In our latest podcast, our team discusses the implications on Europe of US tariffs, under a Trump presidency, and of China's accelerating push into manufacturing.
The Eurointelligence Podcast
Geopolitics is intruding
Welcome to the Euro Intelligence Podcast. I'm Wolfgang Munschere and with me, Arzazana Munshank and Jack Smith. Today we're talking geopolitics. The United States has a new vice presidential candidate for the Republicans. We've had tumultuous events in the last few days after the attempted assassination of Donald Trump. The polls have shifted in his favor. The whole mood has shifted. We don't know whether this persists, but it's certainly in a different situation than we were a month ago before the debate between Biden and Trump. And this raises some serious questions about the EU's position in the world. The EU has also shifted its policy on China. We have introduced trade tariffs on cars, or we are in the process of doing this. This is a consultative process. There are sort of shifts going on. We don't often get the sense that these shifts are particularly reflected in EU policy debates, which tend to be more focused internally. Let me start with my thoughts on what happened in the United States at the Republican Convention and why we think it's important for Europe in particular. The program of the Republicans is not particularly different. It's shorter than it used to be. It's less precise. It gives the president more freedom. It is full of language, of Trumpian language. Interestingly, it focuses on inflation as its first point, which we think is probably quite an intelligent thing to do, because this is sort of where popular opinion about the economy is. Most of odds with official thinking economists, the way economists talk about the economy and write about the economy. We think this has traction. We think this has political traction, because for most people feel whether irrational or irrational, I think there's a combination of the two that they feel was off because of inflation, and that this really impacts their perception of the economy. So the fact that GDP and productivity growth have risen is not impressive. Just as it wasn't in the UK in 2016, when the UK had a good run of GDP growth figures over a number of years, and yet disposable income for most parts of the population had been negative, and these factors sort of personalized economic news tend to matter. What I thought was particularly important or interesting, or from a European perspective, alarming. It's the appointment of J.D. Vance as the vice president. He's a senator from Ohio. He started off as an anti-Trumpian, but then turned towards Trump during his presidency. He is a very, very strong opponent to US support for Ukraine. He embodies a view on the economy that is becoming increasingly common in the United States, but is virtually unheard of in Europe, which is a pro-small business and anti-large business. He is a darling of California, of Silicon Valley. He's a friend of Peter Thiel, who supports him, who has also supported his campaign, and who clearly also supported, or still supporting Trump. He's hated by Wall Street, hated by large corporate America. He's a strong defender of very strong antitrust action. He actually commended the Biden administration for taking action against tech giants. That's sort of his kind of spiel that he favors, but in particular, he's in favor of the trade tariffs. That's something that concerns us in Europe. Trump appointed somebody who doubles down on a lot of these policies that are quite problematic for us Europeans, both in foreign policy and on an economic policy. The appointment of Vance is clearly indicative that Trump means business in these areas, and that another appointee, while Trump would probably still stuck with those policies, but another appointee would have signaled that this may not be a priority as much as it is now. The way I see this as Trump is now softening his language, especially after the assassination attempt, he is now playing the unifier of the country, which is a completely implausible role. I don't think this will work. But it is something that will be interesting to watch to see whether this will actually have traction with the American people. But whether or not it has traction, what is very clear from this is that the agenda that Trump is prepared for this agenda and that the EU that we should take him at face value at what he says as a likely consequence. In our coverage this morning, we called on the EU to actually come up with an idea, come up with a plan. In fact, I believe that MPs, MEPs have the right to know before they vote for also the founder line on Thursday. They have a right to know what her plans on this point is, whether she has an agenda or she worked with Trump in her first year and a half in office. The relationship was reasonably professional, but it was also clear at that time that the EU was mostly focused on, oh, let this book be over soon, and soon we'll have a democratic presidency, and the EU was very much betting on a change of government. Now that bet came off, but now with Trump back, this is a different situation, especially now with a more serious policy agenda. So my hope would be that there is some kind of a response. I'm not particularly hopeful given the national preoccupations we have in our member states, in France and Germany, where everybody is doing their own sort of spiel and not really focused on the really big issues at the moment. We've seen this, I mean, this is natural after an election or in an election that everybody's focused domestically. But in France, this is now continuing because the election came up with an inconclusive result, and Germany is still, even though there is no election, there is no excuse, but Germany debate is mostly about very narrow domestic issues. So I'm not hopeful that the EU will take, will rise to the challenge. The worst thing they can do, and as is where I will pause now, the worst thing they will do is simply emulate what Trump did. So try to out Trump Trump by also doing the same policies because the EU, unlike the United States, we are a continental power, we are not protected by oceans to the left and the right. When we were not self-sufficient, we have a much higher share of foreign trade in our GDP. Both imports and exports, we are dependent on oil and gas, they're completely different. And I think importantly to the point that we're completely different, and this comes back to the point on trade fundamentally, the EU is not a country. We basically rely on a legal framework to hold the European Union together and to make sure that we can actually basically realize the benefits of the single market. And part of that means accepting basically a version of the rules-based trade order in our own domestic legislation in the EU. Following these rules and following the legal structure that we've laid out for ourselves is very important because in the absence of any overarching sovereign power in the EU, this is pretty much all there is. This is another difference in the sense that, for instance, if you looked at the action against China on electric cars, that was one where the European Commission really did stay within the letter of the law on that one as far as we can tell, or they certainly tried to. And again, that's important because it's not just part of international law. It's now a part of EU law too. So in a way, the EU is an internal reflection of the international legal system. It is indeed. I would have actually wished they had not done this with on the Chinese cars. I think there will be a trade war as a consequence, or if there is a, I think Jackie who wrote that the Chinese can actually afford to ignore this, and maybe that is the optimistic outcome. The problem that we have with the tariffs is that the extra protection it gives to European manufacturers will not be properly used. What the pink car industry badly needs for structuring. It doesn't need protection. It needs a jump. I think this will not be to the benefit of the EU with taxing, essentially taxing consumers. Yeah, it's worth thinking a little bit about what China itself did in order to kind of foster this EV market environment. In the sense that it is completely right to say that China had its own subsidies and it put up its own protective tariffs. But kind of behind that protective wall, what China was also doing was encouraging the entry of new market players and competition within the domestic market. I would almost say in spite of perhaps because of the subsidies and the protections that were afforded to it, the Chinese electric car market for quite a while was a bit of a bloodbath. Out of that, I think has emerged some very strong market players. So that's another difference. And then it's like, okay, well, you can talk in broad terms about tariffs or about subsidies, but then there's a question of how you actually think about competition's policy and industrial policy within your own internal market on the back of that. The unfortunate event is also that we are in a situation not only talking about tariffs, but also not having the capacities to invest largely into the restructuring. We have far in the third indebted country with a huge car industry, also where the private sector is the most indebted, I think, among the European countries. Also, you have a political instability in this country, which makes any investment a much bigger gamble of what you can achieve within the international borders. The question whether or not you want to stay in France, or go somewhere else is a question that will be undermined, depending on how the sole political crisis there will pan out. And also what it means for other European countries. We have Germany coming up next with the elections. There also is a political blockage. On the one hand, the debt break and not having the capacities to invest massively in infrastructures and projects that actually do matter for these huge shifts. If you think about industrial reorganization, supply change that always comes with a big affair share for public investment. If there's no money for that, that makes it very difficult for companies to do the burden. It's also just worth saying that the problem goes beyond, I think we all spend a lot of time talking about public debt within the euro area and rightly so. But I think it's important to point out that this problem goes beyond public debt. And you have to think about these debt-related issues in the context of the wider picture of economic growth, the monetary system, overall the state of the overall financial sector, the state of overall debt, whether it's public or private and so on. And I say this because it's within this context that this issue exists. For instance, if you look again at China, nobody talks about the Chinese debt-to-GDP ratio, which is actually substantially higher than that of any European country. So it doesn't growth. Yeah, exactly. We'll talk about China's growth a little bit later in the podcast, but China's debt-to-GDP ratio in 2023 was close to 288%. Again, it's not something we talk about, but you're still talking about a relatively fast-growing economy. And you're talking about a completely different model of government financials and monetary system and so on and so forth. The debt-to-GDP ratio is a metric that only makes sense in comparing, if you've compared this comparable countries. Now, you can compare Germany's and French, for example, but we all low growth countries. And that is the reality. When German potential growth economies talk about half a percent, Italy's potential growth is close to zero. The French potential growth is generally put higher because France had sort of outgrown Germany by a little. I'm not sure this is still the case. And I would assume that all these trade tariffs that we see from the United States will also affect France, because it will ultimately affect the economy. I know France has people still eat cheese and drink wine and eat great French food and go to France on holidays. This is a big sector in France. But I'm not sure that French, if you think about the actual kind of balance sheet, the biggest net addition to French balance sheets from the US is actually American tourists. Indeed. But if your relations with Europe become worse, then there will be few American tourists coming. This is a... Or for that matter, if the dollar ends up being devalued, which is something that JD Vance has also talked about. Indeed. And this is what they want. I mean, this is always the big trade policy is the dollar. The 10% tariff, if alone, wouldn't be the issue, but it will be a dollar devaluation. And if governments wanted, they get it. Revaluation is harder. For most countries, a devaluation, you can steer. As long as you can manipulate the monetary, the policy of the Fed. That is something that Trump is... That is not even necessary. I mean, with the Japanese yen at the time in the 1990s, for example, there was no immediate direct interference with the Fed policies. But because they talked up about trade and in such a way that suggested a depreciation of the dollar in terms of trade policies, there was enough to depreciate against the yen. If you take it as a foreign policy instrument, and using trade policy to that effect to influence the exchange rate, that is possible. Of course, there are limits, but it is possible. I mean, the only country, the reason why also China, we don't have to talk about too much about that, is also because they have a constant tendency to actually appreciate. So if you always have foreign reserves coming in, it's easy for you because you will always have some money to pay off some debt if you choose to. Yeah, well, that's exactly the point I was making between this and the potential growth. We can consolidate budgets all we like, but we're still stuck in the structural situation that we're already in at the beginning. Which is why the European agenda should be growth based and it should be about creating conditions for growth, capital money. We've been talking about this endlessly, capital markets union. Sounds like a sort of a preacher's list, but in the end, these are always the same stories, the single market, extension to services, capital flows, and a creation of a genuine trans procurement market, where we could also generate some efficiencies and gains. There are an awful lot of things we can do, but not doing, because we stick to the model of European cooperation that we agreed and must reached and later reinforced in this one. We're basically doing all the same things as we always did, and that we have hit the limits of our growth model. I mean, Malcolm's idea was always forget about that growth will take care of it. Yeah. And that doesn't work. Anyway, I don't think it works. I mean, maybe I'm wrong. Maybe France will bounce back miraculously and with something I didn't see, maybe these tourists are coming back anyway. But it works for small countries. You also very much more agile on changing your industries. But then again, you have one or two companies that are dominated basically your GDP. And that's like Nokia. You have these big dependencies on a few companies that actually run your GDP, which is very healthy. It's kind of difficult if you're the size of like a larger European country in the sense that you're large and complex enough that it's very difficult to make sudden changes to your political system, society or economy. But at the same time, you're also still obviously smaller than the United States or China by an order of magnitude. And climate change obligers are a necessity in also our economic component of the implications of what it all means. If the whole economy has to shift structurally, its whole production process towards a more decarbonized way of producing decarbonized way of consuming. All these things have huge implications that have yet to actually trickle down the system and become sort of a second nature to us. Yes. And speaking of the long-term implications of decarbonization, I think that's an excellent opportunity to start talking about China. Indeed, Jack, you've written about China. What should we focus on? Almost in like a stereotypical mirror image, the big American political event this week is a series of campaign rallies. And the big Chinese event this week is a really, really long meeting. So for the uninitiated this week is the Chinese Communist Party's third plenum. So this is normally a meeting that the Chinese Communist Party holds once every five years. And at least for outside observers, its main significance is that it is supposed to set the kind of longer-term economic direction for the country. Now, I think a lot of the time in Europe when we talk about China, we kind of talk about how it impacts us as almost this kind of like weather event or something like that. It's just this big kind of external thing and we don't really fully understand what causes it. It just hits us and we're kind of powerless to deal with it. So it's worth talking a little bit more about the domestic political context that China, that economic context, more importantly, that China finds itself in, which is to say that lately, especially coming out of the pandemic, Chinese economic growth has been kind of underwhelming. As well, China faces as many of our listeners, I'm sure will be familiar with its face, the property crisis for quite a while. It's also faced a rather serious problem with local government debt. So as of 2022, local government debt in China was about 76% of the country's GDP and most of the country's public debt is in local government debt. So you can start to see the contours of this before this meeting. But what it seems like the CCP wants to do is try and engineer a bigger structural shift away from an economy that's really basically been boosted by lots of investment in the housing construction sector and a lot of local government infrastructure investment into something that they think will put the economy on a longer term, more sustainable footing. And for that, the big idea of this iteration of the Chinese Communist Party is what they have dubbed the new productive forces. Interesting in the sense that firstly, unlike maybe previous kind of tenants of the Chinese Communist Party in recent history, it uses some more explicitly the Marxist language. But also interesting in the idea that the Chinese Communist Party really has an ambition to shift itself to the technological frontier. The idea of new productive forces is to be a technological and manufacturing leader rather than a country that basically utilizes existing technology and methods very well. What a lot of this means for us is that China is taking a very strong leadership position in some of these more advanced manufacturing areas and may well continue to do so for the foreseeable future. The big one that's hit us lately, of course, is electric cars, where China is an increasingly large producer of electric cars. There is a very large domestic market in China for electric cars. There'll probably be somewhere around 50% of all new car sales by the end of this year in China, which is quite a staggering figure when you consider that in the context of us in Europe as well. Of course, what we're worried about is China exporting a bunch of cheap electric cars to Europe and decimating our car industry in the process, hence the tariffs. Of course, that success has been built on the back of China having a very strong battery industry and in certain areas being a kind of real leader in the development of new ways to produce batteries. An interesting aspect about China's very strong infrastructure support to manufacturing, but what makes this so dangerous, apart from the fact that we kind of monopolize that by particular sector in Europe, and now China's crowding in on oligopolies, reducing profit margins and growth, that is a big concern. But there's one reason to think why this is particularly dangerous for us. This comes together with Chinese telecom communications. The next generation of manufacturing technology will depend very critically on the technology that's known as 6G, which Europeans don't even have, except France, but we enjoy extremely good 5G signal. You've enjoyed 5G signal, but you're not going to get 6G because the Chinese are the only ones who know how to do this. And the Chinese 6G project starts this year and it has started and the plan is to finish this by 2030. Now, 6G, 5G allows us to watch movies on our smartphones. It produces multimedia in sort of real-time, high-quality experience, but 6G allows factories to operate. This is the stuff that allows machines to have sensors and you can optimize production processes in a way you cannot do now. Now, I know the Germans are onto this. This is a big deal for them. They also have plans for 6G and we have European planning networks and data centers and all this, so we're not going to sit completely still. But the Chinese being so far ahead in their telecommunication structure, because in order really to do this properly, I mean fiber optic is all fine, but you need a lot more. You need a very mature telecommunication and very stable telecommunication infrastructure in order to secure this. And that's where 6G comes in. So it's the combination of China's relentless technology drive and it's focused now and subsidies play a role. It's focused now on manufacturing that is such a big deal. It's not as though we Europeans don't subsidize. We subsidize everybody's subsidizes everybody. We have our indirect and non-tariff standards and, for example, the kindness through their loads and loads of non-tariff barriers. It's how the game is played. The Chinese subsidies tend to be a little bit more overt and therefore more prone to action on the WTO rules, but ultimately it would be hard to argue that we don't do this and they do. Everybody imposes barriers. What is a completely and absolutely kosher instance of somebody simply protecting their own consumer welfare standards could, from somebody else's perspective, be an unacceptable discriminatory non-tariff barrier. For instance, one of the best examples of this is the US crashworthiness standards for trains, where the US has extremely high safety standards for passenger trains and from one side's interpretation. That is just basically a way of ensuring passenger safety to the utmost. From another side's interpretation, it makes it very, very difficult to sell trains into the market without actually making them in America. These things are always a bit of a matter of interpretation. Getting back is a similar issue where you have a regulation that seems to be about the consumer and about the freedoms and rights, but it's ultimately about the protection of products because certain cars meet those products and when there's no speech limit, and we discussed this before, it's a very similar issue. We have these non-tariff barriers and everybody uses them, the Chinese use them as well. Getting back on to China, though, it's like, I think the interesting thing too, of course, is that this is very much not in the direction that a lot of Western economists suggested that China should go in, which is to say that there was, I think, and still is a prevalent view, at least in the West, that China would eventually drop into the middle income trap and that the Chinese government would need to boost domestic consumption in order to overcome that. The long and short of it would be that from a macroeconomic standpoint, China would need to start looking more like a Western developed country. This is kind of premised on the idea that we are in the old model of manufacturing, where it's all about a material world, but here we are in the land of unlimited options and the digital world, where things can happen without necessarily having to have the capacities built with long-term factories, and it's more about digital than infrastructure. Who knows how far they're going to take? I mean, if you talk about artificial intelligence, we Western, as we talk about language models, but they talk about production models for them. Yeah, they talk about production models. The important point is that it will be future historians who judge who was right and who was wrong in this big debate. I think there are important historians who will judge it, not economists. That's for sure. I would not trust Western economists, especially if they are aligned to our model and system as they all are, and to be a good judge of what happens to China. I mean, given the stakes we've made, Russia and I mean, people have been making monumental misjudgments in the last few years. I think they should pause and perhaps reflect on why this misjudgment happened, starting with a global financial crisis, Brexit, the Trump administration itself. There were a lot of predictions from very serious economists that would say that this would collapse. The economic record of Trump won wasn't particularly great, but it was also not particularly terrible. Biden record was good, but it doesn't mean that the next Trump record could be good or bad. It was Russia's defined expectations. We've been writing it, you know, it has this extensive broad inflation forecast, and how comically wrong they are. China is so different. It defies a lot of macro models, very American infrastructure. There's always the G, which is the government, that stabilizes the economy. For example, that doesn't apply to Europe, because we have like 27 Gs, and we don't have this sort of coordinated central planner. We don't have a capital market, so there are completely different different installations, and China doesn't have freedom, it doesn't have a liberalized capital account. They have different ways of dealing with crisis than we do, and they have different adjustment mechanisms. Also, I think the political economy side of it, so the relationship between the overall macroeconomic environment and the political system is quite different, and I don't think it takes a genius to see why a consumer-oriented economy might be a problem if you're running an authoritarian political system. Absolutely. We would not be able to do what they did to the shift, so there's a lot of what we call financial repression going on in China. Interest rates are held artificially low, save us getting really a bad deal in China, that can happen without unity, and no governments have to fear they've been evicted. Yeah, they don't fear being voted out of office. Even the third plenum of the Communist Party will not shift this, but I agree with you that these are important events, these five yearly strategic, all the big shifts in China, China's economic development in the last 30 years were usually pressed by these sorts of events, and the emphasis is that these are really a long-term shift. In the sense that when China first began this kind of transformative process about 40 odd years ago, this was quite telegraphed and organized over a longer period of time, and now we're moving into a new phase of the Chinese economy, and that's also been telegraphed and again thought through and developed over a longer period of time as well. I think it's interesting what you said. It just shows the difference so much because we are in this short-termism thinking and reaction mode, often stuck in there because we have governments can be out of office. We have budget decisions every year coming up. We have plans, we have fiscal plans, but we also have the deviations from it and then how to manage that. But this kind of consultation periods that the Chinese do, and then trying to stick to that long-term vision, looking back of how they carefully planned out their dominance on battery markets, how they actually brought into the mining, into infrastructure projects, just to make sure that they have access to all these ingredients and raw materials, they were always playing it in a long-term. Our time frame was short to medium-term, but not with this long-term determination, slow-determination as the Chinese have demonstrated. The battery thing, especially, that was a very big miss on our part because for a very long time we'd acknowledge that climate change was a very serious issue and that we would need to decarbonize. I think for quite a few areas, like heating and road transportation, it should have been obvious that the existing technology that we had to achieve that was not going to cut it and that we were going to need to develop different forms of technology, like electric cars. Rather than actually kind of thinking about how we would do that seriously and putting the right policies in place, we basically kind of messed about for a while. Now, I don't want to say that it's too late because it's always difficult to predict the future like that, but in these areas, China just has almost such an overwhelming head start. I remember in 2019, then the German economics minister, Peter Altmaier, to his horror discovered that the value added in electric cars no longer the engine, but the battery and that Europeans and the Germans, particularly have no skin in the game in this market, and they basically realized, "Oh my god, this is actually not working anymore." Until then, it was like a future they didn't have to worry about it. Anyway, it's not going to happen the way everyone is predicting and there was a lot of complacency, but this very foreseeable change, this was not like a science sci-fi particular issue. They didn't wake up until about 2019-2020. At that point, the Chinese had been at it for like a decade, especially in the car, in the car, in the car segment, that took a long time to do this. How do we get out of this mess? Obviously, we can talk in the podcast and go on for a very long time, but we should probably discuss this at some point and have a more constructive view on your Phoenix on this. Yeah, exactly, on how we get out of this mess, but I do think that we're already running to 30 minutes on this, so how we get out of this mess is going to have to come for another podcast. Thank you for listening. Until next week.