February 5, 2025 • 29 mins
This week, we ask what it is exactly US President Donald Trump may be trying to accomplish with his tariff threats and trade wars. Stephanie Flanders, Bloomberg’s head of government and economics, is joined by Anna Wong, chief US economist at Bloomberg Economics, and Bloomberg reporter Shawn Donnan, who covers economics and trade policy, to discuss.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. Canadians are always greaming
up a lot of ways to ruin our lives.
Speaker 2 (00:13):
The metric system for the love of God, Chelseius really
young Rider.
Speaker 3 (00:20):
Of course, I'm right.
Speaker 1 (00:21):
It was crazy abousts.
Speaker 2 (00:30):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and that was a reminder of a satirical comedy from
thirty years ago, a rare foray into feature filmmaking by
the documentary maker Michael Moore. It revolves around a clearly
absurd fictional scenario where a US president decides to overcome
failing approval ratings by inciting a mad conflict with Canada.
(00:59):
Welcome to Trump. It's the Bloomberg podcast that looks at
the economic world of Donald Trump, how he's already shaped
the global economy, and what on earth is going to
happen next. We're taking a moment to digest the flurry
of tariff news this weekend, involving two of America's closest neighbors.
The threats, the negotiations, the pauses. We've had all of it,
(01:21):
and in Canada's case, we've also had a flurry of
hastily produced footage of helicopters at the border. Our goal
isn't to retread all of that ground, but to answer
a bigger question in his onslaught of tariff threats and
trade wars, what exactly is Donald Trump trying to accomplish.
We've got some of the best minds on the subject
with us this week to talk that through making his
(01:43):
Trump and Nomic's debut. Sean Donnan joins US. Sean is
a senior writer with Bloomberg. He reports on the US
and global economies, and before joining US, he spent feels
like half a lifetime covering trade for the Financial Times. Sean,
you must feel like you've already worked a five day
week and it's only Tuesday.
Speaker 1 (02:00):
It's been a day or two of work.
Speaker 2 (02:02):
Con we'll get into some of the lessons that you've
learned in the long hours, but you've certainly had to
write many words on it. And we have Trumponomics regular
Anna Wong, chief US economists at Bloomberg Economics. She's worked
at the FED and did serve in the Trump White
House in twenty nineteen and twenty twenty on se comment
at the Council of Economic Advisors and it's brilliant to
have you back. And I'm trying to know what you've
(02:24):
made of the last few days, but we'll get into
that in a minute. Thanks for joining us, Hi, glad
to be here. So on Monday, North America came within
hours of a multi billion dollar trade war, a trade
war that could yet swing a wrecking ball through the
economies of Mexico and Canada and in the process raise
questions about that regional compact which sits at the foundation
(02:46):
of America's global competitiveness and economic power. Now it's true,
President Trump has agreed to delay the twenty five percent
tariffs on his neighbors that he had threatened after both
Canada and Mexico agreed to take tougher measures to combat
migration and drug trafficking at the border. But Trump's ten
percent tariffs on China did take effect, and the Chinese
(03:06):
government did retaliate already with tariff's on natural gas, goal
and other products, and also a curious threat of an
anti monopoly investigation against Google, which doesn't do a whole
lot of business in China. Sean, I was quoting there
from a piece that you wrote. Was thinking about all
the economic relationships at stake in this war. From your
reporting this weekend, what have we learned about President Trump's
(03:29):
trade strategy? Are we clearer or are we more confused?
Speaker 1 (03:33):
I think we're more confused. And I think that's partly
because the trade policy has colliding goals as you kind
of look at what Trump has threatened through the campaign
and in recent weeks and what some of his advisors,
people like Howard Latning, the incoming Commerce Secretary and Scott Bessant,
the Treasury Secretary, has said. There are really three goals
(03:54):
to tariffs under this new Trump administration. One is that
kind of art of the deal, that very familiar piece
that we had from the first Trump administration of using
terroriffs to extract leverage and some kind of concessions from
trading partners. We've already seen that play out in the
last few days with Canaban, Mexico, and we are seeing
(04:14):
a kind of supercharged version of that. In effect, Trump
over the last few days kind of threatened nuclear war
against his neighbors and got him to add a few
more border guards in response, and you know, and the
trade equivalent of nuclear war. The second goal that he
has is this kind of rebalancing trade. That's the familiar
one from going back to twenty fifteen, this whole idea
(04:35):
that trade deficits, that the US has, whether its major
trading partners are unfair, and that you need to rebalance
trade with them, and tariffs are a tool to do that.
And then the third one is a new one kind
of this cycle, and that's the idea of revenues. Trump
starting in the campaign, has talked about the billions of
dollars he can raise with tariffs. In fact, Republicans on
(04:56):
Capitol Hill were very quickly pointing to the billions of
dollars and revenues that would come from these tariffs on Canada, Mexico,
and China as a positive thing. But if you are
using tariffs as leverage and you don't expect to really
deploy them, that doesn't make them a very reliable source
of revenue. Likewise, if you're trying to rebalance trade, inevitably
(05:19):
you're going to reduce the amount of imports that which
are subject to tariffs, which again makes the tariffs a
less reliable source of revenues. What you kind of end
up with is a phenomenon that we saw during the
first Trump Trade wars in twenty sixteen, and that is
this huge uncertainty around Trump's trade policy and its goals
(05:40):
and where it's going. And that is probably the most
toxic thing for the economy because businesses really then stop
making investments, they stop hiring, and you start to get
a slowed down, not just in Canada and Mexico, which
would get hit hard by tariffs, but in the US economy.
Speaker 2 (06:00):
Just to feel the pain of global businesses trying to
think about the implications of this for their supply chains.
In the first term, you got the message loud and
clear from Donald Trump, be careful of putting all your
eggs in the China basket tick that was kind of
underscored under President Biden. But with the addition that you
could be friend shoring, you could be orienting your production
(06:22):
to the friends of the US. Of course, if you're
now questioning whether friends is a safe strategy, and unless
you think, oh, well, we should just take everything into
the US, well not if you want to export, right,
because you're going to get retaliation potentially from these other countries.
So I think that uncertainty must be enormous at this stage.
But Anna, we've spoken to you during the transition, about
(06:45):
how you thought the administration would approach trade, having seen
it close up, how the tariffs unfolded in that first term,
and you know the degree to which it was actually
quite strategic and careful about the economic consequences. What have
you been thinking about that as you saw some of
these threats come out of the out of the White
House in the last week or so.
Speaker 3 (07:04):
Yeah, So, Stephanie, my view about what the end game
of this trade war, version two is has evolved in
the times since we spoke. You know, if you asked
me two months ago, I thought that with Kevin has
to come returning to the White House, that we have
a voice there that would strongly advocate for a targeted
(07:25):
approach toward tariff. But since then we have seen Trump
announce the twenty five percent in Canada, and that made
me paid more attention to what the rhetoric not just
of Trump, but of people like Scott Bestant and also
people who are holding key economic advisor's role in this
White House. I think what's different about this version two
(07:47):
trade war is that Trump he's thinking about creating his legacy.
He's not going to run for a re election again.
So what is the end game, right. So I think
at the end of the day, his approach the time
around is actually very close to the theoretical underpinnings of
the old trade war literature and the academic literature. So
(08:09):
forget what you read about the impact of trade war
starting in twenty eighteen or thereafter, because the academic literature
from that point on was completely dominated by discussions of
who bore the cost of trade war? But before that,
in the even twenty to thirty years before that, that
was a very calm and boring literature on optimal tariffs,
(08:33):
on how to think about trade war, and from a
game theoretical perspective, and I think that the game theory
look of terriff is exactly how Trump thinks about it.
If you think about US China trade war, it's actually
a prisoner's dilemma's game. And in this game, the Nash equilibrium,
which is the outcome where two countries are not cooperating,
(08:57):
and this is the outcome where given the opponent's strategy,
what is your best choice? The nashquilibrium is actually a
trade war outcome. In this outcome, both countries are worse off.
But if US is able to impose unilateral taros without
inviting one for one retaliation, the US actually wins. From
(09:20):
Donald Trump's perspective, the past twenty years of trade liberalization
has been in that matrix where you have US committing
to free trade and China cheating and not committing to
free trade, and the payoff in that stage is actually
bad for US, good for China. And so I think
(09:42):
he is trying to use this trade war basically remove
us from the cooperative equilibrium where you have these institutions
like WTO and GATT which are monitoring and enforcing cooperation.
He broke them all, moved that away from that co
cooperative of equilibrium, get us to the non cooperative equilibrium,
(10:03):
which is the mutually destructive everybody trade war equlobrim. But
from his perspective, as long as the retaliation is not
one on one, US overall relatively one. And this is
what's very interesting about these executive orders he started recently.
It has a retaliation escalation class we have not seen
(10:24):
this before, which is that if the foreign partner retaliate
in a response, then US will ratcheted up, move us
into that matrix payoff where US on net is relatively
more well off than the partners.
Speaker 2 (10:37):
I can see how that might apply to China, But
to have this threat of twenty five percent tariffs hanging
over those trading partners, which could quite clearly have produced retaliation.
Canada announced the retaliation it was going to do if
these tariffs went into force. Just assuming that it's going
(10:58):
to be unilateral seems pretty one. Yeah.
Speaker 3 (11:00):
I mean, I see the threats on Canadian and Mexican
goods as a sequel to the first administration. Recall that
in the first administration it was also a very close
call with Mexico. He threatened to use the same powers
in twenty nineteen on Mexico also on concerns about immigration,
(11:21):
but that was also averted in the last minute. And
at the time, I was also working at the FED,
and I remember the International Finance Division. We were very
worried about the tariffs on automakers coming from Mexico and Canada.
And I think it remains to be seen whether he
is truly serious about the tariffs on our neighbor, because
(11:44):
that is the piece that does not make sense to me.
And now actually things makes more sense that he decided
to delay those tariffs.
Speaker 2 (11:52):
It makes more sense if if it was all about
posturing and the fact that he quite likes trolling justin true.
I mean, there is an element of that which it
just seems to have been quite performative.
Speaker 1 (12:04):
What we've forgotten about the last few days is that
the US just imposed a ten percent tariff on all
imports from China, including consumer goods that it stayed away
from tariffing during the first Trump administration because it was
so worried about the impact on US consumers and inflation
here in the United States. It's kind of hadn't done that,
(12:26):
and that is enormous in its own right. If we
had set aside the Canada and Mexico things, if those
threats had never happened, and what we had seen over
the last few days was simply a ten percent tariff
on all goods from China, the alarm bells would be
ringing all over the place. The pairing of these things
has kind of hidden this momentous action. I think the
(12:51):
whole idea of Trump using leverage and hinges on kind
of his credibility right. And one of the things that
we've seen just in the first two weeks of his
administration is his willingness to go to extreme threats in
terms of economic warfare for relatively small fights. And you know,
(13:17):
the biggest example of that was Columbia, where we had
this kind of nine hour trade war where the President
of the United States essentially threatened not just tariffs but
kind of Iran level sanctions on an ally with which
the US has a free trade agreement over two planes
(13:37):
over essentially a diplomatic skirmish in you know, in the end,
and it wasn't so that the Colombians were refusing to
accept these planes with deportees, is that they just wanted
the deportees not to be shackled while they were on
board these planes and treated more humanely. So, I mean,
it's kind of this willingness to escalate. And it's the
(13:57):
same thing with Canada and Mexico. I'm going to blow
up one of the greatest regional alliances in the world,
a real source of US competitiveness. As you said earlier
on this is and this is what Trump himself said
when you signed the US MCA. This is you know, Canada,
Mexico and the US against the rest of the world.
(14:17):
This is how you compete with China. And to blow
that all up over Yes, there's you know, there's a
horrible tragedy around fentanyl deaths and in the United States,
and you know, the migration issues at the southern border
in particular have been very real politically here in the
United States. And that's a core campaign promise for President Trump.
But to threaten what he threatened on the economic side
(14:40):
to address these issues that are non economic in many
ways is really you start to wonder, Okay, where do
you go next? And then if you play that out
to other trading partners, right, he has put the EU,
the European Union in his sites now for for a tariff. Now,
the EU response, there is no easy way out for
(15:03):
them in putting ten thousand extra border guards at the
border at the EU. That's not what Donald Trump is
going to look for. So how you know, how damaging
is that going to be? You know, the EU in
the US trade is almost a trillion dollars annually. It's
actually bigger than the trade with Canada and Mexico. But
these two countries have two and a half trillion dollars
(15:23):
each in foreign direct investment in their economies. If you
go here in the first two weeks, there's nowhere to
go up from here.
Speaker 3 (15:33):
If it's going up and it's not sustainable, it's going
to go down at some point. And the part where
he decide to de escalate is the part where he's
ready to make a deal. At that point he's going
to I think the endgame is for him to seek
negotiations with all trade partners, where he kind of like
(15:53):
Phase one deal with China, except with everybody, including EU.
Because with EU, as John said, there's no board. It's
not a national security issue. It's more of a commercial issue.
And Trump had the same attitude toward EU in the
first trade war. He did not change at all. He
picked on the same type of sectors and the same
(16:14):
countries as he did in the first trade war.
Speaker 1 (16:16):
I think there's another thing at play here which we
need to think about, and that is that he doesn't
yet have his economic and trade team in place, and
that the advisors who were in the room with Donald
Trump as he marched towards these tariffs at the weekend
were those his most hawkish advisors, Peter Navarro, Stephen Miller.
(16:39):
That's what we've been hearing. And these are the people
who are true believers in tariffs and play to also
to the impulsive side of Donald Trump to that kind
of testosterone driven You are the strongest man on the block,
you know, make them bend your way. And by the way,
(17:00):
these tariffs are great. These are magical tools that will
bring manufacturing jobs back to the Nish, which, by the way,
the data doesn't show actually happening in the first Trump
in series, and he doesn't yet have in place. Howard Lutnik,
his Commerce secretary, who when he nominated him, Trump said
would be leading his trade in terariff strategy. Scott Bessen
(17:21):
was strangely absent from the conversations about this over the
last few days, and his trade representative Jamison Greer, this
is your trade negotiator, This is kind of your tariff lawyer.
Is hasn't yet had his confirmation hearing yet.
Speaker 3 (17:37):
I disagree, Sean. I think if the trade team were
better in place than what we see right now, he
would have gone even more hawkish. I think the lack
of staff in the USTR right now is actually impeding
the implementation of tariffs. It could have gone faster. On
the other hand, I think that the lack of voice
(17:59):
coming from Scott Bessens in this round is trees to
what happened with that Washington Post leak a couple of
weeks ago.
Speaker 2 (18:09):
That was the one saying it was going to be phased,
And yeah, there was pushedback from that from the White House.
Speaker 3 (18:14):
Right when I saw that leak, I thought that these
trade moderate moderating influence like Scott Bessend and Kevin Hassett
must be losing ground.
Speaker 1 (18:24):
But that's really interesting in the context of Trump's broader goal,
which is to bring about this economic golden age in America.
The reason Scott Besson would want to phase in any
tariffs is because he would want to moderate the impact
on the US economy, spread it out over time, and
because he sees restoring growth or boosting growth in the
(18:47):
United States as a key element. It's also, you know,
we get back to the revenue piece. Scott Besson has
talked about using terrorists to offset tax scots, raising a trillion,
maybe two trillion dollars over ten years from tariffs to
offset the four trillion dollar plus costs of extending the
(19:10):
twenty seventeen tax cuts if you don't have a methodical plan,
and they actually did lay that out on day one
in executive order that Trump signed it, which he ordered
up all of these reports and setting in April first
deadline and really ordered up this let's go out there
and study and come up with a plan. And he
literally ripped that up when he threw out these tariffs
(19:31):
on Canada, Mexico and China.
Speaker 2 (19:33):
Sean, you made a good point earlier that although we
maybe missed something quite important with the across the board
ten percent tariffs on China because of all the fireworks
over the much bigger threat that was then withdrawn against
Canada and Mexico, the ten percent tariffs potentially do fit
(19:55):
in the approach to this strategy, which actually the President
Trump outlined to our editor in chief last summer when
they faced with exactly the tension that you raised earlier. Sean,
that if you if you want to change the trading system,
you're not going to raise money because importers will have
moved to the US, so you don't have or will
(20:16):
have the production will have moved to the US. So
then you stop making money if you've successfully changed the economy.
And he said, very interestingly, he said, well, there's some
things where you just have a low tariff and you're
raising money, but you don't change behavior. And then other
things where you really just want to being the production
back to the US, you have very high tariffs. So
but with these ten percent tariffs, if that's the case
(20:38):
and that approach, President Trump is willing to have a
lot of US consumers and US companies lose out and
pay quite clearly those tariffs. This weekend we had what
was I think a perfectly sensible change to reduce that
or get rid of that day Minimus exception from tariffs,
(20:58):
which had provided such a capacity for Timu and Sheen
and other Chinese producers to send goods sort of under
the radar to the US was eight hundred dollars ceiling
on sort of tariff free imports. And if you're there'd
be a lot of Trump supporters who are buying a
(21:19):
lot of things from Sheen and Timu who are going
to see that instantly, and that doesn't feel like that's
going to go away. And equally, there's a lot of
importers who are going to be paying these tariffs. I mean,
he's he wanted to create the External Revenue Service to
create this to collect the tariffs, because we all know
they're paid by US importers, not by the other countries.
So and have you sort of changed your view on
(21:41):
the costs that the political blowback that this president might
be willing to take.
Speaker 3 (21:47):
Yeah, so I so you know that ten percent universal
tariff on Chinese goods, So that now covers the list
for A and four B in the first trade war,
which is comprised mainly of consumption goods. In the first
trade war, the Trump administration largely spared the Chinese consumption goods,
(22:08):
but basically effectively this ten percent raised the list for
A back to the pre phase one.
Speaker 2 (22:16):
Can we translate that he's imposing it on consumer goods
in a way that they didn't in the first administration.
Speaker 3 (22:22):
So in the first administration, he left the consumption goods
from China intact until spring of twenty nineteen. Then he
created two list four A and four B. And these
two lists he planned to slap on fifteen percent on
List four A, which is like a couple hundred billions
of Chinese consumption good and he did it. And then
(22:45):
immediately what you saw back then is that the economy
started slowing very visibly. Fixed business investment immediately start falling,
and manufacturing employment immediately start falling. And this was after
that for a list, and then that was in the
de escalatory phase of that first trade war. I think
(23:07):
that we're going to start seeing the impact on investment,
primarily in stock market once that ten percent Chinese trade
tariffs start to be effect in the next couple of months.
Speaker 1 (23:20):
And just to put that in context, that kind of
list for A and four B from the first Trumpet musition.
We're talking about smartphones, we're talking about toys, we're talking furnitures, furniture,
we're talking about all of the cheap stuff from China
and America. Really by right, and we're.
Speaker 2 (23:37):
And to be clear that trade is that made on
economic by ten percent or is ten percent low enough
for it to continue, but just be more expensive?
Speaker 1 (23:44):
Probably low enough for it.
Speaker 3 (23:46):
Yes, I mean, I mean the trade elasticity from between
US Chinese trade flow is approximately, by my estimation, one
point five to three, which means that a ten percent
increase in terraff will reduce trade flows by either fifteen
percent to thirty percent over time.
Speaker 2 (24:04):
Okay, last question to you, Anna, were amazed it's taken
us this long to get to the FED for any
Bloomberg podcast. I mean, it's it's pretty much mandatory that
we have to talk about the FED at some point.
One of the things that was said over the weekend is,
whatever happens, this puts pay to any idea that there's
going to be any interest rate cuts from the Federal
Reserve this year, and if anything, they're going to be
(24:26):
more concerned about inflation looking going forward. Is what's your
take on if you just say, we've now got a
lot of we've got more uncertainty than we thought and
maybe some new theories about what's going on with Donald
Trump's trade policy, what are the FED thinking? Anna?
Speaker 3 (24:42):
I think in the fact you have Powell and the others,
and from the past two press conference I've heard that Powell,
in fact is a very UH has reviewed as a
very good grasp of the objective findings in the trade literature,
which is that number one matters how broad these tariffs are,
(25:03):
what goods are going to be tariffs, how much retaliation
there's going to be, and there's just not enough information
on that. However, within the set arsenal of economic modeling tools,
they could see two outcomes from trade war. Is at
first is either the burden of the trade war will
(25:23):
show up in inflation as higher inflation. That's what every
obviously what everybody automatically default to the view. However, the
second view is that if the adjustment turns out to
be through squeezing profit margins, and the impact on our
trade partners like China, EU and Canada Mexico turns out
(25:45):
to be more dire than the impact on US, then
the global manufacturing cycle with slows, and ultimately the burden
of the tariffs would be not showing up in higher
US inflation, but rather in lower real come through lower
employment and lower wages. And so I think that the
(26:07):
Fed's optimal response really depends on which of these two
economic outcomes prevail. Obviously, if inflation spikes, then the FED
will have to you know, keep frais on hold or
even hike. However, I don't think that's not my baseline,
because in order for the economy the inflation to rise
(26:28):
by that much in response to teriffs, you basically need
to have inflation expectations be unanchored, and even that's the
worst of inflation. In twenty twenty two, Powell was adamant
that all the market indicators, the monitors suggest that inflation
expectations are very well anchored in the US. In the
(26:50):
past pressor. He also mentioned that through anecdotes and discussion
with firms, all the firms are telling them that they
have no pricing power, So how is it that the
terriffs could be packed completely passed through to consumer prices.
So that leads to the second most likely outcome in
my point of view, which is lower real income over time.
(27:10):
And the optimal FED policy in response to lower real
income and a higher unemployment rate is actually to lower
FED funds rate.
Speaker 1 (27:19):
And I would just point out that we have and
a lot of FED policy makers were there in twenty
nineteen when they faced the first Trump trade wars and
the impacts, and we spent some time looking back through
the transcripts of those meetings, which were just released in January,
and one of the things you see is the policy
makers focusing on a collapse in manufacturing employment, a fallen
(27:43):
industrial production, a stalling in business investment in the United States,
and then this impact of uncertainty, and that leads to
a slowing economy in twenty nineteen. And in twenty nineteen,
the FED started cutting rates and actually went on cut
rate three times.
Speaker 2 (28:00):
And that goes to the point that he might think
it's good news to have lower rates, but not if
it's for the wrong reasons in his view, not the
economic weakness. Well, thank you very much, guys. I sort
of feel like Trumpnomics sometimes is more on the Trump
and more on the politics. So we've had some real
oronomics in this episode, which I quite appreciate. Thinking about
the models for what's going on, I think we're still
(28:21):
stuck with the fundamental question, does Donald Trump really want
to change the global economy or just like the real
estate developer that he is, extract the maximum financial return
from America's prime real estate within it. Whatever he's trying
to achieve, we want to think about what economic costs
might be occurred along the way, and I suspect both
of you will be back to help me answer that question.
(28:46):
But in the meantime, thanks for listening to trump Andomics.
It was hosted by me Stephanie Flanders, and I was
joined by Annawong and Sean Donald. Trumpnomics is produced by
Summer Saudi and Moses and with help from Chris Martlou.
Sound designed by Blake Maple's, with special thanks to Bloomberg, Kilbrooks,
Amy Morris and Nathan Hager. Brendan Francis Newnan is our
(29:09):
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Bloomberg Audio Studios, podcasts, radio news. Canadians are always greaming
up a lot of ways to ruin our lives.
Speaker 2 (00:13):
The metric system for the love of God, Chelseius really
young Rider.
Speaker 3 (00:20):
Of course, I'm right.
Speaker 1 (00:21):
It was crazy abousts.
Speaker 2 (00:30):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and that was a reminder of a satirical comedy from
thirty years ago, a rare foray into feature filmmaking by
the documentary maker Michael Moore. It revolves around a clearly
absurd fictional scenario where a US president decides to overcome
failing approval ratings by inciting a mad conflict with Canada.
(00:59):
Welcome to Trump. It's the Bloomberg podcast that looks at
the economic world of Donald Trump, how he's already shaped
the global economy, and what on earth is going to
happen next. We're taking a moment to digest the flurry
of tariff news this weekend, involving two of America's closest neighbors.
The threats, the negotiations, the pauses. We've had all of it,
(01:21):
and in Canada's case, we've also had a flurry of
hastily produced footage of helicopters at the border. Our goal
isn't to retread all of that ground, but to answer
a bigger question in his onslaught of tariff threats and
trade wars, what exactly is Donald Trump trying to accomplish.
We've got some of the best minds on the subject
with us this week to talk that through making his
(01:43):
Trump and Nomic's debut. Sean Donnan joins US. Sean is
a senior writer with Bloomberg. He reports on the US
and global economies, and before joining US, he spent feels
like half a lifetime covering trade for the Financial Times. Sean,
you must feel like you've already worked a five day
week and it's only Tuesday.
Speaker 1 (02:00):
It's been a day or two of work.
Speaker 2 (02:02):
Con we'll get into some of the lessons that you've
learned in the long hours, but you've certainly had to
write many words on it. And we have Trumponomics regular
Anna Wong, chief US economists at Bloomberg Economics. She's worked
at the FED and did serve in the Trump White
House in twenty nineteen and twenty twenty on se comment
at the Council of Economic Advisors and it's brilliant to
have you back. And I'm trying to know what you've
(02:24):
made of the last few days, but we'll get into
that in a minute. Thanks for joining us, Hi, glad
to be here. So on Monday, North America came within
hours of a multi billion dollar trade war, a trade
war that could yet swing a wrecking ball through the
economies of Mexico and Canada and in the process raise
questions about that regional compact which sits at the foundation
(02:46):
of America's global competitiveness and economic power. Now it's true,
President Trump has agreed to delay the twenty five percent
tariffs on his neighbors that he had threatened after both
Canada and Mexico agreed to take tougher measures to combat
migration and drug trafficking at the border. But Trump's ten
percent tariffs on China did take effect, and the Chinese
(03:06):
government did retaliate already with tariff's on natural gas, goal
and other products, and also a curious threat of an
anti monopoly investigation against Google, which doesn't do a whole
lot of business in China. Sean, I was quoting there
from a piece that you wrote. Was thinking about all
the economic relationships at stake in this war. From your
reporting this weekend, what have we learned about President Trump's
(03:29):
trade strategy? Are we clearer or are we more confused?
Speaker 1 (03:33):
I think we're more confused. And I think that's partly
because the trade policy has colliding goals as you kind
of look at what Trump has threatened through the campaign
and in recent weeks and what some of his advisors,
people like Howard Latning, the incoming Commerce Secretary and Scott Bessant,
the Treasury Secretary, has said. There are really three goals
(03:54):
to tariffs under this new Trump administration. One is that
kind of art of the deal, that very familiar piece
that we had from the first Trump administration of using
terroriffs to extract leverage and some kind of concessions from
trading partners. We've already seen that play out in the
last few days with Canaban, Mexico, and we are seeing
(04:14):
a kind of supercharged version of that. In effect, Trump
over the last few days kind of threatened nuclear war
against his neighbors and got him to add a few
more border guards in response, and you know, and the
trade equivalent of nuclear war. The second goal that he
has is this kind of rebalancing trade. That's the familiar
one from going back to twenty fifteen, this whole idea
(04:35):
that trade deficits, that the US has, whether its major
trading partners are unfair, and that you need to rebalance
trade with them, and tariffs are a tool to do that.
And then the third one is a new one kind
of this cycle, and that's the idea of revenues. Trump
starting in the campaign, has talked about the billions of
dollars he can raise with tariffs. In fact, Republicans on
(04:56):
Capitol Hill were very quickly pointing to the billions of
dollars and revenues that would come from these tariffs on Canada, Mexico,
and China as a positive thing. But if you are
using tariffs as leverage and you don't expect to really
deploy them, that doesn't make them a very reliable source
of revenue. Likewise, if you're trying to rebalance trade, inevitably
(05:19):
you're going to reduce the amount of imports that which
are subject to tariffs, which again makes the tariffs a
less reliable source of revenues. What you kind of end
up with is a phenomenon that we saw during the
first Trump Trade wars in twenty sixteen, and that is
this huge uncertainty around Trump's trade policy and its goals
(05:40):
and where it's going. And that is probably the most
toxic thing for the economy because businesses really then stop
making investments, they stop hiring, and you start to get
a slowed down, not just in Canada and Mexico, which
would get hit hard by tariffs, but in the US economy.
Speaker 2 (06:00):
Just to feel the pain of global businesses trying to
think about the implications of this for their supply chains.
In the first term, you got the message loud and
clear from Donald Trump, be careful of putting all your
eggs in the China basket tick that was kind of
underscored under President Biden. But with the addition that you
could be friend shoring, you could be orienting your production
(06:22):
to the friends of the US. Of course, if you're
now questioning whether friends is a safe strategy, and unless
you think, oh, well, we should just take everything into
the US, well not if you want to export, right,
because you're going to get retaliation potentially from these other countries.
So I think that uncertainty must be enormous at this stage.
But Anna, we've spoken to you during the transition, about
(06:45):
how you thought the administration would approach trade, having seen
it close up, how the tariffs unfolded in that first term,
and you know the degree to which it was actually
quite strategic and careful about the economic consequences. What have
you been thinking about that as you saw some of
these threats come out of the out of the White
House in the last week or so.
Speaker 3 (07:04):
Yeah, So, Stephanie, my view about what the end game
of this trade war, version two is has evolved in
the times since we spoke. You know, if you asked
me two months ago, I thought that with Kevin has
to come returning to the White House, that we have
a voice there that would strongly advocate for a targeted
(07:25):
approach toward tariff. But since then we have seen Trump
announce the twenty five percent in Canada, and that made
me paid more attention to what the rhetoric not just
of Trump, but of people like Scott Bestant and also
people who are holding key economic advisor's role in this
White House. I think what's different about this version two
(07:47):
trade war is that Trump he's thinking about creating his legacy.
He's not going to run for a re election again.
So what is the end game, right. So I think
at the end of the day, his approach the time
around is actually very close to the theoretical underpinnings of
the old trade war literature and the academic literature. So
(08:09):
forget what you read about the impact of trade war
starting in twenty eighteen or thereafter, because the academic literature
from that point on was completely dominated by discussions of
who bore the cost of trade war? But before that,
in the even twenty to thirty years before that, that
was a very calm and boring literature on optimal tariffs,
(08:33):
on how to think about trade war, and from a
game theoretical perspective, and I think that the game theory
look of terriff is exactly how Trump thinks about it.
If you think about US China trade war, it's actually
a prisoner's dilemma's game. And in this game, the Nash equilibrium,
which is the outcome where two countries are not cooperating,
(08:57):
and this is the outcome where given the opponent's strategy,
what is your best choice? The nashquilibrium is actually a
trade war outcome. In this outcome, both countries are worse off.
But if US is able to impose unilateral taros without
inviting one for one retaliation, the US actually wins. From
(09:20):
Donald Trump's perspective, the past twenty years of trade liberalization
has been in that matrix where you have US committing
to free trade and China cheating and not committing to
free trade, and the payoff in that stage is actually
bad for US, good for China. And so I think
(09:42):
he is trying to use this trade war basically remove
us from the cooperative equilibrium where you have these institutions
like WTO and GATT which are monitoring and enforcing cooperation.
He broke them all, moved that away from that co
cooperative of equilibrium, get us to the non cooperative equilibrium,
(10:03):
which is the mutually destructive everybody trade war equlobrim. But
from his perspective, as long as the retaliation is not
one on one, US overall relatively one. And this is
what's very interesting about these executive orders he started recently.
It has a retaliation escalation class we have not seen
(10:24):
this before, which is that if the foreign partner retaliate
in a response, then US will ratcheted up, move us
into that matrix payoff where US on net is relatively
more well off than the partners.
Speaker 2 (10:37):
I can see how that might apply to China, But
to have this threat of twenty five percent tariffs hanging
over those trading partners, which could quite clearly have produced retaliation.
Canada announced the retaliation it was going to do if
these tariffs went into force. Just assuming that it's going
(10:58):
to be unilateral seems pretty one. Yeah.
Speaker 3 (11:00):
I mean, I see the threats on Canadian and Mexican
goods as a sequel to the first administration. Recall that
in the first administration it was also a very close
call with Mexico. He threatened to use the same powers
in twenty nineteen on Mexico also on concerns about immigration,
(11:21):
but that was also averted in the last minute. And
at the time, I was also working at the FED,
and I remember the International Finance Division. We were very
worried about the tariffs on automakers coming from Mexico and Canada.
And I think it remains to be seen whether he
is truly serious about the tariffs on our neighbor, because
(11:44):
that is the piece that does not make sense to me.
And now actually things makes more sense that he decided
to delay those tariffs.
Speaker 2 (11:52):
It makes more sense if if it was all about
posturing and the fact that he quite likes trolling justin true.
I mean, there is an element of that which it
just seems to have been quite performative.
Speaker 1 (12:04):
What we've forgotten about the last few days is that
the US just imposed a ten percent tariff on all
imports from China, including consumer goods that it stayed away
from tariffing during the first Trump administration because it was
so worried about the impact on US consumers and inflation
here in the United States. It's kind of hadn't done that,
(12:26):
and that is enormous in its own right. If we
had set aside the Canada and Mexico things, if those
threats had never happened, and what we had seen over
the last few days was simply a ten percent tariff
on all goods from China, the alarm bells would be
ringing all over the place. The pairing of these things
has kind of hidden this momentous action. I think the
(12:51):
whole idea of Trump using leverage and hinges on kind
of his credibility right. And one of the things that
we've seen just in the first two weeks of his
administration is his willingness to go to extreme threats in
terms of economic warfare for relatively small fights. And you know,
(13:17):
the biggest example of that was Columbia, where we had
this kind of nine hour trade war where the President
of the United States essentially threatened not just tariffs but
kind of Iran level sanctions on an ally with which
the US has a free trade agreement over two planes
(13:37):
over essentially a diplomatic skirmish in you know, in the end,
and it wasn't so that the Colombians were refusing to
accept these planes with deportees, is that they just wanted
the deportees not to be shackled while they were on
board these planes and treated more humanely. So, I mean,
it's kind of this willingness to escalate. And it's the
(13:57):
same thing with Canada and Mexico. I'm going to blow
up one of the greatest regional alliances in the world,
a real source of US competitiveness. As you said earlier
on this is and this is what Trump himself said
when you signed the US MCA. This is you know, Canada,
Mexico and the US against the rest of the world.
(14:17):
This is how you compete with China. And to blow
that all up over Yes, there's you know, there's a
horrible tragedy around fentanyl deaths and in the United States,
and you know, the migration issues at the southern border
in particular have been very real politically here in the
United States. And that's a core campaign promise for President Trump.
But to threaten what he threatened on the economic side
(14:40):
to address these issues that are non economic in many
ways is really you start to wonder, Okay, where do
you go next? And then if you play that out
to other trading partners, right, he has put the EU,
the European Union in his sites now for for a tariff. Now,
the EU response, there is no easy way out for
(15:03):
them in putting ten thousand extra border guards at the
border at the EU. That's not what Donald Trump is
going to look for. So how you know, how damaging
is that going to be? You know, the EU in
the US trade is almost a trillion dollars annually. It's
actually bigger than the trade with Canada and Mexico. But
these two countries have two and a half trillion dollars
(15:23):
each in foreign direct investment in their economies. If you
go here in the first two weeks, there's nowhere to
go up from here.
Speaker 3 (15:33):
If it's going up and it's not sustainable, it's going
to go down at some point. And the part where
he decide to de escalate is the part where he's
ready to make a deal. At that point he's going
to I think the endgame is for him to seek
negotiations with all trade partners, where he kind of like
(15:53):
Phase one deal with China, except with everybody, including EU.
Because with EU, as John said, there's no board. It's
not a national security issue. It's more of a commercial issue.
And Trump had the same attitude toward EU in the
first trade war. He did not change at all. He
picked on the same type of sectors and the same
(16:14):
countries as he did in the first trade war.
Speaker 1 (16:16):
I think there's another thing at play here which we
need to think about, and that is that he doesn't
yet have his economic and trade team in place, and
that the advisors who were in the room with Donald
Trump as he marched towards these tariffs at the weekend
were those his most hawkish advisors, Peter Navarro, Stephen Miller.
(16:39):
That's what we've been hearing. And these are the people
who are true believers in tariffs and play to also
to the impulsive side of Donald Trump to that kind
of testosterone driven You are the strongest man on the block,
you know, make them bend your way. And by the way,
(17:00):
these tariffs are great. These are magical tools that will
bring manufacturing jobs back to the Nish, which, by the way,
the data doesn't show actually happening in the first Trump
in series, and he doesn't yet have in place. Howard Lutnik,
his Commerce secretary, who when he nominated him, Trump said
would be leading his trade in terariff strategy. Scott Bessen
(17:21):
was strangely absent from the conversations about this over the
last few days, and his trade representative Jamison Greer, this
is your trade negotiator, This is kind of your tariff lawyer.
Is hasn't yet had his confirmation hearing yet.
Speaker 3 (17:37):
I disagree, Sean. I think if the trade team were
better in place than what we see right now, he
would have gone even more hawkish. I think the lack
of staff in the USTR right now is actually impeding
the implementation of tariffs. It could have gone faster. On
the other hand, I think that the lack of voice
(17:59):
coming from Scott Bessens in this round is trees to
what happened with that Washington Post leak a couple of
weeks ago.
Speaker 2 (18:09):
That was the one saying it was going to be phased,
And yeah, there was pushedback from that from the White House.
Speaker 3 (18:14):
Right when I saw that leak, I thought that these
trade moderate moderating influence like Scott Bessend and Kevin Hassett
must be losing ground.
Speaker 1 (18:24):
But that's really interesting in the context of Trump's broader goal,
which is to bring about this economic golden age in America.
The reason Scott Besson would want to phase in any
tariffs is because he would want to moderate the impact
on the US economy, spread it out over time, and
because he sees restoring growth or boosting growth in the
(18:47):
United States as a key element. It's also, you know,
we get back to the revenue piece. Scott Besson has
talked about using terrorists to offset tax scots, raising a trillion,
maybe two trillion dollars over ten years from tariffs to
offset the four trillion dollar plus costs of extending the
(19:10):
twenty seventeen tax cuts if you don't have a methodical plan,
and they actually did lay that out on day one
in executive order that Trump signed it, which he ordered
up all of these reports and setting in April first
deadline and really ordered up this let's go out there
and study and come up with a plan. And he
literally ripped that up when he threw out these tariffs
(19:31):
on Canada, Mexico and China.
Speaker 2 (19:33):
Sean, you made a good point earlier that although we
maybe missed something quite important with the across the board
ten percent tariffs on China because of all the fireworks
over the much bigger threat that was then withdrawn against
Canada and Mexico, the ten percent tariffs potentially do fit
(19:55):
in the approach to this strategy, which actually the President
Trump outlined to our editor in chief last summer when
they faced with exactly the tension that you raised earlier. Sean,
that if you if you want to change the trading system,
you're not going to raise money because importers will have
moved to the US, so you don't have or will
(20:16):
have the production will have moved to the US. So
then you stop making money if you've successfully changed the economy.
And he said, very interestingly, he said, well, there's some
things where you just have a low tariff and you're
raising money, but you don't change behavior. And then other
things where you really just want to being the production
back to the US, you have very high tariffs. So
but with these ten percent tariffs, if that's the case
(20:38):
and that approach, President Trump is willing to have a
lot of US consumers and US companies lose out and
pay quite clearly those tariffs. This weekend we had what
was I think a perfectly sensible change to reduce that
or get rid of that day Minimus exception from tariffs,
(20:58):
which had provided such a capacity for Timu and Sheen
and other Chinese producers to send goods sort of under
the radar to the US was eight hundred dollars ceiling
on sort of tariff free imports. And if you're there'd
be a lot of Trump supporters who are buying a
(21:19):
lot of things from Sheen and Timu who are going
to see that instantly, and that doesn't feel like that's
going to go away. And equally, there's a lot of
importers who are going to be paying these tariffs. I mean,
he's he wanted to create the External Revenue Service to
create this to collect the tariffs, because we all know
they're paid by US importers, not by the other countries.
So and have you sort of changed your view on
(21:41):
the costs that the political blowback that this president might
be willing to take.
Speaker 3 (21:47):
Yeah, so I so you know that ten percent universal
tariff on Chinese goods, So that now covers the list
for A and four B in the first trade war,
which is comprised mainly of consumption goods. In the first
trade war, the Trump administration largely spared the Chinese consumption goods,
(22:08):
but basically effectively this ten percent raised the list for
A back to the pre phase one.
Speaker 2 (22:16):
Can we translate that he's imposing it on consumer goods
in a way that they didn't in the first administration.
Speaker 3 (22:22):
So in the first administration, he left the consumption goods
from China intact until spring of twenty nineteen. Then he
created two list four A and four B. And these
two lists he planned to slap on fifteen percent on
List four A, which is like a couple hundred billions
of Chinese consumption good and he did it. And then
(22:45):
immediately what you saw back then is that the economy
started slowing very visibly. Fixed business investment immediately start falling,
and manufacturing employment immediately start falling. And this was after
that for a list, and then that was in the
de escalatory phase of that first trade war. I think
(23:07):
that we're going to start seeing the impact on investment,
primarily in stock market once that ten percent Chinese trade
tariffs start to be effect in the next couple of months.
Speaker 1 (23:20):
And just to put that in context, that kind of
list for A and four B from the first Trumpet musition.
We're talking about smartphones, we're talking about toys, we're talking furnitures, furniture,
we're talking about all of the cheap stuff from China
and America. Really by right, and we're.
Speaker 2 (23:37):
And to be clear that trade is that made on
economic by ten percent or is ten percent low enough
for it to continue, but just be more expensive?
Speaker 1 (23:44):
Probably low enough for it.
Speaker 3 (23:46):
Yes, I mean, I mean the trade elasticity from between
US Chinese trade flow is approximately, by my estimation, one
point five to three, which means that a ten percent
increase in terraff will reduce trade flows by either fifteen
percent to thirty percent over time.
Speaker 2 (24:04):
Okay, last question to you, Anna, were amazed it's taken
us this long to get to the FED for any
Bloomberg podcast. I mean, it's it's pretty much mandatory that
we have to talk about the FED at some point.
One of the things that was said over the weekend is,
whatever happens, this puts pay to any idea that there's
going to be any interest rate cuts from the Federal
Reserve this year, and if anything, they're going to be
(24:26):
more concerned about inflation looking going forward. Is what's your
take on if you just say, we've now got a
lot of we've got more uncertainty than we thought and
maybe some new theories about what's going on with Donald
Trump's trade policy, what are the FED thinking? Anna?
Speaker 3 (24:42):
I think in the fact you have Powell and the others,
and from the past two press conference I've heard that Powell,
in fact is a very UH has reviewed as a
very good grasp of the objective findings in the trade literature,
which is that number one matters how broad these tariffs are,
(25:03):
what goods are going to be tariffs, how much retaliation
there's going to be, and there's just not enough information
on that. However, within the set arsenal of economic modeling tools,
they could see two outcomes from trade war. Is at
first is either the burden of the trade war will
(25:23):
show up in inflation as higher inflation. That's what every
obviously what everybody automatically default to the view. However, the
second view is that if the adjustment turns out to
be through squeezing profit margins, and the impact on our
trade partners like China, EU and Canada Mexico turns out
(25:45):
to be more dire than the impact on US, then
the global manufacturing cycle with slows, and ultimately the burden
of the tariffs would be not showing up in higher
US inflation, but rather in lower real come through lower
employment and lower wages. And so I think that the
(26:07):
Fed's optimal response really depends on which of these two
economic outcomes prevail. Obviously, if inflation spikes, then the FED
will have to you know, keep frais on hold or
even hike. However, I don't think that's not my baseline,
because in order for the economy the inflation to rise
(26:28):
by that much in response to teriffs, you basically need
to have inflation expectations be unanchored, and even that's the
worst of inflation. In twenty twenty two, Powell was adamant
that all the market indicators, the monitors suggest that inflation
expectations are very well anchored in the US. In the
(26:50):
past pressor. He also mentioned that through anecdotes and discussion
with firms, all the firms are telling them that they
have no pricing power, So how is it that the
terriffs could be packed completely passed through to consumer prices.
So that leads to the second most likely outcome in
my point of view, which is lower real income over time.
(27:10):
And the optimal FED policy in response to lower real
income and a higher unemployment rate is actually to lower
FED funds rate.
Speaker 1 (27:19):
And I would just point out that we have and
a lot of FED policy makers were there in twenty
nineteen when they faced the first Trump trade wars and
the impacts, and we spent some time looking back through
the transcripts of those meetings, which were just released in January,
and one of the things you see is the policy
makers focusing on a collapse in manufacturing employment, a fallen
(27:43):
industrial production, a stalling in business investment in the United States,
and then this impact of uncertainty, and that leads to
a slowing economy in twenty nineteen. And in twenty nineteen,
the FED started cutting rates and actually went on cut
rate three times.
Speaker 2 (28:00):
And that goes to the point that he might think
it's good news to have lower rates, but not if
it's for the wrong reasons in his view, not the
economic weakness. Well, thank you very much, guys. I sort
of feel like Trumpnomics sometimes is more on the Trump
and more on the politics. So we've had some real
oronomics in this episode, which I quite appreciate. Thinking about
the models for what's going on, I think we're still
(28:21):
stuck with the fundamental question, does Donald Trump really want
to change the global economy or just like the real
estate developer that he is, extract the maximum financial return
from America's prime real estate within it. Whatever he's trying
to achieve, we want to think about what economic costs
might be occurred along the way, and I suspect both
of you will be back to help me answer that question.
(28:46):
But in the meantime, thanks for listening to trump Andomics.
It was hosted by me Stephanie Flanders, and I was
joined by Annawong and Sean Donald. Trumpnomics is produced by
Summer Saudi and Moses and with help from Chris Martlou.
Sound designed by Blake Maple's, with special thanks to Bloomberg, Kilbrooks,
Amy Morris and Nathan Hager. Brendan Francis Newnan is our
(29:09):
executive producer and to help others find this show, please
rate it highly and review it wherever you find your
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