Brad Setser: Former US Department of Treasury Economist on the impact of Donald Trump's new tariffs

Donald Trump’s sweeping tariff announcement is being described as a shockingly radical shift in policy.  

The US President announced 10% tariffs on almost all goods entering the US, including from New Zealand. 

Many countries face much higher tariffs, including China with a combined 54% levy. 

Former US Department of Treasury Economist Brad Setser told Mike Hosking it’s a fundamental break in the US’ post-WWII international economic policy approach and is an enormous political and economic risk. 

He believes the magnitude of the tariff increase does threaten to push the US into a recession. 

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Episode Transcript

Speaker 1 (00:00):
So I think we've covered off most of the countries
that are severely hit from various correspondents, but the Irish
PM's not happy.

Speaker 2 (00:05):
There is no doubt that the imposition of tariffs by
the US.

Speaker 3 (00:09):
Will have an adverse impact.

Speaker 2 (00:11):
Ireland's priority is the protection of jobs and our economy.

Speaker 1 (00:16):
The US Treasury Secretary is doing his best.

Speaker 2 (00:18):
Prices will go up for Americans in the short term,
right they could, they don't have to, and the President
Trump's first administration prices didn't go up, so the businesses
don't have to pass them on or the producers and
the other countries can eat the tariffs, and traditionally the

(00:42):
dollar adjusts. So it's a very complicated calculus to see
where we end up.

Speaker 1 (00:47):
Well, none of that happens. So as far as this
is all concerned, do we see retaliation, what happens next?
Does it reshape global trade? Does the Trump administration pay
a heavy political price for increasing the cost of living?
If not engineering a potential recession? Form the US Department
of Treasury economists bread Sister is with us. Bread morning
to you.

Speaker 3 (01:06):
Oh well, good afternoon in my time, but good morning
to you.

Speaker 1 (01:09):
What do you make of it?

Speaker 3 (01:12):
Well, It's a shockingly radical shift in policy. I mean,
I think everyone knew that President Trump wanted to raise tariffs,
But even in a context where there was an understanding
that President Trump wanted to raise tariffs, he wrote increased
tariffs on a host of trading partners by more than expected.

(01:37):
This is a fundamental break in the post World War
two US international economic policy approach, and it's an enormous
political and economic risk for President Trump. I mean, the
magnitude of the tariff increase does, in my view, threaten
to push the US into a recession. It's such a

(01:58):
big increase, so broad base, so poorly targeted.

Speaker 1 (02:02):
Do you expect what happened yesterday to be followed by
a lot of phone calls and a lot of negotiation
and a lot of carbouts. And what we're seeing this
morning is not what we'll see in a couple of months.

Speaker 3 (02:13):
Look, I think, on one hand, there's still a set
of tariffs that are in the works that haven't yet
been imposed, tariffs on semiconductor is, tariffs and pharmaceuticals. So
on one hand, we know there are more terriffs in
the works. We haven't seen the end of the tariff
onslot On the other hand, certainly some in the administration,

(02:36):
not all, are open to the idea of negotiating some
of these terraffs down in return for concessions from America's
trading partners. But I think the clear signal is that
you're negotiating the tariff down, you're not going to get
the tariff taken off. The ten percent baseline tariff seems
to be a minimum that everyone's going to have to pay.

(02:59):
And we don't yet know whether the administration is willing
to do realistic deals, whether they just are going to
say they are open to negotiation, but in practice their
terms are not going to be suitable for our trading partners.

Speaker 1 (03:13):
Do does the average American understand? Of course, we from
New Zealand come from a pretty free trading sort of environment,
and the bits we don't understand is that we've got
a balanced trade portfolio with America. Australia's got a pretty
balanced trade portfolio. Israel drops all their tariffs the day
before the announcement, they still get whacked with seventeen percent.
Does American or do Americans understand that the whole world

(03:36):
is not going to relocate to America and build factories
and build you everything you need at prices you can afford.
And that's just basically bs.

Speaker 3 (03:46):
No. I don't think most Americans yet realize how radical
this policy is, how much it's going to raise prices,
how the cost of living is, which was a big
issue in the recent president election, is going to go
up for most people. So I don't think most Americans
recognize it. I don't think the administration recognizes how hard

(04:11):
it's going to be to relocate production into the US when,
as you said, for many goods, the US is going
to be a high cost producer and this production is
only going to be viable with permanent protection. So I
do think that the cost of this policy shift had
been underestimated. And I completely understand how countries that have

(04:33):
had balance trade with the US are wondering why they're
on this list. And I think the answer is that
balance trade isn't enough. President Trump wants to get some
revenue and ten percent is basically the minimum. So Australia
should take comfort, in President Trump's view, from the fact
that their rate is only ten percent, and the best
probably Europe can hope to get out of negotiation is

(04:55):
going from say twenty to ten. I think it's just
a new world.

Speaker 1 (04:59):
If I don't know in your wheelhouse, but if it
gets udly economically in America and you got the midterms,
do the Republicans freak out? And it's not to implode.

Speaker 3 (05:10):
I don't know they implode, but you could certainly see
a split between the congressional Republicans, some of whom are
not that keen on this policy privately, and President Trump.
President Trump's all in, but I think there is yet
still a strong contingent of traditional free trade Republicans that

(05:30):
would break from President Trump. If President Trump's approval rating
falls significantly and the Senate candidate or the House candidate
feels like the tariffs are dragging their prospects down, that
would be a fracture in the party. But it's the
kind of fracture that happens when you have a president who,

(05:50):
at least under conventional terms, is not up for re
election and his power will start to wane further into
a story.

Speaker 1 (06:00):
Great to check to you, but I appreciate it very much.
Brad Sitzer, who's a former US Department Treasury economist. For
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