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So Donald Trump and Xi Jinping 
are meeting in Beijing this 

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week. 
And if the footage is anything 

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like prior summits, will be 
treated to two men in suits 

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walking very slowly through a 
building, shaking hands at a 

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slightly uncomfortable distance 
and staring at each other like 

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two people who've been set up on
a blind date by a mutual friend 

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who has since left the country. 
Now to recap how we got here, 

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because it has been quite a 
journey. 

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Last year. 
Tariffs between the the United 

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States and China hit levels that
hadn't been seen since the 

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1930's. the US put tariffs of up
to 145% on Chinese goods. 

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China retaliated with tariffs of
125% on American goods. 

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And then, just to keep things 
interesting, restricted exports 

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of rarer minerals which are used
in basically everything from 

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vacuum cleaners to fighter jets,
but mostly vacuum cleaners. 

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This went on for a while, and 
then both sides appeared to 

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quietly realize that they were 
running out of things to put 

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tariffs on. 
So they agreed to a 90 day 

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truce, which is the one 
currently in effect and which 

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expires in November. 
Now, expectations for this 

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summit are, to put it 
generously, modest. 

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The press have taken to calling 
it the Beans and Bowing Summit, 

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which tells you something about 
the level of ambition. 

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Both leaders arrive at this 
summit under considerable 

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domestic stress, but for very 
different reasons. 

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China is dealing with a property
sector that has been falling for

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years and shows no real signs of
stopping, youth unemployment 

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that the government briefly 
dealt with by not publishing the

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numbers anymore, and a 
demographic decline that no 

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amount of government 
encouragement seems to be 

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fixing. the US president is 
dealing with the inflationary 

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consequences of his own 
policies, falling approval 

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ratings, and a military 
situation in the Middle East 

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that's not going particularly 
well. 

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So this is the backdrop, 2 
economies under strain, a 

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temporary truce that expires in 
a few months, and the summit 

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that will be mostly remembered 
for the photographs. 

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But the thing that almost nobody
on the news will explain, 

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because it requires about 10 
minutes of patience and some 

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basic accounting, is that the 
problem these two leaders are 

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trying to solve is not really a 
political problem at all. 

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It's an accounting problem. 
And the reason it never gets 

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fixed is not that politicians 
are unwilling to fix it, it's 

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that most of them don't appear 
to understand what's actually 

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causing it. 
And that's what this video is 

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about. 
To understand the current trade 

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dispute, we need to look at what
trade is actually supposed to 

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be. 
About 6 months ago, Robin 

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Harding wrote a piece in the 
Financial Times about a trip he 

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took to China where he posed the
same question again and again to

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the economists, technologists 
and business leaders he met 

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with. 
His question was simple. 

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Trade is an exchange where you 
provide something of value to me

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and in return ioffer something 
of value to you. 

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So what exactly does China want 
to buy from the rest of the 

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world? 
A few of the economists he spoke

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to who had perhaps pondered the 
issue already jumped ahead to a 

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different point altogether. 
Their answer to the question of 

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what China would like to buy 
from the rest of the world was 

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you should let Chinese companies
set up factories in Europe. 

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Which is not really an answer to
the question, but it does tell 

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you quite a lot about how they 
see the problem. 

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Now, to a certain type of 
politician, this might sound 

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like a triumph of national 
strategy, until you remember how

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trade actually works. 
The basic idea, going all the 

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way back to David Ricardo, is 
that trade is supposed to be 

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mutually beneficial. 
The entire purpose of selling 

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your goods abroad is to acquire 
foreign currency so that you can

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buy the foreign goods that you 
need. 

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If you accumulate foreign 
exchange that you never intend 

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to spend, you're not running a 
brilliant economic strategy. 

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You're just collecting pieces of
paper. 

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And if your goal is to 
systematically put the rest of 

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the world's manufacturing out of
business, you eventually run 

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into a problem. 
Your customers won't have any 

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money left to buy all of the 
goods that you're hoping to sell

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them. 
This makes no sense. 

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It's the equivalent of the 
town's Baker aggressively 

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pricing the butcher, the Brewer 
and the candle maker into 

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bankruptcy, and then looking 
around a few years later 

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wondering why nobody in town can
afford bread. 

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During the first China shock in 
the early 2000s, China's exports

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surged, but so did their 
imports. 

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They were buying up the 
sophisticated equipment needed 

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to build their factories. 
Today, as Samira Keynes pointed 

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out in the FT, China's import 
volumes are comparatively 

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anaemic. 
They are selling, but they're 

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not buying, Which raises a 
fairly obvious question. 

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If the strategy eventually makes
everyone poorer, including 

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yourself, would you do it? 
To understand why a country 

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would do this, it helps to look 
at the work of Michael Pettis, a

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finance professor at Peking 
University and a senior fellow 

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at the Carnegie Endowment. 
Pettis has been writing about 

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this for years, and his core 
argument is the trade surpluses 

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and deficits are not really 
caused by trade policy. 

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They're the automatic 
consequence of domestic savings 

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and investment decisions. 
Here's what he means by that. 

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When a government suppresses 
household income through low 

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interest rates on savings and 
undervalued currency, weak labor

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protections, and other policies 
that effectively transfer wealth

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from ordinary people to the 
state and to manufacturers, it 

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forces up the National Savings 
rate. 

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Households earn less than they 
produce, so they can't consume 

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enough to absorb everything the 
economy makes. 

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This is what economists call 
financial repression, and it's 

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the mechanism by which countries
like China and before Japan and 

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Germany subsidized their 
industrial growth at the expense

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of their own consumers. 
Now all of that excess saving 

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has to go somewhere. 
It goes into investment, and 

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building infrastructure that you
actually need does generate real

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economic growth. 
But once your investment exceeds

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your productive needs, once you 
build enough high speed rail and

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enough apartment blocks, 
continuing to invest doesn't 

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create economic value, it 
destroys it. 

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The money is spent. 
The GDP figures look impressive,

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but the underlying projects 
generate less value than they 

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cost to build. 
The difference shows up as dead.

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President Xi has reportedly 
spent a good portion of his 

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career studying Japan's last 
decades. 

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Apparently, he found them 
inspiring. 

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In the 1980s, Japan suppressed 
consumption to fund investment 

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LED growth, built spectacular 
infrastructure, achieved 

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extraordinary technological 
advances, and was widely 

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expected to overtake the United 
States. 

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Then the debt caught up with 
them, and they spent the next 30

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years dealing with the 
consequences. 

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Pettis argues that the only way 
out of this is to shift from 

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investment LED growth to 
consumption LED growth. 

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You have to stop subsidizing 
factories and start giving money

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to households so that your own 
citizens can actually afford to 

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buy the things your economy 
produces. 

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But politicians generally hate 
doing this, because shifting 

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well to households means that 
the state has to give up control

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over where capital gets 
allocated. 

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So rather than making that 
difficult choice, they keep 

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subsidizing production. 
The domestic consumers can't 

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absorb the output, and the 
excess has to go somewhere. 

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It goes abroad as a trade 
surplus, not because anyone 

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planned it that way, but because
the accounting leaves no other 

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option. 
So if China is producing vastly 

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more than it can consume and 
doesn't want to buy anything 

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from the rest of the world, who 
is absorbing all of this excess 

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output? 
Well, let's look at who else is 

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at the table. 
Europe is running a trade 

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deficit with China of roughly €1
billion per day, which is a 

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number that sounds made-up but 
isn't, and is driven by a 

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massive imbalance in 
manufactured goods, particularly

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electric vehicles and 
electronics. 

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The EU is simultaneously trying 
to deregulate it's own economy. 

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A recent survey found that 
German firms alone had hired an 

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additional 325,000 people over 
three years whose entire job was

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to take regulatory boxes. 
Europe is also preparing 

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legislation that wood forest 
Chinese companies to hire 

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European workers, buy European 
components, and transfer their 

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technology as the price of 
market access. 

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This is, of course, exactly what
China did to Western 

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multinationals a generation ago,
and Chinese officials have 

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apparently noticed the 
similarity. 

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They're not finding the 
imitation flattering, but Europe

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is not absorbing all of this. 
Happily. 

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The EU trade commissioners 
compared Europe dependency on 

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Chinese minerals to its former 
reliance on Russian energy and 

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has warned that without action, 
Europe risks losing whole 

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sectors of industry within a 
couple of years. 

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The IMF estimates that selling 
goods across EU borders costs 

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firms the equivalent of a 44% 
tariff on goods and a 110% 

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tariff on services. 
These are not tariffs imposed by

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a foreign adversary, these are 
tariffs the EU has imposed on 

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itself through paperwork. 
The EU has essentially conducted

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a trade war against it's own 
economy and impressively appears

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to be winning. 
So Europe is already 

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uncompetitive and it's now being
flooded with cheap Chinese goods

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on top of that. 
This is not a combination that 

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ends well for European 
manufacturing. 

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That leaves the United States. 
the US has the deepest, most 

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liquid, and historically best 
governed financial markets in 

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the world. 
When surplus countries like 

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China and Germany suppress 
domestic consumption and 

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generate excess savings, those 
savings have to go somewhere. 

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And roughly half of the world's 
excess savings end up in 

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American financial markets, not 
because Americans invited them, 

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but because there's nowhere else
for that volume of capital to 

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go. 
Now here's where the accounting 

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gets important. 
When foreign capital flows into 

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the United States, the US must, 
by definition, run a 

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corresponding trade deficit. 
This is not a choice. 

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It's a balance of payments 
identity. 

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The foreign money is being used 
to buy bonds and financial 

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assets, not goods. 
The US becomes the consumer of 

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last resort for the global 
economy, not because it wants 

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to, but because the accounting 
leaves no alternative. 

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As Pettis puts it, the US 
doesn't fund its trade deficit. 

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Surplus countries force it to 
run one. 

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Now, you might think that all of
this foreign capital pouring 

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into America would be good for 
the economy, and that it would 

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fund new factories and lower 
interest rates. 

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And that might be true if 
American businesses were 

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desperate for capital. 
But they're not. 

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US corporations are sitting on 
trillions of dollars in cash. 

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They don't lack access to 
funding. 

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They lack customers who can 
afford to buy more of what they 

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already produce. 
So the foreign capital doesn't 

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flow into productive investment.
Instead, the economy has to 

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absorb it some other way. 
As Pettis points out, there are 

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really only three options. 
The excess capital can push up 

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unemployment as cheaper imports 
put American factories out of 

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business. 
It can push up household debt as

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consumers borrow to maintain 
their spending. 

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Or it can push up the fiscal 
debt deficit as the government 

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borrows to keep the economy from
contracting. 

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Since no politician wants the 
first option, the US has 

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historically chosen some 
combination of the 2nd and 3rd. 

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And here's the part that almost 
nobody in Washington seems to 

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understand. 
Running a massive fiscal deficit

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doesn't fix the problem. 
It feeds the monster. 

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The bigger the deficit, the more
Treasury bonds you issue. 

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The more bonds that you issue, 
the more attractive your debt 

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markets look to surplus 
countries with excess savings to

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park. 
The more capital flows in, the 

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stronger the dollar gets, the 
less competitive American 

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exports become, and the wider 
the trade deficit grows. 

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And of course, all of that 
government spending is 

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stimulative, which means it's 
inflationary, which pushes up 

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interest rates, which makes the 
debt even more expensive to 

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service, which requires yet more
borrowing. 

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It's a feedback loop, and it's 
one that no amount of summitry 

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in Beijing is going to break. 
Now, being the consumer of last 

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resort has not been entirely 
unpleasant. the US economy is 

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remarkably productive. 
Labor productivity has been 

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growing at about 2% a year over 
the last five years, the fastest

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rate in two decades. 
Cheap domestic energy means 

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Americans pay about half what 
Europeans pay for electricity. 

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The US economy is flexible, 
dynamic, and has been absorbing 

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these imbalances for decades 
without anything obviously 

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00:14:06,080 --> 00:14:08,680
breaking. 
But the bill has been 

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00:14:08,680 --> 00:14:12,600
accumulating. 
A few days ago the FT reported 

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00:14:12,760 --> 00:14:17,360
that the US government sold 30 
year debt at a 5% yield for the 

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00:14:17,360 --> 00:14:21,680
first time since 2007. 
Financing the growing national 

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00:14:21,680 --> 00:14:25,000
debt is getting meaningfully 
more expensive. 

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00:14:25,400 --> 00:14:29,400
In a video a couple of weeks ago
on inflation, I discussed how 

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00:14:29,400 --> 00:14:33,640
the US Treasury under Scott 
Percent has been funding long 

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00:14:33,640 --> 00:14:37,520
term obligations with short term
borrowing, a strategy that the 

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00:14:37,520 --> 00:14:42,480
economist Stephen Moran Annuriel
Dubini described as activist 

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00:14:42,480 --> 00:14:47,000
Treasury issuance and compared 
to stealth quantitative easing. 

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00:14:47,400 --> 00:14:50,840
Besent, as it happens, 
criticized Janet Yellen for 

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00:14:50,840 --> 00:14:54,800
doing exactly the same thing 
before he took office and then 

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00:14:54,800 --> 00:14:59,080
adopted the strategy himself, 
which is the Treasury Secretary 

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00:14:59,080 --> 00:15:02,920
equivalent of mocking someone's 
cooking and quietly asking for 

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00:15:02,920 --> 00:15:06,120
the recipe. 
This is essentially a massive 

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00:15:06,120 --> 00:15:09,840
bet that long term interest 
rates are going to come down. 

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00:15:10,200 --> 00:15:12,960
Which seems like a rather 
aggressive gamble when you 

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00:15:12,960 --> 00:15:16,560
consider that the US government 
is simultaneously pursuing 

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tariffs, running a massive 
fiscal deficit, reducing the 

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00:15:20,440 --> 00:15:23,520
labour supply through 
deportations, pressuring the 

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00:15:23,520 --> 00:15:27,280
Federal Reserve to cut rates, 
and fighting a war in the Middle

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00:15:27,280 --> 00:15:31,000
East that has driven up the 
price of fuel and fertilizer. 

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00:15:31,520 --> 00:15:35,320
It's not entirely obvious why 
long term interest rates would 

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fall while the government is 
actively engineering inflation. 

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00:15:39,560 --> 00:15:42,920
Betting that rates will come 
down while you borrow a trillion

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00:15:42,920 --> 00:15:46,560
dollars a quarter to fund a 
trade war is a strategy that 

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00:15:46,560 --> 00:15:51,080
relies heavily on optimism. 
None of this is a new problem. 

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As Martin Wolf pointed out in 
the FT this week, clashes over 

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how to adjust these imbalances 
have reoccurred roughly every 

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00:15:59,200 --> 00:16:02,960
two decades. 
The 1920's, the 1960's, the 

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00:16:02,960 --> 00:16:08,880
1980s, two, 1008 and now the 
1920s version ended with a 

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00:16:08,880 --> 00:16:10,600
global depression and the World 
War. 

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00:16:10,600 --> 00:16:14,720
The 1980s version was resolved 
through the Plaza Accord, where 

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the major economies agreed to 
coordinate their exchange rates.

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00:16:19,200 --> 00:16:24,600
The 2008 version was resolved 
by, well, a global financial 

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00:16:24,600 --> 00:16:27,400
crisis. 
So the two available options 

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00:16:27,400 --> 00:16:31,480
appear to be international 
cooperation and economic 

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00:16:31,480 --> 00:16:34,480
catastrophe. 
And historically, we've tended 

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00:16:34,480 --> 00:16:38,240
to go with the second one. 
Economists have understood the 

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00:16:38,240 --> 00:16:41,800
structural problem since at 
least the 1940s. 

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As Darren McFadden outlined in 
the FT last week, when the 

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global financial architecture 
was being designed at Bretton 

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00:16:49,200 --> 00:16:53,320
Woods, Keynes proposed a system 
built around a neutral 

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00:16:53,320 --> 00:16:56,560
international currency that he 
called Bancorp. 

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00:16:56,840 --> 00:17:00,480
The key innovation was that it 
would penalize countries for 

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00:17:00,480 --> 00:17:03,960
running either persistent 
surpluses or persistent 

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00:17:03,960 --> 00:17:06,520
deficits, forcing both sides to 
achieve. 

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00:17:06,640 --> 00:17:11,480
Just as the economist Robert 
Triffin later pointed out, any 

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country that supplies the 
world's reserve currency is 

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essentially trapped. 
It must run persistent deficits 

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00:17:18,640 --> 00:17:21,359
to meet global demand for safe 
assets. 

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00:17:21,839 --> 00:17:26,000
Keynes saw this coming and 
designed a system to prevent it.

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00:17:26,480 --> 00:17:31,240
the United States rejected that 
proposal at the time. the US was

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00:17:31,240 --> 00:17:34,320
the world's largest creditor 
then and it's dominant 

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00:17:34,320 --> 00:17:37,240
manufacturer. 
It was basically the China of 

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00:17:37,240 --> 00:17:41,520
that era, and it had no interest
in signing up to a system that 

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00:17:41,520 --> 00:17:45,920
would penalize it's surplus. 
In doing so, it consolidated the

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00:17:45,920 --> 00:17:49,520
dollar as the anchor of the 
International Monetary system, 

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00:17:49,680 --> 00:17:53,480
which is the very thing that now
forces it to run the deficits 

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00:17:53,480 --> 00:17:57,360
it's complaining about. 
So that worked out well. 

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00:17:57,960 --> 00:18:02,120
Wolf also makes a point that 
surplus countries tend to 

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00:18:02,120 --> 00:18:04,680
overlook. 
They are not in a strong a 

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00:18:04,680 --> 00:18:08,800
position as they think. 
Japan ran enormous surpluses in 

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00:18:08,800 --> 00:18:13,320
the 1980s, and the pressure to 
boost domestic demand led to a 

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00:18:13,320 --> 00:18:17,200
property bubble that, when it 
burst, produced 3 decades of 

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00:18:17,200 --> 00:18:21,080
stagnation. 
China ran huge surpluses after 

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00:18:21,080 --> 00:18:24,840
2008, and the pressure to 
reinvest them domestically 

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00:18:24,840 --> 00:18:29,320
produced a property bubble. 
Germany ran persistent surpluses

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00:18:29,320 --> 00:18:32,400
within the euro zone, and when 
the deficit countries hit 

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00:18:32,400 --> 00:18:36,640
crisis, Germany had to choose 
between financing them or 

305
00:18:36,640 --> 00:18:40,720
watching the euro collapse. 
They chose to finance them, but 

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00:18:40,720 --> 00:18:43,880
they did want everyone to know 
that they were not happy about 

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00:18:43,880 --> 00:18:45,720
it. 
The pattern is fairly 

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00:18:45,720 --> 00:18:48,680
consistent. 
Surplus countries build their 

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00:18:48,680 --> 00:18:51,920
economies around selling to 
others, and when the music 

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00:18:51,920 --> 00:18:55,840
stops, they discovered that they
needed those deficit countries 

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00:18:55,840 --> 00:18:58,880
more than they thought. 
So what happens when the global 

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00:18:58,880 --> 00:19:03,520
consumer of last resort, the 
United States, is running a 5% 

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00:19:03,520 --> 00:19:07,000
cost of capital and starts 
looking for ways to stop 

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00:19:07,000 --> 00:19:09,680
absorbing everyone else's excess
production? 

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Well, historically it ends in 
either one of two ways. 

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00:19:13,960 --> 00:19:16,920
Either the major economies sit 
down and negotiate a cohort 

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00:19:17,000 --> 00:19:19,520
coordinated adjustment, which 
requires a level of 

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00:19:19,520 --> 00:19:23,520
international cooperation that 
is, to put it politely, not 

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00:19:23,520 --> 00:19:27,080
obviously forthcoming at the 
moment, or the adjustment 

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00:19:27,080 --> 00:19:31,280
happens through crisis. 
If the US stops buying, American

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00:19:31,280 --> 00:19:34,880
consumers will face higher 
prices and fewer cheap goods. 

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00:19:35,160 --> 00:19:39,400
That would be unpleasant but for
the surplus economies, countries

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00:19:39,400 --> 00:19:42,520
that have built their entire 
economic model on the assumption

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00:19:42,680 --> 00:19:45,840
that foreigners will endlessly 
borrow money to buy what their 

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00:19:45,840 --> 00:19:49,840
factories produce. 
It will be significantly worse. 

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00:19:50,040 --> 00:19:54,040
A consumer can find a more 
expensive substitute or do it 

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00:19:54,040 --> 00:19:57,160
less. 
A factory with no customers has 

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00:19:57,160 --> 00:20:00,600
a much bigger problem. 
This brings us back to the 

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00:20:00,600 --> 00:20:05,120
handshakes in Beijing this week.
Expectations for this summit 

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00:20:05,120 --> 00:20:07,520
are, to put it generously, 
modest. 

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00:20:07,800 --> 00:20:11,640
Both sides appear to be looking 
for just enough progress to 

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00:20:11,640 --> 00:20:15,960
justify the photographs. the US 
wants China to commit to buying 

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00:20:15,960 --> 00:20:20,280
those beans and bow wings. 
To oversee these purchases, the 

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00:20:20,280 --> 00:20:24,000
two sides are expected to 
announce a Board of Trade, a 

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00:20:24,000 --> 00:20:27,440
committee of senior officials 
from both countries, whose job 

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00:20:27,440 --> 00:20:30,640
will be to make sure the. 
With China actually follows 

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00:20:30,640 --> 00:20:34,480
through this time. 
This is necessary because China 

338
00:20:34,480 --> 00:20:37,680
made similar purchase 
commitments in the phase one 

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00:20:37,680 --> 00:20:41,520
trade deal in 2020 and then 
didn't follow through. 

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00:20:41,840 --> 00:20:46,200
So the solution to China not 
honouring its commitments is a 

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00:20:46,200 --> 00:20:49,960
new committee to monitor whether
China honours its commitments. 

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00:20:50,200 --> 00:20:52,280
I'm sure that this time it'll be
different. 

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00:20:52,880 --> 00:20:56,440
Now the Board of Trade will sit 
alongside the already existing 

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00:20:56,680 --> 00:20:59,800
Board of Peace, which was 
established earlier this year to

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00:20:59,800 --> 00:21:03,320
promote peace building, which 
Trump will chair for life. 

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00:21:03,600 --> 00:21:07,520
So we now have a Board of Peace 
and a Board of Trade, and all we

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00:21:07,520 --> 00:21:10,760
really need next is a board of 
good intentions and we'll have 

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00:21:10,760 --> 00:21:14,560
the complete set. 
There's also the small matter 

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00:21:14,720 --> 00:21:18,600
that Trump arrives in Beijing 
having largely been disarmed by 

350
00:21:18,600 --> 00:21:21,720
his own courts. 
In February, the Supreme Court 

351
00:21:21,720 --> 00:21:25,480
struck down his IEPA tariffs, 
the ones he had been raising and

352
00:21:25,480 --> 00:21:28,360
lowering on a near daily basis 
last year. 

353
00:21:28,600 --> 00:21:31,880
He immediately pivoted to a 
different legal authority, 

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00:21:31,880 --> 00:21:36,120
Section 122 of the Trade Act, 
which allows temporary tariffs 

355
00:21:36,120 --> 00:21:38,600
to address balance of payments 
crises. 

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00:21:39,000 --> 00:21:43,600
Last week, a Federal Trade court
ruled those ones illegal, too, 

357
00:21:43,800 --> 00:21:47,120
on the grounds that the US is 
not actually experiencing the 

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00:21:47,120 --> 00:21:50,880
kind of balance of payments 
crisis the law was designed for.

359
00:21:51,200 --> 00:21:55,280
The administration is appealing,
but the tariffs expire in July. 

360
00:21:55,280 --> 00:21:58,920
Regardless, a third set of 
tariffs under Section three, O 

361
00:21:58,920 --> 00:22:03,360
1, is being prepared, but those 
investigations won't be complete

362
00:22:03,560 --> 00:22:06,880
until the summer. 
So the US president is sitting 

363
00:22:06,880 --> 00:22:11,040
across from Xi Jinping at a in 
negotiating table, and his most 

364
00:22:11,040 --> 00:22:15,160
prominent negotiating tool has 
been taken away from him by his 

365
00:22:15,200 --> 00:22:19,880
own judiciary twice. 
His domestic position isn't 

366
00:22:19,880 --> 00:22:24,120
helping either. 
Approvals ratings are at 34%, 

367
00:22:24,280 --> 00:22:28,000
the lowest of his second term. 
And with midterm elections in 

368
00:22:28,000 --> 00:22:32,520
November, Republican members of 
Congress are not exactly lining 

369
00:22:32,520 --> 00:22:36,760
up to support inflationary trade
policies in an election year. 

370
00:22:37,040 --> 00:22:41,040
Several were reported to quietly
celebrated when the Supreme 

371
00:22:41,040 --> 00:22:45,920
Court struck down the tariffs. 
Xi Jinping will be aware of all 

372
00:22:45,920 --> 00:22:47,960
of this. 
When you're negotiating 

373
00:22:47,960 --> 00:22:52,000
counterparts own party is 
relieved that your signature 

374
00:22:52,000 --> 00:22:55,760
policy has been overturned by 
the courts, it does somewhat 

375
00:22:55,760 --> 00:22:58,960
reduce the credibility of the 
threat to bring it back. 

376
00:22:59,440 --> 00:23:03,560
Both sides are really just 
trying to buy time. the US wants

377
00:23:03,560 --> 00:23:07,640
breathing room to build domestic
rare earth processing capacity 

378
00:23:07,840 --> 00:23:11,800
because China currently controls
those supply chains and use them

379
00:23:11,800 --> 00:23:14,520
as devastating leverage during 
the tariff war. 

380
00:23:14,880 --> 00:23:18,560
China wants time to develop it's
semiconductor industry and 

381
00:23:18,560 --> 00:23:21,480
reduce its dependence on western
technology. 

382
00:23:21,840 --> 00:23:25,040
And XI has his own grievances to
raise too. 

383
00:23:25,400 --> 00:23:29,640
China imports roughly 40% of its
oil through the Strait of or 

384
00:23:29,640 --> 00:23:32,120
move. 
So the American military 

385
00:23:32,120 --> 00:23:36,360
situation in the Middle East is 
not just AUS political problem, 

386
00:23:36,560 --> 00:23:40,560
it's costing China money and she
will want to make sure Trump 

387
00:23:40,560 --> 00:23:43,840
knows it. 
As Eli Ratner, who served as the

388
00:23:43,960 --> 00:23:48,040
US Assistant Secretary of 
Defense for Indo Pacific Affairs

389
00:23:48,040 --> 00:23:52,720
until last year, pointed out in 
the FT, the US has made this 

390
00:23:52,720 --> 00:23:55,800
mistake before. 
The pattern is consistent. 

391
00:23:55,960 --> 00:24:00,160
When Washington backs off, 
Beijing doesn't reciprocate it 

392
00:24:00,160 --> 00:24:03,960
consolidate it's gains. 
When the Obama administration 

393
00:24:03,960 --> 00:24:07,120
declined to challenge China's 
island building in the South 

394
00:24:07,120 --> 00:24:11,560
China Sea, artificial reefs 
became military installations. 

395
00:24:11,760 --> 00:24:15,160
When Trump paused tariffs in his
first term in exchange for the 

396
00:24:15,160 --> 00:24:19,280
phase one trade deal, China 
missed it's purchase commitments

397
00:24:19,480 --> 00:24:23,080
and the structural reforms were 
deferred to a phase two that 

398
00:24:23,080 --> 00:24:26,400
never came. 
Ratner argues that the time 

399
00:24:26,400 --> 00:24:30,360
being bought isn't being used to
strengthen America its position,

400
00:24:30,600 --> 00:24:34,680
particularly given that the war 
in Iran has drained military 

401
00:24:34,680 --> 00:24:38,160
readiness for any potential 
crisis in the Pacific. 

402
00:24:38,520 --> 00:24:41,840
And all of this will happen 
while the much larger 

403
00:24:41,840 --> 00:24:45,600
geopolitical issue, the future 
of Taiwan, hovers in the 

404
00:24:45,600 --> 00:24:48,960
background. 
A senior Taiwanese official told

405
00:24:48,960 --> 00:24:53,000
Bloomberg last month that what 
they fear most is being put on 

406
00:24:53,000 --> 00:24:57,760
the menu at a Trump XI summit. 
China would very much like 

407
00:24:57,760 --> 00:25:02,480
rhetorical concessions on Taiwan
in exchange for those beans and 

408
00:25:02,480 --> 00:25:05,200
bowings. 
Whether they get them is another

409
00:25:05,200 --> 00:25:08,080
question. 
So the two leaders will shake 

410
00:25:08,080 --> 00:25:10,600
hands, make announcements and 
fly home. 

411
00:25:10,840 --> 00:25:14,080
The photographs will look very 
serious, but the underlying 

412
00:25:14,080 --> 00:25:17,440
problem, the one we've spent 
this entire video explaining, 

413
00:25:17,520 --> 00:25:21,440
will not have changed. 
Trade imbalances are not caused 

414
00:25:21,440 --> 00:25:24,200
by lack of summits. 
They're caused by domestic 

415
00:25:24,200 --> 00:25:28,480
policy choices that need either 
side appears willing to change. 

416
00:25:28,960 --> 00:25:33,200
China will continue to suppress 
household consumption, the US 

417
00:25:33,200 --> 00:25:36,480
will continue to absorb the 
resulting surplus, and the 

418
00:25:36,480 --> 00:25:41,000
accounting will continue to do 
what accounting does, regardless

419
00:25:41,000 --> 00:25:44,040
of what anyone announces at a 
podium in Beijing. 

420
00:25:44,480 --> 00:25:46,600
Thanks for tuning into this 
week's podcast. 

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00:25:46,800 --> 00:25:50,120
The podcast is entirely 
supported by viewers like you on

422
00:25:50,120 --> 00:25:52,800
Patreon. 
If you'd like to support it, you

423
00:25:52,800 --> 00:25:55,400
can sign up using the link in 
the show notes. 

424
00:25:55,560 --> 00:25:58,040
Have a great week and talk to 
you again soon. 

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00:25:58,280 --> 00:25:58,600
Bye.