Cornell University professor Eswar Prasad joins Market Domination to give insight into the potential for increased tariffs imposed on China from the US and what the US-China trade war could look like. Both President Biden and former President Trump favor tariffs, with the latter campaigning on even steeper import taxes.

Prasad, a Brookings Institute Senior Fellow, elaborates on the current situation China finds itself in:

"I think there is a baseline right now that is going to be very difficult to go below, meaning that it's going to be difficult to deescalate tensions because in the US there is very little political or economic payoff to doing so. But the reality, of course, is that, if one limits imports from China, that does have effects on US inflation, that does have effects in terms of limiting access to a lot of products that China is now marketing to a very significant extent, where it has a large part of the world capacity. Now, China cannot afford to lose access completely to US and other Western markets..."

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This post was written by Nicholas Jacobino

Video Transcript

President.

Biden and former President Trump disagree on most things, of course, but there's at least one topic.

They can find common ground on tariffs.

In 2018, Trump began placing heavy tariffs on many Chinese goods, and when Biden moved into the White House, he kept many of them in place.

Trump has promised even more extreme tariffs if he wins a second term.

Joining us now is Ishwar Prasad, Cornell University professor and author of The Future of Money.

How the Digital Revolution Is Transforming Currencies and Finance.

Ishwar.

It's good to See You, Um, so as we noted there, listen election front and centre and tariffs are are front and centre ear, you know, Biden and Trump.

Um, did you have different approaches?

But they both have embraced tariffs.

I'm just interested in war to begin there.

Whether when you think about tariffs, you know, is that in your opinion, is that smart, effective policy?

I have just returned from a trip to China, and I can tell you that the Chinese government is certainly poised for having to deal with the tariffs under either a second Biden or other Democratic administration and Trump administration.

Now, there is going to be a change, though, in terms of the tactics and strategy, if there was to be a trump, probably much higher tariffs.

But the Biden administration has actually been quite effective in terms of limiting technology transfers, limiting China's access to chips, which matters a lot more to China right now, essentially because they are trying to move up the value added chain, upgrade the technology sector.

But the reality that China faces right now is that a recent recovery has been led by the production side rather than the consumption side, and they need export markets.

So I think tariffs are coming from the US and perhaps from other Chinese trading partners as well.

So to the extent that you can, I'm curious what you can charge us about the sentiment of Chinese officials at this point towards the US, and we do see this continued escalation of tariffs, what exactly the US China relationship could potentially look like here in the coming years.

I think there is a baseline right now that is going to be very difficult to go below, meaning that it is going to be difficult to de escalate tensions because in the US There is very little political or economic payoff to doing so.

But the reality, of course, is that if one limits imports from China, that does have effects on US inflation.

That does have effects in terms of limiting access to a lot of products that China is now marketing to a very significant extent where it has a large part of the world capacity.

Now China cannot afford to lose access completely to us and other Western markets.

As I mentioned right now, exports have been powering their growth and at least in the short term they certainly need export markets and they need the foreign technology as well.

So they are trying to play nice to the extent they can, trying to limit their retaliation to what they consider proportionate retaliation.

But I don't think it's going to get any much, much better in terms of the relationship between the two countries in the coming years.

And as you said, you just got back from China.

I'm interested in your take on the Chinese economy, EU not just today, but where do you think it is six months from now, 12 months from now?

Because we speak to a number of investors and money manager and there there is a fair amount of of obvious scepticism there.

There are both cyclical and structural factors that are a problem for China right now.

As I mentioned earlier, what China has been able to do, which a command economy is very good at doing is stoking production.

So what they have done in the last couple of years is try to fuel credit to the parts of the economy that they are traditionally relying on, which are the large state owned enterprises.

The problem is that those are not very good at generating employment growth, and importantly, the Chinese government faces a problem.

Right now.

There are lots of underlying structural problems, weaknesses in the financial system, weakening demographics and there is a sense of economic malaise overall.

And I get the feeling that both households and private businesses in China feel that the government does not have a very clear policy strategy, either in terms of boosting short term growth or in terms of dealing with these longer term issues.

Private enterprises feel that the government has become much more hostile, so we have seen household consumption and private investment not doing very well, and that creates a real imbalance in the Chinese economy.

If consumption stays weak, and if private investment does not pick up, that's going to make both employment and productivity growth much harder for them to sustain.

So some difficult times ahead, both in the short run and the medium term for the Chinese economy.

Going back to what you just said a couple of minutes ago there, when you were talking about inflation, some of the inflationary pressures that we could see as a result of tariffs.

I'm curious if you can elaborate on that just a little bit here.

If we do see that 10% blanket tariff that President Trump has floated in a couple of interviews, or even escalating that up to up to 60% tariffs specifically on Chinese goods, what's the ultimate impact?

Do you see to Americans and then that global fallout, what that could potentially look like.

So there are two elements here.

One, of course, is the direct inflation impact.

If you think about, um, you know, low skill, low wage manufacturing, which China has been very good at, there are attempts to find other countries from which the US could import, but there aren't any that can provide those things at scale.

But China is a very important part of global supply chains for a variety of other goods as well, including electronics, including solar panels and the sort of things that are very important for the green transition in the US.

So in each of these, while the US looks to build domestic capacity or look for alternative sources of supply, the fact that there are going to be rising tariffs in China will almost certainly affect US prices.

But the underlying fact here is that China is trying to move into those industries.

I think of them as new technology industries, green energy, electric vehicles and so on, which are precisely the industries that the US is counting on for its own manufacturing revival.

So that I think, is a structural problem in this relationship right now.

It used to be seen as the economic relationship being a positive sum game.

But given that both countries are now relying on exactly the same sort of industries for the future of the manufacturing sectors, it's becoming seen as a zero sum game between the two countries is super interesting conversation.

Thanks so much for helping us walk through it.

Have a great fourth.

Thank you.

You too.