Professor Lawrence Lau Juen-yee, former vice chancellor and professor of Economics at The Chinese University of Hong Kong, is on the show this week.

Professor Lau talks about the ongoing US-China trade war and tariffs, and how they are affecting everyone here in Hong Kong, and how it may pan out in the near future.

Check out the full transcript of TVB’s Straight Talk host Dr Eugene Chan’s interview with Professor Lawrence Lau:

Chan: Good evening. I'm Eugene Chan, and we are on Straight Talk, speaking with Professor Lawrence Lau, the Ralph and Claire Landau Professor of Economics at The Chinese University of Hong Kong. A Stanford- and UC Berkeley-trained economist, Professor Lau taught at Stanford University for nearly four decades, and served as the vice chancellor of The Chinese University of Hong Kong from 2004 to 2010. He is a renowned expert in economic development, economic growth and East Asian economies. In fact, he developed the first econometric model of China in 1966. He was a member of the 11th and 12th National Committees of the Chinese People’s Political Consultative Conference from 2008 to 2018 and a member of the Executive Council of Hong Kong from 2009-2012. Welcome, Professor Lau!

Lau: Thank you, Eugene.

Chan: Maybe I shall call you Larry …

Lau: Yes, that’s okay.

Chan: … because it’s more comfortable. We are seeing sort of escalating tensions between the US and the rest of the world, of course, including China, Europe and some of the emerging powers. How do you see the current geopolitical landscape shaping the global economic outlook in the next 12 months, or even in five years? That's a very big question I'm asking you.

Lau: Yes, but I think we have to accept the fact that China-US strategic competition is a new normal. It will be a new normal for at least the next few years.

Chan: Okay.

Lau: And if you really look at it from the United States’ point of view, if the US wants to maintain its global hegemony, it cannot allow China to say no without being punished, right?

Chan: Right.

Lau: Because, if China can get away with saying no, other countries will follow suit, and the hegemony would be no more, very soon. So, I think from the US point of view, suppressing China is part of their strategy. It’s something that they must do.

Chan: So would you say that the next 12 months will be very volatile, or should be even lasting the next five years?

Lau: However, let me add that there will not be a hot war. I think some of you may be familiar with the book by Graham Allison called the “Thucydides’ trap”, right? And I know Graham back in the ’60s, so we've been friends for a long time. And I told him that in the last century, the former Soviet Union and the United States did not go to war at the time even though they are ideologically very opposite. I think it is not likely that China and the US will go to war, because in any war today, we have no winners or losers. So, I think we don't have to worry about World War III.

Chan: Alright, this is very reassuring. When you mentioned about sort of a hot war … that will ask you … there's also a growing fear of what we call the Cold War, or New Cold War, or even economic decoupling ...

Lau: Yes.

Chan: … as you said, is that inevitable? Or can globalization kind of adapt to survive into sort of such a fragmented world?

Lau: Well, see, I actually want to say something good about decoupling.

Chan: Okay.

Lau: Yes. Because if you think about it for a moment, right now, it is actually quite risky to have only one supply chain, because one supply chain can be interrupted for many reasons: geopolitics, pandemic, natural disasters such as earthquake or tsunami. So, having two or more supply chains is actually a blessing, right? It makes the world economy much more resilient, number one. But number two: it also means there's competition, right? So, there's American supply chain, there's a Chinese supply chain, and perhaps even a European supply chain, they will compete.

Chan: Right.

Lau: And, so, no-one would be able to monopolize. And in fact, there will be competition, prices will come down, quality will improve.

Chan: Right.

Lau: So, I think in the longer term, it's not a bad thing.

Chan: People are worried when countries are in conflict. Actually, I read the news today that actually the number of tourists to the USA actually has dropped as well. I mean, a lot of things are happening as a result of what people perceive.

Lau: Yes.

Chan: I think the reason why we invited Larry here today is a lot of people are concerned … something new, they have never seen this before, and how should we take it? So, we need to have as much information as possible. Just now when you said, when decoupling might be a good alternative, but will trade and investment flows still continue as what we have known in the past?

Lau: You have to think of it this way: economic globalization actually improves the welfare for everybody.

Chan: Right.

Lau: Okay. Because, and the simple way to think about it is the following: once you have economic globalization, the people in every country has more to choose from, right?

Chan: True.

Lau: You may not want to import anything, might not want to export anything, but at least you have choice, right? So, whenever you have more choices, you are automatically better off, right?

Chan: Right.

Lau: So, that's a very simple idea. Now you think of the opposite, de-globalization, decoupling, that means everybody will end up with fewer choices. So, on the whole, they all have to be worse off, alright? So, I think de-globalization will lead to a lower level of welfare worldwide. No question. But there is actually one angle that's very interesting to think about, and that is: even under economic globalization, even though every country will be better off, but within each country, there will be losers and winners with the globalization, right? So, the same is true with de-globalization. Each country will then create new winners and losers.

Chan: So, completely new picture altogether.

Lau: Exactly.

Chan: So, bring it back to say for Hong Kong, I mean, how do we fit in this sort of, this geopolitical contest? I mean, our role is sort of a bridge between the East and the West, especially in the financial world. Is our role shifting in this new era? Can you foresee?

Lau: Well, you know, I think Hong Kong still has a substantial role to play, but I think we have to take into account the fact that to the US government, Hong Kong is not going to be distinguished from the Chinese mainland. We have to accept that fact. We shouldn't have any illusion that they would treat Hong Kong differently from the way they would treat the mainland, alright. So, I have to take that … But the mainland actually has been very, very supportive and very helpful to Hong Kong, you know, since it's began the second its economic reform, right? We could simply, we could easily say that Hong Kong's prosperity, for the last you know, let's say four decades, it's very much due to the Chinese economy rising up, right?

Chan: Right.

Lau: So, I think it is inevitable that in the short term, the China-US relationship will be, will not be very good.

Chan: No.

Lau: Okay. But that also implies that the Hong Kong-US relationship will not be very good, okay? Our CE, our chief secretary, they are all being sanctioned, right?

Chan: Right, yes.

Lau: I think there's still a lot of room for Hong Kong to play, being the bridge, the link between the East and the West, alright? And in fact, if you really think about it, if I'm a foreigner, not a US citizen, but somewhere, anywhere in the world, if I want to learn about China, where would I go? I will go to Hong Kong.

Chan: Right.

Lau: Because, even though it's not China … but on the other hand, China is very difficult for a foreigner who doesn't know Chinese, the language, to survive.

Chan: So, Larry, let's move on to look at the maybe look at the greater picture. It’s quite reassuring we won't be having a hot war, but the Cold War, decoupling is likely to happen. So, look actually at the tariff. I mean you we have read from the papers, watching the news that the US is raising tariffs on virtually every trading partner, and especially for China, even for China includes everything from electric vehicles, semiconductors through all consumer products. And of course, recently, they have sort of put a pause on tariffs imposed on the other countries and only imposed it on China. This will change daily. But how damaging is this going to be to the consumers and businesses worldwide? Because I think what's happening in the world is people are a bit worried. What will happen?

Lau: It actually will be very damaging in the short term. Okay, let me just give you an example. Someone calculated that in order to make Apple iPhones in the US, it will have to sell for $3,500 or more right? From right now is about a little bit less than $1,000. So, you can see that it's almost impossible. There would be a transition that would be very painful, right? You know. So, I think now fortunately for China, you know, China has to buy airplanes from Boeing or Airbus.

Chan: Right.

Lau: If you buy Boeing today, there's a tariff of, you know, the Chinese tariff against American imports, of 84 percent …

Chan: Say, today.

Lau: .. yes, as of today. No one is going to buy a Boeing in China, why not buy an Airbus? Same quality, prices comparable. No-one would want to pay those kind of … So, it would be a huge disruption.

Chan: Right.

Lau: It would be a huge disruption. There are many other examples, I won't say, but there will be a disruption. But I think that the supply chain will be reconstituted, and I think China can actually undertake what I call import substituting innovation.

Chan: Right.

Lau: If you think about the Huawei cell phones, Huawei actually virtually went out of business, sold their cell phone business five years ago because it could not buy the chips, right? But over the years, Huawei and some companies in China managed to develop the chips, right? So, Huawei is back in business with a new cell phone. So, it will take some time, but I think what would happen is that eventually, you know, I think there will be parallel supply chains. Now, in the interim, there will be some pain, I don't dispute that.

Chan: Right, Larry, let's take a short break now. But viewers, stay with us. We will be right back.

Chan: Welcome back. Professor Lawrence Lau, a leading voice in economics, is with us unpacking the very topical issue of global tariffs and how this is going to affect Hong Kong people. So, Larry, in the first half, you have given us the overview of what will happen after the tariffs are being imposed. There will be short pain.

Lau: Right.

Chan: But in your view, in mid to long term, it should be fine. It will be a new sort of mechanism being constituted. So, would you say tariffs are an effective tool in today's economy, because in a way it is hurting ordinary people through inflation?

Lau: Yes.

Chan: And could we see a return to the 1970s styles of stagflation where there is a high inflation and slow growth in the US and this trade war intensifies?

Lau: I think it is possible. I think that might be one reason that the US has decided to pause the tariff for 90 days, because the impact has been quite negative. But I think we cannot be too optimistic about how quickly this trade war will come to an end, okay?

Chan: Right.

Lau: Given that the positions on both China side and the US side seem to have hardened. But I want to go into something that is slightly different, and that is to reassure you that the impact on the Chinese economy of these US tariffs is not that big.

Chan: Right.

Lau: Now, if you look at the US tariff rates, together with the latest addition, it is about 124 percent, 125 percent.

Chan: Which is going to be 145 percent with the additional …

Lau: Right, 145 percent now.

Chan: Yes.

Lau: But that basically means no trade, okay? Because 145 percent on one side, 84 percent on the other side, basically …

Chan: There’s no trade.

Lau: … is no trade, right? So, we want to say, “Okay, if there is no trade with the US, what is going to happen to the Chinese economy?” Now, I want to give you two statistics. One is that Chinese exports to the US, you know exports of goods and services to the US, as a percent of Chinese GDP, was less than 3 percent in 2023, it’s 2.9 percent. But if you now take into account that China has been importing also from the US, so you look at the net. You look at Chinese trade surplus vis-a-vis the US as a percent of Chinese GDP, is 1.67 percent. So, it is a very small amount. So, even if you take that away, it is okay, 1.67 percent, well okay, it is still significant because even 1 percent of GDP is still very significant. But it is not something that would kill you.

Chan: Right. Is that the reason why our motherland has been quite strong in sort of defending our position?

Lau: Yes, because I think the cost, because people now actually still have this idea that exports are extremely important for the Chinese economy. But that has already changed over the last 10, 20 years.

Chan: Right. But how about, say to Hong Kong? I mean we don't have anything to produce.

Lau: Yes.

Chan: I mean Hong Kong is still a free port. I mean, how is it going to affect Hong Kong with tariffs?

Lau: Well, you see …

Chan: Would it be sort of an indirect effect more so?

Lau: … it would be quite indirect, and I think the direct effect is small. And as you said, Hong Kong does not manufacture anything, and most of Hong Kong's exports, whatever Hong Kong exports, are re-exports. They are transhipments of things made elsewhere through Hong Kong. And, so, it is not a large number. But I actually have some sympathy for these people. For example, you have people in Hong Kong, small and medium enterprises, dealing in Chinese medicine, okay? ‘Cheung Pak San’ Ginseng, you know.

Chan: Right, Ginseng.

Lau: And Hong Kong has a useful role to play, and Hong Kong adds some value …

Chan: Right.

Lau: … even though it is not produced here because Hong Kong certifies the quality and so forth. So, those would suffer because they would lose their business.

Chan: Right.

Lau: Because the Chinese products that they try to ship to the US, Hong Kong products will not be subject to tariff, but Chinese products even shipped to the US via Hong Kong will be subject to tariff.

Chan: Right. So, Larry, let's come back to more to the viewers now. I am sure the viewers will say “All right, looks like it is not that bad”.

Lau: No.

Chan: But for the regular households, who still worry about a possible rising cost ...

Lau: Yeah.

Chan: … you never know. What will you advise them to protect their finances in this volatile environment? Would you be asking to do savings, more investment, or diversification? What would you advise them to do?

Lau: Oh, I think the thing to think about is that the markets are very volatile today, okay? So, I would say that it is much better to be conservative.

Chan: Right.

Lau: Because you know, I mean … because with the markets being so volatile, if go in and out, chances are that you lose money rather than make money.

Chan: Right.

Lau: So, I would say that stay calm, don't do anything drastic.

Chan: Right, but with the knowledge that it should be all right in the long term as you have been trying to say to us?

Lau: Right.

Chan: But how about young professionals? Should they be rethinking about their careers with all these geopolitical changes?

Lau: Yes.

Chan: Because usually people like to have their career overseas. The US is a very popular area, you were there for four decades. Will any of this change your guidance?

Lau: No, I think you ask a perfect question, because I think that the United States is no longer as hospitable to Chinese people as it used to be because I've actually known a significant number of Chinese students on student visa, who were turned back upon arrival in New York or San Francisco, right? And I think that is so unconscionable because you should either don't … you shouldn't have given them the visa because they have, you know, I mean, they've undergone so much trouble, so much expense to arrive in America, and then you send them right back. I think that is just, it is just wrong.

Chan: Right, right. So, we talked about the advice to the public, how about for businesses? I think a lot of people, a lot of businesses have built their long-time supply chains and thinking that globalization will never reverse. But what is your advice to the businesses? They are, I am sure they are scrambling to adapt. What will you suggest them to do? Will you say …

Lau: Well, I think you need to look at new markets.

Chan: Okay.

Lau: And ASEAN countries are a good market. ASEAN is growing very fast, right? The Belt and Road, you know, and maybe South America, right? You know, Brazil is actually becoming a major trading partner of China, right? So, instead of buying American beef, you can import beef from Brazil, right?

Chan: Right.

Lau: So, I think you need to change because I think the China-US trade is not going to revive strongly any time soon.

Chan: Right.

Lau: And that will also affect Hong Kong-US trade.

Chan: Right. Larry, you have been an advisor to the government and also institutions for decades. What would be, you would be saying to the Hong Kong government sort of, I would say, sort of mindset or sort of a policy that you will advise them in the midst of all these tensions?

Lau: Well, I think the Hong Kong government is trying very hard. I mean like it launched the support for the credit support for the SMEs, but I think it can actually be more proactive.

Chan: Okay.

Lau: Because this is the time when Hong Kong has the risk of going into recession because the sentiment has turned very negative and so forth, right?

Chan: Exactly.

Lau: So, you need to do something positive. And I think that one thing the Hong Kong government can do is to push forward on some of the large infrastructural projects, like the Northern Metropolis project. Now is the time to push.

Chan: Right.

Lau: Because, and say, where does the government get the money from? You can use bond financing, issue bonds, right?

Chan: So, it is time to invest now.

Lau: Time to do investment.

Chan: So, it looks like our financial secretary has done the right thing to plan for investment.

Lau: Oh, yeah, should spend more. And don't worry about deficits.

Chan: Alright, not now anyway.

Lau: Yeah, not now because basically you want to save the patient first.

Chan: Right, okay. Thank you, Professor, for your valuable insights. And as we have discussed, tariffs and trade wars are more than headlines, they impact our very livelihoods. While uncertainty is rising, with our Lion Rock resilience and support from the motherland, Hong Kong is able to ride the storm and we will come out stronger. Until next time, I am Eugene Chan, and thank you for watching Straight Talk.