The Coronavirus Crisis Could Lead To The Mother Of All Trade Imbalances

Joe Weisenthal (0:10)

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

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

So Tracy, something that you've been writing about lately, and of course, we're still in the middle of this extraordinary global crisis. The story has taken on a new dimension, and I feel like you being positioned in Hong Kong, covering the story from Asia, it's going to really an area that you can appreciate.

Tracy Alloway (0:40)

Oh, what's that?

Joe Weisenthal (0:42)

Well, I mean, in the last few days, and we're recording this on May 4th, 2020, so important to note, the idea of the trade war, tariffs, China-US trade tensions has really sort of re-emerged as one of the subplots, so to speak, within this crisis.

Tracy Alloway (1:00)

Oh yeah, so after a relatively long hiatus, we have Donald Trump once again threatening tariffs on China. And of course, there are political dimensions to what he's doing. China is sort of an easy distraction or an easy scapegoat for the coronavirus chaos. But yeah, it's definitely interesting to see the trade war pop up again in the midst of what is arguably the biggest global recession that we have had for a long time.

Joe Weisenthal (1:29)

Yeah, and it's interesting too, because obviously the trade war, trade tensions dominated really the second half of last year.

And you would have expected that sort of, perhaps very early on in this crisis, that due to the origin of the virus, that Trump would have taken an extremely hard line against China. But so far, at least rhetorically, he's been fairly conciliatory.

Tracy Alloway (1:58)

I guess that's true, but it does feel like it's something that's probably going to come. The other thing that I find really weird about the whole past few months in the market reaction was back in January, in February, when we saw large chunks of the Chinese economy shutting down because of the coronavirus efforts. It took a really long time for the market to react. And it was so odd, I think we've had this conversation before, but it was so odd because we spent all of 2019 worrying about a trade war. And then effectively, we had something that amounted to a similar thing in the form of the Chinese economy shutting down.

And the market didn't seem to care anymore.

Joe Weisenthal (2:38)

Right, here we have the biggest supply shock, so to speak, imaginable, the total shutdown of manufacturing.

And I remember the first real coronavirus episode we did, and it was before US markets really started crashing, was with Dan Wang of Gavkal talking about, I think it was just after, or it was the week that Apple warned about the disruptions.

And that was the first time US markets really started getting very anxious about this. But the beginning of the story was really about sort of the supply side disruptions out of China, because of course at that point, I think it was mid or late February, there wasn't an appreciation yet in the markets of what it would do to the economies of the US and Europe, which would de facto total shut down.

Tracy Alloway (3:30)

Yeah, but that was another weird thing, because people were very focused on the supply shock side of it. And there were just a handful of people who were really talking about the hit to demand. And now two months later, it's pretty clear it's both a demand and a supply shock. And the really interesting thing over here in Asia, as we sort of emerge from lockdown and start to recover, is that even though manufacturing is getting back up and running, a lot of people still aren't in the shop. So in China, for instance, the authorities there are trying to give out vouchers in order to get people to go shopping.

Joe Weisenthal (4:08)

Right, so that's the problem. I mean, we've seen, perhaps surprisingly, the speed with which manufacturing can come back online. In China, various factories are starting up, but that doesn't help much if they have no one to sell to.

Tracy Alloway (4:22)

Yeah, exactly. Supply and demand shock isn't a great thing for the global economy.

Joe Weisenthal (4:28)

Indeed. So now, anyway, that the trade war is perhaps starting to reemerge as a dimension of the story.

I thought it would be a good idea to talk about that. And we have the perfect guest. I think we've never had him on, but he's someone we're both friends with and someone who's perfectly positioned to speak to the tensions that are here and which may be emerging in the months ahead.