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00:00I WANT TO GET YOUR INITIAL REACTION TO THE BREAKING NEWS WE HAVE HEARD. DAVID DAVIS RESIGNING AS BREXIT SECRETARY. THE BRITISH POUND IS PAIRING SOME OF ITS GAINS. EARLIER IT WAS UP TO 1.3325, NOW IT IS 1.329. SO CLEARLY INVESTORS ARE NOT HAPPY. PAUL: WHEN IN TO SEE THE DETAILS OF WHAT WAS THE STATED REASON FOR THE RESIGNATION. I AM GUESSING COMING OUT OF THAT VERY IMPORTANT MEETING ON FRIDAY WHICH ESSENTIALLY, THE PRIME MINISTER ATTEMPTED TO BRING THE WHOLE CABINET ON BOARD AND HAVE CABINET UNITY, SO THERE WAS A VERY IMPORTANT TURNING POINT FOR THE WHOLE U.K. APPROACH TO THE BREXIT NEGOTIATIONS BUT PRESUMABLY THE MINISTER HAS DECIDED HE CANNOT BUY INTO THAT CABINET UNITY AND IS STEPPING OUT. IT LOOKS LIKE BAD NEWS THREE DAYS AFTER THE CABINET MEETING, BUT PERHAPS IT MEANS WE WILL GET A MORE UNIFIED CABINET. YVONNE: PLEASE EXPLAIN BECAUSE THE CHECKERS MEETING LED TO THERESA MAY PUTTING OUT A PLAN FOR A SOFT BREXIT. SO IF WE CAN CONTROL MIGRANTS IN OUR COUNTRY, WE STILL WANT TO TRADE FREELY. THIS IS A BIG STICKING POINT BETWEEN THE U.K., NOT ONLY THERESA MAY AND HER CABINET BUT THE U.K. AND THE AU -- THE E.U. PAUL: THE U.K. IS SUPPOSED TO HAVE BEEN NEGOTIATING WITH THE E.U., YET THE COMMON OBSERVATION IS IT IS NEGOTIATING WITH IT ALL. THEY WERE TRYING TO PUT THAT BEHIND THEM AND COME TO A POSITION THEY COULD TAKE TO THE E.U. I SUSPECT A LOT OF THE COMMENTARY WILL BE CHERRY PICKING OR WANTING TO HAVE THEIR CAKE AND EAT IT BECAUSE THEY WANT SOMETHING ACCUSTOMED TO THE UNION AND CLOSE IN SOME WAYS ON THE GOOD SIDE OF THINGS. RETAINING SOME OF THE SOVEREIGNTY. MY GUESS IS THE E.U. WILL COME BACK WITH A FAIRLY HARD STANCE HERE, PLAY HARDBALL. IF THERE IS ANY INCREASING FRACTURES IN THE CABINET, THAT WILL RAISE THE STAKES EVEN FURTHER. HAIDI: HOW MUCH TIME DO YOU ASSIGN TO WORRYING ABOUT DISORDERLY BREXIT AND THE EFFECTS ON THE EUROPEAN ECONOMY? PAUL: THAT IS ONE OF THE TAIL RISKS RIGHT NOW. COMING INTO MARCH NEXT YEAR, EITHER THERE WILL BE SOME KIND OF AGREEMENT, TRANSITION ARRANGEMENT FOR THE BEST PART OF A YEAR-AND-A-HALF AND SOME SORT OF OTHER -- ORDERLY BREXIT PROCESS OR THE U.K. IS POISED TO CRASH OUT OF THE E.U. THAT IS A TALE RISK FOR THE GLOBAL ECONOMY. BREXIT IS NOT JUST ABOUT THE U.K.. IT IS ABOUT THE E.U. ITSELF. THE E.U. HAVE TO DECIDE WHAT KIND OF CONFIGURATION AND ARCHITECTURE IT REALLY WANTS TO END UP WITH IN TERMS OF HOW THEY SHARE VARIOUS DIMENSIONS OF SOVEREIGNTY. EVEN IF YOU GET THROUGH BREXIT, YOU STILL HAVE A LOT OF QUESTIONS ABOUT WHERE IS THAT E.U. 27 HEADED? KATHLEEN: COMING BACK TO FEDERAL RESERVE, TRADE, I THINK IT WAS STRIKING WE SAW THE KNIFE, HEALTHY INCREASE IN MANUFACTURING JOBS. BUT SEEMS TO ME THAT IS BACKWARDS. WHAT IS YOUR CONCERN WHEN YOU LOOK AT THE U.S. ECONOMY, THE GLOBAL ECONOMY AND THE TRADE WAR WHICH LOOKS LIKE IT COULD GET UGLIER BEFORE IT GETS BETTER? PAUL: ON THE TRADING FRONT, THIS COULD GO WELL OR VERY BADLY. I AM HOPING IT MIGHT GO WELL. IF YOU LOOK AT WHAT THE TRUMP ADMINISTRATION MESSAGE, THE MESSAGE COMING OUT FROM A SLIGHTLY DIFFERENT ANGLE, IT IS THE IDEA OF FREE TRADE, BUT IT NEEDS TO BE FAIR AND RECIPROCAL. SO THERE IS THE SENSE IN WHICH YOU COULD TURN THAT ON ITS HEAD AND SAY THE PRESIDENT AND ADMINISTRATION COULD BECOME A FORCE TO PUSH -- BRIEF -- BREATHE NEW LIFE INTO THE TRADE AGENDA THAT IS PRETTY MUCH DEAD. VERY BADLY OF COURSE IS THE ATTEMPT TO DO THAT, THE RALLYING CRY FOR FREE BUT FAIR TRADE ENDS UP BEING ESCALATION OF TIT-FOR-TAT AND FULLY FLEDGED TRADE WAR. I THINK PEOPLE SHOULD TAKE A STEP BACK, TAKE A DEEP BREATH AND SAY, WHAT ARE THE KEY UNDERLYING FUNDAMENTAL ISSUES AND ADDRESS THEM IN A WAY THAT TURNS OUT TO BE A WIN FOR EVERYBODY RATHER THAN POTENTIALLY GOING DOWN THE TRIP -- THE TIT-FOR-TAT TRADE WAR. KATHLEEN: IS CHINA READY TO DO THAT? WHAT WORKS FOR US, WHEN WE WERE SO STRONG AND HAD A BIG ECONOMY, IT DOESN ' T WORK, AND WE HAVE TO MAKE CHANGES THE WAY WE DEAL WITH INTELLECTUAL PROPERTY AND OTHER ASPECTS OF FREE TRADE? PAUL: IT IS INTERESTING BEHIND THIS, WITHOUT GETTING TOO TECHNICAL, THESE ACTIONS AGAINST CHINA, THEN THE ACTIONS ON STEEL AND ALUMINUM, BOTH OF THEM ARE ALL ROADS TO DEFTLY TO CHINA. THAT IS TELLING US CHINA IS NOW A BIG ECONOMY. IT IS ON SOME MEASURES THE LARGEST IN THE WORLD AT LEAST THE SECOND. CHINA HAS COME TO LOOK AT THE WHOLE INTERNATIONAL ORDER FROM THE VIEWPOINT OF SAYING THE U.S. CANNOT CARRY ALL OF THE WEIGHT IN TERMS OF BEING THE GLOBAL POLICEMAN BUT ALSO THE CONSUMER OF LAST RESORT. THAT CONVERSATION, I DON ' T KNOW IF IT IS TAKING PLACE. I HOPE IT IS RATHER THAN THE RECIPROCAL TIT-FOR-TAT. RAMY: THE CONVERSATION ABOUT THE HEGEMON HAS BEEN HAPPENING FOR DECADES. WHEN I WAS LIVING IN CHINA, THAT WAS ONE OF THE FIRST WORDS I LEARNED LEARNING ABOUT CHINA RELATIONS. WHAT DEGREE CHEMCHINA PUSHBACK ON THE UNITED STATES? I WANT -- 10 CHINA PUSH BACK ON THE UNITED STATES? THE U.S. PULLS IN MORE THAN $500 BILLION IN TERMS OF TRADE WITH CHINA, AND TALK ABOUT THE $550 BILLION CHINA -- TRUMP IS SAYING. PAUL: CHINA NEEDS TO BE QUITE ADULT HERE AND RESIST THE TEMPTATION I THINK TO DO THE TRADITIONAL KIND OF RETALIATION IF YOU WOULD LIKE. WE NEED TO LOOK AT SOME OF THE UNDERLYING ISSUES. WHAT IS CHINA ' S POSITION ON THE ALLEGATIONS BEING MADE IN THE SECTION 301 REPORT? IT IS A COUPLE HUNDRED PAGES LONG. CHINA SHOULD LAY ON THE TABLE WHERE IT AGREES, DISAGREES. MOST PEOPLE WOULD COME TO THE CONCLUSION THAT IF CHINA HAS MADE CLAIMS LOOSE AND FAST WITH INTELLECTUAL PROPERTY, THEY CAN TIGHTEN UP THAT AREA, THAT WOULD GO A LONG WAY TO ASSUAGING THE U.S. CHINA HAS HAD TREMENDOUS ECONOMIC DEVELOPMENT OF -- AFTER ENTERING THE WTO, BUT THAT HAS HAD CONSEQUENCES FOR MIDDLE AMERICA, THE INDUSTRIAL HEARTLAND. CHINA COULD TAKE THE U.S. THAT IS THE U.S. ' PROBLEM, BUT THE MAGNANIMITY, SAYING WE ARE IN A SENSE GRATEFUL FOR THE FACT THAT THE GLOBAL ECONOMY AND THE U.S. ECONOMY BEING OPEN TO US HAS ALLOWED LITERALLY HUNDREDS OF MILLIONS OF CHINESE TO COME OUT OF POVERTY. SO LET ' S SEE IF WE CAN APPROACH IT IN THE SAME SPIRIT RATHER THAN GOING INTO ADVERSARIAL KIND OF WORLD. HAIDI: IN TERMS OF WHAT POLICYMAKERS IN THE U.S. CAN DO TO COUNTER A TRADE WAR IF THINGS ESCALATE, IF YOU GET THIS PHENOMENON OF SHORT-TERM INFLATION FOLLOWED BY LONG-TERM DRAG ON GROWTH, CAN THE FED DO ANYTHING? PAUL: THE FED CAN ONLY DEAL WITH ONE SORT OF ISSUES, TRYING TO GET THE ECONOMY AT FULL EMPLOYMENT AND KEEP INFLATION AROUND 2%. IF YOU

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China Needs to Resist Temptation of Traditional Retaliation, Sheard Says

Paul Sheard, former vice chairman of S&P Global, talks about David Davis' resignation as Brexit Secretary, the trade spat between the U.S. and China, and Federal Reserve policy. He speaks with Ramy Inocencio, Kathleen Hays and Haidi Lun on "Bloomberg Daybreak: Australia." (Source: Bloomberg)

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