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Why Tariffs Can’t Fix America's Economic Malaise · Trumponomics

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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Speaker 2: I'm Sevany Flanders, head of Government and Economics at Bloomberg,
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Speaker 2: and welcome to Trumpponomics, the podcast that looks at the
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Speaker 2: economic world of Donald Trump, how he's already shaped the
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Speaker 2: global economy, and what on earth is going to happen next.
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Speaker 2: And this week we have something slightly different, a conversation
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Speaker 2: with Richard Baldwin about his new book, The Great Trade Hack,
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Speaker 2: How Trump's Trade War Fails and the World moves on.
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Speaker 2: Richard is a professor of international economics at the IMD
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Speaker 2: Business School. Financial Times once called him one of the
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Speaker 2: most important thinkers in this era of global disruption, and
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Speaker 2: listeners to previous iterations of this podcast might even remember
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Speaker 2: that we've talked to him before as one of the
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Speaker 2: people who has researched and written most deeply about the
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Speaker 2: changing nature of globalization and trade. And his latest book,
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Speaker 2: an e book published by the Center for Economic Policy Research,
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Speaker 2: as you gather from that title, turns its hand to
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Speaker 2: what Donald Trump is doing or not doing to the
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Speaker 2: world of international trade and what it means for all
1:17
Speaker 2: of us. As an economist. Richards joining the long list
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Speaker 2: of economists who believe the protectionism of the Trump administration
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Speaker 2: is not going to fulfill its objectives. But I think
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Speaker 2: what's distinctive is he also delves into the political economy
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Speaker 2: of trumpnomics to explain why it will still continue, and
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Speaker 2: then also thinks about how the rest of the world
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Speaker 2: will engage or should engage with the US as it's
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Speaker 2: part of this grand Trumpnomic experiment, all of which did
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Speaker 2: seem like it was worth a conversation, and I should
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Speaker 2: say probably full disclosure. The other reason we're doing this
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Speaker 2: is so we could record it today Friday, twenty third
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Speaker 2: of May, ahead of the holiday weekend in the UK
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Speaker 2: and the US, and ahead of me getting off on
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Speaker 2: a week's holiday. Richard, thank you very much for joining us.
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Speaker 2: It's a great title. What's the Great Trade Hack?
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Speaker 1: Thanks for having me, Stephanie. The hack is what Trump
2:22
Speaker 1: did on April second. That was an historic moment. It
2:26
Speaker 1: wasn't an attempt to revise or reform or negotiate. It
2:31
Speaker 1: was an attempt to break through the firewall of the
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Speaker 1: world trading system and disrupt the way it runs with
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Speaker 1: tariffs that were big, bold and everywhere at once, violating
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Speaker 1: most wtwo rules in one fell swoop with everybody, breaking
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Speaker 1: every trade agreement the US had ever made with anybody anytime.
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Speaker 1: This wasn't your normal trade war. It looked a lot
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Speaker 1: more like a war on trade. And that's why I
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Speaker 1: think of it as a hack rather than a beginning
3:01
Speaker 1: of a war or a reform or an effort. It
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Speaker 1: was really one man trying to hack the system.
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Speaker 2: What are you trying to get across? Intellectually and as
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Speaker 2: an academic, when you talk about a hack, I.
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Speaker 1: Think it's important to distinguish this from other things, for instance,
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Speaker 1: anything to do with the dispute between US and China.
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Speaker 1: And also it's entirely different than what he was doing
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Speaker 1: between his inauguration and April second. Those were piecemeal tariffs,
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Speaker 1: totally in the line of the kind of thinking that
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Speaker 1: many countries get. They're unfair. I'm going to put tariffs on,
3:36
Speaker 1: then we're going to negotiate. We'll come to a better deal.
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Speaker 1: This thing was completely different. He's trying to change the
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Speaker 1: way the world works in terms of fair and reciprocal
3:46
Speaker 1: trade in his own mind and reverse the victimhood that
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Speaker 1: he believes, and he's at least selling politically that the
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Speaker 1: US is facing.
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Speaker 2: You talk about the grievance doctrine? What explains this policy?
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Speaker 2: We've heard a lot about grievances from him, but briefly,
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Speaker 2: what are you thinking about that?
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Speaker 1: Well, I think many economists around the world and political
4:07
Speaker 1: scientists slapped their heads when they saw this thing. Is like,
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Speaker 1: what is he trying to do? And then it goes
4:14
Speaker 1: up and it goes down, and there's this and is
4:16
Speaker 1: that all? It looks like he's negotiating himself. It looks
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Speaker 1: kind of crazy, It looks chaotic. When I was looking
4:22
Speaker 1: for some sort of coherence. If you read the introduction
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Speaker 1: to the US Trade Agenda Report for twenty twenty five,
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Speaker 1: he pretty much lays out this grievance doctrine, which has
4:34
Speaker 1: an origin story of America used to play by the
4:38
Speaker 1: rules and they got played. They were ripped off by
4:42
Speaker 1: globalist elite abroad and globalist traders at home, and it
4:47
Speaker 1: was the middle class who paid the price. And what
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Speaker 1: Trump was doing on April second was payback. So it's
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Speaker 1: like that uncomfortable uncle. You sometimes have a family gathering
5:01
Speaker 1: who lashes out and says the most outrageous things, upsets everybody.
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Speaker 1: Although there's a few people in the room who said yes,
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Speaker 1: those things needed to be said. That's what these tariffs are.
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Speaker 1: It is not justified on economic analysis or clear thinking
5:18
Speaker 1: about what's going home. I think it's not a million
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Speaker 1: miles away from what drove Brexit, that people were angry
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Speaker 1: with the way things work and they struck back by
5:29
Speaker 1: voting for something that they thought would be very upsetting
5:33
Speaker 1: to the globalist delete who they feel have rigged the
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Speaker 1: system against them. Trump's tariffs are economically incoherent but emotionally coherent.
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Speaker 1: And this grievance doctrine that I have called it is
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Speaker 1: a mythic tale that comes with a moral and a mission.
5:52
Speaker 1: And you can interpret the nature of the tariffs and
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Speaker 1: his treatment of them afterwards in the negotiations with countries
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Speaker 1: as following his grievance doctrine. Not any very clear economic analysis.
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Speaker 2: But you yourself have written about the structural changes that have
6:11
Speaker 2: happened in the global economy and what you call it,
6:14
Speaker 2: you know, the twin bombs of globalization and automation that
6:18
Speaker 2: have had profound effects for many American workers. So it's
6:24
Speaker 2: not as though you don't think there's any there there
6:27
Speaker 2: in terms of the grievance. It's just that this is
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Speaker 2: not the right solution. Is that right?
6:31
Speaker 1: Absolutely? So? America's middle class is a terrible shape. I mean,
6:35
Speaker 1: we have opioid deaths like the world's never seen. We
6:39
Speaker 1: have a BCD epidemic, we have frequent school shootings, we
6:44
Speaker 1: have fallen marriage fall of birth rates. White young men
6:49
Speaker 1: are killing themselves in numbers that aren't seen anywhere else.
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Speaker 1: There's social pathologies going on in the middle class which
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Speaker 1: are just absolutely off the chart. Something must be done.
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Speaker 1: But what Trump has decided to do about it tariffs
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Speaker 1: is most definitely not that something. In the book, I
7:07
Speaker 1: argue that we need a social policy, maybe like Canadian
7:11
Speaker 1: social policy, that would actually help the middle class. But
7:15
Speaker 1: it is a problem. And this is, as I say
7:18
Speaker 1: in the book, it's a place ebo for policy in
7:21
Speaker 1: lieu of real medicine that would help them.
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Speaker 2: So why is this not the right solution? What can
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Speaker 2: he achieve with these policies that would actually support his objectives?
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Speaker 2: If anything?
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Speaker 1: Well, I think basically nothing. So let me go through.
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Speaker 1: For example, if you look at the US Traded Gender document,
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Speaker 1: they're essentially listing three things they want to do with
7:44
Speaker 1: these tariffs. First thing is to redress the trade balance,
7:48
Speaker 1: a second is to reindustrialize America, bring the factories back,
7:52
Speaker 1: and the third is to help the middle class. And
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Speaker 1: his tariffs will do none of those things. Let me
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Speaker 1: take them one at a time. So, first of all,
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Speaker 1: it cannot help the middle class. Tariffs are only put
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Speaker 1: on goods, and tariffs can protect workers who are in
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Speaker 1: goods producing sectors. They don't always, but at least there's
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Speaker 1: a possibility that they can protect their jobs and maybe
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Speaker 1: keep their wages from falling. But only less than ten
8:18
Speaker 1: percent of the middle class works in goods producing sectors,
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Speaker 1: and for the other ninety percent who work in service sectors,
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Speaker 1: Trump's tariffs are simply raising their cost of living. So
8:28
Speaker 1: in fact, rather than helping the middle class, it will
8:30
Speaker 1: probably hurt it subtly. It'll show up in terms of
8:33
Speaker 1: slower growth, inflation, and undermining the cost of purchasing. Now,
8:39
Speaker 1: let me take this second one, which is closing the
8:41
Speaker 1: trade deficit. This is a long widely held mistake and
8:47
Speaker 1: belief that tariffs can fix the trade deficit. But I
8:52
Speaker 1: think I've found why people believe it and why it's
8:55
Speaker 1: hard to explain. Now you and I go to the
8:58
Speaker 1: shop and we see eat the price of say domestic
9:02
Speaker 1: beer and imported beer, and if the price of imported
9:05
Speaker 1: beer goes up, we'll tend to buy a little more
9:07
Speaker 1: of the domestic beer. So in our everyday lives buying
9:11
Speaker 1: fruits and vegetables, meat, fish, beer, we look at the
9:14
Speaker 1: prices and we're shaped by things like tariffs. We can
9:17
Speaker 1: imagine how that would make us buy less and then
9:20
Speaker 1: without thinking about how the whole thing adds up, you go, well, Therefore,
9:24
Speaker 1: if you want people to buy fewer foreign goods, you
9:27
Speaker 1: put up the price of foreign goods. The trouble is
9:30
Speaker 1: when you think at the economy wide level, when you
9:32
Speaker 1: think about everybody buying everything at the same time, there's
9:36
Speaker 1: a different way to think about the deficit, and that
9:39
Speaker 1: is the US has a trade deficit because they spend
9:42
Speaker 1: more than they produce. And if Americans spend more than
9:45
Speaker 1: they produce, they have to run a trade deficit. There's
9:49
Speaker 1: no way the spending can't go anywhere else. So unless
9:53
Speaker 1: they either reduce their spending or increase their production, they
9:56
Speaker 1: cannot close the deficit. Now, tariffs cannot really affect the
10:02
Speaker 1: spending unless it induces a recession, and even then that's temporary.
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Speaker 1: And because the US is at full employment, the tariffs
10:09
Speaker 1: won't increase the production. If anything, it would mess it up.
10:12
Speaker 1: But in any case, primarily will have no effect on
10:14
Speaker 1: production and very little effect on spending, So tariffs will
10:18
Speaker 1: not close the deficit. Now. The reason it works out
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Speaker 1: is because the tariffs change the relative price of imports
10:26
Speaker 1: and exports, but the dollar can offset that. So unless
10:30
Speaker 1: they fix the economy wide problem, they are not going
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Speaker 1: to fix the deficit. Now, let me take the third
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Speaker 1: one about reindustrialization. Reindustrialization using tariffs is something people have
10:41
Speaker 1: been trying for literally a half century. It doesn't have
10:45
Speaker 1: a name. It's called import substitution industrialization. And the idea
10:50
Speaker 1: is you protect your local market to encourage local production.
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Speaker 1: First of all, that did actually work up until nineteen
10:57
Speaker 1: ninety five with the offshoring and outsourcing thing, where global
11:01
Speaker 1: value change change the whole proposition. So, for example, the
11:04
Speaker 1: US in the eighteen hundreds did industrialize behind high trade barriers,
11:10
Speaker 1: this time protecting against British goods. So it's not like
11:13
Speaker 1: it's never worked, it just doesn't work anymore. Now the
11:16
Speaker 1: problem is that to bring back these factories, the United
11:18
Speaker 1: States needs world class infrastructure. It needs a world class
11:24
Speaker 1: workforce who are willing to work in factories and able
11:27
Speaker 1: to run the sophisticated machines that are now part of manufacturing.
11:32
Speaker 1: And it needs investment that's coordinated and long lasting. These
11:38
Speaker 1: are ten year plans. You don't just set up a
11:41
Speaker 1: bakery shop and call it an industry. This requires a
11:44
Speaker 1: whole ecosystem, an industrial base to develop. That can be done,
11:48
Speaker 1: but it takes a decade at least, and it would
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Speaker 1: involve a bipartisan consensus, lots of subsidies, changes in laws
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Speaker 1: to confit private firms that this is for real and
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Speaker 1: they should move back. And the tariffs, especially one Trump
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Speaker 1: is talking about, are most definitely not doing any of
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Speaker 1: those things.
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Speaker 2: Imagine the scenario that we're kind of seeing now, which
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Speaker 2: is we had April Seconds Liberation Day, crazily high to
12:17
Speaker 2: most people's eyes, Tariff rates also kind of randomly generated,
12:23
Speaker 2: and a lot of noise about trade deals. And we're
12:27
Speaker 2: talking today on a day that Donald Trump seems to
12:29
Speaker 2: have talked about potentially a fifty percent across the board
12:32
Speaker 2: tariff against the Europeans. He's talked about even higher numbers
12:36
Speaker 2: for the China in the past. And yet once we
12:38
Speaker 2: see the economic consequences or even begin to see the
12:41
Speaker 2: economic consequences. He's tended to step back, and we've had
12:45
Speaker 2: these pauses, and I think the assumption that many people
12:49
Speaker 2: would now make is, yes, we will end up with
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Speaker 2: maybe ten percent tariffs from all goods and a higher
12:54
Speaker 2: effective tariff rate between the US and the rest of
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Speaker 2: the world. That will definitely reduce trade, maybe quite significantly
12:59
Speaker 2: in the case of China. But we're not headed down
13:02
Speaker 2: that full path. We're just on a path where there's
13:04
Speaker 2: going to be more kind of grit in the wheels
13:06
Speaker 2: of global trade. Is that necessarily the end of the world, Richard,
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Speaker 2: If you're sort of thinking about it from a sort
13:13
Speaker 2: of historical perspective.
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Speaker 1: It could just be a bump in the road. I mean,
13:16
Speaker 1: let's put it this way. If it was a ten
13:18
Speaker 1: percent across the board tariff on everything, the first point
13:22
Speaker 1: is that the US dollar would offset part of it.
13:25
Speaker 1: What we know from long experience is that very big
13:29
Speaker 1: changes in trade policy lead to changes in the exchange rate.
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Speaker 2: But what we had talked about was a dollar appreciation exactly.
13:35
Speaker 2: And I have this in mind partly because JD. Vance,
13:37
Speaker 2: the Vice President, has done an interview for a commentator
13:40
Speaker 2: on the New York Times, and he makes this point
13:43
Speaker 2: that actually it shows that economists get things wrong, because
13:46
Speaker 2: absolutely everyone predicts that if you have a higher tariff,
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Speaker 2: you get an appreciating currency. And in fact, one of
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Speaker 2: the most striking things that happened that has not really
13:54
Speaker 2: changed in direction in the last few months as these
13:58
Speaker 2: tariffs have been introduced, is that the dollar has fallen.
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Speaker 2: So we don't know that that universal economist view is
14:07
Speaker 2: actually going to be born out, not yet anyway, let me.
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Speaker 1: Add on a parenthetical statement about whether it's true or not.
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Speaker 1: The closest example was when during the nineties, many developing
14:17
Speaker 1: countries systematically lower their tariffs from like sixty percent down
14:22
Speaker 1: to nine or ten percent, and so that was essentially
14:25
Speaker 1: the opposite of what Trump did, and instead of their
14:29
Speaker 1: currencies appreciating, they've depreciated. So there's wide experience of massive
14:34
Speaker 1: changes in trade policy leading to offsetting long term exchange
14:39
Speaker 1: rates on the import side as well from all the
14:41
Speaker 1: emerging markets who essentially laterally lower their tariffs in the nineties.
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Speaker 2: The dollar's not going up. The one thing is not
14:48
Speaker 2: done in the last six months is the dollar's not
14:49
Speaker 2: gone up.
14:50
Speaker 1: Absolutely so I'm not defensive. I want to explain that. So,
14:54
Speaker 1: the exchange rate, like the dollar, is two things. It
14:58
Speaker 1: is a finan instrument on which there's enormous amounts trillions
15:03
Speaker 1: of dollars of arbitrage every single day. Now that arbitrage
15:07
Speaker 1: is primarily driven by interest rate differentials and expectations of
15:11
Speaker 1: interest rate differentials. One of the times where the dollar
15:14
Speaker 1: depreciates quite reliably is if people think the US is
15:18
Speaker 1: going to go into recession, which means the FED is
15:21
Speaker 1: going to lower interest rates or not raise them as much,
15:24
Speaker 1: and therefore the dollar becomes less attractive. So right now
15:27
Speaker 1: people move out of the dollar. So I think what
15:29
Speaker 1: we're seeing now is certainly a lot of anticipation of
15:34
Speaker 1: a lower path of interest rates for the dollar than
15:36
Speaker 1: people would have thought because of the recession that the
15:39
Speaker 1: tariffs are going to introduce. The second point is, and
15:43
Speaker 1: this is unusual, is that Trump and his administration are
15:47
Speaker 1: systematically undermining the value of the dollar as the world's
15:51
Speaker 1: reserve currency, threatening all sorts of crazy things. People were wondering,
15:56
Speaker 1: is the US actually as reliable as they used to be.
16:00
Speaker 1: This level of rule breaking and carelessness for the system
16:03
Speaker 1: undermine people's trust. Now. The other thing that's going on
16:07
Speaker 1: is we've recently seen just with the House passage, is
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Speaker 1: the US has no plan to close their deficit ever,
16:14
Speaker 1: and they're running six seven percent deficits every year with
16:18
Speaker 1: no plan to change it. And there's no political landing
16:21
Speaker 1: path you can see in the United States where they're
16:24
Speaker 1: going to reather, raise taxes or cut spending sufficiently for this. Moreover,
16:28
Speaker 1: as the interest rates go up on yields, that means
16:31
Speaker 1: more and more of the current budget will be to
16:34
Speaker 1: pay off the debt. And just recently, with the ten
16:37
Speaker 1: year bonds going up, the US is now spending more
16:40
Speaker 1: on financing its own debt than it is on its military.
16:45
Speaker 1: So this is something that people are starting to you know,
16:48
Speaker 1: long ways down the road. What's going to happen is
16:51
Speaker 1: not that people will leave the dollar, but they'll require
16:53
Speaker 1: higher premium. None of these things have to be dramatic.
16:56
Speaker 1: If most big money funds in the world decide I did,
17:00
Speaker 1: to put two percentage points less in the US market
17:03
Speaker 1: than they had before, that will lead to an outflow,
17:06
Speaker 1: which will lead to a depreciation of the dollar. So
17:09
Speaker 1: I think what we're seeing is short and medium term
17:11
Speaker 1: things overwhelming long term things, And in any case, I
17:15
Speaker 1: wouldn't expect the long term things to as submit themselves immediately, because,
17:19
Speaker 1: as you pointed out, we don't know where this thing's
17:22
Speaker 1: going to land.
17:23
Speaker 2: I guess one could still come away with the idea
17:25
Speaker 2: that whatever dollar rise you have associated with the tariffs
17:28
Speaker 2: could be drowned out by some of these other effects,
17:30
Speaker 2: given that there'd been such a move into the US
17:33
Speaker 2: assets in the past, and as you pointed out, it
17:35
Speaker 2: doesn't take much if people start to just adjust at
17:38
Speaker 2: the margin.
17:39
Speaker 1: One of my favorite quotes on this is that the
17:41
Speaker 1: long run takes longer to come than you would have
17:44
Speaker 1: ever thought it would, but when it comes, it comes
17:47
Speaker 1: faster than you could ever have expected.
17:49
Speaker 2: Yeah, yeah, slowly, And then if people gave bus just
17:52
Speaker 2: slowly suddenly yeah. So we don't know, as you say,
17:57
Speaker 2: we don't know where that's going to turn out, and
17:59
Speaker 2: we say, we don't know that the US will continue
18:03
Speaker 2: with the sort of most dramatic version of this war
18:06
Speaker 2: on trade, this trade hack that you've suggested. But you
18:08
Speaker 2: also have highlighted the kind of underlying political reasons for
18:12
Speaker 2: the trade hack, the grievance doctrine, and it doesn't seem
18:15
Speaker 2: like that's going to go anywhere. President Trump seems pretty
18:18
Speaker 2: committed to that. So I guess one of the questions
18:21
Speaker 2: that anyone would have, and that you start to answer
18:23
Speaker 2: in your book, is what happens to globalization? What happens
18:26
Speaker 2: to the global economy in the meantime while the US
18:30
Speaker 2: is engaged in this big experiment.
18:33
Speaker 1: Let me take the first point, which I think is
18:35
Speaker 1: really important I hope that people will take away from
18:38
Speaker 1: my book, is that US protectionism is now permanent. It's
18:43
Speaker 1: here to stay. It's not new, and it's not going away.
18:47
Speaker 1: So this narrative that the system is rigged against us
18:50
Speaker 1: started with the Great Recession, and starting from Obama onward,
18:54
Speaker 1: the US political elite blamed globalization. They found that very convenient.
18:58
Speaker 1: So Obama a media suspended all the trade agreements that
19:02
Speaker 1: Bush Junior had started, and there were lots of them,
19:05
Speaker 1: and he became trade hesitant. He was there for eight
19:08
Speaker 1: years and that hesitancy kept up. Then, of course Trump
19:12
Speaker 1: came and the trade hesitancy turned to trade hostility, and
19:16
Speaker 1: then when Biden came, it just turned back to trade hesitancy.
19:20
Speaker 1: So really, going back to two thousand and eight, the
19:23
Speaker 1: US has not been the leader of the system, so
19:26
Speaker 1: it's not new. And the reason was is because the
19:28
Speaker 1: suffering of the middle class, if you will, was something
19:31
Speaker 1: that was going through they did not want to raise
19:34
Speaker 1: taxes or increase the size of the government in order
19:36
Speaker 1: to actually address it, and as a consequence, they used
19:39
Speaker 1: trade as a scapegoat. So this anti trade element is
19:44
Speaker 1: in there and US is now on a kind of
19:46
Speaker 1: looping gif of protection. They've got the malaise of the
19:52
Speaker 1: middle class suffering, leading to the need for a solution
19:58
Speaker 1: where anti globalization becomes out solution at bigger, lower levels.
20:03
Speaker 1: Those solutions don't fix the middle class problems, and so
20:06
Speaker 1: they have to keep again being protectionist. So Biden, for example,
20:10
Speaker 1: had a worker centric trade policy which meant no trade liberalization.
20:14
Speaker 1: If Harris had won, she would have kept that up.
20:16
Speaker 1: And whoever comes after Trump may be a lot more
20:19
Speaker 1: polite and diplomatic, but they certainly aren't going to start
20:22
Speaker 1: signing free trade agreements. So I think we have to
20:24
Speaker 1: get used to a world where the US has left
20:27
Speaker 1: the stage as the leader of the world trading system
20:31
Speaker 1: at the very least, and maybe more.
20:32
Speaker 2: Broadly, while the US is engaged in this grand experiment,
20:36
Speaker 2: or not say a grand experiment. What happens to the
20:38
Speaker 2: rest of the world. How do you see the global economy,
20:42
Speaker 2: the pattern of global trade panning out.
20:45
Speaker 1: So let me start with the worst case scenario, the
20:49
Speaker 1: sort of ones that we should be panicked for, even
20:51
Speaker 1: though I don't think it's very likely. The last time
20:54
Speaker 1: the US was this irresponsible on trade was in the
20:56
Speaker 1: nineteen twenty nine Smooth Holly Act, which led to retaliation
21:01
Speaker 1: cycles outside the United States. US was actually much less
21:05
Speaker 1: important in the world economy back then, but those cycles
21:08
Speaker 1: or retaliation led to a collapse in trade, which made
21:11
Speaker 1: the Great Depression bad. That's what we have to look for.
21:14
Speaker 1: What could trigger retaliation of non US countries against other
21:19
Speaker 1: non US countries. It's given that the US is going
21:22
Speaker 1: to be more protectionists, and it's given that other countries
21:24
Speaker 1: will be more protection against the US. But the US
21:28
Speaker 1: only accounts for about fifteen percent of world trade, and
21:31
Speaker 1: what really matters is what the other eighty five percent.
21:34
Speaker 2: Do.
21:35
Speaker 1: In the book, I talk about a few scenarios. The
21:38
Speaker 1: one that's most likely is sort of messy multilateralism going forward,
21:43
Speaker 1: and that's what we're actually seeing. So there's two elements
21:47
Speaker 1: of it, we will see more protectionism. I call it
21:50
Speaker 1: cascading protectionism. So this was a recent example. The US
21:54
Speaker 1: put up one hundred percent tariffs on Chinese electric vehicles
21:58
Speaker 1: and then those diverted some more else. Canada then put
22:01
Speaker 1: up one hundred percent tariffs, and then Europe put up
22:03
Speaker 1: one hundred percent tariffs, So that's called trade deflection. Now,
22:07
Speaker 1: so far, those tariffs have been done on WTWOL compliant basis.
22:11
Speaker 1: W two allows people to put up tariffs against import
22:14
Speaker 1: sorges like that, but it's disciplined and it's explained, and
22:18
Speaker 1: as a consequence, it rarely triggers cycles of retaliation. The
22:22
Speaker 1: second is the liberalizing part of it, and in fact,
22:26
Speaker 1: even since April second, we have seen, especially I mean
22:30
Speaker 1: with the UK, three major trade deals done in part
22:34
Speaker 1: because the ex borders who used to sell to the
22:37
Speaker 1: US are pushing their governments to get better access to
22:40
Speaker 1: other markets. So we're seeing things like the UK India deal,
22:44
Speaker 1: which was long long running thing, finally get closed because
22:47
Speaker 1: everybody wants to replace the US market. But again those
22:51
Speaker 1: are WTWOL compliant, So what we're seeing is more WTWOL
22:54
Speaker 1: compliant retaliation, more WTWOL compliant liberalization and we muddle through
23:00
Speaker 1: where the whole rest of the world at least pretends
23:02
Speaker 1: that they're following the rules, and that I think is
23:05
Speaker 1: most likely. The other one, which is a little scarier,
23:08
Speaker 1: is that we get these fighting trade blocks. And the
23:11
Speaker 1: trigger for that is already out there is China. The
23:16
Speaker 1: UK US deal promised indirectly and obliquely to cut China
23:22
Speaker 1: out of the supply chains of the goods which are
23:24
Speaker 1: going to the US, and China said that's not okay,
23:28
Speaker 1: and they threaten retaliation to any country who agreed to
23:32
Speaker 1: things that were anti China. So that's the beginning of
23:35
Speaker 1: trade blocks fighting, where China says you have to be
23:38
Speaker 1: with me or you have to be against me, the
23:40
Speaker 1: US says you have to be with me or against me.
23:43
Speaker 1: We start the European Union might end up with that.
23:45
Speaker 1: So that's the worst that lots of people start violating
23:49
Speaker 1: wtwo rules. It's not just the US, and it turns
23:52
Speaker 1: into this fragmented world of free trade blocks, US, EU, China,
23:57
Speaker 1: and that would be a very bad world. The last one,
23:59
Speaker 1: which I think is most hopeful, is reglobalization without America.
24:05
Speaker 1: So this is the analogy. So just take countries like
24:08
Speaker 1: India and China many decades after World War Two lived
24:12
Speaker 1: in splendid isolation. They bought almost nothing from the world,
24:15
Speaker 1: they exported almost nothing to the world, and the whole
24:17
Speaker 1: rest of the world did just fine without them. Now,
24:20
Speaker 1: when these over two billion people opened up, the world
24:23
Speaker 1: was a better place for them and for us. But
24:26
Speaker 1: the world does not actually need the US market to thrive.
24:30
Speaker 1: So if these ideas that we start going back to
24:34
Speaker 1: signing big regional trade agreements and liberalizing among the rest
24:38
Speaker 1: of the eighty five percent, I can see a future
24:41
Speaker 1: where the world moves on from the US protectionism, US
24:45
Speaker 1: closes itself off for political reasons. Isolationism, as you well know,
24:50
Speaker 1: is a very long tradition in American politics, especially on trade,
24:54
Speaker 1: and the rest of the world essentially continues on with
24:57
Speaker 1: liberalizations based on mega regional agreements.
25:01
Speaker 2: There's so many things there, and we're going to run
25:02
Speaker 2: out of time. So I just very briefly, if you
25:06
Speaker 2: giving advice to other leaders, some of the countries that
25:10
Speaker 2: are trying to negotiate with Donald Trump, but also navigate
25:13
Speaker 2: a world with Donald Trump in it doing all the
25:17
Speaker 2: things he's doing, You know, what are your kind of
25:19
Speaker 2: top tips for people sitting in chancellories and finance ministries thinking,
25:24
Speaker 2: how the hell do we deal with this?
25:27
Speaker 1: Yeah, so there's two questions. There is one is how
25:29
Speaker 1: do you deal bilaterally with the US? And the second
25:32
Speaker 1: is what to do to prevent this from becoming another
25:34
Speaker 1: nineteen thirties. So let's go with the first advice, so
25:37
Speaker 1: that is, negotiate, don't retaliate. There's really only the European
25:41
Speaker 1: Union in China who have the might to stand up
25:44
Speaker 1: to the arm twister that the United States has become,
25:48
Speaker 1: and China in particular, since the US is so dependent
25:51
Speaker 1: on Chinese intermediate inputs in their entire manufacturing base. Europe
25:55
Speaker 1: less so. But in any case, they're big enough to
25:57
Speaker 1: take care of themselves. They're large, closed economy and they
26:00
Speaker 1: can deal with loss of sales. The rest of the
26:03
Speaker 1: countries can't and shouldn't, and in any case, all they
26:06
Speaker 1: would do is make him mad. The second bit of
26:09
Speaker 1: that is that what Trump is looking for because of
26:12
Speaker 1: the grievance doctrines, it's things that make him look like
26:16
Speaker 1: he's winning, like he's redressing the problems with the unfairness
26:22
Speaker 1: of the trade system. So what he wants is happy headlines.
26:26
Speaker 1: He wants to be saying Trump is winning again on trade,
26:32
Speaker 1: moving this rigged system to something that's fairer and more reciprocal.
26:37
Speaker 1: And as long as those headlines can be generated, the
26:40
Speaker 1: details do not really matter. And if you look at
26:43
Speaker 1: any of the agreements, they're not signed because they're really
26:46
Speaker 1: just press releases, sometimes joints, sometimes not, and those are
26:50
Speaker 1: really just generating happy headlines. And that's really what he needs.
26:54
Speaker 1: So don't make him mad, give him happy headlines, and
26:57
Speaker 1: definitely don't retaliate. That's advice now to keep things on
27:01
Speaker 1: an even keio. We can defend the rules based system
27:06
Speaker 1: simply by following the rules. So if the rest of
27:09
Speaker 1: the eighty five percent do their tariff, they're more protection,
27:13
Speaker 1: they're more liberalization, which they will do because this is
27:16
Speaker 1: like through a great big rock in a pond and
27:18
Speaker 1: the waves are coming out. They will. As long as
27:22
Speaker 1: they do it with a wtwo compliant mechanisms, and there
27:25
Speaker 1: are lots of them to do that with, then the
27:28
Speaker 1: system would be okay. Things could evolve inside the US
27:31
Speaker 1: where they change, but if they don't, then the US
27:33
Speaker 1: is more or less shutting us off from the world
27:35
Speaker 1: and the rest of the world moves on. So that's
27:38
Speaker 1: the main thing, is to defend the rules by following
27:42
Speaker 1: the rules.
27:43
Speaker 2: How much of this can be undone by another administration
27:46
Speaker 2: or is this a case or are there some things
27:48
Speaker 2: you would identify that you know, once broken, are just
27:51
Speaker 2: never going to be put together again.
27:53
Speaker 1: Well, ever is a long time. But I think the
27:55
Speaker 1: key phrase that my father always used to tell me
27:59
Speaker 1: when I was a young man is trust comes on foot,
28:02
Speaker 1: but leaves on horseback. And that's what we've see. Trust
28:06
Speaker 1: in America has been eroded in the last six weeks
28:09
Speaker 1: in a way that is incredible. And people used to
28:13
Speaker 1: view the US universally regarded as the steward of the system.
28:18
Speaker 1: Now the US is universally regarded with suspicion. It's not
28:22
Speaker 1: just one man. The guy got re elected saying he
28:26
Speaker 1: would do all these things, and people still elected him. Moreover,
28:29
Speaker 1: I think we're at a situation now where if somebody
28:33
Speaker 1: stood up and ran for presidents saying I'm going to
28:35
Speaker 1: undo all this stuff, I'm going to take the blame
28:38
Speaker 1: on America. We're not going to blame the foreigners anymore.
28:41
Speaker 1: That would be political suicide. So they aren't coming back
28:44
Speaker 1: so I really think our grandchildren will study this episode
28:48
Speaker 1: April second really being very different than what was before
28:51
Speaker 1: as the beginning of the post American leadership era. I
28:55
Speaker 1: think that the trust of America, especially in economics, has
28:59
Speaker 1: been funded mentally undermined. We've seen it on trade enormously.
29:03
Speaker 1: It's slipping on the dollar and relying on the US's
29:06
Speaker 1: reserve currency. Moreover, and in terms of military and security
29:11
Speaker 1: things that this Trump administration has done, for instance in
29:14
Speaker 1: Ukraine threatening to withdraw support for reasons that don't really
29:18
Speaker 1: seem like long term steady allies. I think the fact
29:22
Speaker 1: of the US leadership being dominant is over. Just for example,
29:27
Speaker 1: the whole discussion on the Middle East. It didn't work out,
29:30
Speaker 1: but that was held in Saudi Arabia, not Camp David.
29:33
Speaker 1: And we're in a world now where the US is
29:36
Speaker 1: no longer leader. So I think that is not going back.
29:39
Speaker 2: I just wonder whether we're being a bit schizophrenic about this,
29:42
Speaker 2: because on the one hand, we tend to say, oh,
29:44
Speaker 2: many of Donald Trump's critics, and certainly some of what
29:48
Speaker 2: you've said today, is this is a fundamental breaking of
29:52
Speaker 2: the system. It's very damaging, It undermines America's position. There's
29:56
Speaker 2: no going back. This is going to be a fundamental
29:58
Speaker 2: shift of regime, we tend to say, or a lot
30:02
Speaker 2: of people, some of the same critics will say he
30:06
Speaker 2: will bulk under pressure. We've seen pauses once there will
30:11
Speaker 2: be real economic harm to these policies, and then as
30:14
Speaker 2: a result, he will back down, and we've seen signs
30:17
Speaker 2: of him backing down. And April second, yes, if implemented,
30:21
Speaker 2: would be enormously catastrophic, but in fact, I mean April
30:24
Speaker 2: second was almost immediately put on pause all of those
30:27
Speaker 2: crazy tariffs. And in the end this will be a
30:30
Speaker 2: much smaller change than people are arguing. You can't argue
30:34
Speaker 2: it both ways. That it's going to be sort of
30:36
Speaker 2: he's going to give up and it's going to be feeble,
30:38
Speaker 2: but it's also going to be studied by our grandchildren
30:40
Speaker 2: and our great grandchildren.
30:42
Speaker 1: Let me put that in perspective. First of all, you've
30:44
Speaker 1: probably heard of this taco trade. They're talking about it
30:47
Speaker 1: in finatural markets, which is Trump always chickens out taco,
30:51
Speaker 1: And that's the big idea. The key is is Trump
30:55
Speaker 1: is not dogmatic. He's pragmatic, and he really believes America
30:59
Speaker 1: has been ripped off by the system. Even talked about
31:02
Speaker 1: that in nineteen eighties when he was a private businessman.
31:05
Speaker 1: So he fundamentally believes that, and he fundamentally he's fixing it.
31:09
Speaker 1: But he's very flexible show he believes he's strong by
31:13
Speaker 1: threatening and he's wise by showing flexibility. But the whole
31:17
Speaker 1: point is that they have completely ripped up respect for
31:20
Speaker 1: the rules based multilateralism and turned it into US thinking
31:24
Speaker 1: they can do whatever they want on pretty much anything,
31:27
Speaker 1: whether it's the dollar, or it's the debts and deficits,
31:31
Speaker 1: whether it's on the tariffs. America is no longer acting
31:34
Speaker 1: in this enlightened self interest way, and that enlightened self
31:38
Speaker 1: interest leadership is what's ended. So it's not so much
31:42
Speaker 1: that we're going to tip into the next nineteen thirties.
31:46
Speaker 1: It's more like the interagum between when the UK ran
31:50
Speaker 1: the world and when the US ran the world packs
31:53
Speaker 1: Britannica to Pax Americana. There was a time in between
31:57
Speaker 1: where it wasn't clear who was running what, and I
32:00
Speaker 1: think that's the kind of era we've shifted into now.
32:03
Speaker 1: But also I don't think there's anybody who can take
32:05
Speaker 1: the US leadership, not like the UK steps down, US
32:09
Speaker 1: was right on the horizon. China can't do it. You
32:11
Speaker 1: can't do it because they're not a thing. So I
32:14
Speaker 1: think we're kind of moving into a very very different
32:16
Speaker 1: era what Ian Bremer calls the g zero world, where
32:20
Speaker 1: there's no clear leader on the whole, no clear hedgemon,
32:24
Speaker 1: and we just have to muddle through. But in any case,
32:26
Speaker 1: it's the beginning of a completely different era, and I
32:29
Speaker 1: think that is absolutely true, even if the terif cy
32:32
Speaker 1: actually does don't cause a great depression.
32:36
Speaker 2: Richard Boulden, that's a great place to end. Thank you
32:38
Speaker 2: so much, thanks for listening to Trumpnomics from Bloomberg. It
32:54
Speaker 2: was hosted by me Stephanie Flanders, and I was joined
32:57
Speaker 2: by Professor Richard Baldwin. Trump Andomics is produced by Samasadi
33:01
Speaker 2: and Moses and with help from Chris mart Lou and
33:03
Speaker 2: Amy Keen. Sound design is by Blake Maples and Brendan Francis.
33:08
Speaker 2: Newnham is our executive producer. Please help other people find
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33:14
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