Cornell University Professor Eswar Prasad appeared on Market Domination to share his thoughts on the possibility of higher tariffs on China by the US and what a trade war between the US and China might look like. Both President Biden and former President Trump have supported tariffs, with the latter calling for even higher import taxes.
Prasad, a senior fellow at the Brookings Institution, elaborated on China’s current situation:
“I think at this point there is a threshold that is very hard to fall below. I mean, it’s hard to ease tensions in the U.S. because there’s very little political or economic benefit to doing that. But the reality is that if you restrict imports from China, it has the effect of impacting U.S. inflation and limiting access to many of the products that China now sells on a very large scale. China has the manufacturing capacity of most of the world. Now China can’t afford to completely lose access to the U.S. and other Western markets…”
For more expert insights and the latest market trends, click here to watch this entire episode of Market Domination.
This post Nicholas Jacobino
Video Transcript
president.
Of course, Biden and former President Trump disagree on most things, but there is at least one topic they share.
They can find common ground on tariffs.
In 2018, President Trump began imposing heavy tariffs on many Chinese products and kept many of them in place after Biden took over the White House.
President Trump has promised even tougher tariffs if elected to a second term.
Now we’re joined by Ishwar Prasad, professor at Cornell University and author of “The Future of Money.”
How the digital revolution is transforming money and finance.
Ishwar.
Nice to meet you. As I said, the election and tariffs are top priorities for Biden and Trump.
Well, was there a different approach?
But both countries have accepted the tariffs.
I’m just interested in where the war begins.
When you think about tariffs, do you think they’re a wise and effective policy?
I just returned from a visit to China, and I can say that the Chinese government is certainly preparing for a situation in which it will have to deal with tariffs under a second Biden administration or another Democratic administration, and also under a Trump administration.
But there has been a change in tactics and strategy, and a Trump presidency would likely result in significantly higher tariffs.
But the Biden administration has actually been pretty effective in terms of limiting technology transfer, limiting access to semiconductors, which are very important to China right now, because China is basically looking to move up the value-added chain, to upgrade in the technology sector.
But the reality China now faces is that its recent recovery has been led by production, not consumption, and China needs export markets.
So I think tariffs will come from the US and possibly from other Chinese trading partners as well.
So I’m interested to the extent that you can, what can you tell us about the sentiment of Chinese officials at this point toward the United States, and what exactly could U.S.-China relations be like over the next few years as we see a continued increase in tariffs?
I think there is a very difficult threshold to fall below at this point, which means that it is going to be difficult to ease tensions in the United States because there is very little political or economic benefit to be gained from easing them.
But the reality is, of course, restricting imports from China will have an impact on U.S. inflation.
This will certainly have an impact in terms of restricting access to many of the products that China currently sells on a very large scale in a region that represents a large proportion of global manufacturing capacity.
China can no longer afford to completely lose access to the US and other Western markets.
As I just said, exports are the engine of growth and we certainly need export markets, at least in the short term, and we also need foreign technology.
So they try to be as kind as possible and limit their retaliation to what they consider to be a deserved retaliation.
However, I don’t see relations between the two countries improving much in the next few years.
And as you said, you just came back from China.
Regarding the Chinese economy and the EU, I would like to know not only the current situation, but also what you think the situation will be like in six to twelve months’ time.
Because we’ve spoken to a lot of investors and asset managers, and there’s clearly a lot of skepticism.
The challenges facing China today are both cyclical and structural.
As I said earlier, what China has been able to achieve is what a controlled economy is good at: stimulating production.
So what they’ve been doing in recent years is trying to increase credit to parts of the economy they’ve traditionally relied on, which are the large state-owned enterprises.
The problem is that they are not very effective at generating job growth, and more importantly, the Chinese government is in trouble.
right now.
There are a lot of underlying structural issues, a weak financial system, weak demographics, and an overall sense of economic stagnation.
And I think both Chinese households and private businesses feel that the government doesn’t have a clear policy strategy, both in terms of promoting short-term growth and in terms of addressing these longer-term issues.
Private businesses feel that the government has become more hostile, household consumption and private investment are not doing so well, and that is creating real imbalances in the Chinese economy.
If consumption remains weak and private investment does not recover, employment and productivity growth will be more difficult to sustain.
Therefore, the Chinese economy will face difficult times in both the short and medium term.
Going back to what you said earlier about inflation, you said we could see inflationary pressures as a result of the tariffs.
Could you elaborate a bit more on that here?
What will the net impact be if President Trump imposes a blanket 10% tariff, as he has hinted at in several interviews, or if he raises tariffs specifically on Chinese products up to 60%?
What do you think the potential impacts could be for the American people and then globally?
So there are two elements here.
One, of course, is the direct effect on inflation.
If you think about the low-skill, low-wage manufacturing that China excels at, there are attempts to find other countries from which the U.S. can import, but no country can supply them on a large scale.
But China is also a very important part of the global supply chain for a variety of other products, including electronics, solar panels, and other products that are critical to the U.S. green transition.
So in both of these cases, the fact that tariffs are rising in China while the US is building up domestic capacity or looking for alternative sources of supply will almost certainly impact US prices.
But the underlying fact here is that China is looking to enter those industries.
I think of those as new technology industries, green energy, electric vehicles, etc. These are exactly the industries that America is counting on to revive its manufacturing industry.
So I think that’s a structural issue in this relationship right now.
Economic relations were once thought to be a positive-sum game.
But it’s increasingly being seen as a zero-sum game between the two countries, given that both countries currently rely on the exact same types of industries for their manufacturing futures, and this is a really interesting conversation to have.
Thank you so much for helping us get through it.
Have a wonderful April!
thank you.
you too.
