Michael Froman on the New 'Polyamorous' Global Trading System

When President Trump announced the tariffs on Liberation Day, it seemed to truly mark the end of the old world trading system. But of course it had been dying for a long time. The first Trump administration erected aggressive trading barriers against China. Then Biden expanded them further. And there were signs of its demise even under Obama. So what was the global trading system? What will come after it? What are the benefits and costs to changes? On this episode, we speak with Michael Froman, the President of the Council on Foreign Relations, and the former Trade Representative during Obama's second term. We discuss how the system began to collapse, and what he sees as the emergence of a new "polyamorous" global trading system, where friends and allies and partners move in a more liquid manner between different poles and blocs. Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox now delivered every weekday plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 3:00Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 3:15Tracy Alloway?

  And I'm Tracy Alloway.

• 3:17Joe Weisenthal?

  Tracy, you know, we're several months, I guess like five months or so, recording this September 16th, five months or so since Liberation Day, since the trade war started. By and large, the world is still kind of working, right? You can see its effects for sure in certain categories and so forth, but by and large, I don't think the contours of the economy look that much different than they did say in March or April.

• 3:41Tracy Alloway?

  Look, I'm still missing my auction item that's supposed to be mailed from the Netherlands. So it has affected me directly.

• 3:47Joe Weisenthal?

  Wait, what happened with it? Wait, wait, say more.

• 3:49Tracy Alloway?

  No, okay, so I won something from a Dutch auction house and they were supposed to mail it in-house shipping and instead of mailing it, they sent out an email saying that they can't mail it because everyone's trying to figure out the new tariff schedule and customs and things like that.

• 4:05Joe Weisenthal?

  Oh, that's annoying.

• 4:06Tracy Alloway?

  I still haven't heard from them.

• 4:07Joe Weisenthal?

  But it still feels like something happened or some sort of rupture. Kind of hard to imagine going to a March 2025 world again, but also hard to imagine going to a pre-Trump one world ever. Like, it's hard for me to imagine that in my lifetime, that there will ever be a sort of 2015-style trading relationship between the US and China. I could be wrong.

• 4:32Tracy Alloway?

  Never say never, but...

• 4:34Joe Weisenthal?

  It's just hard for me to see at this point.

• 4:35Tracy Alloway?

  At this point, like, it's not a single administration thing, right? We've had Trump 1.0, and then Biden continued a lot of the tariffs and even added some new ones, and then we have Trump 2.0, which is arguably going even harder on China. So it does seem like at least a durable trend, not a flash in the pan.

• 4:54Joe Weisenthal?

  And as we've discussed, you mentioned the fact that Biden was a continuation, arguably an expansion of Trump 1, particularly with some of the export restrictions on technology. Yeah, this is one of the rare trade, rethinking the global trading system, whatever that means, is one of the rare areas of bipartisan consensus in DC, as has come up in many episodes.

• 5:17Tracy Alloway?

  Yeah, that and housing.

• 5:18Joe Weisenthal?

  That and housing, right. That housing is very expensive. We really do have the perfect guest, someone who has a very big-picture view on trade, someone who has been directly involved in trade negotiations, someone who remembers the sort of pre-Trump 1...

• 5:34Tracy Alloway?

  The long, long, long ago.

• 5:36Joe Weisenthal?

  The long, long, long ago global trading system, and who could talk about whatever remnants of that are left, or even maybe who can explain to me what the global trading system was. We're going to be speaking with Michael Froman. He is the President of the Council on Foreign Relations, and he was the former US Trade Representative during the Obama, Obama II administration, 2013 to 2017, has continued to write a lot about this topic. So, Michael Froman, thank you so much for coming on Odd Lots. Thrilled to have you here.

• 6:05Speaker 07

  Thanks for having me.

• 6:06Joe Weisenthal?

  Absolutely. What does the US Trade Representative do? You had that job. I actually realize I don't really know.

• 6:11Speaker 07

  Like, it's a great job. It really has the function of negotiating trade agreements and enforcing US trade rights under previous agreements. The reason I love the job is that it combines high diplomacy, seen down with ministers, presidents, prime ministers of other countries, trying to reach agreements. With having to have a really detailed understanding of elements of the US economy. I mean, I learned more from American farmers teaching me the 500 things you can do with a molecule of milk and how they manipulate a molecule of milk to circumvent trade restrictions and

• 6:50Speaker 07

  get around tariffs. You export it as butter or as whey or as low calorie powder or whatever. This is a whole episode. Whole episode right there. But that's only one example of the literally thousands of issues you have to learn as US trade rep to be able to sit down with your counterparts in other countries and negotiate agreements.

• 7:10Tracy Alloway?

  Can you give us an idea or a sense of the average negotiation? What exactly is the process? Like, do you meet for the first time in a designated room somewhere? Or is there prep that goes into these? You're exchanging emails. What exactly happens?

• 7:25Speaker 07

  So, in the past, and of course, it's a very different situation now, but in the past, the US or another country might come up with an idea of what they wanted to do in a trade negotiation, a set of issues they wanted to take on, a set of countries they wanted to negotiate with, and they would go around and do consultations with other countries, float the ideas, see what kind of feedback they got, and scope out the nature of the negotiation. Is it going to be just about goods and tariffs? Is it going to touch upon agriculture and regulations and services and labor and environment and all various other issues that have become part of trade negotiations in the past? And get agreement by the other countries that this was the agenda. And then, in the past, usually it's

• 8:06Speaker 07

  the US that has been driving the agenda. These would be the topics we would deal with. The US would come up with proposals of what are the disciplines that we would like to see in each of these areas? What are the rules that we'd like to see? And it was the way the US brought other countries along to adopt high standard rules across one sector or one subject matter or another. And the idea was, we know we live in a high wage, highly regulated economy. We compete with economies that oftentimes have lower wages, lower regulation, and if we could raise other countries' standards closer to our own, it would level the playing field for American workers and farmers and ranchers and make it easier for us to compete.

• 8:49Joe Weisenthal?

  I mean, for better or worse, it really just seems like a totally different era now. The idea of getting to, the idea of going back to some world where the US is actively working with a bunch of country on rules rather than rates, tariff, it really does seem, it seems like ancient history now. It just seems, right?

• 9:09Speaker 07

  Look, I think that's right. First of all, I think, I think the, the international trading system had been under stress for some time. President Trump, in some ways, put, was the final nail in the, in the coffin of it. But, you know, the global multilateral rules-based system, that's like the WTO, the World Trade Organization, where 160-plus countries got together, agreed to a set of rules, agreed to some mechanisms for enforcing those rules and for monitoring them. That's been under stress for, for a long time. There's been dissatisfaction. And I think now, in fact, you're, you're right. I think we can't go back to the way things were pre-Trump. We're gonna have to think about what comes next.

• 9:47Tracy Alloway?

  Just to play devil's advocate for a second, to what extent did we actually have a rules-based trading system? In the sense that everyone was actually beholden to the same limitations or the same rules? Because looking back, there were always accusations about China cheating, or maybe the US was taking advantage in, in some way. And in fact, you could argue that that sense of unfairness is kind of what got us to where we are today. So was it really rules-based for everyone?

• 10:17Speaker 07

  So I think we have to look back at the, the whole history of the post-war period. Because for decades, China wasn't a factor. It wasn't part of the global trading system. It wasn't a major economy. And it was the US and Europe, Japan, others, who came together to really form this set of rules. And it's never a perfect system. My, my sense is, what, what rules means is that most countries follow most of the rules most of the time. Not that it's 100% perfection. By the way, that's true when you have laws in the United States. I mean, we have laws in the United States because people do commit crimes. The existence of laws does not prevent people from committing crimes. That's why you need enforcement. Same thing is true on the international side as well. The big difference is, as you

• 11:01Speaker 07

  pointed out, Tracy, is when China became a major factor in the global economy and began to integrate globally. On one hand, there was an opportunity to say, okay, this is an opportunity for, bring China into the global system. Get them to adopt the set of rules that the rest of us have all agreed to because they appear to be on this path towards market reform, openness, liberalisation. Right. I think what happened in reality is that that trajectory wasn't as linear, didn't go as far, didn't go as fast as people anticipated. And what we did not anticipate is that somebody like President Xi would come in and in fact stop or reverse it. And so now we have an economy that is huge, second largest economy in the world, biggest manufacturing part

• 11:45Speaker 07

  of the global economy, likely to be accounting for something like 45% of all global manufacturing in a few years, which is the biggest that any country has ever been in history. And it's following a fundamentally different set of rules. And that has led to a lot of distress in the international system.

• 12:18Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 12:33Speaker 08

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service insocial clients.

• 12:42Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Rees-Merrick Ripple says.

• 12:50Speaker 09

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 13:09Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 13:19Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 14:01Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work: employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

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• 15:42Joe Weisenthal?

  Can you explain maybe the philosophical premise behind the idea that trade with China, I guess, why do we care about what their internal rules are, right? Theory of trade, it's sort of, okay, they're cheaper for whatever reason, or they're more efficient, et cetera, and so, you know, comparative advantage, we benefit from that. Why does the global trading system, why is it, or was it, or is it premised on this notion that all of the participants would trend in some sort of more liberal direction with their domestic economies?

• 16:21Speaker 07

  You know, I think it's because the actions that China has taken domestically to drive their really quite remarkable economic growth over the last few decades, does have ramifications outside of China, has ramifications for the rest of the world, for manufacturing in the rest of the world, for, for other factors. And so, it's, it's not something that can be limited to China. If China gets to where it's going because it steals intellectual property, because it produces overcapacity, so it produces, it creates far more factories than it needs to for the reasonable demand for a product in order to drive other producers out of the market in other countries, that has an adverse effect on us.

• 17:02Speaker 07

  If they subsidize state-owned enterprises, or even private enterprises in such a way that it creates this unlevel playing field, then it affects the rest of us as well. And I think that's what's really happened, is that China, whether it's state-owned enterprises, subsidization, intellectual property rights theft, government intervention into the private sector, all towards positioning China as the leading manufacturer, but it has come at the expense of other industrialized countries, in some cases, other emerging economies, and that's why there's been this counter reaction.

• 17:34Tracy Alloway?

  So, I know you were a trade representative before the tensions with China really ramped up under the first Trump administration, but...

• 17:44Tracy Alloway?

  How were you thinking back then about incentivizing other countries when it comes to trade negotiations? Like carrot and stick strategy, was it mostly about incentives? And if so, what were you giving them? Or was it sometimes maybe threats?

• 18:00Speaker 07

  So you have to use both. I think on the threat side, it's not really threats, it was enforcement that we would bring cases against countries, including China, at the WTO or against other trading partners where we had arrangements if we felt that they were violating our rights under those agreements. We brought, during the Obama administration, I think we brought the most cases ever brought against China. We won all the cases that got to conclusion. The problem was China would find ways either of delaying implementation, or by the time the fix was implemented, the relevant industry in the United States or elsewhere was gone. And so it was really sort of cold comfort. And that's one of the challenges, I think, that we saw in the World Trade Organization. I think on the incentive side, that's where trade agreements, real trade agreements, come into play.

• 18:45Speaker 07

  I was involved in something called the Trans-Pacific Partnership, which was 12 countries around the Asia-Pacific region that were working on opening their economies to each other, abiding by a high standard set of rules. Some of the countries already had free trade agreements with us, about half of them did. So we weren't giving them any more access to our economy. We'd already given them access. But at the table, we had Japan. And Japan was an economy that had never really opened up to other markets. And these other countries knew that they couldn't get Japan to open on their own. But if the US was pushing Japan to open, they would benefit from it. So you had countries like Peru or Chile, who already had free trade agreements with

• 19:27Speaker 07

  us, willing to raise their labor standards, or willing to enforce environmental laws because they were getting access not to our market, but to Japan. And that incentive was one that was powerful for them.

• 19:39Joe Weisenthal?

  That's a very... That's a very interesting dynamic. Talk a little bit more about those years, 2013, pre-Trump and the actions toward China. Because if you said by that point Obama had already introduced a record number of actions against China, winning many of them, winning all of them, did you say?

• 19:58Speaker 07

  All of them that went to conclusion.

• 20:00Joe Weisenthal?

  All of them that went to conclusion, but it didn't really matter because either there was some way to evade or the US industry had been decimated. Was there something pre-Trump? I mean, I don't know, whenever that, was there a feeling that something has to change fundamentally in how the US and China trade or the rules governing that trade even at that point?

• 20:20Speaker 07

  Absolutely. Look, the day one of the Obama administration, the world had been involved in something called the Doha Round of negotiations at the World Trade Organization. It'd been going on since 2001. And I remember going to a G20 summit, there was one in April in London, and all the other leaders around the table, here was the new President of the United States, on their mind was asking him, okay, what are you going to do to bring the Doha Round to successful conclusion this year? And the President said, all right, we're going to go back and take a look at this. And he asked a group of us to do a study, and by the summer, we'd come back to him and said, this Doha Round isn't going to get done.

• 21:00Speaker 07

  But the Doha Round was founded on this fundamental premise in 2001, that basically developing countries should, it was called the Development Round. And the primary beneficiaries of the Doha Round would have been developing countries, not industrialized countries. And the fundamental premise was, developing countries shouldn't have to live by too many rules. Industrial countries should, and this would help the developing countries catch up. By 2009, when we saw what had happened with China between 2001 and 2009, there was no way that an agreement that gave China a pass on rules so that it could continue to expand its manufacturing and undermine manufacturing around the world, that that was going to fly.

• 21:42Speaker 07

  And the President went back to the other leaders at the next G20 meeting and said, the Doha Round is not going to get done on the path it is currently on. And I remember, we were at a G20 summit, and the other leaders all went around and read their talking points. The traditional talking point at the time was, the Doha Round will get completed by December this year, or by the ministerial this year. And, you know, President Obama intervened, he made his point, the other leaders read their talking points, and he put his flag back up and said, you know, you guys aren't listening. This isn't going to happen. And that was the first indication that something needed to change.

• 22:19Tracy Alloway?

  Yeah.

• 22:20Speaker 07

  And then we were sitting down with the Chinese bilaterally in lots of consultations, sort of unending consultations, and we'd have this conversation with them and remind them that their tremendous success was based on a benign international environment, the capacity to export to the rest of the world, and that if we didn't address these underlying concerns, state-owned enterprises, subsidization, IPR rights, et cetera, that benign international environment was going to disappear. And that, of course, is exactly what's happened. And that's the bipartisan consensus against China that has now emerged. We started warning them of that back in 2009, 2010. And I think we made some modest progress during the Obama

• 23:02Speaker 07

  administration to get them change certain practices. But by the time President Xi came in and made it clear he was going to be dominant in the following sectors, he was going to reduce his dependency on the rest of the world and increase everybody else's dependency on China, the game was over.

• 23:16Tracy Alloway?

  Actually, this leads into my next question, which is, we've talked a lot about how, you know, there was this break in the rules-based liberal trading order. Was there a single moment where you went like, aha, this has fundamentally broken, instead of just like slowly declining, slowly changing? Was there something that sticks out to you about, wow, this is actually changing right now?

• 23:40Speaker 07

  So I think that Doha moment back in 2009 was one of them. I also think later on in the Obama administration, we were trying to negotiate an agreement over environmental goods. It was a list of 250 or so products that would have been, you know, good for countries to buy more of and produce more of because it was good for the environment, for climate change or otherwise. And it failed. It failed over bicycles.

• 24:11Speaker 07

  That between China and the EU, the EU was protecting the Polish bicycle industry. China wanted to put bicycles on the list and they couldn't agree on what to do with bicycles. And so the entire agreement fell over that one issue. And to me, it sort of underscored, okay, we're pretty far from reaching consensus. That if we can't reach agreement over bicycles, we're not going to reach agreement over things that are much more meaningful.

• 24:39Joe Weisenthal?

  Were you surprised at all? I want to, we start to move a little bit closer to the present. But before we get to the present, was it inevitable that in your view that the Biden administration ended up as a continuation slash expansion of some of the Trump restrictions? Was there still an opportunity to turn somewhere closer to a pre-Trump path?

• 25:02Speaker 07

  I, I think there was an opportunity to make some changes, but not go back to the way things were before. The Biden administration, for example, launched a review of the China tariffs. And I think in many respects, the Biden administration was very strategic in how it approached export controls and foreign investment constraints. It was very targeted. The tariffs, they launched a review to try and distinguish between strategic and non-strategic tariffs. Like, there's a case to be made for tariffs if there's unfair trade practices or if it's a product that you really need to produce here in the United States. You don't want dependency. But do we need tariffs on T-shirts and underwear and socks? Is that important to our national security?

• 25:44Speaker 07

  And they never got themselves to the position of reducing those tariffs. And to me, it's not necessarily a criticism of, of the Biden administration. I think it just goes to show that tariffs are easy to put on and hard to take off. Because once they're on, there are constituencies that...

• 26:02Speaker 07

  Are supportive of them and any movement to reduce tariffs, particularly in this political context, is seen as being weak on China. Even if it makes pure sense from a economic point of view. Who is hurt most by tariffs on underwear, T-shirts and socks? It tends to be low-income Americans who spend a disproportionate amount of their disposable income on imported goods. And we could afford to bring in those products from China without questioning our national security.

• 26:30Tracy Alloway?

  Without losing our strategic underwear-producing capacity. Although I think the US military does actually have some strategic clothing operations.

• 26:38Speaker 07

  There are restrictions under, like I used to call it the Department of Defense, the Department of War that require uniforms, footwear and other things to be made in the United States.

• 26:49Tracy Alloway?

  Fun fact. How would you actually describe the current state of the global trade system? Because I've heard people say there are shades of mercantilism, protectionists, that sort of thing. What's your description of where we are right now?

• 27:05Speaker 07

  Well, I think the challenge of where we are right now is you have the two largest economies in the world, the US and China, basically following their own set of rules rather than the multilateral rules-based system that the US was very much driving the creation and the defense of over all these years. And when you have the two largest economies doing that, the question is, well, what are the other economies going to do? Are they going to start imitating the US or China? Will they continue to abide by the rules if nobody else does? I think they're all sort of wrestling with that question because for some of them, like the European Union, European Union is more ideologically in favor of free trade, integration, the rules-based system. The whole notion of the European Union is based on that,

• 27:50Speaker 07

  of bringing the European countries together, let alone the rest of the world. So it's harder for them to make this leap than it has been for the United States. But I think the reality is, is that the system is under great stress. And we're going to have to think through, how does it evolve? What are the elements of it that we want to try and preserve or reconstitute? And how does it need to change to take into account not only the lessons of the last 80 years prior to Trump, but the lessons of the Trump administration, some of which will be instructive.

• 28:39Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 29:21Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 30:02Speaker 02

  Running a small business takes everything you've got, but with Chase for Business, you're not alone. They bring together local support and a broad range of resources to more than 7 million customers. With a deep understanding of your day-to-day needs, they provide products and guidance built to help you thrive. Right now, earn $500 when you open a new Chase Business Complete Checking account for new business checking customers with qualifying activities. Offer expires January 21, 2027. Chase Business Complete Checking has the flexible tools you need to accept payments, make deposits, and manage your finances with confidence. Learn more at chase.com/podcastbizoffer. Chase, make more. Of what's yours. Fees may apply to Chase Business Complete Checking Accounts.

• 30:44Speaker 02

  The $500 offer is available for new business checking accounts with qualifying activities through 121 2027. Eligibility and qualification requirements must be met. Additional restrictions may apply. Please speak with a business banker for more information. JPMorgan Chase Bank, N.A., member FDIC.

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• 32:00Joe Weisenthal?

  Let's talk more about some of the paths that things could go, because I'm thinking about, setting aside even the Europe and the US. You know, there was the BRICS gathering recently. These are, there are a lot of countries whose own developmental trajectory could be undermined by China's manufacturing success, right? And yet, perhaps because of the actions of this administration, et cetera, they don't feel that there is a sort of comfortable home or friend in DC and that maybe it makes more sense for them, even given the competitive challenges, to be friendlier with Beijing, et cetera. What is your view on that? Do you believe there could be a new?

• 32:43Joe Weisenthal?

  I mean, one thing we've heard, we were talking to, we recently interviewed Robert Kaplan, Vice Chairman over at Goldman Sachs. His view was globalization is alive and well. It's just that the US isn't really part of it and that we're actually reemerging, sort of free trade, et cetera, except it's with China at the helm. Is that a fair characterization? Like, what is happening with these massive other countries as they think about who their partners and friends are?

• 33:09Speaker 07

  So first of all, I think globalization is not over. Other countries continue to move ahead to integrate their economies. European Union has signed additional trade agreements with Mercosur. They're working on one with India. Africa has a continental wide free trade agreement, signed a few years ago, that they're in the process of implementing. So I think Robert Kaplan's observation that it's the US that has exempted itself is to a certain degree correct. I'm not sure the next step is that this is all going to shift to China and it's going to be a China-led bloc, because there's no country that's more concerned about the potential adverse impact of Chinese exports on their own manufacturing and economic aspirations

• 33:53Speaker 07

  than India. India, and you could add Brazil, you could add Indonesia, you could add South Africa. They're all deeply concerned that if the US and Europe begin to close their markets, all that excess capacity from China has to go somewhere, and it could well get dumped in their markets and hurt their capacity to build up their manufacturing base as well. And so I've been of the view that, you know, we had this, the Cold War was about bipolarity, US, Soviet Union. The wall came down, Soviet Union was dismantled, and that was kind of a unipolar moment. That's over now. That 30-year period is over. What we have now isn't multipolarity.

• 34:34Speaker 07

  It's not like you've got two or three camps that do everything together, a China camp, a US camp, some other camp. I think it's really more akin to like polyamorous life, right? Like, India is the perfect example.

• 34:48Joe Weisenthal?

  We got our episode title. That's right.

• 34:51Speaker 07

  India is the greatest example of this. India loves the United States, at least until recently, for technical, technological cooperation, for civil nuclear cooperation, for investment, for the relationship between the Indian diaspora and our entrepreneurial ecosystem here.

• 35:12Speaker 07

  They love Russia for oil, for arms. They love Iran for oil. They love and they hate, depending on the day, they've had, it's one of the countries they've gone to war with, you know, on their border. They've had skirmishes. People have died in armed conflict between India and China. But then, as you saw recently, there was a conference in China where you had Modi, Xi and Putin holding hands, walking down the red carpet together. So I think India is archetypal example of trying to play these relationships.

• 35:45Joe Weisenthal?

  They always were during the Cold War, too, right? They were the preeminent non-aligned country, right?

• 35:50Speaker 07

  That's right. I mean, it's changed now. Then they were non-aligned. Now I think they're multi-aligned. So they'll be aligned with the polyamorous. And you could use the same analysis to, I think, cover a lot of other countries, a lot of the other middle countries. That makes it a much more complicated world. You know, in retrospect, the Cold War was very simple. It was black and white. You were with us, you're with the Soviet Union, you know, and there were some proxy wars in between. But it was pretty, it was pretty simple. This is much more complicated. And it leads to the view that you're going to have to be very proactive and creative in creating coalitions of the willing around various issues. Because sometimes India might be in it, sometimes they might not. Sometimes China might be in it, sometimes not. And I think that's the challenge for the United States to continue to exert leadership going forward.

• 36:35Tracy Alloway?

  How resilient would those smaller coalitions of the willing actually be? Because I can imagine, maybe it's easier to negotiate with a smaller group. Maybe you don't get caught up in debates over bicycles and things like that. But on the other hand, if you don't have like a big trading partner who is necessarily driving the agenda, it seems like it might be a little bit more difficult to enforce.

• 37:01Speaker 07

  I think you need a combination of smaller groups of like-minded countries.

• 37:07Speaker 07

  But it does, to your point, trace you require leadership. And in the past, the US has been a leader of it. I mean, you've got some very strong examples like NATO. You know, a military alliance is the strongest example of a plural lateral group. So something less than the whole world, but a like-minded countries that have agreed to do certain things together because they have a common interest to do so. I'm not sure it would exist without US leadership and US driving it going forward. That was true of the Trans-Pacific Partnership as well. I think it could be true of a number of these other things. And by the way, China is very good at this. I mean, the conference, the Shanghai Cooperation Organization Conference that they recently held, where Modi and others were present, that's a good example of them putting together coalitions.

• 37:50Speaker 07

  BRICS is another good example. Now, we can talk about the strengths and the weaknesses of BRICS and where the countries actually have common interests and conflicting interests. But it's that kind of drive that you need a leader and you need a group of like-minded countries.

• 38:03Joe Weisenthal?

  Let's talk a little bit more about some of these tensions that emerge because it does sound like, you know, BRICS, BRICS is a nice acronym that Gemonio from Goldman Sachs Asset Management came up with in 2001 and which may now be, you know, this important geopolitical entity. We'll see. We don't really know for sure yet. But it seems like one possibility is that, okay, the US, we feel that we need to have in key strategic sectors, some sort of, you know, capacity to build semiconductors or maybe capacity to build batteries, at least there was a big push under that, under the Biden administration. Of course, China has that and it's growing.

• 38:45Joe Weisenthal?

  I mean, when people think about the economy going forward, is there a risk that essentially every country feels they have to make that decision, that India feels it has to have its own battery-making capacity, that Germany feels it has to make its own battery-making capacity? And that There is a sort of domino effect and we just wind up in a much costlier, less efficient world.

• 39:07Speaker 07

  Well, I think we are heading towards a costlier, less efficient world. I'm not sure that's necessarily a bad outcome.

• 39:14Joe Weisenthal?

  Okay.

• 39:14Speaker 07

  In that to go down the path of greatest efficiency.

• 39:19Joe Weisenthal?

  Yeah.

• 39:19Speaker 07

  Could be, at least in the short run, to become utterly dependent on China for all of this product. Because they can produce things cheaper, not always because it's cheaper labor, but because they've become very efficient.

• 39:30Joe Weisenthal?

  Sure.

• 39:30Speaker 07

  Infrastructure.

• 39:31Joe Weisenthal?

  Massive scale.

• 39:32Speaker 07

  Massive scale. And I think the question is, is it a good thing? I mean, is it that the US have a battery industry and that Europe have a battery industry? It's probably a good thing. It may not be as efficient as relying completely on China, but having that diversification, particularly over the long run, is a positive. Rule number one of of risk management, diversification. And yet we became very complacent and very, we became very complacent over the years of just relying on China as our manufacturing floor. And now I think companies have come to the conclusion, whether it was because of natural disasters, COVID, or political intervention, as we've seen with China, that it's to their benefit, their economic benefit even, over the longer run,

• 40:17Speaker 07

  to diversify even in the short run if it's more expensive.

• 40:20Tracy Alloway?

  With your trade representative hat on, can you maybe say something about how you view military strategy? And I guess trade and this idea of, well, maybe we want to be independent. Maybe we want to have independent capacity in something that's strategically important, like semiconductors, or I don't know, making ballistic missiles or something like that. How does the US government actually think about the relationship between trade and military might?

• 40:47Speaker 07

  So I think over time, broadly, economics and national security have converged into economic security. And we're sorting through what that means in practice. So in the case of the Biden administration, they talked about a small yard and a high fence. So take a limited number of technologies and say, these technologies, we refuse to export to our competitors and our adversaries. We refuse to allow them to buy US companies that specialize in those technologies and refuse our companies to, who dominate that area, to invest in China and give them their capacity. But it was a relatively few sectors, relatively few technologies. The question is.

• 41:30Speaker 07

  Is there an extensible set of pressures to expand that yard and to add more and more things to it? And where is it appropriate? And where is it not appropriate? And I think that's what we're now sort of wrestling with. We're highly dependent on China for all the ingredients that go into our pharmaceuticals. Do we feel comfortable with that? China's done nothing to say they would cut it off, but they could. And we've seen recently, China has used its choke point capacity, rare earths, magnets, to demonstrate that it has leverage to. And it worked. The Trump administration raised tariffs to 145% on China. China restricted the export of certain rare earths and magnets, and suddenly there was a de-escalation.

• 42:15Speaker 07

  And so, we have to now wrestle with that and decide over the long run, what products do we actually need to be made in the United States because they're so critical to national security or our sense of national security? And which ones, and this is where there's been, I think, insufficient attention, which ones can we rely on our allies and partners? Because we probably can't produce everything, at least in the short run, or wouldn't make sense to produce everything ourselves. But can we rely on Canada, and Europe, and Japan, and South Korea, and Mexico for some of this production, or in India? And how do we differentiate between which products fit in what group? And therefore, then what do we need to do about it to drive production here where necessary,

• 42:58Speaker 07

  and to develop the relationships with the allies and partners where possible?

• 43:02Joe Weisenthal?

  The idea of friend shoring, or whatever you want to call it, sounds very intuitive. And it's like, we don't need to build a ton of shipyards, maybe we could get the Koreans to do that for us, or I don't know, probably the Finns are good at it, I'm not sure.

• 43:15Speaker 07

  Icebreakers. The Finns are very good at icebreakers.

• 43:17Joe Weisenthal?

  Oh, the Finns are the icebreaker. Yeah, that's right. One of these facts that we've learned over the years. But is there, I mean, when you look at the current administration, do you see anything other than widening a gulf between those partners? Like, yeah, it sounds great to have a nice relationship with the Koreans, for them to build more ships for us, and then that solves the problem of scale and redundancy, et cetera. But in practice... From your perspective, is it going the opposite direction?

• 43:48Speaker 07

  Well, look, I think one of the challenges of any administration, but it's certainly evident in this one, is the connecting of dots between one policy objective and another policy objective. And so, yes, in the short run, it's going to take us a while to build up our shipbuilding industry. And it's going to require a lot of government support. And it's going to require a lot of policies that we've not yet adopted. Perhaps it's something we should do, but it will take years to really build that up. In the meantime, should we look to Korea? Should we look to Japan? Should we look to Finland for the ships that we need right now? That's one set of objectives. Then you have the raid on the Hyundai plant, which was another set of objectives.

• 44:31Speaker 07

  You know, objectives around migration, illegal migration and illegal workers. I sometimes wonder whether the dots are being connected within the administration or whether there's a view, and they may be right, they may be wrong, but they can have it both ways. That they can come down on Korean workers in the United States and still look to Korea and say, "You will deliver us ships."

• 44:52Tracy Alloway?

  And share your expertise and technical knowledge and all that.

• 44:55Speaker 07

  And help us build shipbuilding here in the United States.

• 44:58Tracy Alloway?

  I want to broaden out the conversation.

• 44:59Joe Weisenthal?

  I think Mike was very ambassadorial, by the way. Anyway, keep going.

• 45:02Tracy Alloway?

  Of course. Just to broaden out the conversation, though. Back in March, I wrote an Odd Lots newsletter titled, "The US Is Looking A Lot Like China." I got an enormous amount of pushback on it, but you actually wrote something similar. And I don't even have a question, just tell me that I was right.

• 45:22Speaker 07

  You're right. You were right.

• 45:24Tracy Alloway?

  Thank you.

• 45:25Speaker 07

  Look, I think we spent years, we always thought there was a theory of convergence. That by bringing China into the international system, we would become more alike. Now, our view was, they would become more like us.

• 45:36Tracy Alloway?

  Like us, yeah.

• 45:37Speaker 07

  More open, more liberal, more market oriented. And we used to go to them and lecture them about, "Don't be protectionist." Don't restrict foreign investment in your country. Don't make it impossible for our companies to invest in your company. Don't engage in industrial policy and subsidization. And don't take stakes in private companies and intervene in the private sector. And now, what are we doing? We are protectionists. We have restrictions on foreign investment. We are engaged in limited industrial policy. And now, we're beginning to take stakes, government stakes, in private companies. So, rather than them becoming more like us, we have become more like them.

• 46:18Speaker 07

  And the challenge of that, I think, is that we're now competing with them on their playing field, under their set of rules. I'm not at all convinced that we can compete on their playing field as well as we can compete on ours. Because we don't have unlimited, we can't go to Congress and say, "Give us unlimited resources to invest in this sector after that sector." We can't subsidize, you know, the commanding heights of the technology competition. And I think it's unfortunate, because I think the Chinese can play that game much better than we can.

• 46:50Tracy Alloway?

  Yeah, I think this is a really important point. Because when we're thinking about, you know, choke points in terms of manufacturing or whatever, China has the most experience out of practically anyone in the world of like building up strategic capacity and doing it in a very conscious and interventionist way.

• 47:08Joe Weisenthal?

  Well, and also, a lot of that sort of massive oversupply that people call it is maybe to some extent intentional, but maybe also just to some extent a function of their provincial versus provincial relationship, where the provinces are hyper-competing, etc. for market share. That's just a dynamic that doesn't, nothing like that exists in the United States. And so, the idea of moving in that direction, all kinds of conditions, either by design or just sort of by happenstance of the political structure of the system, is just very different.

• 47:47Speaker 07

  Exactly right, Joe. I think, you know, in their case... Leadership says we want to be dominant in these 15 sectors. Every provincial governor looks at that and says, all right, I'm gonna take my local state owned.

• 48:01Tracy Alloway?

  I am now judged by my ability to produce this.

• 48:03Speaker 07

  And we have, you know, in China, I think there are over 100 EV companies. You know, and so, and they're producing, and they will be producing enough cars for, to meet the demand of the entire world. So where does that leave the US auto sector? Where does it leave the European auto sector? Now, in our case, I think, you know, we have effectively kept them out. We've effectively said we're not going to have Chinese EVs here, at least at the moment. Europeans have a slight, you know, more schizophrenic about it. They've also adopted protectionism, but they're more open, I think, to having Chinese imports. What does that mean for the future of Volkswagen, for the future of Renault, for the future of the other auto companies? And, you know, in that case, it could have broad political implications in Europe as well over time.

• 48:48Tracy Alloway?

  I hesitate to ask this question, but is there anything the US can learn from China in terms of, you know, trade and building out strategic industries?

• 48:57Speaker 07

  Well, look, I, I think China, we, we shouldn't make China into more than it is. China's made huge mistakes. They've wasted hundreds of billions of dollars on bad domestic investments. And they've got, you know, tremendous challenges, including demographic challenges, that the US currently doesn't, doesn't have. And so we shouldn't make them out to be, you know, 12 feet tall. I think one thing that is current is to think through, okay, if there is an industry that you think is important for national security or otherwise, what's the best way of supporting it by the government? The Trump administration's approach, I think, has been based largely on tariffs.

• 49:39Tracy Alloway?

  Right.

• 49:39Speaker 07

  That if we create this wall of tariffs, companies will have to produce or have to move their supply chain to the United States. And that's how we'll build out this area. I think what we've seen in China is that, yes, they've used tariffs and other restrictions. They've also used industrial policy. They've also invested.

• 49:59Tracy Alloway?

  Subsidies, credit.

• 50:00Speaker 07

  Subsidies, credit, free energy. You know, they've also invested heavily in R and D. In many sectors, the life sciences, obviously AI, among others, government subsidies and government investment. And it's that combination of policies that probably is more effective than tariffs alone. To me, the concern is we're approaching this from a position of tariffs are the answer to everything. We know what the costs of tariffs are. And we're taking a gamble on whether the benefits will be there. And whether tariffs alone are going to remanufacture the United States economy.

• 50:36Joe Weisenthal?

  You mentioned that some degree of greater redundancy and higher costs is not the end of the world, particularly if there's some political, it creates some political sustainability. What is it, what does the, um, the left tail risk looks, look like to you? What is the scenario in which things really, the wheels really come off?

• 50:57Speaker 07

  One, the US doesn't have a great history with industrial policy. So if we were to multiply our efforts in various ways, but not do it well, that would, uh, that would be a waste of resources and costs that we didn't need to, need to incur. I think if we don't, to go back to the point about allies and partners, if we insist on reshoring everything and not friend shoring anything, I think we probably lose some of the economies of scale and some of the comparative advantage that we have. I also think if we're, if the, if the existential threat is competition with China, if they are the pacing challenge, working with allies and partners is our way to reach scale.

• 51:42Speaker 07

  We're a big economy, we're the biggest economy in the world. But when it comes to manufacturing, we're not going to be able to compete with China alone necessarily. Or rather, we're going to be able to compete with China much better if we do so with our allies and partners.

• 51:56Tracy Alloway?

  I have just one more question. This is the most important one. How good are you at tradel? Do you ever play that?

• 52:02Speaker 07

  We do. I love these games. Tradel and worldle.

• 52:06Joe Weisenthal?

  Oh, worldle. Yeah, that's the other one. I didn't get into that.

• 52:09Speaker 07

  Tradel, I think, is a great game. I don't always get it right, but it's a good reminder of just how complex certain economies are.

• 52:19Joe Weisenthal?

  After we're done with this, could you help us find that Jerry Farmer who explained the 500 different ways to use a tarry molecule?

• 52:24Speaker 07

  Absolutely. It's a fascinating lesson.

• 52:27Joe Weisenthal?

  Michael Froman, thank you so much for coming on Oddlo.

• 52:30Speaker 07

  Thanks for having me.

• 52:30Tracy Alloway?

  Thank you. That was great.

• 52:45Joe Weisenthal?

  Tracy, I'm really a fan of this neologism, or wherever it came from, the polyamorous world order. Because, you know, people talk about the G7, and what's his name talks about the G0, and then other people talk, oh, bipolarity. But I think this is a good one.

• 53:03Tracy Alloway?

  It is kind of funny to me that there's this idea out there that just because Goldman came up with like a catchy acronym for the BRICS, that somehow that's going to like create a new strategic coalition from like pretty disparate countries.

• 53:18Joe Weisenthal?

  We should have Jim O'Neill on to talk about. We've never talked to Jim O'Neill. And so the thought of him coming up with this paper, these are going to be the big economies, and now it's a rival bloc to the West is like a really good.

• 53:29Tracy Alloway?

  Oh, that would be really interesting. But I do think, okay, one thing you can say about polyamorous relationships is they tend to come with a lot of drama, right? And so it definitely feels like we're going to have more instability, or at least like more things changing, more things in flux, more volatility.

• 53:48Joe Weisenthal?

  Right. So. This idea that I I I find it compelling, this idea that the old globalization can't just be replaced with the same globalization, except the leader has changed.

• 54:02Tracy Alloway?

  Right.

• 54:03Joe Weisenthal?

  Right? I mean, the US was this huge trade deficit country. China is a huge trade surplus country. That naturally means that its relationship with all of its partners on some level, even if it wants to be at the forefront of creating new tariff-free zones, et cetera, is going to be of a different type than the relationship that the US had.

• 54:25Tracy Alloway?

  Absolutely. Shall we leave it there?

• 54:26Joe Weisenthal?

  Let's leave it there.

• 54:27Tracy Alloway?

  All right. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 54:33Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest, Michael Froman. He's at Mike Froman. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashal Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 54:58Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about the future of global trade, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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