Hi guys, welcome to this next episode of Ashley's Digital China. Today I am bringing you another phenomenal guest. We are with Alice Han today. Alice is a prominent expert in Chinese microeconomics and geopolitics and global theme tech. Currently she's serving as a director of Greenmantle, a financial advisory firm, with degrees from both Harvard and Stanford. And Alice's research has been published by top academic institutions, including Tsinghua University, the Hoover Institution, and major media outlets such as Financial Times, Wall Street Journal, and many others. Alice, welcome on the show.
Thanks so much for having me, Ashley. I'm looking forward to it.
I'm very excited to speak with you today because we are all living in the era of Trump tariffs. And today we are going to talk exactly about that: the tariffs, the global implications of those tariffs, China's response, and probably the overall shifting global order. So the first question right away: what are tariffs?
Well, I think there's a common misconception about tariffs, and that's certainly played out politically within the US when people are confused about who pays, quote unquote, for the tariff. But effectively, the way to think about it from an economic standpoint is that it is a tax on consumption, on the imported goods that effectively the consumers in an importing country have to bear. And in the case of the US, putting tariffs on Chinese goods effectively means that there will be a markup in prices that are coming into the US that are imported from China. And even if the consumers do not see a significant markup because there isn't a markup from the, say, suppliers or the middlemen in the US, this creates a degree of uncertainty, which again has macro effects beyond just the tariff cost itself. So really think of it as a tax burden that the consumers have to bear. And in this case, it's the US consumers.
And could you briefly also explain the key features of this new 2025 tariff? Because we all remember how a few months ago we woke up one morning and suddenly there was this universal tariff, and then there was a change in mood. But the escalation continued with China. So we are right now at the end of April, and we know that everything can change. But where are we right now, and what are some of the key features? How are they different from the previous rounds of, let's say, tariffs posed during Trump's administration or other administrations?
Well, that's a great question, Ashley. And we currently, and again, when we publish this, things may change because the Trump administration is quite stochastic and unpredictable. But certainly as we currently stand, I think we are at a standstill in tariffs, meaning that both sides do not see an incentive to continue to escalate the tariff response in the trade war. But generally speaking, I think what is a useful heuristic is to think about how this set of tariffs is different from trade war one, or even US tariffs against other countries, including the EU and the first Trump administration, if you recall. In the sense that certainly Trump feels further empowered to use his executive authority and basically call on AIPA, Emergency Powers Act, capabilities to basically launch these tariffs without congressional approval on a host of countries. And certainly looking back as historians, we'll see Liberation Day as Liquidation Day, we're liberating people from their money because it was some of the biggest stock market plunges that we've seen in recent years. And certainly more significantly created a huge rout in the bond market where yields, especially in the long end, were pushed up extremely high in a sign that investors domestically and globally were losing their confidence in the US as a safe haven destination, and even the US dollar for that matter.
But I think again, if we compare this to the first Trump administration, what is clear is two things. Number one is that the Trump administration and the MAGA base really believe that tariffs are required to re-industrialize the US and make sure that the US is back on a fairer ground when it comes to trade relationships, not just with China but with the rest of the world. So there was a strain in MAGA, and you go back to even the Tea Party, which was the precursor to it, that felt like America lost out to globalization. Globalization, which promised you reducing tariffs, further freer trade liberalization, basically screwed middle America and especially the blue-collar industrial bases of America. So Trump is trying to redress that domestic imbalance that's been created by globalization. Number two is, I think, a very unpredictable structure of power in the sense that Trump, who is at the apex, is clearly in the camp of Navarro and others who are going for tariffs as the blunt instrument to redress these imbalances. Now, we can debate whether or not this is an effective method, but it's clear to my mind as a historian that we're seeing the highest tariffs that we've seen since Smoot-Hawley, since the 1930s, and in some instances even higher for certain goods. So it is a regime shift that takes America back to its protectionist roots, so to speak. It's certainly not a baron if you look at the longer duration of American history, but it means that effectively, America being a champion post-Bretton Woods and post-World War II of the liberal trade international order is at a standstill, and maybe even a pause during these Trump years. But again, for foreign investors, for the global community writ large, this is a significant shift, and I don't think that that should be understated.
Absolutely. And how do you see these tariffs reshaping global trade flows? We are likely going to see more, for example, regional blocs forming, or will global supply chains adapt in some unprecedented ways? We've already seen interesting responses, and things have started moving ahead. But what is your take?
I think what's been interesting to me is that both sides, Washington and Beijing, are trying to weaponize and take advantage of the situation in building these informal coalitions against each other. And this is, we can talk into this later on, a part of a, I think, a general structural shift in the relationship towards decoupling, and you can call it Cold War II. The problem is that these other, I would call, non-aligned or rest of the world countries, including EU, which is the biggest market, do not want to have to choose sides. They benefit from hedging. And what I think we'll end up seeing is a China plus one and a US plus one strategy, meaning that just as Apple is going to increase its production capabilities in India to offset any further risks to a China strategy for its foreign exports of Apple products, other countries, and I specifically think about the EU when it comes to defence equipment, will try to look domestically to their own production within the EU, or other countries like Korea or Canada, to again diversify and reduce supply chain risk. I think the watchword of this decade is supply chain resilience, and countries around the world are going to have to have a China plus one and a US plus one strategy, because it's clear now that trade is a national security issue, whereas I think in previous decades trade was seen as an inherent good towards reducing costs for consumers and increasing welfare.
It's a very interesting way to look into it, because a lot of people are seeing the China plus one, and actually for years it has been encouraged to look beyond China and de-risk, so to say. But de-risking from the US is something new on the agenda of a lot of countries, but it's happening very, very fast. What about the impact on businesses? What industries or sectors in your view, both in the US and globally, will actually be impacted most by these tariffs and also by the shifting dynamics? Could this be a tipping point for companies diversifying completely away from China? For example, we spoke about Tesla, Apple, right? Apple is struggling to have its position in China, because some of their AI features are not fully integrated or affected. And today the Chinese consumer sentiment is also not particularly high. And if Apple iPhones are going to be even more expensive, it's going to be again harder for Apple or Teslas or other companies to stay competitive, but not only because of that, because the Chinese competitors in the market are so strong, right? So you need to put so much effort to probably get a lot, a lot less, versus what you have achieved in that market before. So a lot of things are shifting, both in the US, in China and globally. And what industries and sectors do you think will be most affected and how?
Well, this is a great question again, and I recalled trade war one, which I covered very closely in the first Trump administration. Unlike trade war one, because we are targeting potentially a host of countries with these reciprocal tariffs after this pause that's been put into place. Basically, I think everyone will be affected. Anyone who has intermediate goods that they import from any other country is going to have to factor in some kind of a tariff risk. It was interesting, I was in China two weeks ago, after we saw each other in Hong Kong. And on CCTV, there was Milton Friedman talking about the pencil in the 80s. So he has this speech where he talks about the pencil being produced in all different parts of the world you wouldn't have imagined, because no one country can produce it. We're at this point where for most goods in the world, we need to have intermediate good imports. And it's going to be very hard for certain countries to ramp up their own domestic or target production. So I think it affects everyone now. So certain people will be affected more in the case of the US. US SMEs in particular that are reliant on China and other ASEAN potentially countries for imports of intermediate goods will be affected. But also, let's be honest, the agricultural sector and energy sector in the US that obviously will confront these Chinese tariffs. But I think for them, because of the way that the supply chains work for the agricultural and energy sector, it will be somewhat easier, I would say, compared to the manufacturers to find alternative markets to soak up demand, because it's relatively substitutable. But again, I think we're in a place where everyone will be affected, and they will have to factor in tariff risk, especially if Trump continues to deliver, not only on the high tariffs on China, but also tariffs on other countries. And I will end by saying the issue with the tariffs on China that the rest of the world needs to confront because they don't get a free pass, is that China will have to find alternative markets. EU is going to be one developed one that they will seek, but certainly other countries, say in Latin America and the global south, will need to figure out a way, they will need to figure out a way, Chinese government officials, to basically soak up Chinese goods demand in other markets, aside from the US, if tariffs remain in place. So this is a global problem, not just a China-US problem.
Yeah, no, absolutely. And beyond just the trade problem, there's also the American relationship with, let's say, broader allies, particularly with those that are very much connected and intertwined with China economically. You've mentioned the EU, you've mentioned, or we can talk about Canada, Australia, and other countries that for many years were US's closest allies, including Japan, including Korea. And right now, as you said, they don't necessarily want to join any of the two camps, but do you think they will be given a chance to actually stay more neutral? Will they have to form their own coalition, or will they be allowed to play the game in both courtyards?
I think if Trump were a more disciplined strategist, and I think he has some merits to the way that he bullies countries into giving him a fair trade deal, if he were more disciplined, he would find an opportunity to create an anti-China coalition, leveraging what the Biden administration was trying to do. The problem is that Trump sees things in very transactional ways, and I don't think has the capacity to see the broader strategy, which others say Scott Bessent, his Treasury Secretary, or Marco Rubio, his Secretary of State, see. So I do not think for that reason alone that countries, whether it's the EU countries, Japan, or Korea, even Australia, where I'm from, traditional allies of the US will see it in their incentive to create an anti-China coalition and balance with the US against China. I think we see a bigger non-aligned movement of countries that hedge, including traditional US allies, because the Trump policy is so unpredictable. And I think China has made the most of this versus trade war one, in terms of framing itself as a defender of the liberal international order and free trade. Now whether or not that's true remains to be seen, but certainly they have taken more advantage of it this time around than trade war one. And there could be interesting developments where you see further reductions in tariff and non-tariff barriers in ASEAN with other trading partners, including the EU, notably EU China summit 50 year anniversary is happening in Beijing now, not Brussels at the end of July, in a bid to again move closer to Xi potentially, but both sides, China and the EU are trying to show the US that they have alternatives. So I think, long story short, Ashley, countries outside of the US, either traditional allies will probably see it in their best interest to continue to hedge. I will note lastly, that it's interesting, what's happening in South Korea, the front runner of the Democratic Party, Lee is probably going to be more of a hedger, rather than an anti-China hawk. And certainly in the case of Japan, we saw a statement recently saying that they would be against an anti-China coalition led by the US. So again, because the Trump administration, the structure of power is very much Trump dominated, and Trump's word is the last word, I just do not think he has the strategic discipline to rally other countries to block against China.
And that is a beautiful entry into the next question of, you know, China's response. So this time, they actually chose to respond. And as you said, they are seen by many, especially in the global south as the defender of order, and also somebody with common sense. Just yesterday, we've heard one of top politicians in China saying that we are open to talk, and our door is wide open, but you need to also give basic respect and stop bullying people around. And a lot of people suddenly have that newly found respect. And I would say a lot of memes, right? So there used to be a trade war, there's the Cold War right now, it's a meme war, where we see all sorts of things shared around the world. And this support for China's response, I think is maybe at its peak over the past 10 years. And also internally inside the country, I think a lot of Chinese feel really proud with the way China is playing an adult in this whole situation. And they're quite frankly enjoying it, besides the fact that, of course, a lot of companies are struggling, manufacturers are struggling. Earlier today, I'm a member of a group of companies that basically trying to find a new normal in this whole tariff situation. And many of them, Chinese manufacturers are saying, hey, we looked at Cambodia, going to be difficult, we looked at Vietnam, we are likely going to go to India. So Chinese manufacturers going to India to also diversify and find new roots. So everything is very, very unique. But China is kind of playing a more active role. So what do you think is this going to mean for China's place in the shifting global order? Is this situation, and that's what a lot of China watchers see and maybe follow, is this going to accelerate China's rise onto international arena? Or is it going to potentially expose some of its limitations that we also know exists?
I think it remains to be seen, history can move in very unpredictable ways. I will say two things. Number one, this is domestic structural challenge for the economy. You having lived in China have witnessed this slowdown over the last decade, and that China confronts its own structural challenges, whether it's ever increasing debt burdens, mainly in the local government debt balance sheet, for instance, the demographic challenge. And China's, I would say, mainly thwarted efforts to rebalance the economy away from its traditional fixed asset investment led growth. I think that what could be the upside scenario for China domestically is going to be that this trade war expedites China's rebalancing efforts. We've heard rebalancing as a theme, I really think, since Jiang Zemin. It's been a theme that has reoccurred, but when push comes to shove, whether it was the global financial crisis, whether it was the first trade war, whether it was COVID, that rebalancing effort went to the back burner because ultimately they needed to boost growth. I think we are seeing more structural impetuses within China to push towards an expedited move to rebalancing a consumption led growth. Because I think there has been a degree of self reflection by the Chinese officials in Beijing whereby they understand that Chinese over capacity, if left to continue to rise, and it has risen since trade war one, it's worth mentioning, will create not just economic problems for China, but geopolitical problems. And we've again seen that in backlash in recent years, even when it comes to, I would say, somewhat strategic allies or partners like Brazil against Chinese steel, or even potentially against Chinese EVs in the future. And certainly has been the case of the EU-China relationship getting even more difficult in recent years. So that's the economic side of it in terms of the opportunities that I think will arise in China. In terms of the geopolitical international standing of China, I'm a little bit skeptical. I think China has its own domestic issues to deal with right now. And it's watched enough of US history to see the incommensurate burdens and responsibilities assigned to the hegemon. And ultimately doesn't want to be the hegemon in the global international order, or even the global policeman for that matter when it comes to security issues. It certainly wants to have a degree of influence globally on trade, and even to some extent on geopolitics and certainly technology. And I would say wants to be premised into Paris first among equals, or even potentially hegemon in the Asia Pacific region for strategic geopolitical reasons. So I don't think that China comes out of this necessarily as being the replacement of the US or even stronger geopolitically. But I do think it creates opportunities for China to, I think, correct the narrative that it is that people in the West or even critics have assigned to China as being this monolithic, autocratic, authoritarian regime. And again, maybe shifts it towards a country that other countries can potentially do deals with and reduce trade barriers with. I think what will be interesting in the next few years, it's already being flagged by the State Council, is a further reduction in foreign investment restrictions. And I think that that will certainly favor certain countries like the EU countries. But I certainly see it, I think, in a strange way, that Trump is the push for China to liberalise the economy further. I wouldn't say exponentially and expeditiously overnight, but certainly it expedites that process and expedites the process of rebalancing. I will end on one note, which is going to be more controversial, and it is the Ukraine issue, and to some extent, the Iran issue, is that it's going to be very hard for China for, again, strategic reasons to shake off the yoke of its partnerships with countries that are considered by the West as "axis of evil" or "axis rather of ill will" sorry, not "axis of evil." And that is going to be hard for China, again, to raise its standing, especially when it comes to traditional American allies Japan, South Korea, especially the EU. So it remains to be seen. But I'm a little bit more bullish versus trade war one that China is doing the right things to raise at least the international sympathy for China. Remember, after COVID, if you look at the Pew surveys and global surveys of China approval rating, it took a massive hit in some countries even halving. I think with the Trump mayhem, we could see approval ratings rise actually.
