April 5, 2025 • 28 mins
He needs no introduction: When trade is in the news, we speak with Brad Setser of the Council on Foreign Relations. Brad has been talking for awhile about the major imbalances of world trade, and the US-China relationship in particular. However, rather than building up a large trading bloc with our allies to counter Chinese influence, the Trump administration has chosen a path of going it alone, targeting friend and foe alike with large and wide-ranging tariffs. In this episode, we talk about the significance of the move, the potential damage, and what, if any, positive scenarios could result.
Read More:
Global Recession Fears Engulf Wall Street on Tariff Retaliation
Matt Levine: The Tariffs Have Some Math
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Allaway.
Speaker 3 (00:22):
And I'm Joe Wisenthal.
Speaker 2 (00:24):
Joe Another Day, another emergency podcast.
Speaker 3 (00:27):
We're gonna do a lot. This is a fact, this is.
Speaker 2 (00:30):
The I should just resign myself to this inevitability.
Speaker 4 (00:34):
Right.
Speaker 3 (00:34):
The story of the tariffs, the market reaction, the global
reaction is the central story of our time, one of
the biggest stories of our entire career. I think, perhaps,
depending on how they could go, a bigger story than
the past two big stories of the Great Financial Crisis
and the COVID shock. We're going to be doing a
lot of episodes about what this all means.
Speaker 2 (00:57):
This is what is mind blowing to me, because in
two thousand and eight happened. I remember thinking this was
the biggest thing that ever happened in modern finance and
the modern economy. And then in twenty twenty, I remember
there was a very vibrant debate about whether or not
the pandemic and the market selloff would end up being
the central crisis for a new generation. And I think
(01:19):
in retrospect it certainly was a lot more people remember
twenty twenty than they remember two thousand and eight. Now
and here we are, you know, just five years later,
having another discussion about how big this is inevitably going
to be. So on that note, we are recording this
on Friday, April fourth, the market is selling off yet again.
(01:40):
We had Trump's new tariff announcements. Those were released on Wednesday,
April second, Liberation Day. Investors have been I mean, I
would say pretty much panicking since then. Yeah, and what's more, overnight,
coming into Friday morning, we've started to see some reaction
from other countries. Notably China is one of the US's
(02:01):
biggest trading partners, and they say they're instituting a thirty
four percent reciprocal tariff on US goods. So things seem
to be escalating totally.
Speaker 4 (02:10):
You know.
Speaker 3 (02:10):
I'm just gonna make one short comment here, which is
why I think this might be end up being a
bigger story than the Great Financial Crisis potentially, and that
is banking crisis happen. They happen around the world, they've
happened in the US. They've even happened in the US
between massive crises, and there is a playbook, and there's
a response and you try to reflate the economy and
(02:31):
you stuff like this. This is different because this is
a policy choice purposely aimed to completely reorient America's relationship
with the rest of the world and reorient the internal economy.
And so it's very different than sort of like, oh,
you have a run on the bank, which happens for
we had one in March twenty twenty three. We had
a run on the bank. You know, this is very
(02:53):
different in terms of the entire relationship of both the
internal and the external economy, and it may end up
being more consequential for better or worse.
Speaker 2 (03:03):
Than I don't disagree with you, but I'm just gonna
say one thing. Number one, that's not a short comment.
Number two, you're right. This is an entirely self inflicted
own goal basically by the Trump administration. Like it is
their decision to do this, and they presumably knew what
the results were going to be, right, they decided not
to hold the tariff press conference while the markets were open.
(03:27):
They knew that coming out was something that was worse
than a lot of professional economists and analysts had expected,
was going to have this impact on the market. And
here we are. So this is something that the administration
has chosen to do. Obviously, there's lots going on. Obviously
we have a lot of questions. Who do we turn
to when we have trade questions? We do, in fact
(03:47):
have the perfect guest. We're going to be speaking with
Brad Setzer, senior fellow at the Council on Foreign Relations
and a long time trade expert. One of our favorites
to talk to. The last time we saw him was
actually at our pre election event at a live show
in New York, and Brad, I remember speaking to you there.
There were a lot of concerns about what Trump could
(04:10):
do on trade. How has the reality shaped up to
expectations here?
Speaker 5 (04:16):
Well, look, Trump did campaign on an agenda that was
tariffs and more tariffs. He campaigned on a ten percent
across the board tariff and prohibitive tariffs on trade with China,
and at times he did suggest that ten percent was
the minimum. That said, a lot of people close to Trump,
(04:39):
a lot of people who found their way into the administration,
were sending different messages privately to people in the financial markets.
People like Scott Bessett were talking about how the Trump
Trump's plan was escalate to de escalate the tariffs were
a negotiating tool, they weren't a tool to up end
(04:59):
the global economy. I think what the announcement on Wednesday
showed is that the decision of the administration, not surprisingly,
was to follow President Trump's instincts, not the instincts of
his more moderate advisors, to go all in, and that
the goal really is to, as you guys suggested at
the beginning, to radically restructure the US and global economies
(05:22):
using tariffs as a tool, with some flexibility, perhaps negotiate
at the edges, but fundamentally this is a test of
what you can and cannot do with tariffs, and there
was very little restraint I would say a part for
strangely enough, Canada and Mexico USMCA on the level of
(05:43):
the tariffs. So the tariffs are set at levels which
are just going to frankly be painful.
Speaker 3 (05:48):
You know, Tracy mentioned that we talked to the night
before the election, and one thing that's interesting about talking
to you is you are not a sort of naive
you know, all trade it fine, fair economists, yeah, or
just like you know everything was fine in the global
trading system, and you've been talking for years that like
this is an unhealthy relationship that the US has with
(06:10):
China specifically, and that night that we talked to you
before the election, and you're like, the answer is to
really deepen the trading relationship with our allies, our friends,
so that would be Europe, Canada and so forth, and
really build up a coherent open trading block that would
stand to something different to China, which you've said, which,
as you've said, has had unfair trade practices for a
(06:32):
long time. Trump says the same thing, we haven't. So
what are the consequences of closing it, fragmenting what you
saw as the potential open trading block to counter China.
Speaker 5 (06:44):
Well, obvious point is elections do have consequences. Look, I
do think that trade with China is very difficult for
most countries that aren't just commodity exporters. If you look
at China's pattern of trade over the last six years,
China's imports of manufacturers increased on average by fifteen one
(07:09):
five billion dollars a year, essentially nothing. China's exports of
manufacturers over the last six years increased on average by
one hundred and seventy five billion dollars a year, ten
times as much so. China became an economy, particularly in
respond because of the way it responded to COVID because
of the real estate crisis, that was exporting but not
(07:31):
importing when it came to manufacturers, and China's trade surplus
surge to be in about a trillion. It's a little
over a trillion dollars now about a percent of world GDP.
It's manufacturing surplus is two percent of world GDP. These
are really unprecedented numbers, and so you know, my view
was that, hey, we don't have to abandon all the
(07:53):
benefits of trade. We can maintain the benefits of relatively
integrated trade among like minded I guess I don't like
that term, actually amongst countries that have similar economic systems,
similar politics, and that that was a better way of
both putting pressure on China, because the pressure is really
(08:15):
on China, and also avoiding the costs that come from
fully disengaging from the world economy. I think the choice
was made was essentially an American to go with in
America alone policy, where we're going to give up a
lot of the benefits of trade with our neighbors and
with long standing friends. And I think the net effect
(08:36):
of that. Yes, it's going to put a lot of
pressure on China, the tariff's on Vietnam or in some
ways tariffs on indirect Chinese exports as well, But it
does so at a very very high cost, and it
sort of gives up the benefits that I thought the
US had for being at the center of a much
bigger block than China was going to be at the center.
We've kind of the vision here is at least shrinking
(08:58):
to within North America and maybe ranking to within the
United States. That's just fundamentally a different vision, and I
think it's a more costly form of disengagement.
Speaker 2 (09:23):
So you mentioned Vietnam there, and I think this is
one of the big differences between tariffs this time around
and tariffs in the first Trump administration. So we did
see a lot of production that basically circumvented the China
tariffs post twenty eighteen, that increased production in places like Vietnam,
(09:43):
lots of Chinese components going into Mexico and then finding
their way into the US from there. Is there any
wriggle room left in the current constellation of the new
export limitations the new tariffs. Is there any wriggle room
to kind of reorient and potentially American imports that way,
or are there ways maybe to I don't know, figure
(10:06):
out lower tariff bands by like arbitraging between one country
and another, or are they so sweeping that a lot
of that ability has just been wiped out.
Speaker 5 (10:16):
There are two potential arbitrages that have opened up if
Wednesday Night is maintained. So the first is there are
a set of countries, generally countries which have now relatively
balanced trade with the US that only got the baseline
ten percent tariff. So if you reoriented your supply chains
(10:37):
and took the increase in shipping costs and found a
bunch of, say workers in Brazil, you could employ those
workers in Brazil to put together components from China and
send them to the US and only pay a ten
percent tariff. That's better than Vietnam's forty five percent tariff
and the fifty five percent tariff ballpark China that any
(10:59):
good from China faces, with some goods facing iron tariffs.
So opportunity number one is basically move production or at
least final assembly to countries that already have balance trade
with the US and thereby only have a ten percent tariff.
Note the ironing that if these countries become centers for
final assembly, bilateral trade will no longer stay balanced. It'll
(11:22):
quickly shift the other big exception again for now, and
it doesn't apply to autos, and it doesn't apply to steel,
and it doesn't probably won't apply to pharmaceuticals, and it
probably won't apply to some other sectors. Is that for now?
And I mean I do find it a bit shocking
given how much emphasis President Trump has placed on Canada
(11:44):
in the first two months of its administration. For now,
most trade with Mexico and Canada, outside of autos is
still relatively low tariff. It has to be us MCA compliant.
You can generally achieve that the USMCA compliance. You know
a lot of people weren't doing it because there was
no advantage in say electronics, because electronics tariffs were zero
(12:07):
inside USMCA and zero for Vietnam. Now there's a huge
incentive to be the USMCA compliant.
Speaker 2 (12:14):
So if you can do.
Speaker 5 (12:15):
Us MCA compliant production assembly in Mexico, there's no really
right now, but it'll probably change over time. Limits on
how many Chinese parts can be included in that operation.
For now, you get around the tariff.
Speaker 2 (12:29):
Now.
Speaker 5 (12:30):
I think there will be a renegotiation of USMCA that
will make some of this a bit harder over time,
but that at least is the opportunity that would be
open for now if nothing more changes. But it doesn't
feel fully consistent with the president's intent either.
Speaker 3 (12:48):
You know, you've been talking about trade for your entire career,
et cetera. You know, on that Wednesday announcement, every country
got a tariff slapped on it, and it was basically
a strict function of the amount of surplus then divided
by exports and then divided by Yeah, so China, for instance,
(13:08):
trade surplus of two hundred and ninety five billion last
year on exports of four hundred and thirty eight billion,
a ratio of sixty eight percent, and then they divided
by two and that's how they got thirty four percent.
And that's how they did it every country down the line.
And the theoretical idea here seems to be that if
we run a bilateral trade surplus with you any country
in the world, then that must be some proxy for
(13:29):
the amount that you're cheating, either through tariffs or non
tariff trade barriers or currency manipulation or something like that.
This seems to be the intellectual logic. And what I'm
curious from you is, in all your knowledge of sort
of the theory of world trade, is this something that
people have talked about. Is a reasonable way or a
(13:51):
reasonable proxy to measure the amount with which a country
quote cheats in the rules of free trade?
Speaker 5 (13:58):
The simple answer is, as you know, Joe, no, this
felt like a group of economic advisors who had put
off doing a term paper until really late at night
and were scrambling to come up and then use chat
GPT right, perhaps, but I mean, essentially, it certainly seems
from the tiktoks that the President himself asked for tariffs
(14:20):
on not just fifteen countries, but seventy countries or something,
and people had to come up with a formula because
it was clear that USTR and others didn't have the
capacity to do true assessments of all of the countries
that were covered by this announcement. But it does feel
like a term paper that went horribly wrong because it
was written at four in the morning and had to
(14:42):
be submitted at six. There are some obvious weirdness that
comes from this formula. The most significant of which, in
my view, is that small Asian economies that generally have
current account deficits, they're trade deficits overall, often run surpluses
(15:03):
with the United States because they're relatively poor, they don't
can't afford many of our goods, and they can still
produce clothing more or less for the US market. So
hence we put really quite heavy tariffs on a country
like Sri Lanka, on a country Bangladesh, you know, countries
where I don't think there was any significant concern about
(15:25):
the pattern of trade. I'm sure there were some concerns
about sweatshops and labor rights and so forth and so on,
but no one was sort of in the US economy
was you know, hey, hey ho ho, competition from Sri
Lanka has to go. This was just a function of
a formula applied without thought, and so you end up
(15:46):
having heavy tariffs on countries that are just producing clothes
which realistically won't be produced in the US. So there's
an element of pure pointlessness that comes out of this formula. Now,
I will say that there is some value in looking
at bilateral trade patterns. I mean, I've certainly learned a
lot from trying to understand why the US runs such
(16:08):
a large deficit with Ireland. I think the answer is
not that Ireland is an unfair trader. I think the
answer is we have a tax policy that incentivized American
companies to produce in Ireland, to reduce their US tax
rate from twenty one to ten and a half percent.
And so in some cases you can learn from the
pattern of bilateral trade. I certainly think you can learn
(16:30):
something from looking at global trade surpluses, not bilateral trade surpluses.
And the global surplus is pointing to a problem with China.
China really has been growing on the back of net
exports for the last four or five years. China's trade
surplus with the world really is big. And in a sense,
the bilateral deficit with China now understates our reliance on
(16:52):
Chinese supply because of all this re routing through third countries.
But just using this simple formula produced some obvious absurd results.
And you know it was done late at night because
we ended up tariffing islands that only produced penguins.
Speaker 1 (17:07):
Yeah.
Speaker 2 (17:08):
Yeah, make the penguins sign up for better trade terms, certainly, Okay,
So on this note. I mean this is actually the
thing that I find most depressing slash disturbing about all
of this. It's the arbitrariness with which some of these
seem to have be been designed. And I know I
wrote about it in the newsletter yesterday, so Joe's aware
of this. But like the example I've been reaching for
(17:29):
is Nahru. So you know, thirty percent tariffs on this
tiny island state in the middle of the South Pacific Ocean,
and they, you know, they export like one to two
million worth of pig meats and some computer parts every
year to the US. I just cannot fathom what the
(17:49):
US wants from a country like Nahru, or in what
way the US economy is at all threatened by a
country like Naru. And as you point out, Brad, it's
not like the islanders are suddenly going to be buying
a bunch of Fords from the US, right like they
have twelve miles worth of road What exactly are they
going to be buying from America? That disturbs me a lot.
(18:10):
But beyond that, you know, you might have realized already
Joe certainly has that. I'm a little bit cranky and
tired this morning, Joe's very exhilarated by watching a history
change in real time. I just got kind of kind
of sad and tired. But for my benefit, can you
maybe describe is there any path where you see this
going reasonably well or at least not completely terribly.
Speaker 3 (18:37):
Well.
Speaker 5 (18:38):
There are long parts. Is a path to de escalation.
The path to de escalation is one where you know,
in some sense, the Trump administration decides not to make history.
Joe's going to be a bit bored. Just doesn't turn
out to be the glow, the repeat of the global
financial crisis. It turns out to be a more ordinary
trade war, maybe with a few Trumpian flourishes and maybe
(19:00):
with a bit more revenue collection. But if the administration
concludes that it overshot, that they are worried about throwing
the US economy into a self induced recession, that they
don't have political support for this particular trade war, and
they want to back off, They've left a little space
to do quote unquote phenomenal deals. And so if there
(19:23):
are phenomenal deals done with China, with Europe, with Japan,
if there's some agreement that is reached with Mexico and
Canada that rolls back some of the auto protection, which
is actually significant in its own terms, even if the
rest of not the rest, but even if the consumer
goods and non metal based part of North American trade
(19:47):
is still relatively untariffed, if you reach deals with them,
reach deals with Southeast Asia, reach deals with the UK
and so forth and so on, you could generally perhaps
fall back to something that's closer to a ten percent
tariff across the board, which is significant but not as disruptive.
And then whatever your deal with China leaves you with,
(20:10):
you kind of play a trade war out with China
using the three zho one tool, and you really just
focus on China. So that is the most plausible path
towards de escalation. I think right now, though Joe's in luck,
we're on a path where the President does seem fairly
committed to changing the fundamental structure of the US and
(20:32):
North American economies. And if you want to achieve that
deep change through policy, you have to impose policies that
are are disruptive and painful and so and other countries
are going to react, and the US basically is taking
policy steps, then on one hand, risk throwing the US
into recession. And are almost starting to throw some of
our major trading partners into recession. And countries generally don't
(20:55):
want to be pushed into recession by policy choices made abroad,
So the natural reaction is going to be to try
to reduce your dependence on the US market. Now that's
really hard because the US is the only big, big,
big country that runs really big deficits, I guess along
with the UK. So it is just really hard for
all the surplus countries to find an alternative source of demand.
(21:18):
The US has really been supplying a lot of demand
to the global economy. But if Trump is determined to
close the trade deficit and willing to do so by
shrinking the US economy, and is more or less given
up on the idea of growing exports as a way out,
and then I think, a we're making history because we
are carrying apart something that has grown up organically over
(21:40):
eighty years, something that the US actually helped. It's a
trite statement, but it is true. It's the system the
US after World War two more or less created. And
then the cost of that system, in Trump's view eyes,
got to be too big, and so he made a
decision to radically step away from current trade patterns and
(22:00):
trade policies. I mean, this is a real break. It's
a much bigger break than just doing a targeted action
against China, which is his term one trade policy. You know,
I'm not sure it's going to be bigger than the
global financial crisis anything. I was unfortunately around then, and
I remember, you know, the panic in New York when
(22:22):
the big institutions were on the edge of going busts
and the five percent fall in the US economy and
the very very slow recovery. You just do normal economic analysis,
you maybe get a shock of a third of that
size from what we're doing now. We're not so integrated
into the global economy. We haven't stopped all trade, We've
(22:42):
just taxed it at a very high rate. But yeah,
it will play out over a much longer period of time.
A financial crisis, you know, risk disaster, but it forces
you to respond quickly. This is a more slow moving
and as you indicated, it's a result of a conscious
policy choice. So therefore it has a very different dynamic.
Speaker 2 (23:05):
Lots and lots and lots and lots and lots of
trade episodes to come in our future.
Speaker 4 (23:11):
We'll talk to you next week.
Speaker 1 (23:12):
Brad.
Speaker 2 (23:13):
Yeah, Brad, thank you so much.
Speaker 5 (23:14):
Well, let's talk about capital flows.
Speaker 6 (23:17):
Uh, you know, Canadian pension funds and Taiwan in the
trade war and Taiwan, Taiwan the good old days they are.
Speaker 5 (23:29):
They are still interesting, Joe. They are still.
Speaker 2 (23:32):
The good old days of Taiwanese life insured mysteries. All right, Brad,
thank you so much, Really appreciate it.
Speaker 4 (23:38):
Thank you, Joe. I guess, I guess.
Speaker 2 (23:53):
On the plus side, we are making history. All of
it is very interesting from an economic intellectual perspect So
there is that, can you tell. I'm trying to make
myself feel better.
Speaker 3 (24:03):
Tracy were the best business in the world. This is
why we get up in the morning. But I'm just
gonna say one comment. There's not really much for me
to add. I don't have much to add to Brad.
But when he said that comment about how the formula
for the tariff announcement reminded him of turning in a
very bad economics term paper at four am, Yeah, the
only thing that I could remember was the time that
(24:27):
I interviewed for a job with Rubini Global Economics in
two thousand and seven, and Brad Setzer was my interviewer,
and I completely flopped that interview by basically talking about
the Argentine economy with the sophistication that he described the tariffs.
And I did not get that job. And so when
(24:47):
Brad says this is bad economics, I have personal experience
with hearing that from Brad. That's all I'm gonna say.
Speaker 2 (24:56):
I mean, yes, it does seem to be bad economics
in terms of the terraff roll out. But this is
the thing that you know, Okay, yes it's exhilarating, it's
interesting to watch, but this is the thing that actually
bothers me because, as Brad points out, there are some
legitimate grievances over yes China trade, and you could go
about trying to fix those in a cohesive and potentially
(25:19):
effective manner, and instead we've chosen this weird wish list
of things that we want that don't seem to be
based on anything like rational. Here are some numbers that
we pulled out at four am in the morning as
we were cramming for this announcement or whatever. And we're
also targeting countries from which like there can't be anything
we want from like Curebos or Nahru, Like why exactly
(25:44):
are they even included in this thing? What are we
doing here?
Speaker 3 (25:47):
Well, this actually is one thing, you're right that drives
me crazy, which is there's this whole game that gets
played where it's like, well, we need more manufacturing, and
you know what are we going to do? Be reliant
on China for all of our like se conductors and
batteries and stuff. That's actually really not great. And we
had a policy put in place by the last administration
that was specifically targeted. And look, I'll be very clear,
(26:10):
like I'm totally fine with disagreeing with like how the
chip sack rolled out, and I think there's reasons to
think like that is totally like, to my mind, ground
for debate. But the idea that no one was talking
about the national security implications of heavy reliance on China
for manufacturing goods up until Wednesday, that part is complete nonsense.
Speaker 2 (26:32):
No, it's crazy. And also, I mean, we know that
central to Trump's world vision or his economic vision of
America is the centrality of private capital. Right, I want
private capital to fund in and build all these strategically
important industries for the US, like semiconductors, But at the
(26:53):
same time, the magnitude of what he's trying to attempt
all at once seems very ob going to scare a
lot of private capital away from building anything in the US. Like,
I don't really see why it has to be this
shock and awe approach to reorienting US trade when you
could be something that's much more strategic and done perhaps
(27:15):
like much more in coordination with a bunch of different constituents.
I guess of the American economy.
Speaker 4 (27:22):
Don't that's me.
Speaker 2 (27:23):
I'm going back to bed. Okay, this has been another
episode of the Odd Lots podcast. I'm Tracy Alloway. You
can follow me at Tracy.
Speaker 3 (27:31):
Alloway and I'm Jill Wisenthal. You can follow me at
the Stalwart. Follow Brad Setzer Brad Underscore Setser. Follow our
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(27:53):
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Speaker 2 (27:58):
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Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Allaway.
Speaker 3 (00:22):
And I'm Joe Wisenthal.
Speaker 2 (00:24):
Joe Another Day, another emergency podcast.
Speaker 3 (00:27):
We're gonna do a lot. This is a fact, this is.
Speaker 2 (00:30):
The I should just resign myself to this inevitability.
Speaker 4 (00:34):
Right.
Speaker 3 (00:34):
The story of the tariffs, the market reaction, the global
reaction is the central story of our time, one of
the biggest stories of our entire career. I think, perhaps,
depending on how they could go, a bigger story than
the past two big stories of the Great Financial Crisis
and the COVID shock. We're going to be doing a
lot of episodes about what this all means.
Speaker 2 (00:57):
This is what is mind blowing to me, because in
two thousand and eight happened. I remember thinking this was
the biggest thing that ever happened in modern finance and
the modern economy. And then in twenty twenty, I remember
there was a very vibrant debate about whether or not
the pandemic and the market selloff would end up being
the central crisis for a new generation. And I think
(01:19):
in retrospect it certainly was a lot more people remember
twenty twenty than they remember two thousand and eight. Now
and here we are, you know, just five years later,
having another discussion about how big this is inevitably going
to be. So on that note, we are recording this
on Friday, April fourth, the market is selling off yet again.
(01:40):
We had Trump's new tariff announcements. Those were released on Wednesday,
April second, Liberation Day. Investors have been I mean, I
would say pretty much panicking since then. Yeah, and what's more, overnight,
coming into Friday morning, we've started to see some reaction
from other countries. Notably China is one of the US's
(02:01):
biggest trading partners, and they say they're instituting a thirty
four percent reciprocal tariff on US goods. So things seem
to be escalating totally.
Speaker 4 (02:10):
You know.
Speaker 3 (02:10):
I'm just gonna make one short comment here, which is
why I think this might be end up being a
bigger story than the Great Financial Crisis potentially, and that
is banking crisis happen. They happen around the world, they've
happened in the US. They've even happened in the US
between massive crises, and there is a playbook, and there's
a response and you try to reflate the economy and
(02:31):
you stuff like this. This is different because this is
a policy choice purposely aimed to completely reorient America's relationship
with the rest of the world and reorient the internal economy.
And so it's very different than sort of like, oh,
you have a run on the bank, which happens for
we had one in March twenty twenty three. We had
a run on the bank. You know, this is very
(02:53):
different in terms of the entire relationship of both the
internal and the external economy, and it may end up
being more consequential for better or worse.
Speaker 2 (03:03):
Than I don't disagree with you, but I'm just gonna
say one thing. Number one, that's not a short comment.
Number two, you're right. This is an entirely self inflicted
own goal basically by the Trump administration. Like it is
their decision to do this, and they presumably knew what
the results were going to be, right, they decided not
to hold the tariff press conference while the markets were open.
(03:27):
They knew that coming out was something that was worse
than a lot of professional economists and analysts had expected,
was going to have this impact on the market. And
here we are. So this is something that the administration
has chosen to do. Obviously, there's lots going on. Obviously
we have a lot of questions. Who do we turn
to when we have trade questions? We do, in fact
(03:47):
have the perfect guest. We're going to be speaking with
Brad Setzer, senior fellow at the Council on Foreign Relations
and a long time trade expert. One of our favorites
to talk to. The last time we saw him was
actually at our pre election event at a live show
in New York, and Brad, I remember speaking to you there.
There were a lot of concerns about what Trump could
(04:10):
do on trade. How has the reality shaped up to
expectations here?
Speaker 5 (04:16):
Well, look, Trump did campaign on an agenda that was
tariffs and more tariffs. He campaigned on a ten percent
across the board tariff and prohibitive tariffs on trade with China,
and at times he did suggest that ten percent was
the minimum. That said, a lot of people close to Trump,
(04:39):
a lot of people who found their way into the administration,
were sending different messages privately to people in the financial markets.
People like Scott Bessett were talking about how the Trump
Trump's plan was escalate to de escalate the tariffs were
a negotiating tool, they weren't a tool to up end
(04:59):
the global economy. I think what the announcement on Wednesday
showed is that the decision of the administration, not surprisingly,
was to follow President Trump's instincts, not the instincts of
his more moderate advisors, to go all in, and that
the goal really is to, as you guys suggested at
the beginning, to radically restructure the US and global economies
(05:22):
using tariffs as a tool, with some flexibility, perhaps negotiate
at the edges, but fundamentally this is a test of
what you can and cannot do with tariffs, and there
was very little restraint I would say a part for
strangely enough, Canada and Mexico USMCA on the level of
(05:43):
the tariffs. So the tariffs are set at levels which
are just going to frankly be painful.
Speaker 3 (05:48):
You know, Tracy mentioned that we talked to the night
before the election, and one thing that's interesting about talking
to you is you are not a sort of naive
you know, all trade it fine, fair economists, yeah, or
just like you know everything was fine in the global
trading system, and you've been talking for years that like
this is an unhealthy relationship that the US has with
(06:10):
China specifically, and that night that we talked to you
before the election, and you're like, the answer is to
really deepen the trading relationship with our allies, our friends,
so that would be Europe, Canada and so forth, and
really build up a coherent open trading block that would
stand to something different to China, which you've said, which,
as you've said, has had unfair trade practices for a
(06:32):
long time. Trump says the same thing, we haven't. So
what are the consequences of closing it, fragmenting what you
saw as the potential open trading block to counter China.
Speaker 5 (06:44):
Well, obvious point is elections do have consequences. Look, I
do think that trade with China is very difficult for
most countries that aren't just commodity exporters. If you look
at China's pattern of trade over the last six years,
China's imports of manufacturers increased on average by fifteen one
(07:09):
five billion dollars a year, essentially nothing. China's exports of
manufacturers over the last six years increased on average by
one hundred and seventy five billion dollars a year, ten
times as much so. China became an economy, particularly in
respond because of the way it responded to COVID because
of the real estate crisis, that was exporting but not
(07:31):
importing when it came to manufacturers, and China's trade surplus
surge to be in about a trillion. It's a little
over a trillion dollars now about a percent of world GDP.
It's manufacturing surplus is two percent of world GDP. These
are really unprecedented numbers, and so you know, my view
was that, hey, we don't have to abandon all the
(07:53):
benefits of trade. We can maintain the benefits of relatively
integrated trade among like minded I guess I don't like
that term, actually amongst countries that have similar economic systems,
similar politics, and that that was a better way of
both putting pressure on China, because the pressure is really
(08:15):
on China, and also avoiding the costs that come from
fully disengaging from the world economy. I think the choice
was made was essentially an American to go with in
America alone policy, where we're going to give up a
lot of the benefits of trade with our neighbors and
with long standing friends. And I think the net effect
(08:36):
of that. Yes, it's going to put a lot of
pressure on China, the tariff's on Vietnam or in some
ways tariffs on indirect Chinese exports as well, But it
does so at a very very high cost, and it
sort of gives up the benefits that I thought the
US had for being at the center of a much
bigger block than China was going to be at the center.
We've kind of the vision here is at least shrinking
(08:58):
to within North America and maybe ranking to within the
United States. That's just fundamentally a different vision, and I
think it's a more costly form of disengagement.
Speaker 2 (09:23):
So you mentioned Vietnam there, and I think this is
one of the big differences between tariffs this time around
and tariffs in the first Trump administration. So we did
see a lot of production that basically circumvented the China
tariffs post twenty eighteen, that increased production in places like Vietnam,
(09:43):
lots of Chinese components going into Mexico and then finding
their way into the US from there. Is there any
wriggle room left in the current constellation of the new
export limitations the new tariffs. Is there any wriggle room
to kind of reorient and potentially American imports that way,
or are there ways maybe to I don't know, figure
(10:06):
out lower tariff bands by like arbitraging between one country
and another, or are they so sweeping that a lot
of that ability has just been wiped out.
Speaker 5 (10:16):
There are two potential arbitrages that have opened up if
Wednesday Night is maintained. So the first is there are
a set of countries, generally countries which have now relatively
balanced trade with the US that only got the baseline
ten percent tariff. So if you reoriented your supply chains
(10:37):
and took the increase in shipping costs and found a
bunch of, say workers in Brazil, you could employ those
workers in Brazil to put together components from China and
send them to the US and only pay a ten
percent tariff. That's better than Vietnam's forty five percent tariff
and the fifty five percent tariff ballpark China that any
(10:59):
good from China faces, with some goods facing iron tariffs.
So opportunity number one is basically move production or at
least final assembly to countries that already have balance trade
with the US and thereby only have a ten percent tariff.
Note the ironing that if these countries become centers for
final assembly, bilateral trade will no longer stay balanced. It'll
(11:22):
quickly shift the other big exception again for now, and
it doesn't apply to autos, and it doesn't apply to steel,
and it doesn't probably won't apply to pharmaceuticals, and it
probably won't apply to some other sectors. Is that for now?
And I mean I do find it a bit shocking
given how much emphasis President Trump has placed on Canada
(11:44):
in the first two months of its administration. For now,
most trade with Mexico and Canada, outside of autos is
still relatively low tariff. It has to be us MCA compliant.
You can generally achieve that the USMCA compliance. You know
a lot of people weren't doing it because there was
no advantage in say electronics, because electronics tariffs were zero
(12:07):
inside USMCA and zero for Vietnam. Now there's a huge
incentive to be the USMCA compliant.
Speaker 2 (12:14):
So if you can do.
Speaker 5 (12:15):
Us MCA compliant production assembly in Mexico, there's no really
right now, but it'll probably change over time. Limits on
how many Chinese parts can be included in that operation.
For now, you get around the tariff.
Speaker 2 (12:29):
Now.
Speaker 5 (12:30):
I think there will be a renegotiation of USMCA that
will make some of this a bit harder over time,
but that at least is the opportunity that would be
open for now if nothing more changes. But it doesn't
feel fully consistent with the president's intent either.
Speaker 3 (12:48):
You know, you've been talking about trade for your entire career,
et cetera. You know, on that Wednesday announcement, every country
got a tariff slapped on it, and it was basically
a strict function of the amount of surplus then divided
by exports and then divided by Yeah, so China, for instance,
(13:08):
trade surplus of two hundred and ninety five billion last
year on exports of four hundred and thirty eight billion,
a ratio of sixty eight percent, and then they divided
by two and that's how they got thirty four percent.
And that's how they did it every country down the line.
And the theoretical idea here seems to be that if
we run a bilateral trade surplus with you any country
in the world, then that must be some proxy for
(13:29):
the amount that you're cheating, either through tariffs or non
tariff trade barriers or currency manipulation or something like that.
This seems to be the intellectual logic. And what I'm
curious from you is, in all your knowledge of sort
of the theory of world trade, is this something that
people have talked about. Is a reasonable way or a
(13:51):
reasonable proxy to measure the amount with which a country
quote cheats in the rules of free trade?
Speaker 5 (13:58):
The simple answer is, as you know, Joe, no, this
felt like a group of economic advisors who had put
off doing a term paper until really late at night
and were scrambling to come up and then use chat
GPT right, perhaps, but I mean, essentially, it certainly seems
from the tiktoks that the President himself asked for tariffs
(14:20):
on not just fifteen countries, but seventy countries or something,
and people had to come up with a formula because
it was clear that USTR and others didn't have the
capacity to do true assessments of all of the countries
that were covered by this announcement. But it does feel
like a term paper that went horribly wrong because it
was written at four in the morning and had to
(14:42):
be submitted at six. There are some obvious weirdness that
comes from this formula. The most significant of which, in
my view, is that small Asian economies that generally have
current account deficits, they're trade deficits overall, often run surpluses
(15:03):
with the United States because they're relatively poor, they don't
can't afford many of our goods, and they can still
produce clothing more or less for the US market. So
hence we put really quite heavy tariffs on a country
like Sri Lanka, on a country Bangladesh, you know, countries
where I don't think there was any significant concern about
(15:25):
the pattern of trade. I'm sure there were some concerns
about sweatshops and labor rights and so forth and so on,
but no one was sort of in the US economy
was you know, hey, hey ho ho, competition from Sri
Lanka has to go. This was just a function of
a formula applied without thought, and so you end up
(15:46):
having heavy tariffs on countries that are just producing clothes
which realistically won't be produced in the US. So there's
an element of pure pointlessness that comes out of this formula. Now,
I will say that there is some value in looking
at bilateral trade patterns. I mean, I've certainly learned a
lot from trying to understand why the US runs such
(16:08):
a large deficit with Ireland. I think the answer is
not that Ireland is an unfair trader. I think the
answer is we have a tax policy that incentivized American
companies to produce in Ireland, to reduce their US tax
rate from twenty one to ten and a half percent.
And so in some cases you can learn from the
pattern of bilateral trade. I certainly think you can learn
(16:30):
something from looking at global trade surpluses, not bilateral trade surpluses.
And the global surplus is pointing to a problem with China.
China really has been growing on the back of net
exports for the last four or five years. China's trade
surplus with the world really is big. And in a sense,
the bilateral deficit with China now understates our reliance on
(16:52):
Chinese supply because of all this re routing through third countries.
But just using this simple formula produced some obvious absurd results.
And you know it was done late at night because
we ended up tariffing islands that only produced penguins.
Speaker 1 (17:07):
Yeah.
Speaker 2 (17:08):
Yeah, make the penguins sign up for better trade terms, certainly, Okay,
So on this note. I mean this is actually the
thing that I find most depressing slash disturbing about all
of this. It's the arbitrariness with which some of these
seem to have be been designed. And I know I
wrote about it in the newsletter yesterday, so Joe's aware
of this. But like the example I've been reaching for
(17:29):
is Nahru. So you know, thirty percent tariffs on this
tiny island state in the middle of the South Pacific Ocean,
and they, you know, they export like one to two
million worth of pig meats and some computer parts every
year to the US. I just cannot fathom what the
(17:49):
US wants from a country like Nahru, or in what
way the US economy is at all threatened by a
country like Naru. And as you point out, Brad, it's
not like the islanders are suddenly going to be buying
a bunch of Fords from the US, right like they
have twelve miles worth of road What exactly are they
going to be buying from America? That disturbs me a lot.
(18:10):
But beyond that, you know, you might have realized already
Joe certainly has that. I'm a little bit cranky and
tired this morning, Joe's very exhilarated by watching a history
change in real time. I just got kind of kind
of sad and tired. But for my benefit, can you
maybe describe is there any path where you see this
going reasonably well or at least not completely terribly.
Speaker 3 (18:37):
Well.
Speaker 5 (18:38):
There are long parts. Is a path to de escalation.
The path to de escalation is one where you know,
in some sense, the Trump administration decides not to make history.
Joe's going to be a bit bored. Just doesn't turn
out to be the glow, the repeat of the global
financial crisis. It turns out to be a more ordinary
trade war, maybe with a few Trumpian flourishes and maybe
(19:00):
with a bit more revenue collection. But if the administration
concludes that it overshot, that they are worried about throwing
the US economy into a self induced recession, that they
don't have political support for this particular trade war, and
they want to back off, They've left a little space
to do quote unquote phenomenal deals. And so if there
(19:23):
are phenomenal deals done with China, with Europe, with Japan,
if there's some agreement that is reached with Mexico and
Canada that rolls back some of the auto protection, which
is actually significant in its own terms, even if the
rest of not the rest, but even if the consumer
goods and non metal based part of North American trade
(19:47):
is still relatively untariffed, if you reach deals with them,
reach deals with Southeast Asia, reach deals with the UK
and so forth and so on, you could generally perhaps
fall back to something that's closer to a ten percent
tariff across the board, which is significant but not as disruptive.
And then whatever your deal with China leaves you with,
(20:10):
you kind of play a trade war out with China
using the three zho one tool, and you really just
focus on China. So that is the most plausible path
towards de escalation. I think right now, though Joe's in luck,
we're on a path where the President does seem fairly
committed to changing the fundamental structure of the US and
(20:32):
North American economies. And if you want to achieve that
deep change through policy, you have to impose policies that
are are disruptive and painful and so and other countries
are going to react, and the US basically is taking
policy steps, then on one hand, risk throwing the US
into recession. And are almost starting to throw some of
our major trading partners into recession. And countries generally don't
(20:55):
want to be pushed into recession by policy choices made abroad,
So the natural reaction is going to be to try
to reduce your dependence on the US market. Now that's
really hard because the US is the only big, big,
big country that runs really big deficits, I guess along
with the UK. So it is just really hard for
all the surplus countries to find an alternative source of demand.
(21:18):
The US has really been supplying a lot of demand
to the global economy. But if Trump is determined to
close the trade deficit and willing to do so by
shrinking the US economy, and is more or less given
up on the idea of growing exports as a way out,
and then I think, a we're making history because we
are carrying apart something that has grown up organically over
(21:40):
eighty years, something that the US actually helped. It's a
trite statement, but it is true. It's the system the
US after World War two more or less created. And
then the cost of that system, in Trump's view eyes,
got to be too big, and so he made a
decision to radically step away from current trade patterns and
(22:00):
trade policies. I mean, this is a real break. It's
a much bigger break than just doing a targeted action
against China, which is his term one trade policy. You know,
I'm not sure it's going to be bigger than the
global financial crisis anything. I was unfortunately around then, and
I remember, you know, the panic in New York when
(22:22):
the big institutions were on the edge of going busts
and the five percent fall in the US economy and
the very very slow recovery. You just do normal economic analysis,
you maybe get a shock of a third of that
size from what we're doing now. We're not so integrated
into the global economy. We haven't stopped all trade, We've
(22:42):
just taxed it at a very high rate. But yeah,
it will play out over a much longer period of time.
A financial crisis, you know, risk disaster, but it forces
you to respond quickly. This is a more slow moving
and as you indicated, it's a result of a conscious
policy choice. So therefore it has a very different dynamic.
Speaker 2 (23:05):
Lots and lots and lots and lots and lots of
trade episodes to come in our future.
Speaker 4 (23:11):
We'll talk to you next week.
Speaker 1 (23:12):
Brad.
Speaker 2 (23:13):
Yeah, Brad, thank you so much.
Speaker 5 (23:14):
Well, let's talk about capital flows.
Speaker 6 (23:17):
Uh, you know, Canadian pension funds and Taiwan in the
trade war and Taiwan, Taiwan the good old days they are.
Speaker 5 (23:29):
They are still interesting, Joe. They are still.
Speaker 2 (23:32):
The good old days of Taiwanese life insured mysteries. All right, Brad,
thank you so much, Really appreciate it.
Speaker 4 (23:38):
Thank you, Joe. I guess, I guess.
Speaker 2 (23:53):
On the plus side, we are making history. All of
it is very interesting from an economic intellectual perspect So
there is that, can you tell. I'm trying to make
myself feel better.
Speaker 3 (24:03):
Tracy were the best business in the world. This is
why we get up in the morning. But I'm just
gonna say one comment. There's not really much for me
to add. I don't have much to add to Brad.
But when he said that comment about how the formula
for the tariff announcement reminded him of turning in a
very bad economics term paper at four am, Yeah, the
only thing that I could remember was the time that
(24:27):
I interviewed for a job with Rubini Global Economics in
two thousand and seven, and Brad Setzer was my interviewer,
and I completely flopped that interview by basically talking about
the Argentine economy with the sophistication that he described the tariffs.
And I did not get that job. And so when
(24:47):
Brad says this is bad economics, I have personal experience
with hearing that from Brad. That's all I'm gonna say.
Speaker 2 (24:56):
I mean, yes, it does seem to be bad economics
in terms of the terraff roll out. But this is
the thing that you know, Okay, yes it's exhilarating, it's
interesting to watch, but this is the thing that actually
bothers me because, as Brad points out, there are some
legitimate grievances over yes China trade, and you could go
about trying to fix those in a cohesive and potentially
(25:19):
effective manner, and instead we've chosen this weird wish list
of things that we want that don't seem to be
based on anything like rational. Here are some numbers that
we pulled out at four am in the morning as
we were cramming for this announcement or whatever. And we're
also targeting countries from which like there can't be anything
we want from like Curebos or Nahru, Like why exactly
(25:44):
are they even included in this thing? What are we
doing here?
Speaker 3 (25:47):
Well, this actually is one thing, you're right that drives
me crazy, which is there's this whole game that gets
played where it's like, well, we need more manufacturing, and
you know what are we going to do? Be reliant
on China for all of our like se conductors and
batteries and stuff. That's actually really not great. And we
had a policy put in place by the last administration
that was specifically targeted. And look, I'll be very clear,
(26:10):
like I'm totally fine with disagreeing with like how the
chip sack rolled out, and I think there's reasons to
think like that is totally like, to my mind, ground
for debate. But the idea that no one was talking
about the national security implications of heavy reliance on China
for manufacturing goods up until Wednesday, that part is complete nonsense.
Speaker 2 (26:32):
No, it's crazy. And also, I mean, we know that
central to Trump's world vision or his economic vision of
America is the centrality of private capital. Right, I want
private capital to fund in and build all these strategically
important industries for the US, like semiconductors, But at the
(26:53):
same time, the magnitude of what he's trying to attempt
all at once seems very ob going to scare a
lot of private capital away from building anything in the US. Like,
I don't really see why it has to be this
shock and awe approach to reorienting US trade when you
could be something that's much more strategic and done perhaps
(27:15):
like much more in coordination with a bunch of different constituents.
I guess of the American economy.
Speaker 4 (27:22):
Don't that's me.
Speaker 2 (27:23):
I'm going back to bed. Okay, this has been another
episode of the Odd Lots podcast. I'm Tracy Alloway. You
can follow me at Tracy.
Speaker 3 (27:31):
Alloway and I'm Jill Wisenthal. You can follow me at
the Stalwart. Follow Brad Setzer Brad Underscore Setser. Follow our
producers Carmen Rodriguez at Carmen armand Dash O Bennett at
dashbod Kill Brooks at Kilbrooks. From our Odd Laws content,
go to Bloomberg dot com slash odd Lots, where we
have all of our episodes and a daily newsletter and
you can chat about all of these topics twenty four
(27:53):
to seven with fellow listeners in our discord Discord dot
gg slash odlines.
Speaker 2 (27:58):
And if you enjoy all, If you like it when
we roll out these emergency trade episodes, then please leave
us a positive review on your favorite podcast platform. And remember,
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Hosts And Creators
Joe Weisenthal
Tracy Alloway
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