Tony Roth, Chief Investment Officer
Shehzad Qazi, Managing Direct, China Beige Book
Roth, Anthony
This is Tony Roth and you're listening to Wilmington Trust Capital Considerations. I'm very excited to have a very special guest today because I believe it's the 1st time we've had a guest for a 3rd episode. Today we have Shehzad Qazi.
Who is the chief operating officer and managing director of China Beige Book. An organization that helps institutional investors navigate China's notorious black box economy. Shehzad leads the firm's efforts in data innovation, macroeconomic analysis, and strategic advisory on China's evolving economic landscape. Since joining the firm, Shehzad has been at the forefront of reshaping how global investors and policy makers understand China beyond officially reported data. Shehzad is a frequent guest on CNBC, Bloomberg, and CNN.
And I can't imagine a better time to have Shehzad on our podcast than right at this moment, where as of this recording, we're all on tender hooks waiting to see whether or not there may be deescalation of trade or at least the start of official conversations that might even assuage to some degree in the markets around what's going on. And so thank you so much for being here today and we're really going to be very excited to hear if you have any insights for us on this critical topic. So thanks for being here.
Shehzad Qazi
Yeah, my pleasure, thank you for having me back.
Roth, Anthony
As we sit today, we have 150% on average tariffs, more or less on activity from China into the U.S. and just slightly lower on U.S. to China. And I guess unlike the rest of the ecosystem where the tariffs are low enough that there's some pain, maybe even enough pain to cause a recession, but not a catastrophic situation, if you will. Whereas with China, the situation is really quite dire in that there's so much uncertainty and the, and the tariffs themselves are so high leading to uncertainty around whether consumers would actually purchase these goods at that level, that a lot of the goods are just not being manufactured or sent at all from the shores of China, which really stands to have all kinds of implications for the U.S. economy. In particular, there are so many small businesses where we measure about 50 % of what comes from China, goes into other products. And so you can have a product that has one little piece that you need from China, right? But if you don't get that, you can't actually complete the product, so to speak.
And then of the other 50 %, so much of it are final goods that are sold by small businesses. So there's so many potential profound and even existential impacts for small businesses in particular that we're worried about across the entire economy that we think that even if the rest of the trade work does not send the economy into recession, the situation with China is really quite singular and that we need to see a deescalation. So we know you're plugged into, to a lot of folks on both sides of the, of the Pacific ocean. What's your take right now on the possibility of some kind of deescalation between, you know, now and say Memorial Day in the month of May?
Shehzad Qazi
Yeah, Tony, this is a great setup, you know, what we've been doing over the last, now almost couple of weeks is actually preparing our clients for exactly the kind of deescalation and off ramp that we've increasingly seen both sides take. One of the things that we've been doing is telling our clients, you know, look, tariffs have reached a very, very high level, but quite honestly 145 % is actually NO different in terms of real economic activity and trade between the two sides than half that amount. But these are as has been said by the administration, unsustainably high, and because of the building economic pressure and you know on the Trump administration, there's certainly a desire to take an off ramp, and I think we're increasingly seeing that happen. I should point out, you know, we saw the latest results from China Beige Book come in, and what you're seeing of course is an immediate impact on the Chinese manufacturing economy.
So where pain began building there, big pain began there in March, we saw in our data over April, that become more severe. Their export orders have collapsed, their output is down. And so there's real, you know, economic pressure building on the CCP and Xi Jinping and there's the anticipation of empty shelves and, you know, as being gauged by the collapse of freight and cargo etc. And potentially a recession, which has created issues in the market of course that the administration here is concerned about and that's why you're seeing both sides now being increasingly I think looking for that deescalation and figuring out a way to jumpstart talks.
Roth, Anthony
So thanks so much for that overview, that introduction. Where does that leave us then, do you think from a timing standpoint? Do you think that there'll be, number one a an announcement that they're talking and then maybe even at the beginning of that process, they'll de escalate so that they can have a little bit more of of a runway in order to reach a framework of an agreement or do you think that they're going to start talking but they're not going to deescalate for quite a while? Are you hearing anything that might be insightful for us in that regard either from a timing or a content standpoint?
Shehzad Qazi
Yeah, maybe I can sketch out a few pathways here. So the 1st thing of course that we now know is that the Chinese side has said that before talks can begin, they would want to see tariffs completely erased or shaved off. That of course is a very, very big ask and it's not going to happen, but what it does tell us that they're going to need some kind of, cut in tariff levels from the 145 % they're at for there to be meaningful dialogue. What we've also now seen, which is again something that we were explaining privately over the last few weeks, is that the conversations don't have to begin necessarily from trade. It's become clear now the fentanyl cooperation which was put on hold is actually a great way to resume cooperation, a dialogue between the two sides.
Beijing has now offered that up as a way to begin to restart the talks. There's also a 3rd thing, there is a TikTok deal that is sitting, you know, and it's certainly been shelved from the Chinese side, not so from our side, the pace of conversation or talks picking up on an eventual TikTok deal is also a way to further this thaw. And then of course you get to the actual trade issue itself, where, you know, certain amount of pairing back off the tariffs from that 145% you know could be done as a goodwill gesture in order to begin the talks. But that’s it. Now this is where we get into the difficult part of the conversation.
There is not going to be any quick, easy resolution when it comes to the U.S. and China. I think it's become very clear by now to those who are watching this closely, that trade deals in general across the various countries that we're trying to do trade deals with right now are taking time. And even the work products that we're going to end up with are not really going to be trade deals as much as they're going to be sort of these memorandums of understanding and in whatever legal terms we end up with, which really just say that look, these are the set of promises that, you know, the other side is going to try to make good on.
The U.S.-China deal, and a very skinny deal, I I am very negative. I'm very bearish in regards to a big U.S.-China deal, and i'm happy to talk about that. But I think even a so called a skinny deal between the two sides, I think it's going to take a long time to figure that out. So markets, investors need to brace for a far more volatilely that I think they're, they're prepared for this week. Everybody's getting giddy about a détente, everybody's getting giddy about talks.
Roth, Anthony
So, do you think that most of these frameworks will allow tariffs to come down during the subsequent rounds of conversations or do you think that they're going to be, these frameworks but they're not U.S. will not lower tariffs until the final agreements are reached? Because in the case of China, even Treasury Secretary Bessent has come out and said that these, the, the level of tariffs are so high that they're unsustainable and that they're going to come down in the you know again the language you use was the very near future, which would imply that before they have a an agreement that's ready for a west signature as it were, they're going to start to bring these down to a level that can allow trade to start to flow again. Do you think that I'm being optimistic?
Shehzad Qazi
No, not at all. I completely agree. I think that the thing to keep in mind for everybody is the president does not want a full decoupling from China. The president doesn't see the tariffs on China staying at this perpetually high level, you know, forever and ever. He, what he actually wants is the opposite. He wants to do a deal. He wants to have negotiations and he wants to have talks, which means that there will absolutely be a pairing back, a bringing down a cutting of tariffs in the current 145 % level that they're at as part of the talks rather than being just an end state. Now, do we come down from the 145% level and go back to where they were on so called liberation day and then talks begin, which tie, you know, certain Chinese actions, you know China making good on certain promises in exchange for further tariff reductions? Do we go down below even where liberation day tariffs were at? That of course is to be decided. We also have to complicate the picture by remembering that we have ongoing investigations right now that the U.S. trade representative is doing for so-called sectorial tariffs, so outside of what we've got, the base 10 % on global tariffs, the 20% fentanyl tariffs, then you've got the 34 % liberation day tariffs, then you've got the escalation from there because China retaliated, you also have sectorial tariffs coming down the pipeline. So this picture is going to get very, very complicated I think moving forward.
Roth, Anthony
And what do you think the possibility is that we don't get any kind of material information announcement positive developments between now and the end of this month? Do you think that it's highly likely that something that's going to happen this month that will provide some relief for the markets? I mean, are they talking to each other right now or are they just sort of casting out some elliptical negotiations through the media. What do you think's actually happening?
Shehzad Qazi
You know, I think it's the likelihood of a big announcement in terms of tariff level reductions again as I as I've sort of alluded to, in the coming weeks are, are probably, you know, they're rising there and I think where you know we probably should hear about tariff levels coming down because quite honestly, there is a need here. There is an economic need on this side of the pacific, where we do need trade to resume. We don't want to be in a situation where we have empty shelves and and you know severe shortages hitting our grocery stores or our retail stores and so forth and to avoid that because I think there has been a decision made that we're not going to suffer through that pain. So far that seems to be fairly clear. I think tariff reductions in the next few weeks visibly China, I think we can expect that.
Roth, Anthony
It's a game of chicken. Who’s more in the cross hairs here? One side or the other has a worse situation? And do you think that the Chinese government looks at this administration with contempt or do you think that they sort of understand the, internal politics that the Trump administration is sort of going through and that they are letting Trump do his dance, but they understand that the Trump now needs to have a deal and they're going to engage constructively or are they offended by sort of the approach that Trump has taken here?
Shehzad Qazi
The way we think about this perhaps or can think about this is, you know, there are two entities in this world that you know up until liberation day I think or just before, really saw the president more so as a deal maker than quote unquote as tariff man and really didn't think that his, you know, tariffs are ultimately something that he likes to stick with, even if he levies them on.
The assumption was, look, he likes to do big deals and I think Beijing has always assumed that even if we get tariffs and we will get tariffs, we will ultimately be able to go to the negotiation table and strike a deal because that's what Donald Trump likes to do and I don't think that their view of that has shifted any. And this is where the question of leverage comes in. You know, the reality is that the U.S. obviously has more leverage because of how much their—the Chinese economy is dependent on selling to the U.S. The Chinese economy is incredibly dependent on exports. That's, not a surprise for anybody, but they're exceptionally dependent on selling directly to the United States. That gives us a lot of leverage.
However, this is where the situation becomes more complicated. In the short term, the pains that we would suffer from the complete cutting off of trade with China are so severe and so politically unpalatable that it actually gives China a lot more room to make big asks and to hold back and say, no, we're not coming to the negotiating table till you do X Y and Z. If we had a way to substitute China, if we had made the plans to do that, if our companies had diversified enough supply chains to where cutting China out would not be completely devastating as it is right now, that would have allowed the United States to hold off for far longer and the longer the trade war goes on, the worse it is for China. So I think that's the framework with which you understand who's more vulnerable and who holds the cards. It's really just a matter of the timeline more than anything else.
Roth, Anthony
So, let's play devil's advocate on the idea that the U.S. holds the cards. China has not only the rare earth minerals card, which they've already pulled, right? Because they've already cut that off from the U.S. They also have the ability to, pull the license for Foxconn to build Apple products in China. They could kick Tesla out, they could stop the flow of ingredients for pharmaceuticals. I mean it seems like either, either side in a way has, if you will, sort of nuclear options in a way, even more so maybe on the Chinese side because, yes, their economy would suffer, but I don't know that there are essential components that the U.S. provides China that China still has to have, whereas there are a lot of essential things that they provide us potentially. Maybe I'm misreading that.
Shehzad Qazi
I don't think there's a question about the fact that if both sides wanted to go nuclear, that if China really wanted to escalate this, it can, because of our severe dependencies on them for, for essentials, as you just said pharmaceuticals, and, and APIs and and medical supplies and medical goods being maybe the most important. Now when you're at 145% tariffs and trade between the two sides has essentially collapsed the word is embargo that everybody likes to use. To an extent, we've sort of tested that nuclear option now anyway, which is why I think that there's a concern also around bringing, bringing tariffs down or perhaps doing exemptions so that we are, we are not kind of, you know, using the nuclear bomb on ourselves.
But I don't contest that China has the capacity to do all those things. That said, again, pulling back and looking at the larger picture, what does Beijing ultimately want? Beijing doesn't want a trade war. Beijing doesn't want this conflict to spiral. They want a deal, they want the resumption of commerce because their long term model still remains dependent on selling abroad, selling to us. And, and being the factory of the world, not just for things like consumer electronics etc anymore, but for eventually for even more high end technology, for more sophisticated goods and more sophisticated products.
So they're trying to make sure that they keep that very, very plumbed position that they have in terms of how much we depend on them, they want to keep that intact, and, and they want a deal more than anything else and they want this war probably to be over with as soon as realistically possible.
Roth, Anthony
I'm thinking about why is it that they have not already de escalated? What is stopping them all from deescalating right now? And to your point, I think the Chinese will be ready to de escalate at any time if the Americans came to the table with some type of symbolic face-saving gesture to start to reduce tariffs, but then the Chinese would reciprocate and then we would, we would all move to a more sane place. And it's almost the Americans that have been dragging their feet or delaying, right? They're the ones that put the tariffs in in the 1st place.
What's causing the Americans to delay at this point? In other words, why aren't we seeing a an American administration moving faster here.
Shehzad Qazi
So I think it just just in terms of how this has all played out, you know, Xi Jinping is not going to take these tariffs and this so you know assaults on their economy sitting down. So retaliation was obviously very, very important for them, not only for all the face-saving arguments that are made on that side, but also because obviously China sees itself as a big player on the global stage now, I empowering or or looking like they're showing up in Beijing with a begging bowl asking for a deal is not something they were going to be doing. But I think the other reason there has also been a delay in, in, you know, moving from the tariff escalation part to the, ok now let's talk about a part.
It's for a while I think the president was absolutely convinced that if he keeps insisting on the fact that he needs to have a phone call or what he earlier wanted was a meeting with President Xi, a summit in Beijing in, over the summer in June specifically, that he would get that. And I think that was a misread of this picture. You know, there's NO way that you get a meeting with Xi Jinping and then start the tariff process.
That is incredibly risky for the Chinese side to commit to because there's no guarantee that the president wouldn't turn around and immediately embarrass the CCP and more importantly Xi Jinping by, you know, some other escalatory move or some other tariff move or just saying, look, the president, you knowXi Jinping has come to me begging for a deal or or anything of that nature. So any kind of summit with Xi Jinping, any kind of big meeting between the two heads, is going to come at the end of the process.
It's almost a gift, I think that the CCP sees as delivering to the Americans. That certainly created a lot of delay, and then I think the U.S. president, I think wisely stepped back from consistently in public asking for this meeting which President Xi and a call with President Xi.
But that is all practically speaking also built in quite a delay and the two sides have been very in their own positions, I suppose and not wanting, not wanting to budge. That has of course changed in recent days. Both sides have either invented or had real messages being sent across and now are increasingly saying they're open to talks. So, so something has shift either due to the imaginations of each side or perhaps because there were some actual messages sent. But that has moved taking us now closer towards some kind of resumption of dialogue.
Roth, Anthony
That all makes sense. My theory is that, it's a theory I'm a layperson, you're the expert on these types of issues, is that the U.S. is working hard to try to put in place some frameworks with India, Japan, Vietnam, South Korea?
Shehzad Qazi
Mmmmhmmm.
Roth, Anthony
Not all at once, but sequentially over the coming, you know, 30, 60, 90 days, and that if it could have some of those in place, it could demonstrate to China that Its ability in a sense to move on that it could give us some additional leverage if you will, as opposed to just being singularly focused on the situation with China. And so the U.S. perhaps wanted to get some of that accomplished before it engages with China. From a sequencing standpoint, it would put it in a better position. Does anything resonate with you there or does that sort of seem a little bit naive because really what matters more than anything else is going to be the supply chain collapse that we're seeing in the U.S. economy, and that's what the Americas need to respond to, not the pace of deals that maybe occurring with other countries.
Shehzad Qazi
The way we've been able to make sense of this and our understanding of sort of the chronology over here as we tried to relay this to clients in real time was that ultimately up until, you know a week ago or so, the administration had no option but to sort of rely on this format that said, ok, let's 1st deal with nothing's happening on the China side, right? About a week or ten days ago, there's really NO movement on the China side. In all the time before that, the administration had no option but to kind of say, we're going to now focus on because we're not really making any progress on the China side, there's been a lot of escalation, now we're each holding, you know holding our positions. We're unwilling to talk to each other. Let's 1st figure out the deals with these other countries, and then, and then you know we'll come back to China. And the way I think it got spun in public was that, well, this was a plan all around. The plan was to 1st do deals with all the countries in the region, some of our other big trading partners, and then we're going to collectively approach China.
That is not necessarily how they initially planned to do this or assume that they were going to do this. And now where they are, of course is they've realized that the deals with all these other countries are taking a while, but there's not going to be any, anything that's going to be necessarily meaningful in terms of deliverables that we get today that these are not going to be really active, these are not real trade deals that we're getting into. And so the time is now. We're also running out the clock on the China side, which is why I think there's also pressure to now resume the China dialogue, and so what perhaps in a few weeks here you end up with is us now having conversations with everybody at the same time.
Roth, Anthony
Okay, so then let's talk a little bit more about the situation in China right now, and we've talked a lot in our prior conversations around what's really happening versus what is reflected in the data on the surface that China reports, right? And there's a difference, of course. Directionally, probably China is telling a fair tale, the economy goes up, goes down, but in magnitude, not necessarily.
So when you think about what's happening now as a result of the collapse and trade, how dire is it in China? How bad is it for the CCCP, and how great is the pressure, you know, on the Chinese administration to really start to want to come to the table here just because of the collapse in trade?
Shehzad Qazi
So, the Chinese economy, you know, by the way, got a nice boost late last year and early into this year from a lot of front loading, because everybody was so nervous about tariffs that they were absolutely, you know, ordering up in advance and so forth. This is, this is seen across all data points including, of course, China Beige Book’s proprietary tracking as well. The other thing that was also helping the economy was that there were some amounts of very targeted stimulus in the sense of trading programs, et cetera, where there was, you know, some consumer spending numbers were looking good. And then you got the Lunar New Year coming in, so people were traveling, they were going to restaurants, there were booking hotel rooms and such. So there were a few factors that were working really well for the economy up until March.
When you get into March, what we saw in our numbers was that the benefits from front loading had expired. Export orders were now dropping pretty fast. Output was pulling back pretty fast. Consumer spending had slowed down pretty significantly as well because some of those annual events around which the spending was taking place were now gone. The benefits from the trading programs, which was really just pulling growth forward was now over and you had both these factors bringing economic growth down. Manufacturing was slowing down, retailing services was also beginning to decelerate.
And when you get into April, this trend has only, I think, accelerated or exacerbated in the sense that export orders, for example, directly from the U.S. are in contraction territory. Exports in themselves have slowed down pretty significantly. Domestic orders are somewhat lackluster.
Year over year, they're down of course as well and manufacturing production has slowed down pretty significantly month over month and year over year. If you look at the consumption picture, if you look at the household side what they're spending or even businesses, month over month, they looked fine, year over year they’re at slow down, so the so the rest of the economy, ok, so it's not terrible, we're not in a crisis, but we are seeing signs of softening.
Property, by the way, and this is this is the counterintuitive point, property actually has yet to be hit by any of this, so those numbers actually looked fine. So the bottom line takeaway from all this was that you’re absolutely seeing pain in the manufacturing economy on the industrial side. And you are simultaneously seeing Beijing step in with stimulus support, with credit support on that side. You're seeing more fiscal activity already taking place because they're very nervous. It's a clear sign that they're very nervous about what's going to hit them over the summer and into the fall, especially as the trade war drags out, even if the deal talks begin. That I said this at the beginning of our program, though deal talks, there's not going to be an early resolution. So Beijing has to plan for the economic hit for a while. The talks don't really, you know, don't really resolve too much for it, even if export activity resumes.
Roth, Anthony
So Shehzad, you've made it clear that your belief that the U.S. administration is not looking for a complete decoupling from China. We still want access to some of that manufacturing base etc. And one of the things that we hear a lot about is the idea that we can't, once the supply chains start to really materially either slow down or detach, there's permanent damage. That the Chinese manufacturers either take that capacity and they create something else for something else in the world. We can't get that capacity back for us or they lose the employees or It's going to be irreversible damage or they've lost permanent confidence in the U.S. as a buyer, so they are going to accept lower profits elsewhere, all those types of arguments. What's your take on that?
Shehzad Qazi
I don't necessarily buy that right away. What I do think is going to actually happen with supply chains. Given the high levels of tariffs that we're going to still have on China, even while, you know, as we've said deal talks happen, if, you know, let's assume they resume in the, in the next few weeks, it's still going to make direct trade with China incredibly expensive for companies and the importers out here. And same thing with, with the Chinese side, they're going to be still struggling to sell with the tariff levels even if they are at Liberation Day levels. This means that it's almost guaranteed that China and Chinese factories are going to be relying on two things. The 1st big thing is transshipment, which is of course illegal, but has been going on for a long time, which is China and Chinese companies I should say, simply rerouting their goods through Vietnam, through Cambodia, through maybe Thailand, Malaysia or whatever else.
And I think a big chunk of U.S.-China trade we saw in the aftermath of the 1st round during the 1st trump administration when the tariff war begun, we've seen a pretty serious rise in in in U.S.-China trade really taking place through these 3rd countries in Southeast Asia and largely because of the transshipment issue. So I think transshipment is going to become a really serious problem and I know the administration understands this fully well and are trying to work, work to kind of address that to a certain extent. So you see that happening.
So supply chains don't really die or shift but that, but then you get the rerouting. 2nd thing I think which is also going to pick up a pace is Chinese factories looking to maybe more permanently or continue the process which has already begun of moving their factories, moving their plants to these 3rd countries where they can actually supply goods from.
So not just engaging in the illegal rerouting of goods, but maybe something more legitimate where there's still some genuine economic activity taking place maybe in terms of the final product or or the shape of the product has to be in before it comes to the U.S., which takes place in Vietnam, which takes place in Cambodia or wherever else so that it is a made in Cambodia, and made in Vietnam made in Malaysia product.
Roth, Anthony
Because we're not using a, a value add tariff system, which is to say that we're looking at the total value of a good, not just the value that was added in the last And that means that those kinds of strategies where let's just say in an extreme example 90% of the value is added in China but then they ship all the components and they put them together in the 3rd party, you totally avoid the tariffs that would be subject uniquely to China.
Shehzad Qazi
That's exactly correct.
Roth, Anthony
So we're going to see an increasing amount of that, and then at the same time, this transshipment, how does it actually work, do the goods have to be offloaded or then reloaded on the same ship or does the ship just seem to drop anchor and then it can continue on and just say it's been through Vietnam or Malaysia? How what's the standard? How does it work?
Shehzad Qazi
Yeah, it's both of those things. The most extreme example is that the goods don't ever have to leave the container and it'd be, you know, be offloaded onto the port or the dock. They can just, the ship can just sit in the dock for a certain amount of time and then the way the paperwork and the licensing or whatever else the way that works is that the goods just become crazy enough made in Vietnam goods or made in wherever else goods and then can then skirt all U.S. tariffs on China.
Roth, Anthony
Okay, now let's go back to the idea of rare earths. How big a lever is that? In other words, rare earths are used for things that I would imagine would take a long time for that pain to show up like the certain manufacturer equipment that needs those magnets to be effective, right? And so it's going to be a while before we wear out our current equipment, that kind of ideal although of course there's always a an uptake of those things, but we can live with, little older equipment for a while, but then there are things like particular batteries e.g. or other components that you can't even build the finished product without that rare earth available to you. So do you have a read on how big a lever that is relative to the U.S. economy, not having those come in?
Shehzad Qazi
It's been something that policy makers on the Hill and and a lot of members of the current administration are very worried about . It's been a topic that's been a top of concern for U.S.-China policy wonks for, you know many many many years now. This is not new. And there is certainly an urgency in the current administration to lessen our reliance and dependence on China, which is why we're hearing about all these deals with the Ukrainians and potentially doing deals with Russia on that stuff. Now what does the Chinese side of this look like? What we know so far is obviously that they've put export controls to restrict direct access of U.S. companies to Chinese so-called rare earth minerals.
This is, you know, we just talked about Chinese transshipment, them using 3rd countries to export to the U.S.. That game is also played the other way where we can also rely on 3rd countries to just do the procurement. And as a matter of fact, I don't have the numbers in front of me, but I think a lot of our access presently to Chinese very earth minerals is actually because of 3rd parties or 3rd countries. And so now if China wants to become really extreme about it, they could, you know, try to enforce these global export controls incredibly difficult to do.
I would say virtually impossible. I mean conversely look at our track record of doing export controls and semiconductors. And so I just don't think they're trying to do that. China has been very cautious I think in the way they have gone about this. They haven't yet tried to unveil something where they say, look, if you were going to buy out of these, you know, X Y and Z countries we're going to put export controls on those too.
Roth, Anthony
These two countries are not dancing on the stage by themselves, right? They're, they're tangoing with lots of other couples around them and how important is that and is the U.S. generally trying to build a coalition against China that enlists the other countries like Canada and Mexico e.g. that says that you can't route anything through Mexico or Canada. The Chinese can't build a manufact, a plant in Mexico. And are the Chinese, I understand that there's a, in Europe there's going to be this summer, a Chinese Europe trade summit. I've heard maybe in July in Italy.
I can't remember if that's correct but is one of the reasons that the Chinese and Americans haven't engaged yet potentially because there's so much posturing going on vis a vis these other countries trying to bring them into their camp? Is that important in this or is it really not that important?
Shehzad Qazi
No, it's incredibly important. It's vital, and I certainly hope that the kinds of agreements we're going to end up with, with these other countries especially our Southeast Asian trade partners, they will include a lot of clauses, focused on this exact issue. Of course, we have to deal with the USMCA stuff separately as well as, to prevent what you know what you mentioned is in terms of trying to opening up different factories and such. But I think there's, this is a big topic of conversation, big topic of, you know, a an important topic in the negotiations that are going to be taking place to not just deal with the illegitimate or the illegal rerouting of goods that we already discussed, but also this other factor where just Chinese factories simply come in and now start supplying the U.S. market through, different jurisdictions. I think addressing that is going to also be important.
I mean one idea which maybe sort of, I'm not sure how in play this is presently, but it's also, you know, a negotiating some kind of, understanding where these countries themselves will increasingly raise their own tariffs on China, which is supposed to be towards preventing this. Again, this is all very fluid, this is ongoing, this will require a lot of close tracking because we really are taking on a behemoth. America's trying to restructure its trade abroad, and we're trying to do it with all countries and everything all at once. It's a big undertaking, but I think the reality is that this is going to play out over several years, including I think some of those the nuts and bolts of those trade deals.
Roth, Anthony
Do you think that the ultimate nuclear option that China could use, which would be to put it in an embargo on Taiwan is something that is at this point something we should even be thinking about? Or do you think that for different geopolitical reasons, that's still quite a ways down the road.
Shehzad Qazi
I think I don't think that is in play today or the risk of that has materially risen sitting here with you today. You know, where we are today right now, China is not looking to have this escalate into even nuclear options on the economic front that we talked about. I don't think Xi Jinping has any desire to have this leave the realm of trade and economic statecraft and turn into an actual war with actual, you know, conflict taking place.
Roth, Anthony
Okay, so that's reassuring. And what about technology? And maybe that we'll leave it on this topic, give us your thoughts on the technology and the chips in particular have been so important and we have moved and in fact it was happening already pretty clearly under the Biden administration with very definite steps to limit the ability of NVIDIA to export chips that had AI capability to China, but of course now we're learning just directly from Huawei that China is making its own strides and doesn't necessarily in the long term doesn't need us as a resource for its AI.
Is that going to be a sticking point in any negotiations where they're going to want access to things we're not willing to give them? Do you think that we've already by stopping the export of these XH10 ships, we've already sort of used our bullets there. There's nothing left to withhold from them or how do you think about the whole technology ecosystem?
And it's heightened role in all of this negotiation and what might happen there?
Shehzad Qazi
The perspective I'll take on this is that while the administration is trying to restructure America's global trade abroad and even more complicated topic is how to get American export controlled policy straightened out. Whereas we've heard a lot about export controls over the last eight plus years now. The reality is that there are a lot of leakages or a lot of seepages, partially or largely due to our own feelings given how willing prior administrations have been in terms of giving out licenses for entities that have ended up on the entity or for companies that have ended up on the entity list, which is always confusingly and inaccurately referred to as a blacklist, it is not a blacklist, and certainly not so when you think about the fact that, you know, 70% or so license requests are approved by the commerce department.
There's some very capable and very smart people who are being put into positions at commerce to run American export control policy and certainly wish them well, but I think one of the big tasks over the next three years that they've got now is going to be really straightening out American export controls because there's a there are plenty of access, there's plenty of access technology that China could get from the U.S. today. And of course I know that the industry groups like NVIDIA and others are hell bent on making sure that the export controls are as slim and targeted as possible. They're doing things like for always trying to create a kind of China-only chip. But the reality is that just that is not how it works. So we have to make a decision. It's a very straightforward decision.
Do we want to do export controls? Do we want to cut off technology access or do we not? And, and, and I think that's the battle that this current administration and the implementers are going to be dealing.
Roth, Anthony
Well, I I have to follow up on this one because I was under the impression that we had already made that decision that we definitely want to have controls, very significant controls, but I guess what you're saying is that we're not consistent over time in our efforts and it's one thing to say that we want them at a political level. It's another thing to actually follow through in a consistent and coherent way, and we may not have to wherewithal to do the latter. Is that sort of what you're saying?
Shehzad Qazi
I think that's absolutely it. And I think, you know, to their credit, I suppose industry, you know, of semiconductor firms and chip design firms and others have been remarkably successful at ultimately figuring out a way to continue selling to China, and I think that right there, you know, by obtaining licenses, by getting approvals, by somehow creating these or by creating these so called China-only chips, but all of that doesn't add up to helping America succeed in its export control.
Goals or what perhaps should be our goals. Again, that's a question to ask, which is to make sure that China's technology gap with the U.S. is not narrowed because of our action. They will make the progress that they need to make. They've already announced funding and resources and stood up bodies in order to support that and that's where we have less control, but we do have more control over is making sure that we're not handing them the keys, but we're not doing a good enough job of even of you know of ensuring that that doesn't happen.
Roth, Anthony
Okay, and I just want to go back to one other topic we talked about, which is the idea of this multilateralism with other countries. Is there a risk that in your mind that China, if you will, and potentially the Europeans, the EU in Japan, that if the administration is not effective in negotiating trade deals and reducing tariffs with these other areas of the world that you could have a a reduced trade free trade type of zone with China and Europe or China and Japan, where the U.S. is on the outside looking in. Is that a real risk right now or no really?
Shehzad Qazi
That's at least not my reading. I don't see that the U.S. somehow being locked out of the global trading system is happening, and I think largely because we're not going to, I don't foresee us ending up in a situation where we have so successfully and rapidly tried to alter supply chains that that somehow, you know, Oh resolve our country to say, you know what, forget it, we don't want to do business with you. I think this is why I keep saying that we're trying to negotiate too many deals too fast and have taken on a big project and the result I think of that will be that a lot of what you'll end up seeing as so called trade deals are probably going to be very superficial at the currently, at least.
Roth, Anthony
Right. And that wouldn't surprise me. Well, from an investment standpoint, of course what we're dealing with is a market that and it's something I haven't really seen in my career before. We have a market that we have the consensus actually of forecasting a recession, but the market in the U.S. equity market ignoring that now, looking through the recession, I don't think it's because the market believes that the recession won't happen, but that there'll be enough positivity from, fiscal a monetary accommodation from the Fed, from the lift that we get from these deals starting to sequentially occur, maybe tax cuts et cetera, that the market doesn't need to go back down basically to get to growth on the other side of the recession towards the end of the year.
And that is an unusual outcome for equity markets, it's possible, but in order for even that to happen, I think we need to see some real movement specifically on the singular relationship with China so that we get some goods flowing again or the recession could be a lot deeper and a lot more prolonged because it could have some real permanent impacts on many many thousands or tens of thousands of small businesses in the United States. So that's how I'm seeing it. Yeah, I don't know if that resonates with you, but...
Shehzad Qazi
No, that absolutely does. Look, the way I'll put it is that, you know, I think markets have decided that there's a Trump put, there's a Powell-Fed put, and that some that everybody will come to our rescue. And of course, you know, whereas whereas I think the Fed put stuff is, is overblown given all the deal talk right now, you couldn't fault them. But I think the problem with markets is that they always get so convinced that, you know, there will be a deal that everything will be fine that they completely.
To oversee the amount of volatility, uncertainty that in that's going to happen in in the process and or and even there or thereafter, even thereafter.
Roth, Anthony
Well, that's I'm going to give you the final word, I think it's a great summary that, you know, hopefully things start to brighten for us. Hopefully we're at what I would describe, you know, peak policy negativity over the month of April and now as we move forward, we're going to see some rays of light on the tariff and trade side along with some of these other areas that will help to continue to brighten markets to some degree here in the U.S. and some of that's obviously being priced in already. So with that Shehzad, thank you so much for joining us and I want to remind our audience that for a full roundup of all of our ideas and thought leadership in the investment space as well as the planning space, please go to Wilmingtontrust.com and thank you for joining us today.
Shehzad Qazi
Thank you for having me back.
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