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What Is Trump's Endgame With Tariffs? · Trumponomics

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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Canadians are always greaming
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Speaker 1: up a lot of ways to ruin our lives.
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Speaker 2: The metric system for the love of God, Chelseius really
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Speaker 2: young Rider.
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Speaker 3: Of course, I'm right.
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Speaker 1: It was crazy abousts.
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Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
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Speaker 2: and that was a reminder of a satirical comedy from
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Speaker 2: thirty years ago, a rare foray into feature filmmaking by
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Speaker 2: the documentary maker Michael Moore. It revolves around a clearly
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Speaker 2: absurd fictional scenario where a US president decides to overcome
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Speaker 2: failing approval ratings by inciting a mad conflict with Canada.
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Speaker 2: Welcome to Trump. It's the Bloomberg podcast that looks at
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Speaker 2: the economic world of Donald Trump, how he's already shaped
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Speaker 2: the global economy, and what on earth is going to
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Speaker 2: happen next. We're taking a moment to digest the flurry
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Speaker 2: of tariff news this weekend, involving two of America's closest neighbors.
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Speaker 2: The threats, the negotiations, the pauses. We've had all of it,
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Speaker 2: and in Canada's case, we've also had a flurry of
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Speaker 2: hastily produced footage of helicopters at the border. Our goal
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Speaker 2: isn't to retread all of that ground, but to answer
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Speaker 2: a bigger question in his onslaught of tariff threats and
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Speaker 2: trade wars, what exactly is Donald Trump trying to accomplish.
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Speaker 2: We've got some of the best minds on the subject
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Speaker 2: with us this week to talk that through making his
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Speaker 2: Trump and Nomic's debut. Sean Donnan joins US. Sean is
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Speaker 2: a senior writer with Bloomberg. He reports on the US
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Speaker 2: and global economies, and before joining US, he spent feels
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Speaker 2: like half a lifetime covering trade for the Financial Times. Sean,
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Speaker 2: you must feel like you've already worked a five day
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Speaker 2: week and it's only Tuesday.
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Speaker 1: It's been a day or two of work.
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Speaker 2: Con we'll get into some of the lessons that you've
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Speaker 2: learned in the long hours, but you've certainly had to
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Speaker 2: write many words on it. And we have Trumponomics regular
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Speaker 2: Anna Wong, chief US economists at Bloomberg Economics. She's worked
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Speaker 2: at the FED and did serve in the Trump White
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Speaker 2: House in twenty nineteen and twenty twenty on se comment
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Speaker 2: at the Council of Economic Advisors and it's brilliant to
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Speaker 2: have you back. And I'm trying to know what you've
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Speaker 2: made of the last few days, but we'll get into
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Speaker 2: that in a minute. Thanks for joining us, Hi, glad
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Speaker 2: to be here. So on Monday, North America came within
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Speaker 2: hours of a multi billion dollar trade war, a trade
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Speaker 2: war that could yet swing a wrecking ball through the
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Speaker 2: economies of Mexico and Canada and in the process raise
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Speaker 2: questions about that regional compact which sits at the foundation
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Speaker 2: of America's global competitiveness and economic power. Now it's true,
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Speaker 2: President Trump has agreed to delay the twenty five percent
2:54
Speaker 2: tariffs on his neighbors that he had threatened after both
2:57
Speaker 2: Canada and Mexico agreed to take tougher measures to combat
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Speaker 2: migration and drug trafficking at the border. But Trump's ten
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Speaker 2: percent tariffs on China did take effect, and the Chinese
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Speaker 2: government did retaliate already with tariff's on natural gas, goal
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Speaker 2: and other products, and also a curious threat of an
3:13
Speaker 2: anti monopoly investigation against Google, which doesn't do a whole
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Speaker 2: lot of business in China. Sean, I was quoting there
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Speaker 2: from a piece that you wrote. Was thinking about all
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Speaker 2: the economic relationships at stake in this war. From your
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Speaker 2: reporting this weekend, what have we learned about President Trump's
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Speaker 2: trade strategy? Are we clearer or are we more confused?
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Speaker 1: I think we're more confused. And I think that's partly
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Speaker 1: because the trade policy has colliding goals as you kind
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Speaker 1: of look at what Trump has threatened through the campaign
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Speaker 1: and in recent weeks and what some of his advisors,
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Speaker 1: people like Howard Latning, the incoming Commerce Secretary and Scott Bessant,
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Speaker 1: the Treasury Secretary, has said. There are really three goals
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Speaker 1: to tariffs under this new Trump administration. One is that
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Speaker 1: kind of art of the deal, that very familiar piece
4:02
Speaker 1: that we had from the first Trump administration of using
4:04
Speaker 1: terroriffs to extract leverage and some kind of concessions from
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Speaker 1: trading partners. We've already seen that play out in the
4:11
Speaker 1: last few days with Canaban, Mexico, and we are seeing
4:14
Speaker 1: a kind of supercharged version of that. In effect, Trump
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Speaker 1: over the last few days kind of threatened nuclear war
4:21
Speaker 1: against his neighbors and got him to add a few
4:24
Speaker 1: more border guards in response, and you know, and the
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Speaker 1: trade equivalent of nuclear war. The second goal that he
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Speaker 1: has is this kind of rebalancing trade. That's the familiar
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Speaker 1: one from going back to twenty fifteen, this whole idea
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Speaker 1: that trade deficits, that the US has, whether its major
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Speaker 1: trading partners are unfair, and that you need to rebalance
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Speaker 1: trade with them, and tariffs are a tool to do that.
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Speaker 1: And then the third one is a new one kind
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Speaker 1: of this cycle, and that's the idea of revenues. Trump
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Speaker 1: starting in the campaign, has talked about the billions of
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Speaker 1: dollars he can raise with tariffs. In fact, Republicans on
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Speaker 1: Capitol Hill were very quickly pointing to the billions of
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Speaker 1: dollars and revenues that would come from these tariffs on Canada, Mexico,
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Speaker 1: and China as a positive thing. But if you are
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Speaker 1: using tariffs as leverage and you don't expect to really
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Speaker 1: deploy them, that doesn't make them a very reliable source
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Speaker 1: of revenue. Likewise, if you're trying to rebalance trade, inevitably
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Speaker 1: you're going to reduce the amount of imports that which
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Speaker 1: are subject to tariffs, which again makes the tariffs a
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Speaker 1: less reliable source of revenues. What you kind of end
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Speaker 1: up with is a phenomenon that we saw during the
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Speaker 1: first Trump Trade wars in twenty sixteen, and that is
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Speaker 1: this huge uncertainty around Trump's trade policy and its goals
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Speaker 1: and where it's going. And that is probably the most
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Speaker 1: toxic thing for the economy because businesses really then stop
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Speaker 1: making investments, they stop hiring, and you start to get
5:52
Speaker 1: a slowed down, not just in Canada and Mexico, which
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Speaker 1: would get hit hard by tariffs, but in the US economy.
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Speaker 2: Just to feel the pain of global businesses trying to
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Speaker 2: think about the implications of this for their supply chains.
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Speaker 2: In the first term, you got the message loud and
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Speaker 2: clear from Donald Trump, be careful of putting all your
6:12
Speaker 2: eggs in the China basket tick that was kind of
6:15
Speaker 2: underscored under President Biden. But with the addition that you
6:19
Speaker 2: could be friend shoring, you could be orienting your production
6:22
Speaker 2: to the friends of the US. Of course, if you're
6:25
Speaker 2: now questioning whether friends is a safe strategy, and unless
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Speaker 2: you think, oh, well, we should just take everything into
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Speaker 2: the US, well not if you want to export, right,
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Speaker 2: because you're going to get retaliation potentially from these other countries.
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Speaker 2: So I think that uncertainty must be enormous at this stage.
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Speaker 2: But Anna, we've spoken to you during the transition, about
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Speaker 2: how you thought the administration would approach trade, having seen
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Speaker 2: it close up, how the tariffs unfolded in that first term,
6:53
Speaker 2: and you know the degree to which it was actually
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Speaker 2: quite strategic and careful about the economic consequences. What have
6:58
Speaker 2: you been thinking about that as you saw some of
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Speaker 2: these threats come out of the out of the White
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Speaker 2: House in the last week or so.
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Speaker 3: Yeah, So, Stephanie, my view about what the end game
7:08
Speaker 3: of this trade war, version two is has evolved in
7:12
Speaker 3: the times since we spoke. You know, if you asked
7:15
Speaker 3: me two months ago, I thought that with Kevin has
7:18
Speaker 3: to come returning to the White House, that we have
7:21
Speaker 3: a voice there that would strongly advocate for a targeted
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Speaker 3: approach toward tariff. But since then we have seen Trump
7:29
Speaker 3: announce the twenty five percent in Canada, and that made
7:32
Speaker 3: me paid more attention to what the rhetoric not just
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Speaker 3: of Trump, but of people like Scott Bestant and also
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Speaker 3: people who are holding key economic advisor's role in this
7:43
Speaker 3: White House. I think what's different about this version two
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Speaker 3: trade war is that Trump he's thinking about creating his legacy.
7:52
Speaker 3: He's not going to run for a re election again.
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Speaker 3: So what is the end game, right. So I think
7:57
Speaker 3: at the end of the day, his approach the time
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Speaker 3: around is actually very close to the theoretical underpinnings of
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Speaker 3: the old trade war literature and the academic literature. So
8:09
Speaker 3: forget what you read about the impact of trade war
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Speaker 3: starting in twenty eighteen or thereafter, because the academic literature
8:17
Speaker 3: from that point on was completely dominated by discussions of
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Speaker 3: who bore the cost of trade war? But before that,
8:24
Speaker 3: in the even twenty to thirty years before that, that
8:27
Speaker 3: was a very calm and boring literature on optimal tariffs,
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Speaker 3: on how to think about trade war, and from a
8:36
Speaker 3: game theoretical perspective, and I think that the game theory
8:41
Speaker 3: look of terriff is exactly how Trump thinks about it.
8:44
Speaker 3: If you think about US China trade war, it's actually
8:47
Speaker 3: a prisoner's dilemma's game. And in this game, the Nash equilibrium,
8:52
Speaker 3: which is the outcome where two countries are not cooperating,
8:57
Speaker 3: and this is the outcome where given the opponent's strategy,
9:01
Speaker 3: what is your best choice? The nashquilibrium is actually a
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Speaker 3: trade war outcome. In this outcome, both countries are worse off.
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Speaker 3: But if US is able to impose unilateral taros without
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Speaker 3: inviting one for one retaliation, the US actually wins. From
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Speaker 3: Donald Trump's perspective, the past twenty years of trade liberalization
9:25
Speaker 3: has been in that matrix where you have US committing
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Speaker 3: to free trade and China cheating and not committing to
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Speaker 3: free trade, and the payoff in that stage is actually
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Speaker 3: bad for US, good for China. And so I think
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Speaker 3: he is trying to use this trade war basically remove
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Speaker 3: us from the cooperative equilibrium where you have these institutions
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Speaker 3: like WTO and GATT which are monitoring and enforcing cooperation.
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Speaker 3: He broke them all, moved that away from that co
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Speaker 3: cooperative of equilibrium, get us to the non cooperative equilibrium,
10:03
Speaker 3: which is the mutually destructive everybody trade war equlobrim. But
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Speaker 3: from his perspective, as long as the retaliation is not
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Speaker 3: one on one, US overall relatively one. And this is
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Speaker 3: what's very interesting about these executive orders he started recently.
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Speaker 3: It has a retaliation escalation class we have not seen
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Speaker 3: this before, which is that if the foreign partner retaliate
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Speaker 3: in a response, then US will ratcheted up, move us
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Speaker 3: into that matrix payoff where US on net is relatively
10:36
Speaker 3: more well off than the partners.
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Speaker 2: I can see how that might apply to China, But
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Speaker 2: to have this threat of twenty five percent tariffs hanging
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Speaker 2: over those trading partners, which could quite clearly have produced retaliation.
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Speaker 2: Canada announced the retaliation it was going to do if
10:53
Speaker 2: these tariffs went into force. Just assuming that it's going
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Speaker 2: to be unilateral seems pretty one. Yeah.
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Speaker 3: I mean, I see the threats on Canadian and Mexican
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Speaker 3: goods as a sequel to the first administration. Recall that
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Speaker 3: in the first administration it was also a very close
11:12
Speaker 3: call with Mexico. He threatened to use the same powers
11:15
Speaker 3: in twenty nineteen on Mexico also on concerns about immigration,
11:21
Speaker 3: but that was also averted in the last minute. And
11:24
Speaker 3: at the time, I was also working at the FED,
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Speaker 3: and I remember the International Finance Division. We were very
11:32
Speaker 3: worried about the tariffs on automakers coming from Mexico and Canada.
11:37
Speaker 3: And I think it remains to be seen whether he
11:40
Speaker 3: is truly serious about the tariffs on our neighbor, because
11:44
Speaker 3: that is the piece that does not make sense to me.
11:47
Speaker 3: And now actually things makes more sense that he decided
11:51
Speaker 3: to delay those tariffs.
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Speaker 2: It makes more sense if if it was all about
11:55
Speaker 2: posturing and the fact that he quite likes trolling justin true.
12:00
Speaker 2: I mean, there is an element of that which it
12:01
Speaker 2: just seems to have been quite performative.
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Speaker 1: What we've forgotten about the last few days is that
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Speaker 1: the US just imposed a ten percent tariff on all
12:10
Speaker 1: imports from China, including consumer goods that it stayed away
12:16
Speaker 1: from tariffing during the first Trump administration because it was
12:19
Speaker 1: so worried about the impact on US consumers and inflation
12:24
Speaker 1: here in the United States. It's kind of hadn't done that,
12:26
Speaker 1: and that is enormous in its own right. If we
12:29
Speaker 1: had set aside the Canada and Mexico things, if those
12:33
Speaker 1: threats had never happened, and what we had seen over
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Speaker 1: the last few days was simply a ten percent tariff
12:38
Speaker 1: on all goods from China, the alarm bells would be
12:42
Speaker 1: ringing all over the place. The pairing of these things
12:46
Speaker 1: has kind of hidden this momentous action. I think the
12:51
Speaker 1: whole idea of Trump using leverage and hinges on kind
12:58
Speaker 1: of his credibility right. And one of the things that
13:01
Speaker 1: we've seen just in the first two weeks of his
13:03
Speaker 1: administration is his willingness to go to extreme threats in
13:09
Speaker 1: terms of economic warfare for relatively small fights. And you know,
13:17
Speaker 1: the biggest example of that was Columbia, where we had
13:19
Speaker 1: this kind of nine hour trade war where the President
13:23
Speaker 1: of the United States essentially threatened not just tariffs but
13:27
Speaker 1: kind of Iran level sanctions on an ally with which
13:31
Speaker 1: the US has a free trade agreement over two planes
13:37
Speaker 1: over essentially a diplomatic skirmish in you know, in the end,
13:41
Speaker 1: and it wasn't so that the Colombians were refusing to
13:44
Speaker 1: accept these planes with deportees, is that they just wanted
13:48
Speaker 1: the deportees not to be shackled while they were on
13:51
Speaker 1: board these planes and treated more humanely. So, I mean,
13:55
Speaker 1: it's kind of this willingness to escalate. And it's the
13:57
Speaker 1: same thing with Canada and Mexico. I'm going to blow
14:00
Speaker 1: up one of the greatest regional alliances in the world,
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Speaker 1: a real source of US competitiveness. As you said earlier
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Speaker 1: on this is and this is what Trump himself said
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Speaker 1: when you signed the US MCA. This is you know, Canada,
14:14
Speaker 1: Mexico and the US against the rest of the world.
14:17
Speaker 1: This is how you compete with China. And to blow
14:20
Speaker 1: that all up over Yes, there's you know, there's a
14:23
Speaker 1: horrible tragedy around fentanyl deaths and in the United States,
14:26
Speaker 1: and you know, the migration issues at the southern border
14:30
Speaker 1: in particular have been very real politically here in the
14:33
Speaker 1: United States. And that's a core campaign promise for President Trump.
14:37
Speaker 1: But to threaten what he threatened on the economic side
14:40
Speaker 1: to address these issues that are non economic in many
14:44
Speaker 1: ways is really you start to wonder, Okay, where do
14:49
Speaker 1: you go next? And then if you play that out
14:51
Speaker 1: to other trading partners, right, he has put the EU,
14:54
Speaker 1: the European Union in his sites now for for a tariff. Now,
14:59
Speaker 1: the EU response, there is no easy way out for
15:03
Speaker 1: them in putting ten thousand extra border guards at the
15:07
Speaker 1: border at the EU. That's not what Donald Trump is
15:09
Speaker 1: going to look for. So how you know, how damaging
15:12
Speaker 1: is that going to be? You know, the EU in
15:14
Speaker 1: the US trade is almost a trillion dollars annually. It's
15:18
Speaker 1: actually bigger than the trade with Canada and Mexico. But
15:21
Speaker 1: these two countries have two and a half trillion dollars
15:23
Speaker 1: each in foreign direct investment in their economies. If you
15:28
Speaker 1: go here in the first two weeks, there's nowhere to
15:31
Speaker 1: go up from here.
15:33
Speaker 3: If it's going up and it's not sustainable, it's going
15:36
Speaker 3: to go down at some point. And the part where
15:39
Speaker 3: he decide to de escalate is the part where he's
15:42
Speaker 3: ready to make a deal. At that point he's going
15:45
Speaker 3: to I think the endgame is for him to seek
15:49
Speaker 3: negotiations with all trade partners, where he kind of like
15:53
Speaker 3: Phase one deal with China, except with everybody, including EU.
15:57
Speaker 3: Because with EU, as John said, there's no board. It's
16:00
Speaker 3: not a national security issue. It's more of a commercial issue.
16:04
Speaker 3: And Trump had the same attitude toward EU in the
16:07
Speaker 3: first trade war. He did not change at all. He
16:10
Speaker 3: picked on the same type of sectors and the same
16:14
Speaker 3: countries as he did in the first trade war.
16:16
Speaker 1: I think there's another thing at play here which we
16:19
Speaker 1: need to think about, and that is that he doesn't
16:21
Speaker 1: yet have his economic and trade team in place, and
16:25
Speaker 1: that the advisors who were in the room with Donald
16:30
Speaker 1: Trump as he marched towards these tariffs at the weekend
16:35
Speaker 1: were those his most hawkish advisors, Peter Navarro, Stephen Miller.
16:39
Speaker 1: That's what we've been hearing. And these are the people
16:43
Speaker 1: who are true believers in tariffs and play to also
16:48
Speaker 1: to the impulsive side of Donald Trump to that kind
16:52
Speaker 1: of testosterone driven You are the strongest man on the block,
16:57
Speaker 1: you know, make them bend your way. And by the way,
17:00
Speaker 1: these tariffs are great. These are magical tools that will
17:04
Speaker 1: bring manufacturing jobs back to the Nish, which, by the way,
17:07
Speaker 1: the data doesn't show actually happening in the first Trump
17:10
Speaker 1: in series, and he doesn't yet have in place. Howard Lutnik,
17:13
Speaker 1: his Commerce secretary, who when he nominated him, Trump said
17:18
Speaker 1: would be leading his trade in terariff strategy. Scott Bessen
17:21
Speaker 1: was strangely absent from the conversations about this over the
17:26
Speaker 1: last few days, and his trade representative Jamison Greer, this
17:29
Speaker 1: is your trade negotiator, This is kind of your tariff lawyer.
17:35
Speaker 1: Is hasn't yet had his confirmation hearing yet.
17:37
Speaker 3: I disagree, Sean. I think if the trade team were
17:42
Speaker 3: better in place than what we see right now, he
17:45
Speaker 3: would have gone even more hawkish. I think the lack
17:49
Speaker 3: of staff in the USTR right now is actually impeding
17:53
Speaker 3: the implementation of tariffs. It could have gone faster. On
17:57
Speaker 3: the other hand, I think that the lack of voice
17:59
Speaker 3: coming from Scott Bessens in this round is trees to
18:04
Speaker 3: what happened with that Washington Post leak a couple of
18:08
Speaker 3: weeks ago.
18:09
Speaker 2: That was the one saying it was going to be phased,
18:11
Speaker 2: And yeah, there was pushedback from that from the White House.
18:14
Speaker 3: Right when I saw that leak, I thought that these
18:17
Speaker 3: trade moderate moderating influence like Scott Bessend and Kevin Hassett
18:22
Speaker 3: must be losing ground.
18:24
Speaker 1: But that's really interesting in the context of Trump's broader goal,
18:28
Speaker 1: which is to bring about this economic golden age in America.
18:32
Speaker 1: The reason Scott Besson would want to phase in any
18:35
Speaker 1: tariffs is because he would want to moderate the impact
18:38
Speaker 1: on the US economy, spread it out over time, and
18:42
Speaker 1: because he sees restoring growth or boosting growth in the
18:47
Speaker 1: United States as a key element. It's also, you know,
18:52
Speaker 1: we get back to the revenue piece. Scott Besson has
18:55
Speaker 1: talked about using terrorists to offset tax scots, raising a trillion,
18:59
Speaker 1: maybe two trillion dollars over ten years from tariffs to
19:05
Speaker 1: offset the four trillion dollar plus costs of extending the
19:10
Speaker 1: twenty seventeen tax cuts if you don't have a methodical plan,
19:14
Speaker 1: and they actually did lay that out on day one
19:18
Speaker 1: in executive order that Trump signed it, which he ordered
19:21
Speaker 1: up all of these reports and setting in April first
19:24
Speaker 1: deadline and really ordered up this let's go out there
19:26
Speaker 1: and study and come up with a plan. And he
19:29
Speaker 1: literally ripped that up when he threw out these tariffs
19:31
Speaker 1: on Canada, Mexico and China.
19:33
Speaker 2: Sean, you made a good point earlier that although we
19:36
Speaker 2: maybe missed something quite important with the across the board
19:41
Speaker 2: ten percent tariffs on China because of all the fireworks
19:45
Speaker 2: over the much bigger threat that was then withdrawn against
19:49
Speaker 2: Canada and Mexico, the ten percent tariffs potentially do fit
19:55
Speaker 2: in the approach to this strategy, which actually the President
20:00
Speaker 2: Trump outlined to our editor in chief last summer when
20:04
Speaker 2: they faced with exactly the tension that you raised earlier. Sean,
20:09
Speaker 2: that if you if you want to change the trading system,
20:11
Speaker 2: you're not going to raise money because importers will have
20:13
Speaker 2: moved to the US, so you don't have or will
20:16
Speaker 2: have the production will have moved to the US. So
20:18
Speaker 2: then you stop making money if you've successfully changed the economy.
20:20
Speaker 2: And he said, very interestingly, he said, well, there's some
20:23
Speaker 2: things where you just have a low tariff and you're
20:25
Speaker 2: raising money, but you don't change behavior. And then other
20:29
Speaker 2: things where you really just want to being the production
20:31
Speaker 2: back to the US, you have very high tariffs. So
20:35
Speaker 2: but with these ten percent tariffs, if that's the case
20:38
Speaker 2: and that approach, President Trump is willing to have a
20:41
Speaker 2: lot of US consumers and US companies lose out and
20:46
Speaker 2: pay quite clearly those tariffs. This weekend we had what
20:50
Speaker 2: was I think a perfectly sensible change to reduce that
20:54
Speaker 2: or get rid of that day Minimus exception from tariffs,
20:58
Speaker 2: which had provided such a capacity for Timu and Sheen
21:02
Speaker 2: and other Chinese producers to send goods sort of under
21:07
Speaker 2: the radar to the US was eight hundred dollars ceiling
21:11
Speaker 2: on sort of tariff free imports. And if you're there'd
21:16
Speaker 2: be a lot of Trump supporters who are buying a
21:19
Speaker 2: lot of things from Sheen and Timu who are going
21:20
Speaker 2: to see that instantly, and that doesn't feel like that's
21:23
Speaker 2: going to go away. And equally, there's a lot of
21:25
Speaker 2: importers who are going to be paying these tariffs. I mean,
21:28
Speaker 2: he's he wanted to create the External Revenue Service to
21:31
Speaker 2: create this to collect the tariffs, because we all know
21:34
Speaker 2: they're paid by US importers, not by the other countries.
21:37
Speaker 2: So and have you sort of changed your view on
21:41
Speaker 2: the costs that the political blowback that this president might
21:45
Speaker 2: be willing to take.
21:47
Speaker 3: Yeah, so I so you know that ten percent universal
21:50
Speaker 3: tariff on Chinese goods, So that now covers the list
21:54
Speaker 3: for A and four B in the first trade war,
21:58
Speaker 3: which is comprised mainly of consumption goods. In the first
22:02
Speaker 3: trade war, the Trump administration largely spared the Chinese consumption goods,
22:08
Speaker 3: but basically effectively this ten percent raised the list for
22:14
Speaker 3: A back to the pre phase one.
22:16
Speaker 2: Can we translate that he's imposing it on consumer goods
22:19
Speaker 2: in a way that they didn't in the first administration.
22:22
Speaker 3: So in the first administration, he left the consumption goods
22:27
Speaker 3: from China intact until spring of twenty nineteen. Then he
22:32
Speaker 3: created two list four A and four B. And these
22:35
Speaker 3: two lists he planned to slap on fifteen percent on
22:39
Speaker 3: List four A, which is like a couple hundred billions
22:41
Speaker 3: of Chinese consumption good and he did it. And then
22:45
Speaker 3: immediately what you saw back then is that the economy
22:48
Speaker 3: started slowing very visibly. Fixed business investment immediately start falling,
22:55
Speaker 3: and manufacturing employment immediately start falling. And this was after
22:59
Speaker 3: that for a list, and then that was in the
23:03
Speaker 3: de escalatory phase of that first trade war. I think
23:07
Speaker 3: that we're going to start seeing the impact on investment,
23:11
Speaker 3: primarily in stock market once that ten percent Chinese trade
23:16
Speaker 3: tariffs start to be effect in the next couple of months.
23:20
Speaker 1: And just to put that in context, that kind of
23:22
Speaker 1: list for A and four B from the first Trumpet musition.
23:26
Speaker 1: We're talking about smartphones, we're talking about toys, we're talking furnitures, furniture,
23:31
Speaker 1: we're talking about all of the cheap stuff from China
23:34
Speaker 1: and America. Really by right, and we're.
23:37
Speaker 2: And to be clear that trade is that made on
23:39
Speaker 2: economic by ten percent or is ten percent low enough
23:42
Speaker 2: for it to continue, but just be more expensive?
23:44
Speaker 1: Probably low enough for it.
23:46
Speaker 3: Yes, I mean, I mean the trade elasticity from between
23:50
Speaker 3: US Chinese trade flow is approximately, by my estimation, one
23:54
Speaker 3: point five to three, which means that a ten percent
23:58
Speaker 3: increase in terraff will reduce trade flows by either fifteen
24:02
Speaker 3: percent to thirty percent over time.
24:04
Speaker 2: Okay, last question to you, Anna, were amazed it's taken
24:08
Speaker 2: us this long to get to the FED for any
24:09
Speaker 2: Bloomberg podcast. I mean, it's it's pretty much mandatory that
24:12
Speaker 2: we have to talk about the FED at some point.
24:14
Speaker 2: One of the things that was said over the weekend is,
24:17
Speaker 2: whatever happens, this puts pay to any idea that there's
24:19
Speaker 2: going to be any interest rate cuts from the Federal
24:21
Speaker 2: Reserve this year, and if anything, they're going to be
24:26
Speaker 2: more concerned about inflation looking going forward. Is what's your
24:30
Speaker 2: take on if you just say, we've now got a
24:32
Speaker 2: lot of we've got more uncertainty than we thought and
24:34
Speaker 2: maybe some new theories about what's going on with Donald
24:38
Speaker 2: Trump's trade policy, what are the FED thinking? Anna?
24:42
Speaker 3: I think in the fact you have Powell and the others,
24:46
Speaker 3: and from the past two press conference I've heard that Powell,
24:50
Speaker 3: in fact is a very UH has reviewed as a
24:54
Speaker 3: very good grasp of the objective findings in the trade literature,
24:58
Speaker 3: which is that number one matters how broad these tariffs are,
25:03
Speaker 3: what goods are going to be tariffs, how much retaliation
25:06
Speaker 3: there's going to be, and there's just not enough information
25:09
Speaker 3: on that. However, within the set arsenal of economic modeling tools,
25:16
Speaker 3: they could see two outcomes from trade war. Is at
25:20
Speaker 3: first is either the burden of the trade war will
25:23
Speaker 3: show up in inflation as higher inflation. That's what every
25:27
Speaker 3: obviously what everybody automatically default to the view. However, the
25:32
Speaker 3: second view is that if the adjustment turns out to
25:36
Speaker 3: be through squeezing profit margins, and the impact on our
25:40
Speaker 3: trade partners like China, EU and Canada Mexico turns out
25:45
Speaker 3: to be more dire than the impact on US, then
25:49
Speaker 3: the global manufacturing cycle with slows, and ultimately the burden
25:54
Speaker 3: of the tariffs would be not showing up in higher
25:57
Speaker 3: US inflation, but rather in lower real come through lower
26:01
Speaker 3: employment and lower wages. And so I think that the
26:07
Speaker 3: Fed's optimal response really depends on which of these two
26:12
Speaker 3: economic outcomes prevail. Obviously, if inflation spikes, then the FED
26:17
Speaker 3: will have to you know, keep frais on hold or
26:20
Speaker 3: even hike. However, I don't think that's not my baseline,
26:24
Speaker 3: because in order for the economy the inflation to rise
26:28
Speaker 3: by that much in response to teriffs, you basically need
26:33
Speaker 3: to have inflation expectations be unanchored, and even that's the
26:38
Speaker 3: worst of inflation. In twenty twenty two, Powell was adamant
26:42
Speaker 3: that all the market indicators, the monitors suggest that inflation
26:46
Speaker 3: expectations are very well anchored in the US. In the
26:50
Speaker 3: past pressor. He also mentioned that through anecdotes and discussion
26:54
Speaker 3: with firms, all the firms are telling them that they
26:56
Speaker 3: have no pricing power, So how is it that the
26:59
Speaker 3: terriffs could be packed completely passed through to consumer prices.
27:03
Speaker 3: So that leads to the second most likely outcome in
27:06
Speaker 3: my point of view, which is lower real income over time.
27:10
Speaker 3: And the optimal FED policy in response to lower real
27:13
Speaker 3: income and a higher unemployment rate is actually to lower
27:18
Speaker 3: FED funds rate.
27:19
Speaker 1: And I would just point out that we have and
27:22
Speaker 1: a lot of FED policy makers were there in twenty
27:24
Speaker 1: nineteen when they faced the first Trump trade wars and
27:29
Speaker 1: the impacts, and we spent some time looking back through
27:32
Speaker 1: the transcripts of those meetings, which were just released in January,
27:35
Speaker 1: and one of the things you see is the policy
27:38
Speaker 1: makers focusing on a collapse in manufacturing employment, a fallen
27:43
Speaker 1: industrial production, a stalling in business investment in the United States,
27:49
Speaker 1: and then this impact of uncertainty, and that leads to
27:53
Speaker 1: a slowing economy in twenty nineteen. And in twenty nineteen,
27:57
Speaker 1: the FED started cutting rates and actually went on cut
27:59
Speaker 1: rate three times.
28:00
Speaker 2: And that goes to the point that he might think
28:02
Speaker 2: it's good news to have lower rates, but not if
28:04
Speaker 2: it's for the wrong reasons in his view, not the
28:06
Speaker 2: economic weakness. Well, thank you very much, guys. I sort
28:09
Speaker 2: of feel like Trumpnomics sometimes is more on the Trump
28:13
Speaker 2: and more on the politics. So we've had some real
28:15
Speaker 2: oronomics in this episode, which I quite appreciate. Thinking about
28:19
Speaker 2: the models for what's going on, I think we're still
28:21
Speaker 2: stuck with the fundamental question, does Donald Trump really want
28:25
Speaker 2: to change the global economy or just like the real
28:27
Speaker 2: estate developer that he is, extract the maximum financial return
28:31
Speaker 2: from America's prime real estate within it. Whatever he's trying
28:35
Speaker 2: to achieve, we want to think about what economic costs
28:39
Speaker 2: might be occurred along the way, and I suspect both
28:40
Speaker 2: of you will be back to help me answer that question.
28:46
Speaker 2: But in the meantime, thanks for listening to trump Andomics.
28:49
Speaker 2: It was hosted by me Stephanie Flanders, and I was
28:51
Speaker 2: joined by Annawong and Sean Donald. Trumpnomics is produced by
28:55
Speaker 2: Summer Saudi and Moses and with help from Chris Martlou.
28:59
Speaker 2: Sound designed by Blake Maple's, with special thanks to Bloomberg, Kilbrooks,
29:02
Speaker 2: Amy Morris and Nathan Hager. Brendan Francis Newnan is our
29:09
Speaker 2: executive producer and to help others find this show, please
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29:15
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