The Relationship Between The US And China 'Is Beyond Salvation': Expert Breaks Down Trade War Latest

Forbes Breaking News

Dan Wang, Eurasia Group's China director, joined "Forbes Newsroom" to discuss the continuing trade war between China and the United States.

Transcript

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.

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