Walmart Warns of Slower Sales Gains After a Bumper Year Retailer posts strong sales in holiday quarter from shoppers looking for discounts on groceries and other items
(…) “Wallets are still stretched,” John David Rainey, Walmart’s chief financial officer, said in an interview, but U.S. Walmart shoppers are acting basically the same as they have for several quarters, with cautious but steady spending. In Walmart’s Mexico business, tariff talk has caused fear and some additional shopper pullback, he said. (…)
The company feels prepared to manage through an environment of tariff increases, he said. “We are not immune to what is being suggested, but we’ll work with suppliers,” he said. Walmart didn’t incorporate tariff increases into its financial expectations for the year, he said.
To start the year, executives set targets for fiscal 2026 that would come in below where it finished fiscal 2025—where revenue ended up rising 5.1% and operating income rose 8.6%. They are expecting fiscal 2026 revenue growth of 3% to 4% and operating income improving at a faster clip than sales.
Those figures were somewhat cautious, said Rainey on the call with analysts. “We have to acknowledge that we are in an uncertain time and we don’t want to get out over our skis here,” he said.
The company’s projections would put its fiscal 2026 adjusted per-share earnings in a range of $2.50 to $2.60, compared with Wall Street’s earnings estimate of about $2.77 a share for the year. (…)
Walmart said it was seeing broad-based gains with American shoppers looking for deals, especially among higher-income households, a group Walmart defines as households that earn $100,000 a year or more. That gain was especially strong for nongrocery items, driven by the convenience of same-day delivery services, said Rainey. (…)
Walmart’s U.S. comparable sales, those from stores and digital channels operating for at least one year, rose 4.6% in the three-month period ended Jan. 31. Wall Street analysts expected a 4.4% gain in that closely watched metric.
Initial unemployment claims rose a little last week (Feb. 15) and may be starting their mini seasonal pattern, beginning at a higher level than in 2023 and 2024, towards a summer peak.
Initial jobless claims are already on the rise in and around Washington, DC, and economists are bracing for broader impact. So far, President Donald Trump and Elon Musk’s Department of Government Efficiency have fired more than 10,000 government workers, based on press reports, and about 200,000 other probationary workers are being targeted.
There’s also a multiplier effect that ripples out to millions of federal contractors and others who do business with Washington, plus state and local governments and organizations that rely on its services. And it’s not just the direct hit to employment — layoffs have the potential to further dent housing activity as well as broader economic growth. (…)
First-time filings have already been climbing in Washington, DC, Maryland and Virginia, which cumulatively stand at the highest level in three years. (…)
The baseline expectation from Moody’s Analytics is for almost 100,000 federal government positions to be eliminated or moved out of the capital, which would result in a double-digit decline in employment by the second half of 2026, economist Adam Kamins said in a Feb. 18 analysis.
The lost positions will primarily be well-paid roles held by highly educated workers, which will spill over to consumer-facing industries and housing. That will push Washington into a mild recession by the summer, Kamins said.
The firings are also likely to show up in the March jobs report, which is due April 4, said Gregory Daco, chief economist at EY-Parthenon. If all of the probationary federal workers are fired, it could amount to the first drop in job creation since 2020, he said.
There are also 75,000 federal employees who took the Trump administration’s offer to resign and still be paid through September, which could temporarily boost payrolls if those workers take another job between now and then. (…)
Beyond employment, other parts of the economy are also at risk. Layoffs at the Federal Housing Administration and the Department of Housing and Urban Development could further hamstring a housing market already constrained by high prices and borrowing costs. And broader cuts to federal spending — which has largely added to gross domestic product in the last two years — stand to undermine growth. (Bloomberg)
The FOMC will be navigating in these turbulent and murky waters…
Trump’s Tariff Wars Leave US Small Business With Nowhere to Hide Firms have less ability to absorb costs, or bargain for special treatment, than bigger rivals.
Many smaller firms say they’re having to hike prices, freeze expansion plans or absorb a hit to already-thin profit margins as import bills climb. Such businesses employ half the US workforce, so how they cope with Trump’s ramped-up trade war will be crucial to the wider economic impact. (…)
Foreman says his prices with vendors and customers were already locked in through the third quarter when a new 10% China levy landed this month. For now he has no choice but to absorb the costs, which could wipe out almost one-third of this year’s profit margin.
After that, if there’s no US-China deal to remove tariffs, his options include pressuring suppliers to charge less, accepting smaller profits, and raising toy prices just in time for the holidays. (…)
Passing on a cost increase isn’t always simple. What if buyers balk at the higher price? That’s less of a headache for the biggest firms, who as dominant players in their markets tend to have what economists call pricing power — the ability to make hikes stick without losing customers. (…)
Lodhie says many of his customers have been with the firm for decades, but that doesn’t mean they’ll pay whatever he asks. “I have a major, 40-year customer that won’t allow me to increase my prices. I’ve told them this is the best I can do,” he says. “I may lose the customer.”
Along with inflation, another key tariff question is how business investment will be affected. The concern is that companies will be reluctant to build factories in America and add jobs — the ultimate purpose of Trump’s trade policy — until they have a clearer idea of how much they’ll have to pay to import machinery, parts or materials.
That’s an issue for corporate giants — General Motors won’t “spend a large amount of capital without clarity,” Chief Executive Mary Barra has said — and, at the other end of the scale, for Todd Adams at Sanitube too.
The family-owned, Florida-based firm makes stainless steel tubing, valves and fittings for food manufacturers. It sources materials from a range of countries, and employs some 20 people. Sanitube has put expansion plans on hold, Adams says, because there’s no telling how much his bills will increase as a result of tariffs — and he needs to conserve cash just in case.
He’s already on the hook for the 10% China duty, and may well be exposed to two separate tariffs due to take effect early March, on metals and Canadian goods. “We are paralyzed as a company,” he says. “Until we have an idea of what tomorrow, next month or this year holds, we’re just sort of in a holding pattern.” (…)
It’s generally harder for smaller firms to adjust their supply chains in order to avoid tariffs, says Claire Reade, a senior counsel at Arnold & Porter and former assistant US trade representative for China affairs and chief counsel for China trade enforcement.
“You’re a little guy — you don’t have the capital to go off and march into a completely different country and try to start over,” Reade said. “You’re stuck.”
Another thing the little guys lack is lobbying power. After Trump launched the trade war in his first term, a “bewildering array” of businesses were able to win tariff relief, according to the Brookings Institute. The upshot was “heavy costs on small- and medium-sized enterprises that were ill-equipped to jump through the bureaucratic and political hoops.” (…)
“I kind of figured that’s my year’s supply and hopefully things will calm down,” she says. If they don’t, Clayton sees a threat to her business because she’d likely have to raise prices. She says she explored sourcing the trays domestically, but concluded it would be too costly. (…)
After Trump won November’s election, an index of small-business optimism jumped to the highest in more than six years. But it fell back a bit last month, when the same survey also showed the steepest drop in capital-spending plans since 1995. (…)
From Ed Yardeni:
How Tariffs Could Shock America’s Power System Transformers used in power grids are especially vulnerable to trade disruptions
(…) The National Renewable Energy Laboratory estimates that about 55% of in-service distribution transformer units are older than 33 years and approaching their end of life. Distribution transformer capacity might need to increase 160% to 260% by 2050 compared with 2021 levels to meet demand, according to the NREL. (…)
Only about 20% of transformer demand can be met by the domestic supply chain, according to Wood Mackenzie, which also estimated that transformer prices have already risen 70% to 100% since January 2020 because of inflation for raw materials such as electrical steel and copper. (…)
Assuming that Trump moves ahead with 25% tariffs on Canada and Mexico, and imposes tariffs on copper as well, Wood Mackenzie estimates that transformer prices could increase by an additional 8% to 9%.
Mexico, Canada and China are important sources of electrical equipment to the U.S. In 2024, China accounted for over 32% of U.S. low-voltage transformer equipment imports and Mexico accounted for 36% of high-voltage transformer imports, according to Wood Mackenzie. Canada accounted for about 16% of U.S. imports of high-voltage switchgear and 100% of imported utility poles. Utilities typically go through a lengthy process to test the reliability of transformers they are purchasing and tend to require custom specifications, so it isn’t an easy process to switch to a new supplier, notes Chris Seiple, Wood Mackenzie vice chairman. (…)
Last week, the New Jersey Board of Public Utilities said its residential customers’ average monthly bill is expected to increase by 17% to 20% for the 12-month period starting June 2025, partly due to data center-driven demand growth. Nationwide, electricity prices have increased at a compound annual growth rate of 5.7% over the last five years, a considerable acceleration since the preceding five years when prices were roughly flat, according to data from the U.S. Bureau of Labor Statistics.
Also worth watching: If the 25% tariffs on steel and aluminum do result in a reshoring of those energy-intensive industries, that itself would add to long-term power demand, notes Seiple.
Building out America’s AI dominance and reshoring manufacturing are popular policy objectives, but they might come at the cost of perhaps the most popular objective of all—lowering consumers’ bills.
- “Tariffs have not effectively increased U.S. aluminium production, as despite the premium doubling in 2018 after the previous Trump administration introduced tariffs, production remains below 2017 levels,” Fitch Ratings said in a note Wednesday. (WSJ)
FLASH PMIs
Eurozone ekes out growth in February
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, was unchanged at 50.2 in February. After signalling a rise in output for the first time in five months during January, the latest data pointed to a sustained but marginal expansion in activity.
Where growth was recorded, the main source was again the euro area’s service sector. Services activity increased for the third consecutive month in February, but only modestly and to the weakest extent in this sequence. Manufacturing production, meanwhile, continued to fall, the twenty-third successive month in which this has been the case. That said, the pace of contraction was the weakest since May 2024.
The picture of marginal growth seen at the euro area level masked marked differences between the different parts of the currency bloc. The Eurozone’s largest economy – Germany – recorded a second consecutive monthly rise in output, with the pace of expansion quickening to a nine-month high. In contrast, France posted a marked and accelerated reduction in business activity, one that was the most pronounced for almost a year-and-a-half. Meanwhile, the rest of the euro area posted a solid expansion in output.
The slight increase in business activity was recorded in spite of ongoing signs of demand weakness. New orders decreased for the ninth month in a row. The pace of decline was modest, but sharper than seen in January. Services new business fell for the first time in three months, joining manufacturing in contraction territory. New business from abroad (which includes intra-Eurozone trade) also fell again in February. Although solid, the rate of contraction eased for the third month running to the weakest since May last year.
After having neared stabilisation in the previous survey period, employment fell at a faster pace in February. Staffing levels decreased for the seventh successive month, albeit modestly, as a marked reduction in manufacturing workforce numbers outweighed a slight rise in services employment. In fact, the decline in manufacturing employment was the most pronounced in four-and-a-half years. Excluding the COVID-19 pandemic, the fall was the largest since July 2012. Staffing levels dropped in both Germany and France, with the pace of job cuts sharper in the latter. Meanwhile, the rest of the Eurozone saw employment increase at the fastest pace in five months.
The fall in employment was registered amid further signs of spare capacity across the euro area. Backlogs of work decreased solidly, and to the largest extent in three months. Outstanding business has fallen continuously on a monthly basis for almost two years.
PricesAs has been the case in each month since last October, the pace of input cost inflation quickened in February. The latest increase in input prices was the fastest since April 2023 and above the series average. The overall increase in input costs continued to be driven by services, where the rapid pace of inflation was unchanged from January. Manufacturing input prices rose for the second month running and at the fastest pace in six months, albeit one that remained modest overall.
In turn, output price inflation also accelerated and was at a ten-month high in February. A solid rise in charges in the service sector contrasted with a marginal reduction in manufacturing selling prices, the fifth in the past six months. Output prices were up markedly in Germany, while France posted renewed inflation following a fall in January. The rest of the euro area also saw selling prices rise.
Eurozone manufacturers continued to lower their purchasing activity in February, in response to weak customer demand. The latest reduction was marked, despite being the weakest for two-and-a-half years. A slower fall in stocks of purchases was also recorded, but stocks of finished goods declined more quickly than in January. Muted demand for inputs meant that suppliers’ delivery times shortened for the first time in six months.
Although companies in the Eurozone continued to predict growth of business activity over the coming year, optimism dipped to a three-month low in February, thus remaining below the series average. Sentiment dropped across both manufacturing and services alike. Strong confidence was again seen in the rest of the Eurozone. Positive expectations in Germany dipped and were below-average, while optimists in France only just outweighed the pessimists.
Japan: Output expands at strongest rate in five months
Japan’s private sector experienced stronger expansion at the midpoint of the first quarter, with the Composite Output Index reaching its highest level in five months. This modest improvement was driven by sustained growth in services activity, while manufacturing output declined at a softer rate. In areas where growth was recorded, firms often attributed this to business expansion plans and improved sales.
New business received by Japanese private sector companies increased for the seventh time in eight months in February. However, the pace of expansion was only modest and the softest recorded since last November. While new orders for manufacturing continued to decrease, the decline was only mild and was more than offset by an increase in new business within the services sector.
Confidence regarding business activity growth over the next 12 months softened in February, reaching its lowest point since January 2021. Companies cited labour shortages, persistent inflation, and economic malaise in the domestic economy as factors dampening overall sentiment. In fact, employment levels among Japanese private sector firms rose at their slowest rate in just over a year. Additionally, the rate of input price inflation across the private sector was little changed from January’s historically sharp pace.
The U.S. flash PMI is out later this morning.
Continental to Cut Around 3,000 Jobs in Automotive Segment
The German car-parts company on Tuesday said the cuts amounted to around 10% of its global research-and-development jobs. Less than half of the job cuts will be in Germany, it said. (…)
Continental’s job cuts come a year after France’s Forvia, one of the world’s largest auto parts suppliers, said it was cutting up to 10,000 jobs in the midst of a global automotive shift to electric vehicles.
Several European carmakers and suppliers have warned about waning demand as the industry struggles with a sluggish electric vehicle market and fierce competition from Chinese rivals.
More recently, German car-parts supplier Robert Bosch outlined plans to cut up to 5,550 jobs, while Michelin and Schaeffler said they planned to close factories and reduce thousands of jobs in Europe, which together equal nearly 6,000 positions.
‘Mar-a-Lago Accord’ Chatter Is Getting Wall Street’s Attention Backers float US debt deal, weak dollar as part of plan
It sounds too radical to even warrant a second thought. That President Donald Trump could force some of the US’s foreign creditors to swap their Treasuries into ultra long-term bonds to ease the country’s debt burden.
And yet, that’s what Jim Bianco corralled his clients to discuss on Thursday after rumors of a so-called ‘Mar-a-Lago Accord’ began making the rounds. (…)
The idea of dramatically restructuring America’s debt load is part of the Trump team’s agenda to revamp global trade via tariffs, weaken the dollar and ultimately reduce borrowing costs, all with the goal of putting US industry on more even footing with the rest of the world, said Bianco, an over three-decade market veteran and founder of Bianco Research.
Other elements of the plan include the creation of a sovereign wealth fund — which Trump has already set in motion — and forcing America’s allies to shoulder a larger share of security spending. (…)
Many of the ideas behind the agenda come from a November 2024 paper by Stephen Miran, Trump’s nominee to lead the White House Council of Economic Advisers. In it, the former Treasury official laid out a road map for reforming the global trading system and weeding out economic imbalances driven by “persistent dollar overvaluation.” (…)
“The whole idea hopefully is lower the value of the dollar, lower the value of interest rates, bring down the debt burden in the country. And that’s what they’re trying to do.”
Bianco, like Miran’s paper, referenced the work of former Credit Suisse Group AG strategist Zoltan Pozsar, who has for several years called for a “Bretton Woods III” revamp as part of his theory that the dollar will play a much less dominant role in global finance in the coming decades.
One key idea of Pozsar’s is that other nations should pay more for the security and stability provided by the US. A way to do so would be by swapping some of their Treasuries into 100-year, non-tradeable zero-coupon bonds. If these nations needed cash quickly, the Federal Reserve could make it temporarily available to them through a lending facility.
Bianco stressed that this type of debt swap may not actually happen, and if the US were to pursue it, it would require significant international cooperation and could potentially impact global financial stability. (…)
“Take them seriously, don’t take it literally,” he said referring to the debt swap idea and some of Trump’s more radical proposals in general. “If Trump is willing to blow up NATO, why wouldn’t he be willing to blow up the financial system?”
CHINA MATTERS
CCG’s side event within Munich Security Conference 2025
On February 15, 2025, the Center for China and Globalization (CCG) hosted “Writing on the Wall? The China Playbook 2025,” a side event within the Munich Security Conference (MNC), the venues where J.D. Vance made his controversial speech.
Some excerpts.
Xue Lan, Cheung Kong Chair Distinguished Professor and Dean of Schwarzman College, Tsinghua University
I was on the expert committee for the previous Five-Year Plan. I also have already participated in some discussions about the 15th Five-Year Plan. (…) the Five-Year Plan is a process that engages the national effort, with all the academics, government agencies, and also many of the public involved. There are also provincial and city-level Five-Year Plans and sectorial plans. Based on some discussions that I’ve attended, let me just make some brief remarks on this (…).
First of all, a summary of the 14th Five-Year Plan: what’s been achieved and what’s not. In general, most of the initial targets set five years ago was pretty much achieved, and some were actually surpassed. There are also some targets that have not been achieved. The few, I remember, were in the health and education sectors. I was quite surprised by that.
But let me move on to the 15th Five-Year Plan: what are some of the priorities that people have discussed? Again, you will notice this is very much domestically oriented. China’s Five-Year Plan was initially called the economic plan and now it’s called the economic and social plan. (…)
I think the first thing people are concerned about is economic growth: whether there should be any numerical targets being set, and if so, then how much. 4%? 5%? There is some disagreement on that. That’s one priority.
The second is about the so-called growth quality. China has been advocating for high-quality growth. So what does it mean? People talk about many dimensions of that, including a more balanced and diversified economic structure, more balanced rural-urban development, particularly the regional balances and how to maintain the achievements of the poverty allegation effort. (…) That’s the second dimension, growth quality.
The third is on innovation and digital economy: how to continue to promote S&T development and innovation and make sure that S&T remains the main engine of China’s economic growth. There is also, of course, the continued promotion of the digital economy, including the diffusion and application of AI technology in various domains.
The next one is on sustainable development. As we know, China has promised to achieve carbon peaking by 2030. So how can China do that? That’s not a simple task. There are a lot of calculations of how you might do that and so on. So I think that’s another major issue.
The next item people talk about is openness: how to further promote openness and international engagement. (…) China is very much determined to do that and there are many efforts. (…)
And finally, the governance. China is already working on the so-called modernisation of China’s governing capacity. (…) This is a goal that would also be brought into the overall plan, trying to make sure that the rule of law and other elements of the governing capacity will be modernised. Thank you.
Yao Yang, Professor, China Center for Economic Research, National School of Development, Peking University
(…) This is a concise session, so let me just pick up one thing, that is, China’s investment in higher education. Higher education is becoming more and more important because China is moving into an innovative stage of growth. And the right comparison is not to compare China with the United States, right? As economists, we should compare China with countries with similar levels of income. So what are those countries? Brazil, Malaysia, etc.
Compared with those countries, China has done a wonderful, fantastic job in higher education. China now has four universities ranked in the top 50 in the world. If you look at AI publications, among the top 10 institutions in the world, China has four. Tsinghua is just behind Google, ranked No. 2. Our university, Peking University, and Zhejiang University are ranked No. 6. There is another university, I think, Shanghai Jiaotong University. So this is a lot. China each year produces over 10 million university graduates. That’s a huge human resource pool. Anyone who doesn’t believe in China’s growth prospects will make a huge mistake.
Then how to explain the so-called slowdown of the Chinese economy over the last several years? Many people take that as a sign that China is going to follow the Japanese way of growth since the 1990s: deflation, slow growth, and also an ageing population. That’s wrong. The slowdown has been the result of deliberate government actions.
Starting in 2018, the Chinese government has deliberately started several programmes, even campaigns, to deal with the problems in the Chinese economy: over-leveraging or over-financialisation. I think this is very important for the international community to understand the Chinese economy.
One of the lessons that the Chinese leadership has drawn from the United States is that the United States has hollowed out its manufacturing sector mostly because the United States has too big a financial sector. That’s why the Chinese leadership has begun this huge deleveraging campaign—it’s really a campaign—to try to reduce the size of the financial sector. (…)
Of course, that has a real effect on the economy. But I guess in the mind of the Chinese leaders, you know, the Chinese economy is robust and we can stand the slowdown. That’s why you don’t see huge stimulus packages over the last several years.
Okay, but what about the headwinds? For example, aging. Many people say ageing is going to kill the Chinese economy. I don’t think so. You know, the current problem in China is unemployment, not a lack of labour. We’re all worried about, like in other countries, AI and automation going to replace too many people. China is moving fast in those so-called lighthouse factories. Among those new lighthouse factories, China accounts for two-thirds. That’s just too fast. So I don’t think ageing, at least from the supply side, is going to be a factor slowing down China’s growth.
What about the international environment? Since Trump started the first trade war, China’s exports to the U.S. have declined. But, and that’s very important, if you count by the value added, actually, the United States’ reliance on China’s exports has increased, not declined.
So that’s why the United States is putting tariffs on surrounding countries—because Chinese exports go through those countries. Even when we think about the world’s reliance on China, that has not declined; it has actually increased. Of course, it’s going to be a very difficult situation in Trump’s second term, but I still see a lot of room for cooperation and improvements.
Michael Froman, President, Council on Foreign Relations
(…) I think for decades, our expectation had been that if we brought China into the international economic system, brought them into the WTO, engaged them in forums like the G20, they would become more like us. They would sort of sign on to the international rules.
What happened in reality was that we learned that Chinese economic reform didn’t go as far, as fast, as linear in fashion as we had expected. And instead, we saw some very important reversals. I think the key moment was in 2015, the Third Plenum, and laying out plans for China 2025, where there was a sudden realisation that this dialogue that we’ve been having about economic reform, about China moving to more domestic demand-led growth, about social safety net reform, and moving off of an export-led model, that all of that was falling on deaf ears; and that we weren’t making any real progress on that.
And that, plus the hollowing out of the U.S. manufacturing, which I don’t think is because we had too many people in the financial sector but had to do with the fact that China had a tremendous excess capacity and exported its way with subsidies, with various dumping practices, in a way that hollowed out several communities in the United States.
And we saw the results of that in the rise of populism, in the rise of anti-Chinese feelings and in the 2016 election, and now in the bipartisan consensus across both parties about the nature of the China challenge. How different that is than where things worked 14 years ago.
Did we make a mistake in thinking that China was gonna become more like us? You know, perhaps. Did China change its mind and take a different course? I think one thing we have learned is to be humble about our capacity to influence China’s economic strategy.
Instead, I think what you’re finding is that the focus is on changing that international environment in which China operates. So after having lectured the Chinese for years about avoiding protectionism, allowing, not restricting foreign investment, avoiding subsidisation and industrial policy, we are now engaging in protectionism, restrictions on foreign investment, and industrial policy.
So rather than China becoming more like us, we have become Chinese. And in fact, I would say that Making America Great and America First actually is taking a page out of China’s 2025 strategy, putting China first, China rejuvenation. That we are very much following a Chinese strategy. And I see us continuing to do that going forward.
So what does that mean for our capacity to cooperate with each other going forward? I think we have to find ways of reaching a new set of rules. It’s not gonna be the WTO rules. Those aren’t gonna be something that the U.S., let alone others, are gonna be able to support and say, we’re gonna continue to live by a set of rules where China–and by the way, I have great respect for this: China has had tremendous discipline in pursuing its national interests narrowly defined. The problem is that in pursuing its national interests narrowly defined, it’s come at the expense of the rest of the world.
And we are talking right past each other. When we talk about excess capacity, I hear from Chinese counterparts, well, you must have excess capacity in soybeans because you export. That’s a disingenuous argument, right? Exports don’t mean excess capacity. Excess capacity is a result of subsidisation, unfair trade practices, restrictions on your market in a concerted strategy of building up so much more capacity you could possibly use and then dump it on other markets at the expense of their capacity to ultimately compete with you. I think that’s the reality of this as we face it today.
So I think the good news is President Trump—and again, I certainly don’t speak for him. I don’t pretend to know his mind. But he is very transactional. He’s very personal. And he wants to cut a deal, including with China. And he has great respect for President Xi and wants to sit down face-to-face and work something out.
What that looks like because it’s gonna be different than the Phase One deal of term 1.0 when that deal was never implemented and two, I think the world has evolved since that time. So we’re seeing more predatory practices and excess capacity at the expense of the U.S., European, other industrialised countries. And so I think it’s gonna be a much more challenging argument.
And the question will be, right now, we have selective technology decoupling, whether we begin to have broader decoupling or not. I personally feel there’s a great opportunity for the U.S. and China to continue to trade in non-strategic products, to grow that trade.
But I think increasingly, we’re gonna find ourselves having tensions over sectors where China is determined to grow its global foot. And the U.S. and Europe and others are gonna want to retain some role in those sectors: EVs, some of the clean energy technologies and the like. And I think we’re gonna have to find creative ways to resolve those because our traditional ways of resolving them are not gonna be effective.
Arancha González Laya, Dean, Paris School of International Affairs, Sciences Po
(…) Look, Europeans may not necessarily love a world that is a G2 world, but the Europeans don’t love it when the two parts of the G2 go in funny directions. It’s bad enough that one goes in a funny direction, but when the two are embarked on questioning the system, bringing a wrecking ball into rules, institutions, and principles that have been working together, it becomes a little more challenging. (…)
But there are three things that, in my view, Europe would be watching very carefully in the next China plans. Let me start with climate change.
It’s important that China has signalled that 2030 is its carbon peak. But bearing in mind the evolution of emissions worldwide, bearing in mind the evolution of technology in the world, and bearing in mind this has become a critical issue, I would be watching very carefully to see if China takes more ambition to decarbonise its economy.
I’m saying this because, at the end of the day, keeping within the boundaries of the Paris climate agreement is going to be harder now that one integral part of the agreement has decided to move out. Given the amount of emissions that China represents, it would be very important to see if China doubles down on the fight against climate change. So, I will be watching very carefully the commitments China will be taking there.
The second area I would be watching carefully is what steps China takes to rebalance its economy, particularly the current imbalance between savings and investments. I take what Xue Lan said about health and education because I do think these are two very good areas where there needs to be greater investment on the Chinese side. That would likely help address an economy that, let’s face it, is imbalanced and create capacity that needs to be exported, and probably, as we have seen in the last few decades, create imbalances in the international market.
So, I will be watching very carefully the debate that is taking place in China between savings and investment. I’ll be watching because, obviously, it has a lot to do with the demographic challenge, technology uptake, and whether or not China makes the leap to the next stage of development. I’ll be watching this because it has repercussions for the European economy and Europe’s ability to engage with China.
The third and final marker that I’d be watching attentively is how much skin is in the game. Is China ready to build cooperative spaces internationally? It sounds good and fine to go nationalists, turning words, but there are a few issues where we need spaces for international cooperation. It’s good to say we don’t like the rules that we have, but we still need to build these spaces for cooperation, whether it’s in artificial intelligence, international trade, fighting pandemics, or ensuring financial stability. I’ll be watching to see how much skin in the game China is ready to put in building a less corrosive international Olympus because a lot will depend on China’s decision to invest in this space.
It’s outside the list, and maybe it’s a bit convenient, but obviously, I’ll be watching very carefully to see if we stick with this idea that there will not be a change in the status quo of Taiwan by force. I know it’s outside the scope, but since we are in the middle of the Munich Security Conference, I thought I would also put this on the table. So, Henry, thank you again, and back to you.
The moderator:
Graham, you’ve been remarkable. With such senior age, you’ve travelled between China and the U.S. after Dr. Henry Kissinger. I know that President Xi received you last March, and Wang Huning just received you two months ago. Yesterday, you met with Foreign Minister Wang Yi.
So, you’re a voice between China and the U.S. now, and we’d love to hear from you. I agree with you, there are a lot of positive signs that Trump has expressed towards China, inviting President Xi to his inauguration and saying that if the U.S. and China work together, nothing in the world can not be solved. He also delayed the TikTok issue, and of course, yesterday, Google and Apple resumed the TikTok app downloads.
So, a lot of positive things are happening under President Trump. I hope he visits China soon, and we’re still looking forward to a phone call between President Xi and President Trump. What’s your latest take on the bilateral China-U.S. relations, as a go-between for both countries?
Graham Allison, Professor of Government, Harvard University
(…) Firstly, if we think about the U.S.-China relationship at this point, it’s easier to create scenarios where things go badly than scenarios where things go well. And that would be the Washington consensus. But I made a bet at Davos, and I’m happy to make a bet here today if somebody wants to make the bet for a modest amount of money—say, $100 or $1,000. If we have the good fortune to meet this time next year, we will have been surprised by the upside in terms of what happens in the relationship. I can give you a long account of why that might be, but I think the most significant factor in that story is Donald Trump.
The second point, what about Trump? Well, again, that’s another long lecture. I would say, try, despite the antics, to take him seriously, even not literally. Don’t get bogged down with a little literalism, since he doesn’t speak in normal language. He speaks in hyperbole. Millions and billions mean a lot, okay? He doesn’t count the way we normally would. It’s a combination of fact, fiction, and fantasy that he weaves in his own way.
But if you look at the campaign that we just went through in the U.S., with more than 1,000 individuals running for national office—435 House seats, 100 Senate seats, president, and vice president—not a single one of the thousand candidates, and 80% of Americans have a negative view of China. In an election, what you do is try to appeal to people’s views. Not a single candidate had anything positive to say about China, with one exception. And if you look and see what this exception said, you have to be shocked. (…)
And in the middle of it, he will say, I respect China. You say, what? Then he goes on to tell us about Hannibal eating somebody, or this and that. Then another time, he says, “I respect Xi Jinping.” He says, “My people tell me I shouldn’t say this, but he’s brilliant. I know the guy. He’s brilliant.” He even says, “I want China to do well.” In one of these acts, he says, “I love China.”
What? He didn’t get much applause for that. Okay, so what’s this about? I think it’s quite likely that he has a radically different view of relations between the U.S. and China than China experts, China hawks, and the Biden administration. Some for good and some for evil. So that’s my bet. (…)
I think you can see the handwriting on the wall for the positive scenario. I believe the war in Ukraine is going to end relatively rapidly. I believe that China is going to become an active partner in that process. I believe China may even be part of the guarantor structure that will give Zelensky some reassurance that this is not just a modest intermission with China. I think TikTok will be made to seem as big a crisis as possible until it’s easily solved. Trump has a great capacity for theatre, and he’ll make this out to be a great act. But I don’t think it’s very hard to do.
On the tariff war, I think I would defer to my colleagues. But I think it looks to me like if the trade agreement part one that was reached in 2019-2020 was the greatest deal of all times, then this is not that hard to get some version of something like that, that manages.
Taiwan is a big question mark. But I think, if I were stretching, I could even imagine a new communiqué in which it becomes very clear that the U.S. does not oppose any version of peaceful reunification. And then you have to wrap it around with some diplomacy, the details. So I could tell a story of how this goes well.
And one final point, Trump has more than five times said, including in his phone call with Xi, that the U.S. and China working together can solve all the problems. He didn’t say the U.S. and Europe. He didn’t say the U.S. and the UN. So again, G2, we may hear about it again. I don’t think anybody will advertise it in those terms, but I think it’s imaginable for me. And from what I can read of Xi Jinping and the Chinese side of this, having a transactional president who wants to do deals over a range of issues looks like a, I think they call it win-win.
Daniel Kurtz-Phelan, Editor of Foreign Affairs
Let me pick up where Graham left off, but slightly disagree with him. (…)
I think as we try to understand the Trump policy on China, there’s been a lot of reading of released signals from him, the campaign rhetoric. And I think among Chinese analysts, a lot of hopeful signs in that early rhetoric. But I think the challenge with Trump, as ever, is that there is not going to be a Trump China policy.
There are going to be Trump China policies, and how those interact in a chaotic policy-making system, without the normal kind of interagency that would reconcile differences and come to a common strategy, it’s going to manifest in very unpredictable ways.
So, I think it’s worth looking a layer down from the kind of signals that Graham mentioned to some of the other players in the administration, who I think will be shaping this. I think I would break those into three basic categories. When all of us were watching Trump choose his appointees and the people who were going to staff his administration, the one common theme among them, despite everything he said in the campaign, is that they were extremely hawkish on China—so almost to a one. But there were three different kinds of hawks that I saw.
There’s the kind of Marco Rubio traditional hawk, which I think grows out of neoconservatism, has a heavy ideological element, and really does, whether they say this explicitly or not, I think some of them, such as Matt Pottinger in the last administration, would say this very explicitly—they see the CCP as a regime that will never be able to be a decent member of the international order, there will never be an accommodation between the CCP and the United States, and so it must be U.S. policy to weaken the CCP. There’s a heavy human rights element to it. That obviously leads to conflict in lots of dimensions if you start from that point.
The second hawkish camp has a much more restrained view of U.S.-China competition. It’s still very hawkish, very focused on deterrence in the Indo-Pacific, the Taiwan Strait, and the South China Sea, but leaves out that ideological element. So, it sees space for some kind of accommodation. I would put some of the National Security Council staffers, National Security Advisor, and people like Elbridge Colby in the Pentagon in this category. They’re not ideological, but they’re very hawkish and very focused on the U.S. military presence in the Indo-Pacific.
Then the third camp is more, I think, accurately described as isolationist—much more restrained and it would be easier to reach an accommodation.
And then there’s, of course, Trump himself, which leads to lots of unpredictability and impulsiveness. But I agree with Graham on the basic analysis of where Trump is. The difficulty is that Trump has a very narrow set of issues on which he wants to focus and make deals, and that leaves the whole other set of issues in the U.S.-China relationship out. And that’s where things get really complicated. So yes, I think we’ll see probably a little bit of drama around trade and tariffs, which will at some point resolve more or less. It will not destroy the global economy.
But that doesn’t really get you a lot of clarity on the Taiwan Strait, and I’m much more sceptical than Graham that there’d be major diplomatic progress there, especially given the players involved on the U.S. side. The South China Sea remains a huge problem and to me a huge source of risk, even in a Trump administration. And I don’t see anything in what Trump has said that allays that risk in any way. The de-confliction mechanisms, the crisis response mechanisms are somewhat better than they were before the Woodside summit a couple years ago, but still not that good.
And then the whole set of regional issues, which are really, I think, at the heart of some of the U.S.-China competitive dynamics. And all of those will remain really difficult to resolve. And as we saw in the first term—I’m going to sound a little bit like Lindsey Graham defending Trump on Russia on stage here—Trump might be saying one thing about Xi in public, even as the administration is taking very, very tough moves in other ways. You saw this in the first term of Russia with arms control and arming Ukraine. I’m not sure Trump was especially paying attention to that, but all of that was happening even as he was saying nice things about Putin and having summits. And I think you’ll see a version of that on China.
The last thing I would say on the U.S.-China relationship, you hear a lot from especially more hawkish Chinese observers and sometimes people in government on the Chinese side about their eagerness. They are excited that Trump is likely to, in some ways, erode U.S. alliance relationships and partnerships in East Asia. I think most of them see that as a good thing. That’s your kind of risk-taking Chinese hawk. You see that as a moment of opportunity.
I would caution to those voices and anyone in the U.S. who also wants to step back from those relationships that we know that that system has really underpinned stability in Asia, the kind of stability that has enabled the kind of economic success that some of the earlier speakers were talking about. And as that starts to come apart, I think we get to some pretty scary dynamics and some pretty risky dynamics.
From a Chinese perspective, having a nuclear South Korea or Japan that’s really thinking about developing a nuclear weapons capability, I mean, all of that and similar knock-on effects, I think, could really destabilise the region in a way that even if you have a Trump trade deal, even if you have a degree of comedy on these other issues, I think in the medium term that starts to get scary really fast.
So I don’t know if that’s exactly a bet against Graham Allison, which would probably be a stupid thing to do, but I think there are some tensions there.