Latest / The Fourcast / Is Donald Trump’s tariff war about to totally backfire?

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Is Donald Trump’s tariff war about to totally backfire? · The Fourcast

0:00
Hello and welcome to the forecast.
0:02
The trade war has begun, sort of.
0:04
Now. Donald Trump announced all sorts
0:06
of tariffs against Mexico and Canada and then put them on
0:09
hold. But the tariffs against China
0:11
have gone ahead and China has announced its retaliation.
0:14
So already from today, the US coffers are being filled up with
0:19
dollars as those tariffs are being paid by American
0:23
importers, not by the Chinese. Remember, that's an amazing
0:27
slice of hand that he seems to have pulled off with a lot of
0:30
the American public. So where is this going?
0:34
When is he going to announce his tariffs on Europe?
0:38
And where does that leave both Europe and Britain as it tries
0:42
to work out how it can keep both America and Europe sweet?
0:46
Joining me, the Greek economist and former finance minister
0:51
Yanis Varoufakis, and from the United States Tax Foundation
0:55
think tank, Erica York. Yanis, first of all, I mean,
0:59
what do you think is really going on here?
1:02
Is this a sophisticated economic policy to address the trade
1:07
deficit and protect American jobs?
1:10
Or something else? It's definitely something else
1:12
disguising as a policy for reducing the trade deficit and
1:16
bringing jobs back to the United States.
1:18
As you suggested. It is a hyper weapon.
1:22
That is his tariffs, which he's deploying quite smartly, I
1:26
should say, from his perspective, in order to
1:30
maximize his political clout both domestically and
1:34
internationally. Is it real political clout?
1:37
I mean, The thing is that when he makes these announcements, he
1:40
gets the headlines that say, well, he's forced Mexico to send
1:44
10,000 troops to the border and Canada's going to do the same
1:47
thing and have a fentanyl czar and all this kind.
1:49
And then and then it takes a day or two for everyone to go.
1:53
Mexico already had 10,000 people at the border and Canada did as
1:57
well. And all they've really done is a
1:58
point of fentanyl czar, which is one job.
2:01
So, you know, as a political instrument, you know, is it
2:05
really as big a deal as it initially seems?
2:10
Well, judging by his first, it is a potent tool.
2:14
Remember that when he was first elected in 2016, very soon after
2:19
that he tore up the NAFTA agreement, the North Atlantic
2:23
Free Trade Agreement, and slapped large tariffs on Mexico.
2:30
And then very soon after that, he managed, I have to say to my
2:33
surprise, rather rapidly compared to how long it had
2:37
taken Clinton to create NAFTA, to renegotiate NAFTA.
2:40
And I can't say that the NAFTA 2.0, which was called something
2:44
else, was worse for the United States than the original NAFTA.
2:48
So let's not make the mistake of underestimating him.
2:53
He will keep people guessing. This time he introduced the
2:57
tires. He took them back.
2:58
I very much expect that he will do the same thing with the
3:02
European Union. And this time, he's not going to
3:04
take them back. Right, so, So what?
3:07
What does he want from the European Union?
3:11
Oh, I think that we have to take very seriously his long standing
3:18
ideological and theoretical opposition to the very concept
3:22
of the European Union. He dislikes from an isolationist
3:26
sovereign this point of view which is his ideological
3:29
foundation. He dislikes the very notion of
3:31
the European Union and particularly the very large
3:35
trade surpluses the Germany, but also the rest of the Eurozone
3:39
have vis a vis the United States.
3:41
And this is not just a belief by Donald Trump.
3:44
I remember having a conversation with Jack Lew, who was the
3:48
treasury of secretary of Barack Obama, and his position was that
3:54
Europe is exporting deflation, it is exporting recession to the
3:59
United States through it's mercantilist policies.
4:03
So we need to take this very seriously, whatever criticism we
4:06
may have for Donald Trump. So, So what?
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What effect will it have both in Europe and America if they go
4:15
ahead? Well, it is my considerable
4:19
opinion that the worst victim of Trump's return to the White
4:26
House is going to be the European Union.
4:28
China can very easily take in it's stride the 10% tariffs that
4:34
have been announced. Their industry is so well
4:40
technologically advanced and so efficient that they can absorb
4:45
that easily. Even a 20 percent, 25% tariff,
4:50
they will be diverting a lot of their net exports to Europe and
4:54
to the rest of the world. The United States, on the other
4:58
hand, have a enormous autarkic economy.
5:01
They have a remarkable capacity to accumulate the capital, the
5:06
accumulated profits of the rest of the world, as we know.
5:10
But it is Europe which has already been in dynamic of
5:16
secular stagnation well before Trump was elected because of 15
5:19
years of rather silly combination of austerity for the
5:22
many and socialists for the bankers, and political
5:25
fragmentation which led to 15 years of no investment.
5:28
There has been an investment strike in Europe.
5:29
So we missed and the German industry missed a whole
5:33
industrial revolution. So even if Trump was not
5:36
elected, Europe would be stagnating.
5:40
But these tariffs are going to create a greater exodus of
5:47
capital, particularly from Germany to the United States.
5:52
Erica, I mean, do you agree? I mean, is this going to work
5:56
economically for America if tariffs with Europe go ahead?
6:02
I mean, the question is what, what is the goal?
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And you know, I, I think we have some hints from Trump.
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I mean, he has written down in a speech in the past and all caps
6:11
trade is bad. If you look at his talks going
6:15
back to the to the 1980s there, there is just an anti trade view
6:20
that that Trump holds. And so it's not entirely clear
6:24
whether this is a negotiation strategy or whether this is a
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change from Trump 1.0 where tariffs were clearly targeted at
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renegotiating NAFTA and getting US MCA.
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They were targeted at China's IP theft practices.
6:40
Now there seems to be more of an idea of we want tariffs for
6:44
revenue, we want tariffs to replace the income tax, we want
6:48
tariffs to attempt to reindustrialize the US
6:52
manufacturing base. I don't think tariffs are going
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to be successful on those grounds.
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If we look at what it is that the US imports, most of more
7:02
than half of US imports are intermediate inputs or capital
7:06
goods. I'm so placing tariffs on those
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directly increases the cost of producing in the United States.
7:12
When we invite retaliatory actions against US exports, that
7:16
hurts our ability to sell on the global market.
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So it does mean that the US economy turns inward and turning
7:22
inward is not how we get growth. So I don't think it's a a
7:26
positive growth strategy. There's also just not enough of
7:30
a tax base there for it to be a significant revenue source to do
7:34
the income tax reforms that Trump has talked about either.
7:37
I'm so I think in many ways the the strategy will not achieve
7:41
the goals that that have been outlined.
7:44
But I mean, like, like Yanis, I mean, you, you seem to be
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suggesting that it may be the, the, you know, the tariffs are
7:51
going to stay, that we shouldn't be misled by what's happened
7:54
with the first few days of Mexico and Canada, where they've
7:58
been put on hold for now. You know, the the when it comes
8:02
to Europe and China, they're going ahead.
8:06
That's the big question. And you, you can't really have a
8:08
tariff for negotiation and a tariff for revenue.
8:11
You, you have to choose one path.
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We don't really know what path the administration is going to
8:16
walk down yet. But if you look at the way that
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Trump's talked about these, the Canada, Mexico tariffs are a
8:22
good example. You know, the the national
8:24
emergency was related to fentanyl, was related to border
8:27
crossings, but all of the media interviews that Trump did
8:29
afterwards were talking about the trade deficit.
8:32
We're talking about these economic reasons which are in
8:35
stark contrast and contradiction with the national emergency
8:39
related to these border issues. And so at at some point you have
8:43
to choose one path. It's it's not clear to me yet
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that there has been a path chosen.
8:49
Janice, I mean, do do you agree that this is straightforwardly
8:53
bad for the US economy? No, I don't.
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I I can't say I agree with that because the world we live in is
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far removed from the textbook world of general equilibrium
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where you already assume markets working efficiently.
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The strength of the United States economy is its capacity
9:12
to accumulate other people's capital.
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This is not going to to go away. If anything, remember
9:18
immediately after 2000 and eight, 2008 was a financial
9:22
catastrophe that befell the world as a result of things that
9:26
were happening in New York. And yet the rest of the world's
9:29
capital flooded New York because this is what happens when
9:33
capital gets jittery, when uncertainty is in the air, it
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rushes into the United States. So even if Trump's tariff policy
9:44
is macroeconomically destabilising and anti growth,
9:49
if this creates a sufficient crisis, then there will be even
9:52
more of a flood of capital in the United States.
9:55
So those two blocks, mainly the United States and China may very
9:59
well find that, you know, the, the, the, the commotion that
10:04
he's creating strengthens the internal dynamic of capital
10:08
accumulation of innovation. There's no doubt that in China
10:11
you have massive progress as a result of the CHIPS Act that
10:16
Biden introduced. This is a form of impediment of
10:21
trade and the result was that China got stronger from that.
10:25
It is not far fetched to imagine that some jobs will return to
10:30
the United States. But where I do agree with Erica
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is that long term he is facing a major incongruity.
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But I don't agree with the particular incongruity that
10:38
Erica mentioned. For me, the the greatest
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incongruity, and I think that these will be the shows upon
10:44
which the Trumpist ship crashes eventually, not immediately, but
10:49
in the next 3-4 years, is that even if he's successful at
10:53
diminishing, shrinking the trade deficit of the United States,
10:57
which I don't think he will be. But even if he is successful in
11:01
this, the American trade deficit is operates like a huge vacuum
11:09
cleaner which sucks into American territory, the net
11:11
Expos of Germany, of Japan, of China.
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And they get paid in dollars and those dollars go back to the to
11:17
New York where they are invested in real estate and their Stock
11:20
Exchange. So if he succeeds in shrinking
11:23
the trade deficit, he will have dealt a major blow at the real
11:27
estate sector in Miami, in New York, in California and the
11:31
Stock Exchange. So he would have to choose his
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poison. Does he betray the working class
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which elected him, or does he betray his favorite clans, which
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are the finances and the Realtors?
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Erica, I mean, if you look back at history, the last time Trump
11:48
tried tariffs, he didn't shrink the trade deficit and he didn't
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save American jobs. Right.
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And and I agree that we do not live in a standard textbook
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model. And if you look at what the
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standard textbook model says about trade, most of those
12:04
models are based on trade in final goods.
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Like I mentioned earlier, most of what we import is not final
12:10
goods, it's these intermediate inputs.
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It's these capital goods that we use to produce in the US, So
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supply chains are much more complicated than just this
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standard model. Yeah, Alice, Chris Giles in the
12:21
FT has done a column in which he's looked back at the the
12:25
history of President McKinley, who Donald Trump sometimes likes
12:30
to emulate, looking back to the 1890s.
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And he he says that one of the things that happened there was
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that there was a massive fall after the imposition of these
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massive tariffs in the input of in the import of dutiable goods
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because people stopped buying them.
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And that as that fell, so did support for the Republican
12:51
Party. So I mean this could yet blow up
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in his face. Well, Chris Giles need to look
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into his economic history a bit more carefully because yes, it's
12:59
true, but the 1890s were a period of major international
13:03
depression. So it's important to not to
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confuse correlation for causation.
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That he that Trump can inflict a lot of damage on the American
13:13
economy. There's no doubt, but I don't
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believe we should take it for granted that the manner in which
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the American economy is finding it possible to regenerate itself
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and to recalibrate itself through major advances in in the
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way in which intermediate goods are being used in order to
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produce final outputs. You know, this May surprise us
13:43
in terms of the ultimate effect of Trump's policies, which, of
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course, we don't even know what they're going to be.
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The big talking point that we've seen Trump say is that he wants
13:53
to raise this revenue to offset the cost of further tax cuts.
13:57
Those tax cuts would have to be enacted by Congress.
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But there's also some tension there.
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If we look at how the tax revenue raised by Trump's first
14:05
round of tariffs was spent, more than 90% of it went out to
14:10
direct payments to US AG producers who had been targeted
14:13
by retaliation. So rather than represent this
14:15
new source of revenue we can use for new programs, it was revenue
14:19
to compensate those who were harmed by the retaliatory
14:22
action. And, you know, somehow that
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didn't generate political blowback for Trump the first
14:28
time around. He was able to message around
14:31
the tariffs and, and come out on top of that.
14:34
But I do think if we look back at McKinley and we look back at
14:38
the, you know, midterm elections after McKinley as Ways and Means
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chair passed the McKinley Tariff Act, Republicans lost, McKinley
14:45
lost re election and it was directly tied to the tariff
14:49
issue. They had been named the billion
14:51
dollar Congress for taxing and spending.
14:54
So if tariffs are significant enough this time around, if they
14:58
are shocking enough that the American people realize this
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isn't a tax on China, this isn't a tax on the EU, This is a tax
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on us. We are paying being we are
15:07
harmed. Maybe the political story in
15:11
2025 is different than it was in 2018 and 2019.
15:14
Well, that, but that's been one of the most surprising things.
15:17
What watching it from here is that how has Donald Trump got
15:21
away with this narrative that tariffs are something that
15:26
foreign countries pay when it's American consumers who will pay
15:29
it? It's a nice political story.
15:33
It, it lets Trump make an enemy of someone else, lets him tell a
15:37
story that fits in with the way people want to feel.
15:40
And most people have not had a, you know, an economics lesson in
15:43
tariffs. So I think that's why we've seen
15:46
the political message went out, even though it's not tied to
15:49
economic reality. Alice.
15:53
Well, there are many misconceptions that appeal to
15:58
the broader public, like for instance, the idea that spending
16:01
cuts in the middle of the recession is good for the bottom
16:04
line of the government. You know, the myth of austerity.
16:06
It's very difficult to get this out of the heads of the the
16:10
general public. But, you know, I agree.
16:12
I agree with Erica. There's a degree of xenophobia
16:15
as well, because it's easy for a Trumpist to speak of tariffs as
16:22
attacks on the foreigners. Once you actually say that,
16:25
that's the end of the conversation.
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Somebody who is xenophobic and who thrives on xenophobia stops
16:32
listening. From that moment on, just cheers
16:34
and moves on. Can we talk about China then and
16:37
how China is likely to be affected by this?
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There's been some commentaries suggesting that China's in a
16:42
much more difficult position potentially this time round.
16:48
How is China going to be affected if Trump goes ahead?
16:53
I mean, if we're, if we're really just talking, you know,
16:56
10% tariffs on what the US imports from China, I, I don't
17:02
think it's going to be dramatic. If, if we're in a world where
17:06
Trump really follows through and tries to completely cut off ties
17:10
and decouple with China, then then that's a different
17:13
equation. But I, I don't see us moving
17:17
fully in that direction. So, so it's really uncertain,
17:21
but I think at least with the actions we've seen so far that
17:24
the impact is going to be fairly limited.
17:27
Because their react their their retaliation is also fairly
17:29
limited, isn't it? Beijing is celebrating.
17:34
The 10% tariff is much, much lower than what they were
17:38
expecting. It is a gift if anything,
17:41
compared to expectations. I not only is it not going to be
17:46
a dramatic tariff, but I think that if anything is going to
17:49
unleash animal spirits in China because it given the awful
17:54
expectations that preceded. If anything there will be more
17:58
investment towards exporting to the United States in Shenzhen,
18:02
in Shanghai. Beyond that, As for the theory
18:07
that China is in a worse position today than it was in
18:10
2017, I don't buy it. Technologically, China has made
18:15
important strides, so I don't see anything from Beijing's
18:20
perspective that if I were them, would have made me worry with
18:24
the developments of the of the last few weeks.
18:27
I suppose it depends if it escalates though, doesn't it?
18:29
I mean, if you get to 60% or whatever it was that he spoke
18:31
about during the election, then then you've got trouble.
18:35
But I mean, are you saying you just don't believe anything big
18:38
in terms of escalation is possible?
18:40
There's no way that he is going to impose a 60% tariff on
18:43
everything from China because if he does that, Walmart is going
18:45
to be up in arms. And the people who shop from
18:48
Walmart, who are mostly Magda followers or mostly, but to a
18:52
very large extent they will be up in arms if he impose a 60%
18:57
tariff on electric vehicles come from China.
19:00
Again, it's no skin of the Chinese's nose because they
19:03
don't import. They don't export that many EVs
19:06
to the United States. Yeah, I think it depends on how
19:09
far it escalates and then whether the United States takes
19:13
the position of we're isolating against all of the world, we're
19:16
putting up tariff barriers against all of the world, or
19:19
whether the United States tries to lead a new trade bloc that's
19:23
excluding China. To me, it seems like it's been a
19:26
conservative approach so far and we have to see if it's if it's
19:29
going to escalate and really that that depends what the
19:32
administration decides to do next.
19:35
And overall, Yanis, I suppose the Chinese economy has become
19:37
much more self-sufficient. It's less dependent on exports
19:42
now than it was 10 years ago. What China is going to do If the
19:46
United States goes on an all out war against trade, war against
19:52
China, China is going to start thinking very seriously about
19:57
rejigging the bricks, expanding the bricks.
20:01
Perhaps turning the payment system, which is now just a
20:04
payment system, into something closer to Bretton Woods and play
20:09
within bricks the role that the United States played in the 50s
20:13
and 60s, supporting and backstopping with the US dollar.
20:18
The Bretton Woods system. They could do the same thing
20:20
with a bricks equivalent of Bretton Woods, using the one
20:24
that would be a major change in world affairs.
20:28
But Beijing doesn't want to do that and they will only do this
20:32
if they are pushed and if they are pushed fiercely.
20:35
Worth just saying that when Yanis talks about BRICS, he's
20:38
referring to Brazil, Russia, India, China and various other
20:42
countries that have now joined this alternative economic
20:45
grouping. And they've already got, as he
20:47
says, this payments messaging system up and running.
20:50
And people wonder where it's going to go next.
20:53
Let's turn, then, to Britain's role in this.
20:54
I mean, Yanis, you've warned that, you know, Europe is going
20:57
to feel the pain. Britain has this dilemma of how
21:00
it treads the line between being close to Europe and wanting to
21:04
be a little closer to Europe than under the last government
21:08
and staying friends with America.
21:10
Is it possible? There's a major incongruity
21:15
there. The other day Keir Starmer was
21:18
visiting Brussels and I don't think those bags that Donald
21:21
Trump on that same moment as Keir Starmer was trying to make
21:27
to make friends again with Brussels said that, well, you
21:30
know, the Brits, maybe I won't slap any tires on them.
21:35
So, you know, this was this was a way of throwing, throwing a
21:38
hand grenade in the meeting in Brussels between Keir Starmer
21:42
and the European Union. In fact, we were saying to Keir
21:44
Starmer, you want to go into bed with them, then you're going to
21:47
have to to deal with tariffs. So London is caught up between a
21:54
rock and a hard place. There's no doubt about that.
21:55
But even if Trump was not elected, had not been elected,
22:02
the European Union will have 8 secular stagnation, and so would
22:05
the United Kingdom. Erica.
22:08
I think the the big question going forward, both with the
22:13
United Kingdom, with the EU, with Canada, Mexico versus
22:18
China, is what is cooperation going to look like?
22:21
How much multilateralism are we going to have?
22:24
Is the United States going to step up and lead or is the
22:28
United States going to shrink back?
22:30
And other countries will have to choose, too.
22:33
What what do they do in the face of this question about the
22:35
United States versus China? How do you cooperate?
22:39
In the 2018-2019 trade war, it was kind of easy to not make
22:43
that choice. You, you didn't have to choose
22:46
between the US and China. Depending how far the Trump
22:49
administration pushes the trade war with China, we may be at a,
22:53
at a point where you, you do have to decide.
22:56
I mean, that will also depend on the position of the US and
22:59
whether we are creating this off ramp for commerce to increase
23:04
and grow with our allies or whether we are completely
23:08
turning inward and not moving in the direction of, of cooperation
23:12
anymore. I.
23:13
Mean isn't it straightforwardly impossible for Trump to to
23:18
tariff the UK on the basis of emergency powers?
23:23
I mean, what what is the threat coming from the UK it?
23:26
Doesn't need glasses. Coming from Canada, I.
23:30
Exactly. I don't think we're in a world
23:33
where like we're in a world where we are pushing the bounds
23:37
of emergency power in order to kind of have a fig leaf to get
23:41
to tariffs. I think tariffs are the goal.
23:44
Whatever powers are there are going to be used to achieve that
23:48
goal. Yeah, Alex, you don't think
23:50
that's a obstacle? No entirely.
23:52
I agree entirely. And it's already been shown that
23:56
the real liberal establishment, the courts, nobody is prepared
23:59
to challenge the monstrous application of national security
24:03
emergency propaganda for justifying tariffs.
24:09
He's not being challenged on that.
24:10
So yes, he can declare, you know, an emergency for whatever
24:14
reason he wants in order to slap any tariff he he feels like.
24:19
So what do you think Keir Starmer should be doing?
24:23
Well, looking within the limits of the United Kingdom, the the
24:27
United Kingdom has a a serious realisation problem. the United
24:31
Kingdom has for too long relied on a Ponzi scheme that involves
24:37
house prices that are unsustainable remaining
24:40
unsustainable for a very long time.
24:43
It relies on a flow of capital which does not materialise in
24:49
the form of productive investments, and the fact that
24:54
they ditched the Green New Deal, those 20 Watt €5 billion pounds
25:00
which were not enough even before they got into government,
25:03
is indicative of the fact that this is a clueless government.
25:07
They have no plan to create something like an an investment
25:10
bank, the equivalent of the European Investment Bank that in
25:13
association with the Bank of England, could channel the very
25:16
large amount of liquidity that exists in the City of London in
25:19
productive ways. They talk about growth, growth
25:22
and investment and investment, but there's absolutely nothing I
25:25
see in there except for recessionary contractionary
25:27
measures like the English and National Insurance
25:29
contributions, which was a suicidal move by Rachel Reeves.
25:34
I think this is the fastest sinking newly elected by its
25:38
landslide government in the history of the United Kingdom.
25:44
Just say what you really think now, Erica, overall is, is it
25:48
right to say that from your point of view, whatever happens
25:52
on tariffs, it's going to be bad for growth both in the US and in
25:58
Europe and Britain? Yes, very clearly I, I don't
26:01
think you can make a case that tariffs will boost macroeconomic
26:05
growth for the United States or for the countries that are the
26:08
target of the tariff action. I agree with that.
26:12
I agree with that. But let's not forget that when
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we did have growth, that was not necessarily in the interest of
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the majority of people in the majority of countries.
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And that is the political strength of Trump, that he
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appeals to the discontent that went hand in hand with growth.
26:27
Well, maybe a gloomy economic note and possibly a buoyant,
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tough political note for Trump fans, but we'll leave it there.
26:36
Erica York, Yanis Varoufakis, thank you very much indeed.