Seeing the Lighthizer: China trade talks

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shap. This week, Apple entered the entertainment business, saying it would start making its own films and TV shows. That's just the latest media move. As Internet providers, device makers and movie studios join forces and expand offerings, big companies are trying to get bigger, vying for your entertainment dollar. Smaller ones aren't going to survive. And you might have noticed that Kim Jong Un, North Korea's leader, seems a little more modern, a little more approachable, perhaps during his media appearances. Don't be fooled though. The propaganda message is the same as it ever was. First up, though, not so long ago, President Donald Trump thought this might be the week he'd seal a grand trade pact with China. Instead, negotiations to ease the economic war between the countries are dragging perilously on. American negotiators, led by U.S. trade Representative Robert Lighthizer, will arrive in Beijing tomorrow for another round of talks. The Chinese delegation, led by Vice Premier Liu he, will visit America next week with the aim of closing a deal by late April. But the details, it seems, are proving tricky to hammer out. Among the concerns of Mr. Trump, the question of whether China would honor any agreement that's made, because we have to.

Make sure that if we do the.

Deal with China, that China lives by the deal. With a big gap still between them, the talks could easily break down with political consequences for both sides.

These talks are important because at the end of the day, the relationship between the US And China, economically and diplomatically, is the essential link in the world economy. And if it really breaks down, it would be incredibly traumatic and bruising for economic growth everywhere.

Patrick Fowles is business affairs editor at the Economist, overseeing all our business and finance coverage.

The talks have been rumbling on for weeks now, so whether or not this latest iteration is really the crunch point when they attempt to have an agreement is unclear. But even though the process seems quite interminable at the moment, it is still really quite critical what happens.

Interminable might be exactly the word. Why are they dragging on so much?

Well, if you go back to February, it actually seemed quite likely there'd be a kind of short, sharp deal signed. There was talk of President Xi going to Mar a Lago to have a sort of celebratory dinner with Donald Trump as the trade relationship between the two superpowers was all stitched up and rectified. I think what's happened is the underlying problems are actually just much harder to solve. And there's sort of three buckets. One is the simple one, which is, can China buy more stuff that America makes to shrink the trade deficit, which is what President Trump cares about. The second one is more complex, which is intellectual property rights, the role of the government in China in distorting markets. And the last one is arguably the hardest of all, which is how can America be sure that China will comply with whatever agreement is reached? And if you take those three sets of issues, I think probably why the talks have been delayed is because the last two are actually really pretty difficult to resolve.

So, I mean, what's actually on the table this week and next? What elements of a deal have already been struck, or is everything still to play for?

Well, I think one of the things we've heard frequently is that everything's still to play for, partly because President Trump himself is a rather unpredictable person to be negotiating with it, albeit through his deputies. So you have the Treasury Secretary Mnuchin there and also the trade representative, Robert Lighthizer, both of them whom have reputations for being solid in the case of Mr. Lighthizer, you could argue formidable in these negotiations. And yet the Chinese know that ultimately the deciding factor could be a quite impulsive presidential decision, which makes it difficult. What we do know, according to press reports in the Wall Street Journal, for example, is that there may be a text circulating on some of this stuff. So the negotiations have got to the point where specific clauses and language are being agreed. But the air of unpredictability that nothing is agreed until everything is agreed seems to hang over the talks and means, it's really quite hard to say.

So there is still a risk then that they could collapse altogether?

Well, one of the most interesting elements is whether the dynamic has changed. So in February, China's economy was reeling. The financial markets had fallen. There was a sense of people worried about a recession in China, partly because of trade. And then similarly, President Trump was probably more in battle. There was a sense he was under pressure domestically and maybe needed a big win. Now, if you roll forward to today, China's done a stimulus package to its economy. The markets are up. The mood is a bit more optimistic, which might take the pressure off President Xi, and he may feel that actually he's in a sort of stronger position. Meanwhile, for President Trump, you have the Mueller report, which probably changes his sort of momentum domestically and may mean that actually he thinks, I don't need a win right now and maybe I'll keep this in my pocket, keep the talks going for much longer, and then try and announce a victory nearer the election. So the domestic agendas, both economically and politically for both leaders, complicate things as well and make it even murkier trying to work out when these ongoing talks actually come to a resolution.

We've been going back and forth. We've talked on this show multiple times about these trade talks. Do you have a sense for at the moment who holds the cards?

I would think President Trump's position is stronger. I think his domestic political situation has improved as a result of the Mueller report. There is a lot of support, bipartisan and from the US Business community, for being tough with China. And ultimately, the importance of China to the US Economy is lower than the importance of the US Economy to China, which means it is not a balanced threat. China probably has a bit more to lose. And I think for those reasons, the Americans will be able to push a. Push a hard bargain over the next few weeks.

Patrick, thanks very much for coming in.

Thank you.

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What show did you watch last night and how and where will you be getting your entertainment in 10 years time?

In the last few years, the media landscape has changed dramatically, especially in the.

U.S. gaddy Epstein is our media editor.

People are watching just a lot less traditional television, what we call linear television, where you know, there's a show on at a certain hour at a certain time. And of course they're using Netflix. But increasingly they are also watching other television on demand, whether it's via Hulu, Amazon Prime Video, or whether it's watching something that is on one of their cable television services but on demand. So they've changed their viewing habits. And so the big media companies have seen this, the big telecommunications companies have seen this, and what they've done is started to buy each other up and try to marry content and distribution to take on Netflix. So you have AT&T buying Time Warner, you have Disney buying much of Fox in deals that combined were worth almost $200 billion. And you also have Comcast, America's largest provider of broadband, buying sky over in the UK. And that is also partly a play to take on television in a different way.

Amid this upheaval in the business model of entertainment, Apple has made its own.

Announcement to create a new service unlike anything that's been done before.

Apple TV Apple had a big event on Monday in Cupertino where people expected that they would see Apple really announce a lot of details about its new streaming video service. Instead, we got just a glimpse, but the reason people were expecting Apple to make a big splash was is that there's a race right now to provide direct consumer video services in America and also internationally because Netflix has established such a big lead in both places. Got like 60 million subscribers in the US almost 80 million outside the US and growing quickly internationally. And the other folks realize that this is where consumers are going. And so Apple is a formidable potential threat in this space because they've got, you know, 900 million iPhones around the world, 1.4 billion iOS devices. And so that's a big installed base of devices that you can immediately put products and services out to.

It does seem like kind of a mix of companies that you name there. We have the kind that make devices, we have the kind that run the Internet pipes, and the kind that make movies and television shows. Is the push here for each one of them to try to become all of those things.

Each of these companies has a different strategy, a different approach to try and capture the market in streaming video. And that's why I think probably more than one or two can succeed. You've got Netflix, they've got a huge lead. I really don't think anyone's going to challenge them, despite the fact that they're losing access to the films that these other companies make themselves. But I think they're going to survive. And then you're going to have folks like Disney, which has just a ton of world famous popular movie franchises. You've got the Marvel Cinematic Universe, Star Wars, Pixar films, Frozen. I mean, it's just an incredible amount of high quality intellectual property that is unrivaled. So I think they will do well. Then you have AT&T, which I think will take a slightly different approach. They own some of the pipes in this case. Really the most important one is their wireless national coverage in the US and in a world where you have 5G, basically broadband like speeds over wireless, you can imagine their content like HBO being bundled with a wireless subscription and thus retaining wireless customers. So that's their strategy. Apple has its 900 million iPhones around the world that can instantly be feeding whatever product and service they want to. So each of these companies has a slightly different approach and I think each of them has a chance to still be around and 10 to 15 years.

Well, especially if each of them has some stable of highly desirable content.

That's right. This is why people worry a little bit about Netflix, because they created big globally famous content kind of franchises. But people kind of wonder, do they have enough? And this is of course why Netflix is spending massive amounts of money, far more than anybody else is spending right now on TV. This year they'll probably spend about $15 billion. To succeed at a global level without having Marvel films or Star wars, you've got to have a really high volume of content.

You're describing a situation where it seems as if content is still king, but These are different kinds of companies pursuing different business models to get to be king of content. Which do you think looks most promising in that longer run?

I think what's really king in this era is the direct customer relationship, which is sort of a partial marriage of content and distribution. Not necessarily owning the pipes, but, but owning that direct connection to the consumer. Netflix has that at and T has that because they already have a bunch of customers of wireless and via their satellite TV DirecTV. Apple has that with its devices around the world. Comcast has that with Sky. Disney by comparison, is essentially starting at zero. So customer acquisition will be their biggest challenge. And that's why it is so important that they have these must have famous movie franchises.

And so we've only been speaking about a real handful of companies. You reckon in the longer run it's, if not winner takes all, then some sort of, you know, positive feedback thing where all of the small players now will just disappear.

I think it will be a real challenge for any small player to succeed. You'll have a few of these big companies making a huge amount of content and consumers will increasingly winnow down their choices of what they'll buy. Because, you know, each of these services will cost money, 10, $15 a month, and it adds up. So eventually they'll be dropping paid tv. There'll be an acceleration in what we call cord cutting in America where people will drop their expensive bundles. It'll be a real struggle for any sort of small direct consumer service that doesn't have the heft of a really big conglomerate behind them. And what you'll see is the bigger companies gobbling up some of the smaller ones, some of the smaller TV networks either just going out of business entirely or seeking mergers to survive.

It seems like the big cable companies used to try to gather together as many channels as they possibly could to make the best offer they possibly could to you. So you would pay your X dollars a month and stick with them instead of arrival or pay more for your monthly subscription and so on. Aggregating, right. And it now seems like that there are all these tech companies and to a degree still these cable companies still aggregating. Is this just a more tech led, a kind of more wireless version of exactly what we saw with the cable companies.

You could absolutely see things going in that direction where we'll have a new sort of bundle aggregating different direct to consumer services at some point down the road. We're not quite there yet, but you know, they're going to have to avoid repeating the mistakes of the cable companies with pay TV in America, which was just to keep adding channels, which made money for the companies who had TV networks and it made money for the cable companies. But it became so costly for the consumers that it became easy to disrupt for a new player like Netflix and for Amazon Prime Video and now these new direct consumer services where the companies are going to be disrupting themselves to sell directly to consumers.

Gadi, thanks very much for your time.

It was good to be with you, Jason.

North Korea's propaganda event of the year has had a makeover. The New Year's address from Supreme Leader Kim Jong Un felt like the propaganda had taken a more relaxed tone this time around.

It's the one time in the year where Kim Jong Un addresses the nation. You can definitely compare it to the American State of the Union.

Lena Shipper is our sole bureau chief. She's been following the media and the message.

In North Korea previous years, he used to stand behind this podium. It was like he was in some big hall. You know, the flags behind him, what you expect from a nominally at least communist nation. And this year he was sitting in a library, sort of big armchair, wearing a Western style suit and tie, which he doesn't usually do either. Normally he's in a sort of trademark Mao suit and there were bookshelves behind him in a sort of completely different setting from what he's usually done.

Lena, that sounds like a pretty significant shift in propaganda tone or what were state media like before? The same old Stalinist stuff as his father used to put out.

So for a long time it was very similar, the classic diatribes against evil American imperialists. The classic North Korean propaganda is him going off and inspecting a factory, inspecting a farm. One of my favorites from last year actually, because they had a big emphasis on economic issues, was him pointing at potatoes, sitting on massive piles of potatoes surrounded by his officers, which almost looked like a sort of terrible indie band cover for a late 80s band.

So what changed then? Why did Mr. Kim stop pointing at potatoes?

Because he's just done different things, so there's different propaganda material to work with. He's been on all these visits abroad, so there's more picture material for the propagandists. And what they seem to have decided to do is to present him in a way that's a lot more open to the world, presenting a slightly more modern image. You know, the Western dress doing the new era dress. Him standing on top of Marina Bay sands in Singapore, smiling at people, waving at people, having the skyline behind him. That sort of thing.

It sounds like the aesthetic has changed, but do you think anything else has? Is there anything wider to interpret here, or is this just a slightly more westernized form of propaganda?

One should probably be careful in over interpreting what's going on here. So the goal of North Korean propaganda as such hasn't changed. It's supposed to show people that their leader is working tirelessly for the good of the country and everything he does is great. That message hasn't changed. There's been no doubt cast on that at all. But one of the things that's changed since last year is that North Koreans now hear a lot more and a lot more quickly about his visits abroad. So if you look at the first time he went to see Xi Jinping and Beijing last March, people in North Korea didn't know about that until he'd come back. And when he went to Hanoi last month to meet Donald Trump, Vietnam, where.

They really rolled out the red carpet.

There was almost breathless, rolling coverage. There were daily updates. There was a big splash on his red carpet welcome in Vietnam. And that all shows a much greater confidence. The usual North Korean position has been massive paranoia about revolt at home. If the leader leaves the country, who knows what might happen? Or if he leaves the country, who knows what might happen abroad? Someone might try to assassinate him, somebody else might start a revolution at home. That sort of thing was a big deal. And that doesn't seem to be quite so much of a worry as it used to be.

So being careful to avoid over interpreting, then why do you think Mr. Kim is bothering with this?

One of the things that's changed in North Korea over the past few years is, is much more foreign information and foreign media have trickled into the country. Even though Kim Jong Un has tried to crack down on this, an increasing number of people in North Korea have access to things like Korean TV dramas or Western films. It's unclear exactly how much, but there's a clear sense that they're much more familiar with those sorts of media aesthetics than they were maybe 10 or 20 years ago. So one thing this whole propaganda style change might be trying to do is to package the same message in a way that it will be appealing to a much more worldly audience. So clearly there's a sense that he's an internationally respected character because he can adopt the same sort of style as other people who are internationally respected.

Lena, thanks very much.

Thanks.

That's all for this episode of the Intelligence. You can subscribe to the economist@exterator.com radio offer 12 issues for $12 or 12 pounds. See you back here tomorrow.