The State of Trade: A New Approach to China Trade

The State of Trade: China Trade Policy

Phil Levy: Hello everyone and thank you for attending today's webinar, The State of Trade, China Trade Policy, where we're going to discuss a new approach to US China trade. Before we delve into the substance, a few housekeeping items to cover. On your screen, you will see a sidebar to the right of the main stage. If at any time you need assistance during the live webinar, please message us in the help chat located on that sidebar. You can also ask questions at any time through the Q & A tab. Your questions will only be visible to you and to our Flexport team. We'll do our best to answer as many as we can, as time allows and depending which we've anticipated in the chat leading up to it.

We will have a copy of the presentation slides dropped into the chat. Also, while you are in a webinar mood, we invite you to join us on November 16th. For our next logistics rewired webinar, you can find the link to register for that in the public chat. And then finally, an on demand version of this webinar will be available shortly after the webinar concludes and can be accessed using the same link that you were sent earlier.

Alright, now the stuff for the lawyers, please do keep in mind that all information provided in this webinar is presented based on the situation at the time and may not be customized to your specific situation. Alright, what do we got today? First, who are we? I'm Phil Levy, I'm Chief Economist at Flexport and I am joined by one of our regulars Chris Rogers, Principal Supply Chain Economist.

And we are also very fortunate to have with us an old friend James Green. James is Director of Government Affairs and Public Policy at Google, where he covers international policy for the company's hardware business. He's worked for over two decades on US Asia relations for the US government and the private sector. From 2013 to 2018, he served as the Minister Counselor for trade affairs, USTR at the US Embassy in Beijing, where he addressed market access barriers, technology policy and investment restrictions. In other words, he is at the heart of all of this. He has served on the National Security Council staff, and on the Secretary of State's policy planning staff where he and I first worked together. So James, welcome. It's great to have you with us.

James Green: Thanks, Phil. Great to be here.

Phil Levy: And Chris, of course, we're always happy to have you with us. Why are you one of the team? All right. So there's a reason why we are returning to the topic of US China relations at this particular juncture. Just last month, President Biden's US Trade Representative Katherine Tai gave a speech entitled: A new approach to the US China trade relationship. That had been eagerly awaited. President Biden has been critical of President Trump's tariffs and his whole approach to China on the campaign trail. In fact, in July of 2019, he gave a speech in which he said President Trump may think he's being tough on China, all that he's delivered as a consequence of that is American farmers, manufacturers and consumers losing and paying more, end quote. Well, that naturally led those farmers, manufacturers and consumers to wonder how President Biden's policies would be different. So that's the question. We're going to get to that.

If we can move to the agenda, actually, yeah, let's move to the agenda, let's tell you when we're going to get to know how we're going to do this. We want to talk first a bit about how we got here, that what was it that brought us to this current juncture, then we're going to move on to take on this very question of what did the US Trade Representative announced? And what does a Biden-China policy look like? Then we're going to flip that question around and say not just what is the US likely to do in this bilateral relationship, but how will this be perceived from China? And what are the Chinese likely to do in response? And then finally, we'll close with some discussion of what comes next and time permitting questions at the end.

Alright, before we get into all of that, we are going to follow our tradition and we're going to start with a poll. So the poll is to ask, what is the state of commercial relations between the US and China right now? So how do you perceive this at the moment and here are your options: It's quite good, look at all those boats waiting outside the ports, or it's just fine, the stuff that we're hearing in the newspapers is really just political posturing. Alternatively, it's neutral but trending better, or neutral but trending worse, it's dysfunctional with worse to come. And although we're going to try to avoid too much political analysis here, we've offered you the despondent option of we're in a new cold war.

So, I am going to do something here, so I can actually see what people are voting. Let me give a moment or two. Thank you for everyone who's voted. It's nice to see everyone so engaged, and we're getting lots of opinions on this. But we give a moment or two more, and then let's, we'll do this different how we got here in a moment. But what do we think of this? James, I'm gonna let you sort of weigh in. We'll make you vote actually, whether you if you actually vote, you get to see what the results are, the way the technology works, but why don't you talk us through where would you be on this scale?

James Green: Yeah, thanks, Phil. I clicked on I don't know if it's supposed to be secret or not. But I clicked on the neutral but getting better, and maybe it's because having been at the Embassy in Beijing during the exciting part of the US China trade conflict in the Trump administration, I think compared to that era of friction, we're actually in an era that is much calmer. That is the tariffs have been rolled back, but I think you don't have quite the volatility that existed during the parts of the Trump administration. So I'd say it's neutral, and you know there's a tentative approach to things getting better.

Phil Levy: Okay, that's great. You're gonna get plenty of chance to elaborate on that. Chris, where are you on this?

Chris Rogers: I'm pretty much in the same place as James. And the key word in the question is commercial. I think there's a lot of other stuff going on, in relations between the two countries. And we can talk about, you know, can you separate commercial relations from broader geopolitical relations? But I think, you know, from a commercial perspective right now, it does look like they could get better. But as I guess we'll talk about later on, there's still plenty of stuff we can trip over on our way through the trade policy minefield.

Phil Levy: Yeah. And in fact, I think that's gonna be as we're gonna move on to the next section and talk about how we got here. That is one of the things that we're going to check in within a moment, is it, you're right, there was this traditional distinction, where it had been a fairly hard line between the commercial relations and other relations. We'll ask James in a moment, whether or not that line was obliterated in the last few years.

Before we do that though, Chris, I was hoping you could talk us through just some background statistics, the long view of how we got here, and then maybe some what happened with tariffs and the like, during the Trump administration before we get to the story behind the numbers. So Chris, why don't you take us through the numbers?

Share of Global Merchandise Trade

Chris Rogers: Yeah, sure thing. So that we've got the first chart here, this is showing you the Share of Global Merchandise Trade. The green line is China. Excuse me, the solid line is China, the dotted line is the United States. The solid line that's green is China's exports and you can see how that's drifted up with a particular point of inflection obviously after China entered the World Trade Organization. But I think it's important to note that China overtook the US in terms of share of total exports all the way back in 2007.

So you know, China's rise as an export power is well established and if anything, it's only accelerated. The data for 2020, I think partly shows you how quickly China's economy recovered during the pandemic versus other countries including the United States. Now, I think the interesting chart though, isn't necessarily the green lines for exports, it's the red line for imports.

China now is verging on around 12% of global imports. That's a ways behind the US, which is around 14%. But you know, if you think about being the world's customers being a sign of your economic influence, then I think it's important to see that kind of closing of the gap between the two and as I say, this is a very long term perspective. We get into economic policies later on, but this concept of the dual circulation strategy for economic development outlined by President Xi should mean if anything we see that import line continue to rise.

And obviously, the US share of global consumption of imported goods will be a function of the sort of dynamics we see as we roll out of the pandemic. Obviously, we have our own post COVID indicator that tracks this you can find on flexport.com/research that tracks this kind of spending.

Now, that's kind of the spending side of it, and obviously, we've not gotten into the whole thorny issue, trade deficits and all of the unpleasantness that goes with that. But obviously, one of the main things that's been introduced under the Trump Administration was tariffs. And if we go to the next slide, we can put some numbers around where the tariffs are.

US Customs Duty Income

So what you're seeing on this chart, the green line is the total US customs duty income. The red line is what we've imputed for Section 301 duties on imports from China. So that was the main block of tariffs supplied by the Trump administration.

Where we are today is around $4 billion per month of those tariffs that are in place annually over the over excuse me, month by month over the past 12 months. And I think it's worth bearing in mind as well that that number has been pretty stable, because most of the tariffs are applied to industrial goods rather than consumer goods. The green lines have been going up more recently, just because the US has been importing more of everything, not just the section 301 products. But yeah, these are some pretty Yes, is a pretty significant tariff package that's out there that really continues to be a cost for US importers and continues to distort trade.

So, you know, if you want to say in very simplistic terms, what's on the table during the next few months of discussions, it's $4 billion worth of tariffs and the other things that go around that. So anyway, those are numbers to play with China catching the US as being the world's largest consumer and second, a pretty chunky tariff package that is still in place, I’ll park it there Phil, that's probably enough numbers from it.

Phil Levy: You know, that's great. And actually, I want to just make a comment or two on the tariffs, which is, this is a very good rendition of how serious was this tariff package. If this is the same problem that trade economists always face when they're trying to characterize these things, which is, if you put on a sufficiently high tariff that you stop a trade flow, then you get zero tariff revenue. So this is a great way to look at it, but it just shows the effects can be even more severe than this.

The other thing I would note, as we look at this is, you see that starting, especially if you focus on the red line with the 301 tariffs, we see the sort of very sharp rise heading into up through, from July of 2019 or 2018 excuse me into 2020. And then you would not be wouldn't be very difficult there to talk about where it was you saw a change in administration, in terms of seeing any difference, so we'll come back to that. But very interesting with the number.

Actually let's switch back one slide and go to the one with the overall trade, yes. And so, James, I want to turn to you and take this slide that Chris presented, and note for our friends who like to quote facilities, they would look at something like this in great powers and when great powers rise, there will be conflict. Do you think that's true in the commercial realm? Do you think that had you sort of seen something like this 20 years ago? Ah, I get it, there's gonna be conflict, or was this preordained.

James Green: Yeah, thanks, Phil. It is a bit of a cottage industry these days on how much kind of Greek philosophers are relevant for today's geopolitics. And my personal view is, no, there's not enough data in kind of historical transitions have great powers. You can look at the US and Great Britain in the 19th century, or you can look at Japan and Germany in the 20th century. But, that's three or four data points, or inclusivity’s time, Greece and Sparta. I don't think that's really enough for us to straight line and say, well because this happened 2500 years ago, we're destined for conflict. I don't think that's true.

Phil Levy: You know the whole French revolution too soon to tell thing.

James Green: There's other things that come up exactly. Yeah, I do think, if you looked at Japan in the 70s right, you would get this very similar kind of lines. And thankfully, we haven't come to war with the Japanese. In fact, there's still a very close ally of the United States. So I don't really see that as a driving factor of conflict between the two countries. I think part of it and you guys are showing it here, but you know well that a lot of that trade that was coming from China was in other parts of East Asia and had moved from other parts of East Asia to China, and so if you look at the overall picture of US East Asia trade, it's not quite so stark as the lines on this chart here.

Phil Levy: Yeah, that's an excellent point and it’s one of these unfortunate quirks of the way we do trade statistics not we at Flexport, the globe does it which is, if they were really trying to make economists happy, which they're not. They would do this in terms of value added, and you're right as a lot of that time as we saw China emerge, it was some very limited value added where they would be doing the final processing step for a regional value chain. Over time that fraction value expanded significantly, but it definitely had the effect of overstating China's entry.

Let's talk about policy and the arc of policy and what happened during all of this. The criticisms that you often got during the Trump Administration of the predecessors, and there wasn't a lot of distinction between whether it was a Republican or Democratic predecessor was sort of endless and useful dialogues, there was the SED, SNDD, JCTP. You know, that they would get together and they would do these things. Do you think there was reasonable? We're gonna look at the whole set of options that we have. How do you view that era of these sorts of dialogues? And attempting to sort of introduce China, Bob Zoellick, you know, calling for them to be a responsible stakeholder, what's your take on the sort of pre-Trump era of how China was welcomed into the trading system?

James Green: Yeah, thanks Phil. I was actually at the embassy in ‘99, 2000 and 2001, as well, when China was joining the WTO, and so I got to see it from kind of both sides of it. I think there's a little bit of historical revisionism in my view, that it's this idea that everything that came for the previous 20 years was the Chinese pulling the wall over American government officials' eyes and that somehow we were hoodwinked into letting China into the WTO. I had a little podcast with Georgetown University. I interviewed Bob Zoellick and Charlene Barczewski, two former USTR's and Mike Froman, another former USTR and some other former officials about when did the Chinese government become less interested in liberalization and reform? And I think among China's scholars, there's this discussion of how conservative is Xi Jinping? Or how much has Xi Jinping turned from the policies of Deng Xiaoping and Jiang Zemin. And it's interesting, Charlene Barczewski gave the earliest date that I heard and she gave 2006 as the time when China became less interested in liberalisation and more closed. And the reason she gave that, she said that was five years after WTO entry. And the leadership felt like they had given all they wanted to give on market access and so they were exhausted by it and they just said, Yeah, you know, we're not really interested in that.

So I use that as a preface to say, I think a lot of folks look at the Trump administration and say that they started this trade war, trade conflict, and I guess in my view, it takes two to tango. I think the Chinese leadership in about 2006, ‘07, ‘08, ‘09, ‘10 decided that there were certain parts of the international system and of the model that they had thought they were understanding with the Washington consensus of liberalizing your markets and including capital markets, and that was going to lead to growth.

And I think sometime around that period, the Chinese leadership said, particularly after the financial crisis, in which we were working in government together. The Chinese government and the Communist Party said, you know what, actually maybe Wall Street doesn't have it right. Maybe that's not the greatest way to run an economy and so we need to make sure the capital account is not convertible, because that could sink our economy because of what happened in the Asian financial crisis, a decade earlier.

So I think there started to be a re-embrace, shall we say, of central controls, or have a view that, maybe liberalizing and letting foreigners do lots of things in your economy is not great. And so fast forward to say the Bush, Obama administrations, I think there was a lot of frustration with not getting as far as the administration would have liked with opening up the Chinese economy. And that led to all the dialogues. I will say, as a participant in some, it was part farce and circus and part really quite useful. That is the Chinese government, their default is we don't want to meet with you. How about never that's generally the way they interact with other governments or with companies and so if you have that approach, one way to try to tease them out, which Bob Zoellick and Hank Paulson also started was, hey why don't we get everyone in the room and see if we can move things forward? I do think that made some progress.

But I think to get to the end of the Obama administration, I think by 2015, ‘16, it was clear that the Chinese government really wasn't that interested in doing things. The one example that I'll give is, we were negotiating a US China bilateral investment treaty, quite hot and heavy. President Obama came to China in 2016, when Xi Jinping was hosting the G20 in his hometown of Hangzhou, and I remember sitting in the negotiating room and it was clear that we weren't going to make a breakthrough and that this deal was not going to go forward. And it wasn't because of that one meeting went bad was that on the Chinese government side, they just figured you know what this is we this is not in our interest, we don't really need this liberalizing foreign tool to open up our markets because that's not where we want to go.

And so I think by the time the Trump Administration came in, there was a fair amount of pent up frustration that then the Trump administration and certain members particularly Ambassador Lighthizer, the US Trade Representative use that broader frustration to look at parts of the Chinese technology policy, infrastructure and policy framework to then say this is this is not acceptable, we're going to go ahead with an investigation under Section 301 and put tariffs on.

Phil Levy: That's very interesting. By the way, just sort of take us back for a moment and support your point. I think there's something to perception, you know better than this, but that, you know, the US just sort of quickly let China into the WTO when they knocked was in fact, correct me if I get the numbers right, there's a 15 year accession negotiation.

James Green: That’s right.

Phil Levy: There have been a lot, starting in the mid 80s is very prolonged discussion of substantial burdens that China would take on. So let's get back to Trump. President Trump comes in, and let's think about what's distinctive. Clearly from the graph that Chris showed us earlier, tariffs were distinct. We had not seen them, we had had tariffs on China of course, we had things like anti dumping duties and countervailing duties before which we do in many countries, but they hit China, I think disproportionately, but those are sort of standard accepted practices. That was not so true of 301 tariffs. So the 301’s were different. Is that really the difference between President Trump's China policy and predecessors? Or was there more? Was their tone, approach, philosophy? How did you see the difference?

James Green: Yeah, that's a good question. And I think it's hard to unpack that kind of jumble of four years, but I think there's probably a couple of different phases. And I think in the first phase in the Trump administration, it was really Cabinet Secretaries and internal actors trying to figure out, okay what are we trying to do? What's our goal? And so you had some initial phase of kind of negotiation. President Trump hosted President Xi at Mar a Lago early on, and it was before Bob Lighthizer was in the position of USTR. And so Secretary Mnuchin, the Treasury Secretary, and Commerce Secretary met with their counterpart and kind of worked on this new dialogue process called the Comprehensive Economic Dialogue, I think it was called. And so at that phase, it was let's see what we can negotiate with China to be good for American exporters. And then when Lighthizer came in, and that kind of dissipated, I think, probably the highlight of that kind of light engagement strategy was probably when President Trump came to Beijing and 2017. And then after that, after November 2017, I think you're pivoting to another phase, which is not only tariffs, but also seeing China and particularly the Communist Party as something that the US has to stand up to and has to be tougher on, and so a lot of that was driven by the State Department and Mike Pompeo, who was the Secretary of State at the time, but I think that that is that's the way that I try to look at it.

And on the trade and the tariff side, certainly the 301 investigation on forced technology transfer, which then led to the tariffs. But also the Department of Commerce and the Department of Treasury, it was a bit of a bandwagon effect of kind of who could be more macho with putting sanctions on Chinese entities that weren't involved necessarily in broader trade, but in specific narrower areas. So on technology trade on Huawei for example, or on to punish certain Chinese actors for Chinese government activities in Xinjiang.

So I think that's the way that I tried to look at it as a beginning phase and then this kind of transition to another phase. But that second phase ended right at the end of the Trump administration when Secretary Pompeo for example, publicly said that what was happening in Xinjiang should be considered genocide, and I think some of those kind of more robust conflictual instincts of the Trump administration cabinet were kept in check by the White House that didn't want to let this relationship completely blow up. And so in the 2018, 2019 phase, there was kind of ups and downs, as different Cabinet Secretaries tried to figure out okay, what are the guardrails here? You know, I want to do this, I want to put tariffs on but I don't want to blow things up. So you know, how do I manage that?

Phil Levy: So Chris made reference earlier when he was showing us statistics to the viewer, he showed his exports, he showed his imports, well, you can get a trade deficit out of that. If you listen to President Trump, that was very much a salient objective. You wanted to see the trade. He took the trade deficit as something of a scorecard, not usually endorsed by economists as a view but that was what he took us a scorecard. And yet, when you saw White House objectives, it was a much longer list than that it was not just trade deficit. Did you feel there was a sense of clarity on what the objectives were? You talked a bit about how people wanted to be seen and how they perceive China, but in terms of what was the goal of the policy?

James Green: Yeah, that's a good question. I think there's probably a range of different things. And maybe because being in government, I have a bureaucratic actor of view explanation for what happened. But I think there was a broader goal that you saw on the national security strategy of trying to make sure China wouldn't be a pure competitor of the United States who are trying to cut off things that might help China as a pure competitor.

But at the same time, there was the sense that we want to be able to do certain things with the Chinese government. Again, that was earlier on in that kind of engagement phase. So I really think it was a bit of a mixed message from the working level or from the kind of mid level of the government. It was a bit of mixed messaging going on.

And as I said, generally Cabinet Secretaries kind of went off and did their thing. It's been a challenge for China policy since at least the Clinton administration trying to figure out, you know, okay, are we really talking about defense issues? That what's top of mind? Or what's happening in Iran or North Korea? Or is market access important or the trade deficit, you know, where our priorities, and I think this administration, the previous administration struggled with how to balance those and so it came out again, I think a little bit uneven in terms of actual policy execution of sure the White House would say this, and that was really important, but then these other agencies were doing these other things.

Phil Levy: Okay that's helpful. Hey, we want to move on to talk about what's new with the Biden administration, before we do that let's do another poll. And so just sort of wrap up and look at President Trump's approach. What do you, our audience think about, about taking this to James because gave us a characterization, Chris gave us a numbers, but looking at President Trump's approach to China, do you think, it worked, give it some more time, we need to go back maybe to what came before, more dialogue, fewer tariffs, or we just need something new. It was sort of a, we're offering you a none of the above option, which is probably irresponsible. But register your votes, let's get some opinions in here. Those of you who have lived through this and dealt with that. All right, and then I am going to, so then what we're going to do is, we'll react to this. I'll give each of you a chance to speak up. I think I went with the, I know I went with, more dialogue, fewer tariffs, shows me as old school. James? James Green: Yeah, it was a tough call. I went with something new. Phil Levy: Okay. James Green: Because I do think that China. Phil Levy: You’re really gonna have to tell us what that is now. James Green: Yeah exactly, that's the next seminar we're going to do, right? Phil Levy: Stay tuned. James Green: Yeah, I just want one footnote on that. I think the China today is different than the China of 1999 and 2000, and so the disciplines that were put into the WTO, I think probably don't apply to China and so there has to be some other way to address some of the issues of the distortions have been trying to come up. Phil Levy: Okay. Good point, and Chris? Chris Rogers: Well, here's the funny thing. I think we definitely need something new, but actually it kind of worked for a given value of what works. So, you know, he wanted more exports to China, got it. Once if you imports from China that worked up until the point everyone started buying stuff after the pandemic. So transactionally, you got what you paid for. Has it changed China's behavior, how it runs its policies, does it require a whole new load of new stuff? Yes absolutely, it does. So yeah, for me it is really need something new, but on that very narrow transactional basis actually, got what you paid for. James Green: Can I just follow up on that? Phil Levy: Please. James Green: I was just gonna say, I mean, I think If you look at it is, trying to change Chinese behavior, and I'm not saying that that's where you were going, because I don't think we're delusional that we think we can do this with tariffs. But if you look at the goal more narrowly perhaps, of trying to shift the thinking of American companies reliance on China, I do think Ambassador Lighthizer was successful in that, that is companies are now thinking about their supply chains and how reliant they are on China, whether or not they then shift to other production bases or move things, that's a different matter. But if the more modest goal was to have global companies rethink their reliance on China, mission accomplished. Phil Levy: Okay. Good. Chris, you're going to get, you’re working on your response, should you so choose, as you talk us through some of the quantifiable things that President Trump left President Biden. Which is, this is maybe the one non to make me economists happy, it's fun to quantify. So the, one of the sort of party is written the eve of the general election campaign was, you had this phase one trade deal, which said that we were going to just leave this to markets and champs, there would be specific numerical commitments for what China would do to show that it was performing within the bounds of the deal. This didn't get rid of the tariffs as you showed earlier, the tariffs remained. But you've got some data, can you talk us through what we saw empirically and how that phase one deal played out. And then we'll talk about, and we'll do this in the context of what does President Biden, what is USD archive responding to.

US Exports Under US-China Trade & Economic Agreement

Chris Rogers: Sure. So if we pull up the next slide. I mentioned a couple of minutes ago, like one of the things that President Trump wanted was more exports to China, and you certainly got that within this trade deal, in the same way that I'm trying to avoid calling Brexit, Brexit. I'm trying to avoid calling the phase one trade deal, phase one trade deal, because the US China trade an economic agreement, I think it was called the TEA. The big element of it was a whole bunch of commitments from China to buy American goods. On this somewhat messy chart you'll have seen similar stuff from other think tanks, this is drawing from US census bureau data. The dotted lines are the target under the trade and economic agreement, the phase one trade deal. The red line is energy, so oil and LNG, that sort of thing. The green line is agriculture, it's mostly soybeans, and the white line is all kinds of manufactured goods and so that's everything from pharmaceuticals through to cars, through to jet planes and so on. And it was pretty obvious here is that there was a pickup and there has been a pick up in exports compared to 2017, which is the baseline for the deal, but we're a very, very, very long way below the dotted lines. Now there's a lot of reasons for that, there's been a couple of months when agriculture was in line and actually a little bit above target, but that was really just the seasonality of soy beans. And I will actually talk about that a little bit in a minute. The red line, the delivery there was held back last year if you remember oil prices were negative for a little while, they're now much, much higher, but we're still nowhere near target. So there's clear purchasing decisions being made there. The biggest gap in dollar terms and one that's you've not really seen as much of a pickup has been in manufactured goods, now where you have seen growth is in healthcare as you'd expect during a global pandemic in terms of US exports, but actually one of the biggest export lines from the US China was in the aerospace sector. And nobody's been flying anywhere. Boeing have had some challenges with their 737 max line, and so the aerospace I'm kind of dropped out. We've also seen the automotive sector where obviously there's been a lot of challenges for the automakers in terms of shortages of parts and so on. But also the biggest growth area was electric vehicles. And China was a big recipient of Tesla vehicles and now of course, Tesla have their own factory in Shanghai. So there's been lots of dynamics that were underneath how this performance has gone, of course we're a long way behind target. The question of course is, whether in the next couple of months the Biden administration as it has this discussions with the Xi administration chooses to put this inconvenient data line in front of the Chinese government say, this isn't good enough you have to source it out, or whether they go, actually this was someone else's beloved, but this isn't for us, because really the negotiations are probably not so much about, do we have a phase two trade deal, or do we roll the TEA forward? It's actually, what do we do with tariffs? before I hand it back, I just want to go to the next slide. This next slide I mentioned soybeans a second ago.

US Exports of Soybeans to China

This is one of my favorite chart for talking through where relations between the two countries are, so this is a seasonality chart for US exports of soybeans. The green line was exports last year in 2020 and you can see there was quite a significant pickup, the exports came through just ahead of the elections, the deal if you remember was signed in February of 2020 and we got back to levels scene in 2017, so you know sign a delivery there. The red line is this year, and this year we've had something of a failure to launch. So why isn't China buying a lot more soybeans as you'd expect that this time of year, now there's agricultural reasons for that soybean harvest in the US this year appears to be lower than it's been in the past. But the hog herd in China is a lot healthier than it has been in a long time. So there's something missing here, there's something grating here a little bit. I think maybe an area for discussion as the talks between the two countries pick up, but no, increase in exports done, nowhere near target and no real sign and I think that we're going to get to target by the end of this year. That a lot of numbers again, Phil I'll hand it back to you. Phil Levy: No, but that's good. And I think it may well be also that, I think some of the Ag exporters might talk about the availability of containers or the availability to ship those days as it, that's interesting thing to watch. James, let me ask you sort of building off of this. So if you or the Biden administration coming into office. You've got your hand in this thing, which I'll call it the phase one trade deal just because it's easy, his own acronyms. But you've got this, you have some choice. You can disown that, you've already been critical of the predecessor policy, or you can buy into it. The numbers, Chris has given a nice illustration of how this sort of continued to, and increased not going to meet the targets. It was pretty clear when President Biden took office, that we were, weren't on course it was highly unlikely that these numbers were going to be met, but yet they do not seem to renounce this. In fact, USD archive seems to have sort of adopted this. What do you make of that? James Green: That's a great question. Thanks, Phil. I think getting a little bit into the speech that Xi gave at the Center for Strategic and International Studies. Xi could have highlighted four things that they were going to do in a China policy. And I think first of all, the speech was a little bit late. That is, I think there was an expectation among the business community and folks who've been paying a tariffs of a bit of more clarity on where the administration would be sooner on. And some of that was probably unrealistic. The previous administration was very focused on China tariffs and China and tariffs, both separately and together. And this administration not, they were focused on the pandemic and the infrastructure investment, and all the other aspects, social justice issues. Issues they thought that they were elected on, and so China tariffs was not top of their kind of political wishlist. But I think one of the challenges of Ambassador Tai’s speech is, it's mostly a lot of things that make sense, but it's not a regulatory new way of how to deal with China. And I think if Xi had given the speech a couple of months earlier, it would have been seen as a good starting point. And now I think it's probably seen as a bit of a placeholder of, okay, they're going to kind of take the measure of the Chinese side, see where they can make some and do some other things. And the other things I think are quite important. I think that the two things that distinguish this administration from the previous one, one is trying to work with friends and allies to build a coalition of the willing of trying to address some of the accesses in the Chinese economy. And so, the deal with Europe over the Airbus, Boeing, WTO dispute kind of resolving that, deal with Europe over steel and aluminum tariffs. Not perfect, it doesn't get rid of the 232 steel aluminum tariffs put in place by the Trump administration for national security reasons. It creates a quota which basically lets them exist, which ideologically, the Europeans hate of course, the idea that somehow the United States might go to war with Europe and that's why we need these tariffs and make our own steel or aluminum, rankles the Europeans for good reason. But all that said, I think addressing those things and setting up this technology trade council with the Europeans. I think this administration is really trying to work with other countries to circle the wagons and say, let's put our side our trade and economic differences with you guys so that we can focus on the real challenges which come largely from the Chinese economic models. So I think that's a big change for this administration that Xi highlighted in his speech. The other one is, that I think is quite relevant for individual companies is to take a look at some of the exclusion process measures. And so in the previous administration there was a way that you could get an exclusion right for these 301 tariffs and it was maybe chaotic would be a generous way to put it. And I think what a lot of the Biden team is doing, not only on tariffs, but in other parts of the previous administration is to figure out, what is the law say? What policies are actually in compliance with the law? And which things do we need to address, or should we address for policy reasons? And so, the executive orders on TikTok and WeChat for example, that the Trump administration put in place, that were probably inconsistent with US law that Biden teams said, nope, we're going to get rid of those. And what they did and it said was, they said, we're going to put a new executive order out on how to ban platforms from US network. So, we're not saying these two specific platforms are bad. What we're saying is, we the US government needs some way to figure out if there's a bad platform, how to get rid of it. And so, I think a lot of the kind of adjustments that are happening are to address some of the, perhaps poor lawyering or bad drafting for how rules or regulations we're putting into place from the prison administration, but not exactly abandoning all of them. And so, I think the first point that Ambassador Tai made in her speech was, we the US are going to continue with these tariffs. We're going to kind of use that as a basis for negotiation. I know we're going to get to the Chinese reaction a little bit, but I think at the moment I can't see a whole lot of interest from Beijing and kind of negotiating. Phil Levy: Let's do it now. Cause it's a natural time to talk about and we can sort of circle back as we want. But yeah, so let's, alright. They laid this out, if I heard you correctly, the major changes are, we're going to try to coordinate with allies and we're going to color within the lines. But other than that, not any real fundamental shift in direction, including you would describe the Trump approach as, not a ton of clarity of like, this is the overriding objective of the policy. And I didn't take it from your characterization of Ambassador Tai speech that we now have a clear overriding objective thats any different or clearer, how will that be seen in Beijing? James Green: Yeah, I do think, thanks. I do think Ambassador Tai is presenting a vision of, we need to try to have China play by the rules. And that they can't, that the Chinese economic policies that hurt other countries and other economies need to be addressed. I think that's the very broad brush approach, but that's at the 10,000 foot level. I think what you're talking about is the kind of 5,000, 1,000 or 10 foot level. No, I think that that still has to be spelled out. Phil Levy: You could have said that with the Trump administration to be fair too, right? Have kind of not hurt other countries in play by the rules. James Green: That's right. Phil Levy: It just begged the question of what rules. James Green: Right, and who's being heard exactly. Phil Levy: Exactly. James Green: So I think in Beijing they were pleasantly surprised that they survived the trade war, and I don't use the word trade war generally because I think it's a silly concept, it doesn't have any meaning. But in this case, it's the, I'm using it to say, I think the Chinese government felt like they were being attacked. And actually, I think what they realized was actually we have some pretty good tools to deal with this and our economy didn't collapse and like exporting was fine. And in the overall macro sense, like it was okay. So, I think frankly in some ways it gave the leadership a boost of like, hey, we can deal with these guys. Like the previous administration did things we didn't like, but all right, we're still here. And I think what you notice is Xi Jinping who skipped the G20 meeting and the Glasgow Climate Summit. He's focused on the upcoming party Congress because that's what he cares about. He doesn't care so much about what the, how things are happening internationally. And so I think it regarding US China trade relations it will be a, yes we'll talk to you, we'll sit down with you. I think Katherine Tai will meet with her counterpart Liu He the vice premier who handles these things, who's close to the president Xi Jinping. And there will be discussions, but I have a hard time seeing that there's going to be breakthroughs or to Chris point that there'll be phase two, or a phase three, or that somehow this will form the basis for future negotiations. And I think a lot of it is where the Chinese government feels like they are, that is, they survive the last couple of years, it seem to be okay. They're focused on the dual circulation economy to dual circulation strategy. And interaction with the US is important, particularly attracting US foreign direct investment, particularly in the high-tech sector. But I think they'll also realize there are going to be restrictions on what's going to happen. So they're going to make policies that won't be relying on certain trade negotiations with the United States. Phil Levy: Do you want to say a word since you raised it on what dual circulation is and is this, should we see this as a de emphasis on trade? James Green: I don't think so. I think part of it is Marxism–Leninism Mao Zedong thought that need for a catchphrase. And, but that doesn't mean it should be dismissed. I think when we talk about in the US we have catchphrases too a lockbox of social security, wasn't that Al gore, I mean we use catchphrases as well as a way to build momentum and it doesn't necessarily mean a whole lot what you say it, but it encompasses some other things. I think the dual circulation economy approach is that there's going to be the two circulations are internal and external. And the focus is really going to be on internal, but that doesn't mean external is meaningless or doesn't matter. And the focus on internal is both a quantity and more importantly quality. That is all the kind of environmental accesses that are in China or the degradation of the environment or different parts of building up the Chinese infrastructure domestically. Those are, that should be the focus of the communist party and the Chinese government. It's kind of hard to argue with that approach, you shouldn't be building up your domestic economy, it shouldn't be any good. So, I do think the focus will be on kind of right-sizing some of the challenges in the Chinese domestic economy, again, but not ignoring the part that the foreign economy place. Phil Levy: So I was intrigued by your characterization that, of the Chinese conclusion that, well we had a trade war, we had this bilateral conflict with the US and it's actually wasn't so bad, we did alright with the whole thing. I think actually, let's do a slide, we have a data slide here for a second, which is running. There we go. Chris, you wanna tell us what this is?

Real GDP Growth

Chris Rogers: Yeah sure. So, this is basically Real GDP Growth, go to those nice folks at the OACD. The last data point in each of these lines is the OACD forecast for 2021 and 2022. You can see it at China's kind of steadily slowing over time, lower of large numbers. Perhaps also James, as you mentioned to focus on quality over quantity of growth, obviously some of the headaches in the property sector at moment in around debt and so on is maybe some of the early rapid growth chickens coming home to roost, play a big bounce up and down because of the pandemic. But we all looking at this kind of 6% growth going forward. I think the dynamics of that growth is important as well, because obviously China's growth going forward has to come from improved factor productivity. I won't tread on the chief economists toes when it comes to decomposing GDP growth, but clearly technology matters because that's where China's growth is got to come through going forward. It's not going to come from more workers. It might not come from more investment, although China doesn't want to incentivize that more outside investment. It's got to come from fact productivity and from a technology. But of course the other thing to bear in mind is the Biden administration is going to have an eye on growth as well. It's the administration we are talking about differentiating the current and previous administration. Biden's very much focused on jobs, jobs, jobs, when it comes to trade policy. Clearly every president wants more employment on their watch, but I think the Biden administration made a lot more clear the, any trade deals that are signed, whether that's a phase two or rejoining things like CPTPP or other trade deals, it's all about labor. And so that consideration on the one hand from Biden is how do we get labor back to work in trade deals, and on China's side, how do we ensure access to technology? Might lead to some conversations at cross purposes, but anyway, that's what this chart is showing you. Phil Levy: Yeah. So that's great. And one of the things I want to, and the reason I wanted to bring this in at this particular moment is, to come back to James's point which is, if you look at this, and I'm not sure whether this is what China's looking at, because there's some question about just how one interprets Chinese GDP numbers. But, it certainly does seem to show slowing growth. We can have discussions as to why. But there's a question there, which is, is that a concern, and do they think that international commercial relations are an important determinant? James Green: Yeah. I wonder if I could just follow up on that. I mean. Phil Levy: Please. James Green: I think they do, as I said, for the dual circulation part the international is not ignored. I think they feel like with conclusion of the Regional Comprehensive Economic Partnership with 14 other regional economies. And with the extension of some free trade agreements, I think they feel like they've kind of outflanked the United States on the trade front. And we here in the US focused on US China trade conflict and, oh my gosh, and the Chinese had said, all right well why don't we kind of see what we can do with the region or figure out how to make our belt and road project work better. Of course they've also gotten into tiffs with Australia and other countries so it's not like the US is the only country that's had a challenging trade relationship with China. But I think from the kind of Chinese leadership's point of view, there are these other levers that they can deal with and they had signed this investment agreement with the Europeans that you'll remember at the end of last year despite the fact that the incoming national security advisor asked the Europeans not to conclude it, and the Europeans concluded it anyway. And so, I think from the Chinese point of view, they felt like, alright, we have these other options, if US is kind of a challenge trade wise, we're going to start dealing with other trading partners and that's going to work for us. And then when the European trade deal blew up, because China investment deal, because China put sanctions on European members of parliament. I think the Chinese government just walked away and say, well Europe, you want this more than we do, so you need to come back to us if you want this. So maybe a little bit of a push pull or a passive aggressive negotiating behavior. But I think the Chinese feel like they have options. Phil Levy: Right. So as we have at least three potential positions here, one is you don't care about trade stuff. Two, you decide you're okay as long as it's pretty much a conflict with the US but you can get the rest of the world on side. Three, you might be significantly more concerned if it's actually something of United front, which is, as you mentioned, that is one of the discernible characteristics of the new Biden approach, which is a serious effort for coordination. Is that fair? James Green: Yeah. I thinks that's right, and I think if you see a political level where Beijing has hit out the most, it is this ganging up of countries that it feels particularly persecuted by. So, for Australia there were a bunch of sins that the Australian government made in Beijing's eyes, but probably the worst one was calling for an investigation or reinvestigation of the COVID outbreak. And so, it was not just kind of one country saying it, it was a bunch of countries. So the US said it’s fine, Beijing expects that. But when these other countries get on board, then I think that's really unfortunate from Beijing's point of view. And so for the trade technology council for, I think what Beijing, I don't want to say fears, but I think what the Chinese leadership would like to head off is, too much of a condominium between the US and Europe say, or the US and major trading partners of China say, Japan and Korea. And so, Secretary of Commerce Raimondo and then Trade Secretary Katherine's Tai are going to the Asia Pacific this week and next week I guess, and the week after. And I think probably what Beijing will watch closely is, is there any legs to this idea of a Asia Pacific or Indo Pacific digital trade agreement. And I think those are the things that catch Beijing's eye of, are we getting excluded from something? Are there some rules that are going to be put in place? And so, on that China announced a couple of weeks ago now that they were interested in joining the TPP and the CPTPP. Phil Levy: Is that going to happen? __James Green:__What's that? Phil Levy: Is that going to happen, are they're gonna get in? James Green: No, probably not. Yeah. I mean, it depends what timeframe you use. I mean, I think, yes lots of things may happen. I think if you use a 10 year timeframe, sure. I think from the, I was, when we were negotiating an investment trade with the Chinese, I remember they asked us for a different things that were in the TPP text. And in fact after the TPP was negotiated, I remember Mike Froman, who was the USTR. I got a big congratulations from the vice premier and said, Hey, congratulations on doing that. So, there's been interest on the Chinese side at a kind of tactical level to it on the language that's in there. And I think the Chinese view is, hey, Vietnam is in, we can get in. Like there's no reason why we can't do this. And I think they probably feel like, if there's political will on the part of Japan, and Canada, and Australia, then in essence, whatever we negotiate with those three we'll be able to get in. And so, they're probably confident in their own negotiating leverage, but also at some point, yes, many of the obligations in there are ones that they feel like they could take on. But to my point earlier about trying to triangulate and not be cornered in by Washington, I think they saw that as like, aha, Washington, you walked away from this, here's we're putting the finger in your eye. We're going to try it. Phil Levy: All right, we're gonna, before we conclude with What Comes Next, we're going to go to our audience one more time. Let's do another poll. And we're going to ask, looking forward and focusing in particular on the tariffs, focusing on the broad range of tariffs, but especially on the 301 tariffs that Chris showed the red line going up in this between the US and China, do you expect, here’s your choices. They'll be gone in ‘22. They'll recede, but more slowly than that. Things are going to kind of keep going the way they have been that we're going to have ongoing tensions and tariffs or, no things can actually get worse, so we have not bottomed out yet. So I'm going to register my vote here. Alright and let's see where everybody is. All right. So I jumped in with tensions and tariffs continue. That seems to at least be the actually the majority view at this point. James, do you want to dissent or take a different view? James Green: Yeah, I had chosen, they'll recede, but slowly. I think if you look at part of what Katherine Tai said in her speech about the exclusion process, I think tariffs probably won't increase and the extended, the exclusion process will be broadened out, so that the actual impact of the tariffs will be less and less front and center. So not exactly receding, but maybe less hurtful for importers and exporters. Phil Levy: Interesting. I'm going to come back on the exclusion in a second. Chris, where do you stand on this one? Chris Rogers: I think things are gonna get worse, that's partly because I'm British and it's starting to be winter, so I'm kind of gloomy about everything. But what I would say is the, one of the things Ambassador Tai talked about in her speech was, looking at new tools and there there's been plenty of discussion about whether it be a new section 301 review of China's practices with regards to supporting state-owned enterprises. And on the assumption, there isn't a big change in Chinese behavior. The existing tariffs could remain in place. Yes they may come down a bit because of exclusions and so on. I know we've had a couple of questions about those from new audience. But if there's a new block of tariffs out there, then as part of a new section 301 or whatever that becomes, I'd almost see the weight to probability as things getting worse rather than better from where they are. Phil Levy: Well, James has carry a veiled question to you of what are the prospects of say, new 301 and things getting worse that way. James Green: It's hard to be gloomy, I'm sitting here in the east bay, the sun is shining, it's really wonderful. It's really hard to get to that place, but let me, I’m just thinking. Phil Levy: Don't know where you stand is where you sit. James Green: Literally under the sunshine. Phil Levy: Give me logical version. __James Green:__Yeah. Graham Ellison, thank you. I do think that's a possibility Chris that the administration will particularly in the run up to a presidential election decide, Hey, this is something we really need to do. I think there's broad agreement internationally that China subsidizes parts of its economy and that those subsidies lead to exports and surplus in a number of different sectors, whether or not it's a steel and aluminum or solar panels or potential these semiconductors going forward right. I think that the challenge will be for a Biden administration that is trying to kind of reenter the global commons and global norms to go back to using a tool that is unilateral and outside the rules of the WTO. I'm not saying it's impossible, but I think that's their struggle with right.

So I think it's a possibility, I mean if you looked politically at how successful were the China tariffs for the Trump administration, you could argue, well actually it didn't really help them. You could also argue that it was a political boon as you could kind of keep them going and keep the focus on another country. And so, I'm not a spin doctor, so I can't say definitively like where you would come out, I haven't seen a polling data. But I think it's a possibility, I just think it's a lower possibility in this administration than in the previous one. Phil Levy: I want to conclude, and we'll just hang of a speed round here, since we don't have a lot of time. But James, I want to put two political economy questions to you at the end to help shape where we're going with all this. One of the, I'm going to do both at once, you can allocate your time accordingly. One of them is, there used to be a constituency and say the business community for better commercial relations with China. Do you think there still is, or do you think one will revive used to work with the American chamber of commerce in Shanghai? So that's one, and the other we've mentioned that a number of points that the Chinese might be concerned if you actually got a condominium a good working relations with Europe, do you think it's likely that the US and say Japan and Europe will be able to agree on a common approach towards China. You've got two minutes James Green: On the first one I think the consensus has fractured among the business community. And now you have certainly a lot of US companies that are in China and they're doing well in China, but there are also ones who aren't in China or they're partially in China, partially not. And so I think getting a unified business community approach is probably going to be quite difficult. And so I think that's going to make the political economy of it hard. On the, sorry the second question? Phil Levy: Is the, we would like to have a common approach towards China with, say the quad countries. Is that actually going to happen? Do we see things the same way? James Green: I think it's difficult. I think in some areas, particularly digital areas possible. I think areas of subsidies extremely hard given where the Europeans are and we are, so I think it's gonna be subject dependent. And I think the Chinese government will do its utmost to try to undermine some of that with either sweetheart market access deals or trade arrangements or high profile political events. And that's what a leader level they're going to spend a lot of time trying to head off. Phil Levy: Okay, well, thank you very much. Thank you to both of you. Chris, thanks for the insights and all the numbers. Thank you James for your wealth of experience and helping us figure out where we've come from and where we're going. Thank you to the audience for joining us. Let me close by noting that an on-demand version of this webinar will be available shortly after our impending conclusion, and it could be accessed using the same audience link that was sent to you earlier. Please do remember to save your spot for the next logistics rewired webinar. A link to register is in the chat box. So once again, thank you for being with us and please stay safe.