April 3, 2025 • 9 mins
The American economy is richer, more innovative, and has expanded at a faster rate than most of the developed world for many years. How will Donald Trump's tariffs affect that trajectory? Bloomberg's head of economics and government Stephanie Flanders joins host Stephen Carroll to discuss.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and
this is Here's Why, where we take one news story
and explain it in just a few minutes with our
experts here at Bloomberg.
Speaker 2 (00:21):
April second, twenty twenty five will forever be remembered as
today American industry was reborn, the day America's destiny was reclaimed,
and the day that we began to make America wealthy again.
Speaker 1 (00:38):
The American economy is richer, more innovative, and for more
than a decade, has grown at a faster rate than
most of the developed world. But uncertainty over the effects
of Donald Trump's policies, particularly on trade, as many people
asking if the outperformance of the US economy could be
coming to an end.
Speaker 3 (00:57):
A very broad, crude consensus was that the US administration
was going to be brilliant for the US economy and
terrible for everywhere else, quite simply put. And so what
we're seeing so far this year is question marks on
both sides of that. When we know consumer spending drives
about sixty five seventy percent of GDP in the US,
that's something that we're going to watch very very closely.
Speaker 2 (01:18):
We do see that consumer confidence has deteriorated quite fast.
Speaker 4 (01:22):
Anyway you slice it.
Speaker 3 (01:23):
None of this looks to be positive for growth or
inflation in the short run.
Speaker 1 (01:29):
In just a few short months in office, the US
President has upended the global trade in goods that's worth
some twenty four trillion dollars. Here's why tariffs could make
America less exceptional. Our head of economics and Government and
host of the trump Andomics podcast, Stephanie Flanders, joins me
(01:49):
now for more. Stephanie, first of all, for context, how
much better has the American economy been doing than the
rest of the world up until now?
Speaker 4 (02:00):
I think, you know, we're often HARKing back to the
global financial crisis, because, certainly in the UK, but also
a lot of other countries, that was when there seemed
to be a kind of step shift slowed down in
growth and productivity in most developed economies, and the US
has just not suffered from that in the same way.
So even since two thousand and eight, its average real
(02:21):
growth rate has been just under two percent, maybe one
point eight percent, not quite as good as it had
been in previous years, but still much better than both
the European Union or the UK, which has been sort
of just over one percent, and I think it's even
more striking since COVID, where the US has more or
less continued that rate of growth since COVID, and the
(02:41):
economy is probably fifteen percent bigger now than it was
at the end of twenty nineteen before the pandemic, and
both the EU and the UK have not come anything
like close to that.
Speaker 1 (02:50):
So what will tariffs mean for that trajectory? For the
US economy who feels their effect most.
Speaker 4 (02:57):
There's an immediate hit, and obviously we're still sort of
passing through. As you've probably gathered, some of the numbers
weren't quite as advertised. There's even some sort of basic
elements of these tariffs where we don't know whether to
add them up or just consider them as totals for
each country. I know that sounds completely basic, but it
seems to be something that even some officials in the
White House aren't entirely clear about. But insofar as we
(03:19):
can put these numbers into the models, the sort of
rough model of the US economy would suggest that it
would reduce GDP by between two and three percent, so
not nothing at all, and raise the level of prices
by around one and a half percent, But of course
a lot depends on what importers do. Do they pass
(03:40):
on these effectively tax increases, the tariff increases at the
border to consumers, or do they do what actually has
been happening in the first round of tariffs in the
last few months. They've been generally kind of taking it
on the chin, and obviously that means that that would
have a less impact on inflation. So I think as
we're fairly confident of the hit to growth, I think
how large and how long lasting the inflation impact is
(04:04):
a real question mark, which obviously is going to matter
a lot for the Central Bank, for the Federal Reserve
as well.
Speaker 1 (04:08):
On that question of how long things will last. As
you say, there's so much that we still need to know.
What negotiations might yield, perhaps a change in position around
certain sectors or certain industries. What will be the key
factors to watch to determine whether or not this will
have a lasting effect on the American economy.
Speaker 4 (04:27):
As I mentioned, there's one aspect, which is that how
do importers sort of deal with this? Do they just
squeeze their margins because they're worried about losing out in competition. Well,
that that would be good for inflation. But if you
think if you're Donald Trump and you actually wanted to
boost US production and US companies through doing this, that's
not going to help very much if the importers are
just absorbing any of the increase in price. But I
(04:51):
think there's a sort of broader factor. I mean, Donald
Trump has said he wants a lot of production for
things like cars to just come back to the US. Well,
there's a reason why many of these parts and even
the cars themselves, often the production had moved overseass because
it's much cheaper, and if you bring everything back to
the US, then the unit cost of these things is
(05:12):
going to be more expensive over a long period. So
I think that's what the Federal Reserve is kind of
trying to work out. They wouldn't often they would have
said this was just a short term thing, and that
prices it'll just be a step change and the level
of prices. But if it changes the underlying dynamics of
the economy that we're now making things more expensively than
(05:33):
we were when we're making them abroad, well that could
be an ongoing increase in inflation.
Speaker 1 (05:38):
Are there certain industries or part of the American economy
that will do better as a result of tariffs.
Speaker 4 (05:44):
I mean, if you look at what happened in the
first Trump term, steel was hit very early on with tarifs,
and that's happened again in this term. I think that
the President considers steel to be a sort of fundamental
symbol of of US industrial might, and he's trying to
protect what is now a very shrunken steel industry in
(06:06):
the US. Well, that is a sector which will potentially
do quite well. US produced cars. Tesla's one of the
few car companies that does make the cars sold in
the US almost entirely made in the US. Those companies
will gain, those sectors will gain. But if you think
of something like steel, there's vastly more parts of the
(06:27):
economy that you steal as an input than produce steel.
You know, it's a tiny part of the economy, it's
a tiny share of employment, but the amount of manufacturing
and other parts of the economy that you steal is
enormous and a lot of jobs are affected. So what
we found in the first term is even the much
more limited tariffs he had then actually cost jobs overall.
And indeed the government was having in many cases for agriculture,
(06:50):
for example, having to subsidize farmers for their losses, and
these tariffs which kind of meant, you know, everything was
a bit.
Speaker 3 (06:57):
Of a wash.
Speaker 1 (06:58):
It's often said that if America sneezes, the rest of
the world catches a cold. What does a weaker American
economy mean for the rest of US.
Speaker 4 (07:06):
Well, of course, a lot of people have been making
the comparison with the nineteen thirties, the famous or infamous
Smooth Hawley increase in tariffs, which was it was quite
similar in magnitude. We think that the average effective tariff
rate for the US has gone up by about twenty
percentage points, which is more or less what happened in
the thirties, and then that started a global trade war,
(07:27):
everybody retaliating against each other, and global trade fell by
sixty percent this time. Because this is the US unilaterally
doing this. Although some countries are obviously weighing up whether
to retaliate against the US, we obviously don't anticipate them
retaliating against each other because this has been triggered by
the US. So in that sense, we don't think it
(07:48):
is going to be on the same scale. And Obviously,
goods is a much smaller share of our overall economy
now than it was back in the thirties. We have
all these services which make up the majority of most
developed economies, so it's not the nineteen thirty but it
is a significant hit. I mean, we think in the
European Union the exports to the US could have and
that will be a hit to GDP, you know, potentially
(08:10):
a sort of half a percentage point, which the European
Central Bank might have to respond to by cutting interest rates.
The UK, the central Bank has a bit less room
for maneuver, but it certainly it puts a small proportion
of GDP on the line, and certainly some jobs in
sectors like the car industry particularly, so it is a hit.
It's not enough in itself to trigger a global recession,
(08:34):
but as we said at the start, you know, a
lot of countries are not in the strongest shape coming
into this, so it definitely is could definitely do without it.
Speaker 1 (08:42):
It's Deephanie Flanders, Bloomberg's head of Economics and Government and
host of the Brilliant Trumponomics podcast. Thank you for more
explanations like this from our team of three thousand journalists
and analysts around the world go to Bloomberg dot com
slash explainers. I'm Stephen Carroll. This is here's why. I'll
be back next week with more. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and
this is Here's Why, where we take one news story
and explain it in just a few minutes with our
experts here at Bloomberg.
Speaker 2 (00:21):
April second, twenty twenty five will forever be remembered as
today American industry was reborn, the day America's destiny was reclaimed,
and the day that we began to make America wealthy again.
Speaker 1 (00:38):
The American economy is richer, more innovative, and for more
than a decade, has grown at a faster rate than
most of the developed world. But uncertainty over the effects
of Donald Trump's policies, particularly on trade, as many people
asking if the outperformance of the US economy could be
coming to an end.
Speaker 3 (00:57):
A very broad, crude consensus was that the US administration
was going to be brilliant for the US economy and
terrible for everywhere else, quite simply put. And so what
we're seeing so far this year is question marks on
both sides of that. When we know consumer spending drives
about sixty five seventy percent of GDP in the US,
that's something that we're going to watch very very closely.
Speaker 2 (01:18):
We do see that consumer confidence has deteriorated quite fast.
Speaker 4 (01:22):
Anyway you slice it.
Speaker 3 (01:23):
None of this looks to be positive for growth or
inflation in the short run.
Speaker 1 (01:29):
In just a few short months in office, the US
President has upended the global trade in goods that's worth
some twenty four trillion dollars. Here's why tariffs could make
America less exceptional. Our head of economics and Government and
host of the trump Andomics podcast, Stephanie Flanders, joins me
(01:49):
now for more. Stephanie, first of all, for context, how
much better has the American economy been doing than the
rest of the world up until now?
Speaker 4 (02:00):
I think, you know, we're often HARKing back to the
global financial crisis, because, certainly in the UK, but also
a lot of other countries, that was when there seemed
to be a kind of step shift slowed down in
growth and productivity in most developed economies, and the US
has just not suffered from that in the same way.
So even since two thousand and eight, its average real
(02:21):
growth rate has been just under two percent, maybe one
point eight percent, not quite as good as it had
been in previous years, but still much better than both
the European Union or the UK, which has been sort
of just over one percent, and I think it's even
more striking since COVID, where the US has more or
less continued that rate of growth since COVID, and the
(02:41):
economy is probably fifteen percent bigger now than it was
at the end of twenty nineteen before the pandemic, and
both the EU and the UK have not come anything
like close to that.
Speaker 1 (02:50):
So what will tariffs mean for that trajectory? For the
US economy who feels their effect most.
Speaker 4 (02:57):
There's an immediate hit, and obviously we're still sort of
passing through. As you've probably gathered, some of the numbers
weren't quite as advertised. There's even some sort of basic
elements of these tariffs where we don't know whether to
add them up or just consider them as totals for
each country. I know that sounds completely basic, but it
seems to be something that even some officials in the
White House aren't entirely clear about. But insofar as we
(03:19):
can put these numbers into the models, the sort of
rough model of the US economy would suggest that it
would reduce GDP by between two and three percent, so
not nothing at all, and raise the level of prices
by around one and a half percent, But of course
a lot depends on what importers do. Do they pass
(03:40):
on these effectively tax increases, the tariff increases at the
border to consumers, or do they do what actually has
been happening in the first round of tariffs in the
last few months. They've been generally kind of taking it
on the chin, and obviously that means that that would
have a less impact on inflation. So I think as
we're fairly confident of the hit to growth, I think
how large and how long lasting the inflation impact is
(04:04):
a real question mark, which obviously is going to matter
a lot for the Central Bank, for the Federal Reserve
as well.
Speaker 1 (04:08):
On that question of how long things will last. As
you say, there's so much that we still need to know.
What negotiations might yield, perhaps a change in position around
certain sectors or certain industries. What will be the key
factors to watch to determine whether or not this will
have a lasting effect on the American economy.
Speaker 4 (04:27):
As I mentioned, there's one aspect, which is that how
do importers sort of deal with this? Do they just
squeeze their margins because they're worried about losing out in competition. Well,
that that would be good for inflation. But if you
think if you're Donald Trump and you actually wanted to
boost US production and US companies through doing this, that's
not going to help very much if the importers are
just absorbing any of the increase in price. But I
(04:51):
think there's a sort of broader factor. I mean, Donald
Trump has said he wants a lot of production for
things like cars to just come back to the US. Well,
there's a reason why many of these parts and even
the cars themselves, often the production had moved overseass because
it's much cheaper, and if you bring everything back to
the US, then the unit cost of these things is
(05:12):
going to be more expensive over a long period. So
I think that's what the Federal Reserve is kind of
trying to work out. They wouldn't often they would have
said this was just a short term thing, and that
prices it'll just be a step change and the level
of prices. But if it changes the underlying dynamics of
the economy that we're now making things more expensively than
(05:33):
we were when we're making them abroad, well that could
be an ongoing increase in inflation.
Speaker 1 (05:38):
Are there certain industries or part of the American economy
that will do better as a result of tariffs.
Speaker 4 (05:44):
I mean, if you look at what happened in the
first Trump term, steel was hit very early on with tarifs,
and that's happened again in this term. I think that
the President considers steel to be a sort of fundamental
symbol of of US industrial might, and he's trying to
protect what is now a very shrunken steel industry in
(06:06):
the US. Well, that is a sector which will potentially
do quite well. US produced cars. Tesla's one of the
few car companies that does make the cars sold in
the US almost entirely made in the US. Those companies
will gain, those sectors will gain. But if you think
of something like steel, there's vastly more parts of the
(06:27):
economy that you steal as an input than produce steel.
You know, it's a tiny part of the economy, it's
a tiny share of employment, but the amount of manufacturing
and other parts of the economy that you steal is
enormous and a lot of jobs are affected. So what
we found in the first term is even the much
more limited tariffs he had then actually cost jobs overall.
And indeed the government was having in many cases for agriculture,
(06:50):
for example, having to subsidize farmers for their losses, and
these tariffs which kind of meant, you know, everything was
a bit.
Speaker 3 (06:57):
Of a wash.
Speaker 1 (06:58):
It's often said that if America sneezes, the rest of
the world catches a cold. What does a weaker American
economy mean for the rest of US.
Speaker 4 (07:06):
Well, of course, a lot of people have been making
the comparison with the nineteen thirties, the famous or infamous
Smooth Hawley increase in tariffs, which was it was quite
similar in magnitude. We think that the average effective tariff
rate for the US has gone up by about twenty
percentage points, which is more or less what happened in
the thirties, and then that started a global trade war,
(07:27):
everybody retaliating against each other, and global trade fell by
sixty percent this time. Because this is the US unilaterally
doing this. Although some countries are obviously weighing up whether
to retaliate against the US, we obviously don't anticipate them
retaliating against each other because this has been triggered by
the US. So in that sense, we don't think it
(07:48):
is going to be on the same scale. And Obviously,
goods is a much smaller share of our overall economy
now than it was back in the thirties. We have
all these services which make up the majority of most
developed economies, so it's not the nineteen thirty but it
is a significant hit. I mean, we think in the
European Union the exports to the US could have and
that will be a hit to GDP, you know, potentially
(08:10):
a sort of half a percentage point, which the European
Central Bank might have to respond to by cutting interest rates.
The UK, the central Bank has a bit less room
for maneuver, but it certainly it puts a small proportion
of GDP on the line, and certainly some jobs in
sectors like the car industry particularly, so it is a hit.
It's not enough in itself to trigger a global recession,
(08:34):
but as we said at the start, you know, a
lot of countries are not in the strongest shape coming
into this, so it definitely is could definitely do without it.
Speaker 1 (08:42):
It's Deephanie Flanders, Bloomberg's head of Economics and Government and
host of the Brilliant Trumponomics podcast. Thank you for more
explanations like this from our team of three thousand journalists
and analysts around the world go to Bloomberg dot com
slash explainers. I'm Stephen Carroll. This is here's why. I'll
be back next week with more. Thanks for listening.
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