The Second China Shock - Why Europe is the Front Line with Brad Setser | Markus Academy | Ep. 165-2

[00:00:08]Welcome back everybody to part two of our discussion with Brett Sets from the Council of Foreign Relations on the second China shock and the second coming of global imbalancing.

[00:00:19]This part will be about policy implications for Europe and Germany in particular given the new world order.

[00:00:27]Good. So Europe is sandwiched and this Europe can probably not convince China that it should change its interest it exchange rate between US dollar currency.

[00:00:38]>> Uh Europe is the last big open market.

[00:00:41]Um I think Europe has a little bit more leverage. Uh but uh it probably will take a willingness to throw a few elbow. I don't know what the right uh football metaphor is. Uh but you know uh if if if if you're if the ref has lost control of the match and you're getting a lot of very aggressive tackles, you can either hope the ref changes the way he's calling the match or you start doing aggressive tackles of your own uh to deter aggressive tackles against you. And I think Europe may be entering into the world where it needs to uh uh do a few hard tackles, so to speak. Yeah, I hope I got my uh World Cup metaphors close to right.

[00:01:29]>> Any case, >> or football?

[00:01:31]>> Football. Football. Your football. Our association. Football. Soccer. Um uh I'm sorry, by the way, about uh Germany's poor performance in the World Cup.

[00:01:41]>> It's okay. Um, but it's been a great cup. Set that aside. It has not been a great five or six years for German industry. This is a chart from Goldman that they kindly uh let Sander Tortoir and myself reproduce. It shows that you know German industrial production is down 15% over the past uh seven eight years. It is down more like 20 to 25% in those sectors that have the most overlap with China. So there's a clear difference between overall industrial performance, which hasn't been great, and industrial performance in those sectors with the most overlap with China. If you look at the change in China's trade surplus, the manufacturing surplus has gone up by about a trillion dollars. This is the change in the sectors which you might think of as being at the core of Europe's industrial economy, high-end machinery, cars, transportation, equipment. And you see that there's been a big runup in China's global surplus and it's also in its balance with Europe directly in both autos where China's gone from a deficit to a surplus and almost every uh machinery category. So it's been a very broadbased increase in China surplus in sectors which have been traditionally important to Germany's economy and to to Europe's broader economy.

[00:03:08]fancy econometrics where you do export similarity indexes shows that the similarity between China's uh uh export mix and the export mix of key European countries has gone up a lot and so you know now there's a much higher overlap with Italy and Germany than there was 10 years ago and I think it's also interesting to note that this has been a much more of a change relative to Europe than relative to the United States. Our export mix is a little different. We export a lot less to be honest.

[00:03:48]And as a result, the export and we're also we export a lot more commodities.

[00:03:53]So the the overlap with Europe is much more pronounced than the overlap with the United States. And the second part shows the change. How much has have China's exports become similar to the exports of various countries and the change is also bigger for all European countries and for the US. is does it also include it and you know AI and aspects like this >> it would not include AI >> okay >> and it doesn't drive this because um because in a sense all computers were final assembly in all computers was already in China in 2010 >> and there wasn't much final assembly of computers in Europe or the United States so there's there's there's technical questions about how you construct it and then for high-end semiconductors You will see some overlap in automotive ships say between Germany and China now.

[00:04:46]So there will be if you were sufficiently disagregated you would probably see that shift. Um you would uh not see uh overlap between say US semiconductor production which is Intel >> uh and China because the overlap is with Taiwan and TSMC and with Korea. So until China is making the high-end chips, you're not going to see that overlap.

[00:05:12]And you don't see, you know, in a sense, China, you know, for consumer low-end consumer goods, final assembly of electronics, that had already shifted to China. And so this change is coming from, you know, autos obviously from chemicals, uh, from, you know, there's a good example, tunnel boring equipment, the the big machines that bore under the Alps to, you know, to put a rail tunnel or a road tunnel in. They used to be made exclusively by a couple of German companies. Now they're very successful Chinese tunnel boring equipment man.

[00:05:47]like a lot of heavy industrial equipment uh excavators uh mechanical like what the Germans call the mechanical engineering or engineering sector has been the place where you've seen the biggest swing and it's going from low to high in some cases uh but it's the biggest source of the swing >> so you don't see it in the luxury you know fashion and this space where you know France and Italy is more exposed uh to China is not moving in that space I of She is not promoting luxury expending inside the country but there's no own production coming up or do you see it there too? I you know it's it's it is a little hard to see in the data that I look at because uh uh it a handbag is a handbag in the data uh and you would have to have a much more fine grained assessment to tell what is a low-end handbag which had been made in China what's a high-end handbag there are always rumors that the top fashion luxury brands are actually doing a fair amount of production or pre-production in China. Uh and so that they are already producing in China. It you do see substitution of Chinese high-end brands for US brands like Nike and versus the Chinese athletic shoes.

[00:07:12]So you do see it, but it's that is not what is driving this data.

[00:07:16]>> Um >> so you would say Germany's hit the hardest within you.

[00:07:21]>> I I would I would go further. I would not just say I would say the data overwhelmingly shows that Germany has been hit the hardest together with Slovakia and some central European countries that are part of the German automotive uh supply chain. uh Germany unlike the rest of the G7 countries really did benefit on the industrial side from the expansion of Chinese investment rapid Chinese growth so at its peak Germany was getting you know exports from Germany to China were close to 3% of Germany's GDP which is a big big number relatively speaking the US were never we never got above one to be honest We're a little below one. Total US exports of of man, you know, we're not a big manufacturing and exporter. We do like the IT stuff shows up in services and FDI. If you exclude Canada and North America, our global exports of manufacturers and egg would not be that much above 3% of GDP. So, Germany was really exporting a lot to China. And because it was exporting a lot, when Chinese import demand stopped growing and some sectors shrank, Germany was just the most exposed. So German exports to China are now a percentage point of German GDP, lower than they were five or six years ago. So that is by far together with Slovakia the biggest change. And then obviously there's third party uh competition. So German exports of cars of tunnel boring equipment of >> factory all the uh industrial robots where China now makes most of its own industrial robots and exports them.

[00:09:13]Those are sectors where Germany used to export to the world and now it competes.

[00:09:17]It's not is I mean I don't want to overstate it in third party markets.

[00:09:21]Germany is still competing. Germany is still exporting. It's it's only in China where you kind of have some sectors where exports have kind of come close to zero. But there is more competition and so as a result you would just see statistically bigger swings in Germany because Germany had more overlap and the industrial sectors were a bigger part of Germany's economy and exports to China and exports generally were a bigger part of Germany's economy. So I do think that Germany and its neighbors statistically have been the hardest hit. Yes, absolutely. But looking going forward the next five years, do you think this will continue?

[00:10:04]>> Yes, I do. So let's let's look at this chart which is uh German exports of autos and German imports of autos relative to Chinese exports of autos and Chinese imports of autos. So you know you see this this takeoff. So for scale at its peak, Germany's exporting four uh uh 4.5 million cars.

[00:10:30]>> So this is millions of cars.

[00:10:31]>> Millions of cars per year.

[00:10:33]>> Uh at its peak, Japan would export five or six. China is close to 10 now and has gone from 1 to 10 in four to five years.

[00:10:44]Huge huge change. Uh and if you look closely at the graph in in the course of 25, China's export growth in autos accelerates.

[00:10:57]So Chinese exports of autos are now growing off a very high base at 40% year-over-year.

[00:11:05]And this is because this is why it's a good good example. It is because China has a lot of capacity. Chinese factories are not going all out. China can meet incremental demand. Domestic demand for autos in China has fallen. Even for electric vehicles, demand has plateaued and is trending down. So, Chinese companies aren't making money in China.

[00:11:27]Their market is saturated. The market is actually shrinking. And the only way they are making money is by exporting.

[00:11:35]And so, you see an acceleration in China's exports. it it hasn't yet led to a collapse in German exports. Uh but German exports um of auto production and German exports of autos are not where they were six years ago. Um and if you look I think in some of the more recent data you're beginning to see absolute levels start to fall too. But do you think >> so? This is just it there is nothing right now that shows a deceleration in Chinese export growth or an increase in Chinese import growth or a strengthening of Chinese demand.

[00:12:14]>> But you know Germany produced primarily a high-end cars while other countries might be competing much more with the Chinese cars. Do you think that's probably helps Germany to some extent or it will also be eroded down the road?

[00:12:26]you know, we produce Mercedes, BMWs, Audi's.

[00:12:30]>> So, inside China, China's high-end EVs have displaced uh Mercedes, BMW, Porsche. Uh and I think you will see some of the high-end Chinese EV brands displace um uh the top end exports globally.

[00:12:56]uh you you haven't I wouldn't say you haven't seen that as strongly. You also uh see, you know, in a sense uh a shift in consumer preference in some cases away from your finely tuned BMW which hums along the road uh to a Chinese EV which may not drive quite as well but has more consumer gizmos and more more tech and better backseat entertainment. So you you have I wouldn't say Germany's been insulated by its relatively high-end production. I would say Germany's been hurt by the fact that it was selling close to half a million, a little less than half a million cars into China 5 years ago and that's now down to 200,000. And so the the high-end exports into China have been hurt just as bad as anything else. And I don't think it is not clear I would say at this stage that Germany German high-end production whether it's an hybrid an EV or a conventional car will compete effectively globally against China's high-end production. It is possible that chi that that Germany will retain that edge but it is not yet clear.

[00:14:16]it the the and you know of course we have to be you know just to be to be fair and to be honest uh what's all the more remarkable more remarkable about China's export growth is essentially zero of this is coming from the United States and so Germany although Trump is making it much harder uh with the tariffs Germany has to face Trump's tariffs but it doesn't have to face Chinese competition in the US market and so the the the ability for China to see an acceleration in its auto exports without having access to the world's biggest non-Chinese market is remarkable. The other remarkable fact is that with 10 million in exports, domestic demands now was 25 is now 22. So you got 35 million of production which is a lot relative to a global market of 85 and relative to a non US market of 85 70 uh that's a lot but China by most accounts could produce 50 to 55 million cars so it could without building more factories it could double its exports um and if you think about the evolution of global electric vehicle production China's share of global EV production is overwhelming. And there is a plausible argument that if you just go on cost with no protection, with no no industrial policy, no buy your home producer preference, global EV production would concentrate in China. VW and BMW would make more money making their EVs in China, using Chinese batteries, getting subsidies from local Chinese governments, taking advantage of China's weaker currency.

[00:16:07]>> They do, >> and producing in Germany. And you sort of see VW making steps in that direction. Tesla makes more cars in China than the US and it makes more money exporting out of China than it makes selling into China. there is an equilibrium where all global electric vehicle demand more or less is met from China which would be a very different equilibrium than the equilibrium eight years ago in conventional cars.

[00:16:35]>> So, but it's interesting you're saying that actually Europe is benefiting from the high tariffs Trump imposes on China's Chinese cars because then the European cars are more competitive in the US.

[00:16:48]Um well I to be to be clear Europe benefited enormously from President Biden and from Bob Lighheiser.

[00:16:57]Lighheiser Trump won put the 25% tariff on all Chinese cars. Biden moved that up to 100% on EVs. We also have the connected cars. So uh uh you can't have a Chinese autonomous driving system and sell it in the US. All that has shut China out of the US market that was clearly benefiting Europe and Germany despite the inflation reduction act uh despite the um not including Europe in the free trade agreement partner so Europe didn't technically benefit but then you know you could do a leasing exclu exception and you got around it so before the second Trump term before the tariffs on European cars the US was offsetting some of the China shock And now we're we're adding to it unfortunately for Europe. So I I don't want to say we're b >> I should I should tell you that we also have to end at a positive note ultimately >> in this.

[00:17:59]>> Um I'm the positive note is that German and European industry they are they are taking they've taken a punch uh but they haven't been knocked out. Um, so that would be my positive thing. I do actually though want to end a little bit on a negative note if I have time, >> which is that, you know, here's just the chart showing that the net exports have been subtracting a, this isn't all from China, this is globally, but net exports have subtracted a lot from German growth. Uh, so if you didn't have this drag from net exports, Germany's economy would not be flat over the past 5 years.

[00:18:38]It would be up. And conversely, there's been an enormous contribution to China.

[00:18:42]But this is like the the basic theme is that without policy changes either on the importing or exporting side, this isn't going to go away. This is, you know, export volumes versus import volumes, the acceleration in Chinese export volumes that started in 23 hasn't stopped.

[00:19:03]>> Import volume growth. There's been some volatility in the first quarter tied to mismeasurement of chip prices. It's gone away. That hasn't changed. So, we're still having this discrepancy.

[00:19:16]>> That's an ECB chart. No.

[00:19:18]>> Yeah, it's an ECB chart. The ECB is lovely because they always use European colors, uh, blue and yellow. Um, this is my, uh, chart showing the IMF. Don't trust the IMF when they say that China's current account surplus is going to fall. They've been saying that for the last 5 years and they've been wrong. I think the last forecast has corrected this. But it is it has been a consistent failure on the part of the global forecasters to project out. They've forecasted change rather than continuity and they've been wrong. And the reason why like one of the reasons this is autos I'll skip. One of the reasons why exports have been growing is if you do China's currency, real currency against trend. This is a uh Paul Krugman originally made this chart.

[00:20:06]>> Uh but I think Paul Krugman may be a little bit influenced by some of the things I wrote on my blog.

[00:20:11]>> It it shows that the gap between a trend appreciation because China should be appreciating is catching up productivity wise and the exchange rate the real effective exchange rate is as big as it has ever been even with the little appreciation of the past 6 months. So we aren't correcting the undervaluation and if you don't correct the underlying distortion you're not going to change outcomes.

[00:20:38]And then the last one this is you know shifting to you know the other frame which would be a more conventional macroeconomic frame to talking about imbalances savings versus investment.

[00:20:48]China just has an exceptional high level of savings. And it this is just uh a comparison with the other three economies that have savings rates above 40% of their GDP. They're all small.

[00:21:01]Norway, Singapore, and Taiwan. Compared to these high savings economies, China's current account surplus is actually small. Uh and so unless China's savings rate changes, given that China probably cannot sustain this level of investment, you know, there's probably still there's overinvestment in manufacturing, property demand is not coming back, it is plausible that the surplus could go up, not go down, and could become as big as that of other high savings economies.

[00:21:34]The constraint is that China itself is big and so China cannot have a big surplus without the rest of the world either running a big deficit or existing surplus economies like Germany losing their surplus. So what I've been arguing on a policy front is that you cannot assume China will change on its own.

[00:21:56]that there is a need to put some pressure on China to convince China that its model for its own growth has to rely more on its own demand and not draw on global demand, not export without having any import growth. And so the optimistic argument is that some of this pressure will eventually have an impact.

[00:22:21]Can you imagine a world where you know Europe were to say you cannot invest in Europe anymore? That would be very counterproductive.

[00:22:32]>> You can sell your goods but you don't get any assets from us.

[00:22:37]>> You know there have been ideas like that for the US to put you know like Michael Pettis and others who've looked for financial accountbased solutions.

[00:22:48]Um, for the US it's been I have trouble imagining that just because uh if you're sitting in if you're sitting in the corner office where Scott Secretary Bessant sits at the Treasury and you have a 6% of GDP fiscal deficit growing to seven, >> you're you're going to be very reluctant even if you don't see any visible Chinese demand for your assets, you're going to be reluctant to send that signal. strategic companies and no equity. You have to buy US treasuries.

[00:23:20]>> Well, you you you don't actually have to buy them. You have to finance someone who buys them. Uh you can lend to others and then they can do the buying. But yeah, you got to you got to there there there are only so many uh dollar assets that you can accumulate. Would you know Europe's in a slightly stronger position? Europe has also has a fiscal financing need. Uh but Europe as a whole saves a little bit more than it invests.

[00:23:50]The current account surplus has come down but it's not zero. So you can imagine a little more easily Europe saying you know we don't need Chinese demand for our bonds. At the same time, if you go and talk to the treasuries of any of the high like less Germany, more France, more Italy, more Spain, they're all worried about making sure that there's demand for their bonds, too. So, I it it is I suspect politically easier to to change the equilibrium by putting pressure on the trade side.

[00:24:24]Uh but if you if we're in a world uh you know if if China were to fully block for an extended period of time rare earth exports and permanent magnet exports and that were to for an period of time shut down Europe's auto industry.

[00:24:47]If we're in a world of true economic coercion, which you know, we didn't go there last year, but there were sort of hints along that way, then I think you even Europe would start to think very creatively about sources of leverage.

[00:25:03]So, I wouldn't rule it out, but I'm not >> not anticipating it. I think the more likely response is going to be strategic tariffs around strategic sectors, more industrial policy, maybe a move towards a European 301, some kind of uh across the board or across many sectors tariff which you put on for leverage and say we will take this off if you allow more appreciation. something that convinces she that this model is no, you know, President Malcolm, Chancellor Mertz, other I think uh Prime Minister Maloney have all told she that this is unsustainable yet they keep on importing more at some point. If you say it's unsustainable, you kind of have to back up your threats.

[00:25:48]>> But are you saying Europe should put on tariffs and threatening tariffs for China to exch to change it exchange rate with respect to the US dollar and then indirectly also with the euro? Yes, I support that uh policy.

[00:26:01]>> It would be useful if the US were to push along the same line in a sense.

[00:26:06]>> I agree with that 100%. Um to me it is shocking, surprising given President Trump's general views, given the concerns he expressed uh about Chinese currency manipulation in his first term uh when actually there probably wasn't a substantive case. It is surprising to me that the US has not been willing to put pressure on China on this. Uh but you know after I think not thinking through what it meant to go immediately to 100% or above across the board tariffs in a two-month period after liberation day after getting hit by the export controls and the US discovering that it was dependent on China for some key industrial inputs.

[00:27:00]the decision was made at Busousan to deescalate and so far we that that truce has held and ironically uh because of that truce because of the Supreme Court ruling uh the the fall on tariffs on China has been very very substantial and now the base tariff on China is no different than the base tariff on everyone else. They're everyone's at 10%. and President Trump and Greer and Bessant, all the signals have been that they're going to use the new trade actions, the 301's to raise tariffs on everyone. So, they've really kind of pulled back very heavily from a policy that targets China to a policy that's pretty much a tariff on everyone.

[00:27:49]I think that's a mistake to be clear and I think it's a mistake not for the US not to be joining with Europe to think about uh big things like why not have a common market in autos across the North Atlantic? Uh why not have a common market for a lot of industrial goods, strategic goods across the North Atlantic? Why not have joint industrial policies uh in pharmaceuticals? The US doesn't have to make every critical drug in the US, but the US shouldn't and Europe shouldn't rely entirely on China for the entire global supply of key pharmaceuticals for the simple reason that you never know what will happen.

[00:28:33]Doesn't have to be a military scenario.

[00:28:34]It could be another pandemic. You need a little bit of diversification. You need more resil, you know, your resilience balance concept. you know, maybe we should be thinking about the resilience balance amongst alliances rather than amongst nations.

[00:28:49]>> Um, that would be the direction I would like to go. I would like to see more expressions of joint concern. But right now, the US is in a uh are having gone alone, gone a bit crazy with 100% tariffs, which I wouldn't recommend for Europe. They should learn Europe should learn from the US lesson. you a tariff that you can't sustain is a tariff you can't sustain. You're going to bring it off. It's not a source of leverage.

[00:29:17]The US has pulled back and is now focused on summitry. President Trump is arguing that he's solved the problem of China even though he hasn't because the bilateral deficit with China has shrank.

[00:29:29]And we're we're not I mean we're we're we in the US our policy has not been to join forces with any of our allies on this issue right now.

[00:29:42]>> Okay. So in what sense then you you're saying Europe or Germany in particular will be hit the hardest and you think the the initiative has to come out of Europe as well?

[00:29:53]>> I do. I do. um >> and I think I think Europeans are realizing that the initiative has to come out of Europe as well >> because traditionally the US uh took off the initiative and could change things.

[00:30:16]Uh, traditionally the US wanted to be seen as the leader of the North Atlantic Alliance and now the US views the North Atlantic Alliance as a burden. We're not in a as as you know, we're not in a traditional era. The US was once the defender of the rules-based trading order. It's now the the main disruptor.

[00:30:36]Um uh it is absolutely the case that historically the US has expressed the most concern about imbalances because the US has the biggest global trade deficit, a big debt deficit as a share of its GDP. And traditionally Europe, but particularly Germany, particularly the Netherlands, some of the traditional surplus countries have argued that imbalances are not a concern. Um, when your surplus starts shrinking fast and when your export sectors are shedding jobs and shedding production and when those export sectors are at the frontier of the embedded knowledge in your economy, they're not lagging sectors. I think your conception of your interest starts to change.

[00:31:27]I mean you should not change your principles based on your interest in a sense but um >> I mean I think I think you can find ways of showing more continuity. So the way I I would explain it is uh if you're both exporting and importing, if your world of mutual dependence, if you have your choke points and they have their choke points and neither can use them, your resilience balance is is good. uh you're in a world where you don't have to worry about geopolitics where you don't have to worry uh about uh in some sense de-industrialization because the jobs industry lost in the uh importing sectors are offset by expansion of the exporting. Now there's services manufacturing so forth and so on but in general you're not becoming less of a export side of your economy is not shrinking.

[00:32:34]um it's a reallocation across sectors.

[00:32:37]It's not a reallocation into non-tradables.

[00:32:40]So the challenge that China is posing the world is that China has for the past five years had enormous growth in its exports with no growth in its imports. So to me the traditional concepts around the benefits of trade still still work. uh the resilience balance can stay balanced if you're still if there's an intense and balanced trading relationship. But the the old notion that an open economy stayed open be in part because it was a relatively balanced economy something that would have been sort of in the original concepts around the IMF some of Kane's thinking. I think that concept is important and I think the the optimistic vision for the global economy is where this is just a temporary deviation from China and that China you know contrary to what I was woring at the end that China's import start to go back up. China's export growth slows and so this the imbalance doesn't continue to widen and the resilience deficit that the rest of the world feels visav China is corrected >> coming back to the you know the finance finance account and you mentioned canes of course he had this idea of the banker is do you think it's something to these ideas to revive or is it too far out Yeah, >> I it feels like this is not an era for multilateral complex multilateral solutions. Um so uh it it to me that wouldn't that isn't immediately the direction I would go.

[00:34:35]>> Well, generally if you were the chief economist or the head of the WTO, what would you do? The whole system No.

[00:34:46]>> Um, look, I think for the I think the I I have the view this is a controversial view. Um, but my view was that you, the WTO will lose relevance so long as the WTO is defending an old order that doesn't reflect concerns about resilience and that doesn't reflect the reality uh that at least the US and probably the US and Europe do not want to trade with China on the exact same terms they trade with each other. That the principle of non-discrimination no longer works for a global economy that includes an economy with China's unique characteristics, big internal imbalances, big size, a leader who who thinks very much in geopolitical and geoeconomic terms, who wants control over choke points, that the old rules were built for a world economy that no longer exists. So if I were the chief economist of the WTO, I would try to be thinking about new rules that work. And you know in a sense if China doesn't abide by the spirit of the rules which is the consensus in the United States that China really doesn't want to import that it really uses subsidies the state sector to squeeze imports when it can out of its economy that it runs policies that are contrary to the spirit of the WTO second largest economy in the world and the US the world's largest economy simply does not follow its WTO commitments anymore. more that the old system is effectively dead and so I would be trying to think about what the foundation where the foundations for a new system could be but you know as we've sort of discussed I tend to think the foundations for a new system will be rules amongst allies and geopolitical friends to the extent that those are relevant concepts and that's you know contested uh in the US and I think you could have a different set of rules that would bind members of an alliance than the rules that govern trade between the alliance and those outside the alliance. That poses a lot of hard questions, but I think that's the direction I would go.

[00:37:13]>> Do you think there was a special role for the OECD because there might be a group of allies and finding their own trade rules within the OECD?

[00:37:26]I mean, possibly. I hadn't thought of that. Um, but yeah, possibly. I mean I think my my gut as a former adviser to people who make policy is that it is you know the old conception that I was thought of the WTO was that the it was essentially a bargain between the United States and Europe and then between United States, Europe and Japan and then that got generalized >> and my gut is uh that the initial bargain would be between the US and Europe, >> however Europe is defined and then it would get >> including Japan and Korea.

[00:38:14]>> I think they should be included.

[00:38:16]>> Yes.

[00:38:17]>> But um >> I I these kinds I I think if you can't reach a deal between the US and Europe, you're going to have a hard time reaching a deal with Korea and Japan. Um I but ultimately yes I mean I think with Korea with Japan with the complexity that with all the countries that are neighbors to China uh the there are there there are more difficulties uh setting the right rules for their trade with non-China and with China than for countries large countries that are further from China. So I I I don't haven't thought that through fully for a country like Korea.

[00:39:01]>> So I have another question concerning the rest of Asia. So how will countries like Singapore, Vietnam, Thailand be affected by the second China shock? Will they benefit from the second China shock or they will also be hurt? Uh what do you see >> you know um right now you can say uh the world is uh being hit by um three different shocks.

[00:39:31]You've got the China shock, >> you got the AI shock, um and you've got the Trump tariff shock. Mhm.

[00:39:39]>> A country like Vietnam has been unambiguously the winner from the Trump tariff shock. I mean the US now runs, you know, an enormous bilateral deficit with Vietnam, which is just a reflection of the fact that final assembly shifted to Vietnam, but that has been positive for Vietnam. So Vietnam has not been adversely affected by the second China shock because it is benefiting so much from the Trump tariff shock. Uh I Korea is an interesting case because it is benefiting so much from the AI shock that that is statistically dominant relative to both the Trump tariff shock, tariffs on Korean autos and the second China shock. But it is very sectorally bifurcated. And I do think you see some evidence that the second China shock is impacting Korea's auto sector. Um it's just that it the second China shock hasn't hit top-end chips and topend chips are just benefiting so much. So with Korea, it's a kind of bifurcation of the economy and for now the incredible weakness in the Korean Juan has helped buffer the traditional industrial sectors uh from the second China shock as the chips sector benefits.

[00:41:03]>> The Korean car industry be hit and also the currency. Why is the Korean ones so weak?

[00:41:11]Well, the the the car industry uh they just like they've lost their China market. Like they were one of the first to lose their chi and then like you see a lot of the uh chemicals that go into Korean batteries. So Korean batteries are the bane alternative to Chinese batteries. A lot of those chemicals are coming from China. So you do see changes even with the weakness of the lawn. Uh it has helped Hyundai stay very competitive in the US market.

[00:41:40]Um, it's not been a complete buffer, but I do think it has been a partial buffer.

[00:41:45]Thailand been very potentially very heavily impacted by the low-end EV, low-end IC auto exports out of China.

[00:41:54]The Japanese companies made their uh lower pop more popular models there. they have to make a choice about whether they can kind of become an assembly hub for Chinese EVs that in the way they were for Japanese IC's or uh adjust it it's it's it's not been uniform across Asia is like kind of the un Asia is not a a homogeneous >> uh block anymore than Europe uh and I would say in this case it's been less homog Singapore is just an investment it's a private equity company described as or a hedge fund that dressed up as a country. Um they're just in a different world.

[00:42:36]Okay.

[00:42:36]>> But yeah, I mean there there is I think an interesting broader point there which is that Korea and Taiwan haven't had to deal with like Dutch disease from their chip industries because the it's been so new, but also their currencies haven't been pulled up for very complex reasons. Um, and Japan has for its own reasons a very weak currency. So there's very broad weakness across Asia. So you you don't see the kinds of shifts that you see on the European data systematically in the the Asian data. you can find, you know, if you look at the swing in Korea's automotive balance with China, you will see a little bit of it, but you don't see as much. The problem with that is that where we started that these very weak currencies across Asia are adding to the concentration of manufacturing, the concentration of the global surplus across East Asia in a way that is kind of unique.

[00:43:53]We should end at with a positive note or how many more slides do you have? Sorry, >> I'm I'm through with my slides. So, >> okay. So, let's uh so I would like to thank you all for listening to this. I think it was fascinating to look at the whole world and the whole world economy uh with Brad Setsza. He is one of the leading experts in that space and comes always with an interesting new perspective to existing problems and uh we will be facing huge challenges and um we'll stay in touch. Thanks a lot Brad.

[00:44:25]It was fascinating.

[00:44:26]>> Thanks Marcus. It's been a lot of fun and to be honest, I I I spent so much time wa listening to you during the pandemic uh that I feel like I know you and it's a huge honor to be on your on your