Since the election of Donald Trump to the U.S. presidency, much has been said and written about the potential for a trade war between China and the United States. The President's America-first policy appears to reject the principles of globalism, practiced by most captains of industry since the Second World War.
Some people say a trade war is likely. Some say Donald Trump's approach is right. Others want to stop him. Disney CEO Bob Iger says a U.S.-China trade war will hurt the U.S. Others say China will hurt more.
At a Fortune Global Forum dinner held in New York City last night, FedEx CEO Fred Smith weighed in. There's a good reason both countries are acting the way that they are, he told Fortune editor Alan Murray, and the macro trends are more important than the political posturing. Bottom line? It takes two to tango, and the dance is more likely to end in a deal than a dogfight.
An excerpt of their conversation follows, lightly edited for clarity.
Murray: I’d like to start by asking you, where are we? I mean, we just had this election where President Trump attacked trade agreements, the North American Free Trade Agreement, the TPP Agreement. And really attacked globalization, the sort of foundations of what’s been driving the global economy for the last few decades. What do you make of that?
Smith: Well first, Alan, I disagree with the proposition that global markets and free trade has been bad for the United States. I think quite the contrary, it’s been a great thing for the country.
Anybody sitting in this room that has an American passport has got to recognize that 95% of the customers that are potentially out there for businesses don’t have that same passport. They’re citizens of other countries.
So trade is an essential part of the U.S. economic landscape. About 25.5% of our total economic activity is trade. It’s not reported that way in the GDP statistics, which is one of the problems, because it makes imports sort of disappear or seem to be a negative.
When in fact the average family in the United States, a family of four, gets about $12,000 of benefit by goods that they would have to pay much more for had we not promoted trade.
And I think it’s important to recognize that an anti-trade position has been tried by the United States. In 1929 Reed Smoot and Willis Hawley, both Republicans, a senator and a congressman, suggested that we wall the United States off, and actually succeeded in 1930.
A lot of the scholars think that the introduction of the bill in 1929 was one of the things that triggered the Great Depression. So from 1930 over the next two years trade in the United States collapsed by 60%.
And one of the relatively early things that Franklin Roosevelt and his Secretary of State, Cordell Hull, did was to try to turn that around. And from that day in 1934 until just this election, opening up markets and free trade in general has been the policy of the United States. So this is quite different.
Well Fred, there are clearly a lot of people out there, the President’s message resonated with many of them. There are people out there who feel like they haven’t done very well in the last couple of decades and think trade may be responsible.
Well I think that there’s no question that it resonated with a lot of people, but the facts of the matter are that manufacturing employment, including in China has been going down everywhere.
And 80% to 85% of the jobs that were lost in the manufacturing sector in the United States weren’t because of China or opening markets, it was because of productivity and automation.
So this is not just happening in the U.S. obviously.
Economic nationalism is on the rise all around the world. As a business person whose business depends on a globally integrated economy and who's interwoven with a globally integrated economy, how do you react to this?
Well the most important thing is to accept invitations to get grilled by a tough guy like you and make sure that there’s a contrary point of view out there. As you know, your old employer was kind enough to print an op-ed in March of last year when I saw, and my partners at FedEx saw, that this anti-trade rhetoric was really getting a head of steam.
And I gave a speech on December the ninth, which I accepted long before the election was over because Clinton had become anti-TPP and Trump had become anti-TPP. And those positions are, by the way you can go to policy.fedex.com, it’s very simple, you can read them. I know Alan’s read them because I sent them to him.
But as you know, I mean it puts the other side of the case out there that trade is a very good thing for the United States and something we should embrace. Now there are issues, particularly with China.
But in general the U.S. policy from 1934 forward in my opinion has been the correct policy.
I’ll go to China in a minute. General Electric, in their annual report—[CEO] Jeff Immelt talked about how he was changing the way he runs the company in order to nod to this growing economic nationalism, doing more local production. Do you find trade patterns are changing because of rising economic nationalism? And is it changing the way you run the business?
Well, I think sometimes people lean into political slogans when the economics are driving there anyway. If you look at the automotive industry for instance, in the 1970s and 1980s the Japanese automotive industry revolutionized the world with his quality low-cost vehicles using American methodology as Dr. Deming and Dr. Juran developed during World War II to make a fantastic industry.
That led to a huge trade dust up because the Japanese wanted to sell to us, but they wanted to keep many of their markets closed. Which, unfortunately, much of which was corrected in the TPP that’s now been thrown aside.
So I think that the increase in the Japanese currency, relative to the dollar, plus the negotiations during the Reagan administration led the Japanese to make enormous investments in the United States to build automobiles here.
So most of the Japanese automobiles today are actually produced in the United States. Many of which are in Tennessee because our then governor, Lamar Alexander, now our senior senator, recruited those industries into Tennessee.
So as the value of currencies go up, the heavier the item, generally the logistics prevail and you want to make them locally. The lighter the item, the more that they are easily tradeable and moved. So some of that is just a natural function of the currency trends and the logistics underlying the trade that’s involved.
So let’s talk about China for a minute. I was there in Davos when President Xi Jinping came and said, in effect—I’m paraphrasing now—'If President Trump doesn’t want to embrace globalization, I will be the champion of globalization. I think globalization is important to the economy and China’s prepared to take the lead.'
Well, I think that President Xi is a very smart man. Because when you see a market opportunity and a vacuum you want to come in with a differentiated product.
Having said that, I actually think that one of the reasons President Trump got elected and the people were disaffected in the election cohorts that you just mentioned, was the mercantilism and protectionism first by the Japanese, which was an enormous part of the Reagan administration.
In fact Robert Lighthizer, who is on deck to be the U.S. trade representative, now a Skadden Arps lawyer, very proficient in the WTO and anti-dumping tariffs, is going to be the United States Trade Representative. He cut his teeth on putting anti-dumping duties in place and so forth.
Against the Japanese.
Against the Japanese in the 1980s. Now, listen, I am a huge friend of China as you mentioned. I’m going to show you a couple of slides here in a minute that some of the Chinese participants here, I think you’ll be surprised at the first picture I‘m going to put up.
But the reality is that China, over the last 10 or 15 years, has been very mercantilist, very protectionist, has engaged in forced technology transfer, and has at least acquiesced, if not actively promoted cyber espionage. Those things need to change. And I think that—
Could this be the moment?
I think that it is, Alan, because when President Trump took the phone call from the President of Taiwan, and then made his statement about perhaps we needed to rethink about the One China policy, there were a lot of people that are knowledgeable about the situation, including myself, that made sure the administration understood that this was an issue that China simply would not negotiate on.
There’s probably one or two more [issues], but that one and the primacy of the Communist Party are the two most important that I know of.
Now China’s got to understand that there are certain things that the United States holds in the same level of important. And I would submit right at the top of the list is number one, the freedom of the seas. The United States has spent a lot of blood and treasure keeping freedom of the seas.
And the new China policy is somewhat akin to saying we control all the waters between here and Bermuda and Venezuela. Now, maybe the Monroe Doctrine a hundred and some odd years ago is a loose parallel, but World War II has taken place. There needs to be freedom of navigation.
That’s an issue that the United States would consider inviolable and it’s stated so. And I think in the same vein, because of the election result, that China will now find that many of these practices that the United States acquiesced in have reached a point where there needs to be a mutual cooperation.
The good news is that President Xi and the Prime Minister Li of China have stated publically that making China a more liberal economy is in the very best interest of them moving to a consumer driven economy, rather than totally dependent on exports, investment, particularly public works and real estate.
So there’s the making of a deal here. And I was delighted here today that, to head that, and I don’t know whether this is correct, that President Xi is going to come over and there’s going to be—
Well, even better.
Mar-a-Lago. And we’ll go to your slides in just a minute. But before we do, what does that deal look like? I mean you’ve actually, you started out kind of pessimistic about U.S. policies and China policies, but you had an optimistic outcome that you think they’re the grounds for a deal. What do you want to see in that deal?
Well I think the first thing as I mentioned to you was the recognition on the part of the administration that the art of the deal statement about let’s reexamine the two China policy or whatever you want to call it was pulled back based on the input of a lot of people that told the administration how important this was to China.
But China has to understand that Trump, President Trump was elected, at least under the rhetorical umbrella, of we’re involved in an unfair trade situation.
But let me give you one statistic that shows how these two things come together. In the op-ed that I wrote for the Wall Street Journal that I mentioned, I talk in there about the deregulation that took place in this country from 1970 to 1990.
What that did was to take our logistics cost in this country from sixteen cents out of every dollar. Every time you buy a steak, every time you buy an egg, every time you buy an iPad—well they didn’t have iPads in those days, whatever we were buying, 8-tracks.
It was sixteen cents out of the dollar. It’s nine cents on every dollar today. All of that improved productivity has gone into improved social benefits, standard of living and so forth.
In China today, logistics costs are 18% of GDP. And it’s because of too much regulation, at the local level, the provincial level, and the national level. And it needs to be liberalized and world class competitors should compete in the logistics sector to … productivity.
They’re not allowing you to do your thing.
Well, we were—despite all of our efforts to help China and be involved in China we were one of the targets of China’s mercantilism and had to fight like hell when they changed the law and took us out from under the [Ministry of Commerce] regime and passed a new postal law, they refused to give us our license.
We eventually got them, it was a long process and we appreciate it, but it was an overt attempt to retard us to promote local champions. And that is the policy of China. It’s called indigenous innovation. They want Chinese companies to be their number ones in their various segments.
Manufacturing 2025 is another. So I think that those types of policies, which may make sense, I don’t really believe this, just look at Brazil and Argentina, but let’s assume that you could make a case for them. You can do that for a much smaller economy.
China is the second largest economy in the world today. So many of these things that President Xi and Premier Li say about opening up the market are the same things we will want. And that’s the nature—that’s the basis of the deal.