Trump Has Caught the Attention of China Policymakers
Kevin Rudd interviewed by Bloomberg Markets
Following is the transcript of a television interview that Kevin Rudd gave to Bloomberg Markets.
Blomberg Markets: The Chinese reaction to this imposition of 10 percent tariffs, so far, on $200 billion of imports from China. We heard from the Premier Li Keqiang – you’ll say it better because you’re fluent in Mandarin.
Kevin Rudd: You’re doing well, David.
Bloomberg: Overnight, he said that they didn’t want to weaponize the yuan. Listen to what he had to say:
"China will never go down the path of stimulating exports by devaluating its currency."
Now you would never question someone’s honesty, but do you believe him? In this sense, he may mean it right now, but how long can they really stick with that?
Rudd: Well I think if you look at what’s happened to the yuan in the last six months, its valuation against the U.S. dollar and on the crossroads has come down, but not to the extent that it fully compensates for the additional impact on the cost of Chinese goods on the market as a result of U.S. tariff increases. But it will remain effectively — not declared — as an element of Chinese, as it were, policy arsenal, quite apart from the retaliatory measures being used against the United States through the Chinese countermeasures announced in the last 24 hours.
Bloomberg: Is another possible option to reduce the purchase of U.S. treasuries? Because we’ve noticed their holdings in U.S. treasuries this last month went down. Some people say that might’ve been in response to this. Some people say it has nothing to do with that. What’s your impression, knowing China so well?
Rudd: Look, my attitude to Chinese holdings in U.S. treasuries is China will never do anything contrary to its essential interests. China has an interest, therefore, in making sure that their formidable investment in U.S. treasuries — which I think is somewhere between one and two trillion — remains robust in its value. No point in actually exiting out the back door, and sending a signal to marketplaces that these things may not be as valuable holdings in the future. That hurts yourself. So I don’t think that’s part of the policy arsenal at this stage. What you’ve seen with Chinese holdings of U.S. treasuries is more of a long-term strategic hedge by diversifying their investment in, let’s call it, harder sovereign securities, across the world over time, to be less, as it were, dollar-centric in everything that they’ve got. But I don’t think it’s part of the policy arsenal to deal with this immediate challenge which presents itself through the trade war.
Bloomberg: So you’ve said, and it makes perfect sense, China’s going to act in its own best interests.
Rudd: Yup: first, second, and third.
Bloomberg: There you have it. Is the United States acting, in your opinion, in U.S. companies’ best interests right now? I had a discussion with Kevin Hassett just this morning from the White House, and said you know, the United States companies came and really objected to those tariffs coming in, and they put them on anyway. The U.S.-China Business Council has come up with a survey of its members. We’ll show some of the numbers here. Seventy-three percent of its members doing business in China really think that this is a problem for them.
Rudd: Well, I think in terms of China’s retaliatory measures, it is. But that of course will affect the relative access to the Chinese market of American goods — and in time, frankly, services. But it also, at a deeper level, poisons relationships. If you’re doing business on the ground in Beijing, Shanghai, Chengdu, Xian — cities I’ve been to in the last several weeks, for example — it does have a carry-over effect, as people in Chinese corporations get the sense that it’s problematic to be in long-term business relations with American firms. Because politics is now coming in over the top of everything. So to answer your question, are the current measures employed by the U.S. administration — are they in the best interests of American firms? It depends which sector you’re in and which industry you are located in. To give President Trump his due, I would simply say this: He has certainly caught the attention of Chinese policymakers big time. To begin with, they thought it was all bluff and bluster. Then we had the first tranche of 35 million, then the second tranche of another $15 billion to $16 billion, I should say. And now, the third tranche of $200 billion. So there is a big debate in China now about how to land this thing — how to find a pragmatic outcome. But I think we’re a ways off yet. The big focus of the meeting of the Chinese leadership at the beach this summer in August was on the U.S.-China relationship, and specifically the trade war — how do we manage it?
Bloomberg: Well, and so the question in part for you as business, is how long will this go on? And part of that survey also indicated, as you said, it’s not just tariffs going into effect. It’s reduction in investment. It’s a problem with supply chains being disrupted. There’s a range of issues that can help U.S. companies. How long can we afford to have that pain, as a practical matter?
Rudd: I can’t speak on behalf of U.S. firms. That’s impertinent on my behalf. But what I can give you a sense of is where I think this thing goes in terms of resolution time tables. I think it’s highly unlikely we’re going to see any significant move to resolve this thing this side of the midterms, due on the sixth of November. There’s a reason for that on the Chinese side. They want to know: One, are they dealing with a stronger or weaker U.S. president? Two, what will be the shape of the Congress and its attitude to China? And three, will the president be making any key changes in his administration — key personnel decisions which affect the U.S.-China relationship? So the mood in Beijing is, let’s just hang back, and let’s just wait to see what happens. And secondly, the Chinese attitude is, we need to be confident that there is a unified position within the Administration, because in our attempts to resolve this so far — American delegations to Beijing, Chinese delegations to Washington — both have floundered at the end of the day because there was fundamental disagreement within the economic team in the White House as to what the final American, as it were, negotiating position is. So what’s my prediction? I don’t think we’re going to see substantial movement on the resolution of this until much closer to Christmas.
Bloomberg: What sort of larger effect, on global trade flows, is this likely to have? Will it actually reduce the growth in global trade which has been fairly consistent since World War II, frankly?
Rudd: If the measures now being embraced by China and the United States begin to affect, radically, global supply chains, then it is potentially disruptive. Often the United States — it’s judged, for example, that China has a limited policy arsenal for a very simple, practical reason. China currently exports $500 billion per year to the United States. The United States currently exports about $140 billion, $150 billion, to China. Therefore, whatever measures the Chinese impose on American exports is not going to match, quantitatively, the impact that American measures on Chinese exports to the United States. But here’s the run. If the Chinese get backed further into a corner, one of the measures in the Chinese policy toolkit is for China to begin considering the taxation of, shall we say, American componentry in the global supply chain before that final good lands in the Chinese market. Now, if that was the case — and they imposed 10 or 25 percent on that, but then signaled to other global suppliers that we’re going to give you six to 12 months to alternatively source that — that not only punishes America on a much bigger scale, but then begins to really slow global trade.
Bloomberg:And take a longer term view, because you just recently wrote an op-ed in The New York Times, and the question really for me is to what extent could we fundamentally change relations between the United States and China, but also with other trading partners around the world? One of the things you said is, "as Western democracies look increasingly sick, other systems of governance are now on offer … China has become increasingly confident in its own model, described as authoritarian or state capitalism. And its ‘Beijing consensus’ is held up to the non-Western world as an example of a more effective form of national, and even international, governance." What is the risk that, in fact, trade relations will be fundamentally shifted for a generation, and in fact, people will turn to other places to do their business rather than the United States?
Rudd: Well, I think we are at strategic turning points. When the history of this period’s written, mark 2018 in your diary. It’s not just China’s rise. It is now American countermeasures, and I think the administration has represented real American sentiment in taking the posture that it’s taken. But we’re now seeing a deep parting in the ways — not just on trade relations, not just on investment relations, where you’ve seen a radical slowing between the two — but also in the declared and undeclared war in high technology, which is now unfolding. So the period of strategic engagement between the U.S. and China is yielding to this new period of strategic competition. What happens in the rest of the world? They begin to hedge. They begin to look at other ways in which they can carve out their future.