49the year. And for many of the transshipment countries like Vietnam, Cambodia, they're in a
06:56particularly vulnerable position. But there's no other way around. They still have to depend on China
07:02for its manufacturing and depend on the U.S. for its market.
07:06The word that's been thrown around a lot in this is uncertainty. Businesses don't like uncertainty.
07:13Trading partners certainly don't like uncertainty. And a guest on the show just a week and a half ago,
07:18he was in Vienna and he said he was surprised to say it. But China at that point, he thought the
07:25other world is seeing China, the rest of the world rather, seeing China as a more trustworthy trading
07:30partner than the United States. From your vantage point, do you agree with that where the rest of
07:35the world is looking at China more favorably right now than the U.S.?
07:38The rest of the world have higher trade dependency on China, especially after COVID. We can see this
07:45trend clearly. The trade dependency on China has been increasing, even for countries like Europe
07:52or even for the U.S., because it's all about stability. Whenever there are some acute volatility
08:02in the market, China is a reliable source to turn to. And that type of supply chain power cannot be built
08:10overnight. We could always figure out a way to generate a demand out of thin air. But supply chain
08:16means years of investment and also a highly trained staff, a highly educated workforce to make that
08:27happen. And for the U.S., its trade policies have been quite chaotic. Of course, it's losing a lot of trust
08:34from even its allies. So I'm not surprised that other countries see China as more reliable. But
08:40when it comes to the long term partnership, it's a very different story. China might seem reliable as
08:47a trading partnership. But when it comes to security or even ideology and other aspects,
08:53China's status hasn't really changed. And the other countries also have to choose carefully.
08:58I'm curious where you see this going, because like I said, Treasury Secretary Scott Besson says
09:04this is unsustainable. China has repeatedly, reportedly said that they will not negotiate
09:10under duress. But Scott Besson also said that he believes the ball's in China's court. He believes
09:15they need to come to the table to de-escalate the situation. Does China see it that way?
09:20From the China perspective, it's absolutely the opposite. So China will, under no circumstances,
09:29to be on the negotiation table under coercion. And for the U.S., they have, probably I should say
09:36President Trump has a style to force other country to come to the negotiation table and under the U.S.
09:43terms. But for China, this is more to answer the domestic audience rather than to answer the U.S.
09:50It cannot look weak. And even for those escalation period of the tariffs, you can clearly see that
09:56change. And the domestic audience, the general public, really welcomed this change in China's
10:02response to the U.S. tariff escalation. And there is no other way around, really. For China to
10:10get a deal with the U.S. without compromising, it's basically a principle. It's a very delicate balance.
10:20Because what the U.S. want, or what President Trump wants, is one thing, for more Chinese companies to
10:26directly invest in the U.S. rather than exporting to the U.S. And then the second thing, for China to
10:33eliminate the trade balance. And that's practically impossible without a severe revaluation of RMB.
10:39So those terms have to be negotiated under a lot other conditions. And China needs to also be able to feel
10:48comfortable enough to discuss this, because it is a serious compromise for its domestic stance.
10:54Aside from a trade war between the world's two biggest economies, it does seem like there are egos at play
11:00where no one wants to appear weak. No one wants to be the person to blink first here. If China's saying,
11:06I'm not coming up to the table, and I'm not certainly coming under duress, President Trump
11:10says he's not picking up the phone to call China first. He has substantially dialed it back a bit.
11:15He said that the tariff rate will come down substantially. It won't be at zero. He said that
11:20last week. But where is the off-ramp here?
11:25Well, people have been talking about the Mar-a-Lago Accord, and we do not believe that type
11:30of concession could happen, at least on the China side. There might be, though, a goodwill from the
11:39China side if somehow both sides can work out a term to really reel back the tariffs to the pre-April
11:47level. And if that happens, maybe there can be some mild revaluation of RMB. We have given now that
11:54scenario. So even with a 15% revaluation of RMB, that is about 15% to 20% of the trade deficit taken
12:02off on the US side. It is a win for Trump. It is also a win for China. And for other title concessions,
12:10it's very difficult for China to do because there is still the overcapacity. Those goods has to go
12:15somewhere. If it's not US, it's the rest of the world. And then that's a very different pressure.
12:20So, of course, many of the companies that I talked to already have plans to invest in small
12:27scale in the US under this pressure because their standard, their machinery are designed for the US
12:33market. It's impossible to just toss that all the way. But this type of industrial relocation to the
12:39US would take several years. And it's certainly not in the type of scale or quality that US consumers
12:45are looking forward to. We have to realize that at a reasonable price and relatively high quality,
12:55China and the greater Asia is the only option for a lot of the high end equipment and electric
13:03machinery. It's impossible to get around. So I am curious. My last question to you is what
13:10specifically are you looking out for next? Because there is a lot that remains up in the air here.
13:16But are there any indicators from either the US side or the China side that will give you hint to
13:21maybe larger things? Well, we're still sort of in the hope to see a summit happening in June. Maybe
13:31both leaders can finally find a chance to get a phone call or even sit down. But that's a long shot.
13:38So we now put down the year end tariff to be in the range of 45% to 60%. That's very much the market
13:46consensus. And since people don't believe anything higher than that is sustainable. But China's stance
13:54is very firm. I don't think we could see the bilateral relationship to go back to the free Trump era.
14:02And this is the long term competition rather than just the short term battle. China's economy now is
14:10very much gearing towards the domestic circulation. So the domestic market, domestic production are way
14:16more important than the external market. And the US is dividing this world into two camps. And I believe
14:25this trend actually will deepen. The whole trading system under WTO is basically throwing away into
14:32the history. The China US competition now is way beyond WTO framework. And I don't think the old
14:40system can really fit this new reality anymore. Well, there is certainly a lot to look out for. And I
14:47hope you come back down and break it down for us as we see developments underway. Dan, thank you so much
14:52for joining me. You are welcome back anytime. Thank you.