What Trump’s Tariffs Will Actually Do | The Ezra Klein Show

Summary

Highlights

• Trump's Liberation Day unveils a tariff package that's both bigger and more confusing than expected 🤷‍♂️.
• Paul Krugman, the Nobel economist, describes the day as tumultuous for U.S. economic policymaking.
• Trump's tariff approach diverges significantly from historic precedents by targeting trade imbalances directly 😳.
• Klein and Krugman criticize the tariff formula as non-standard and unpredictable.
• Economic uncertainties build up as businesses struggle to plan due to unpredictable tariffs 🏢.
• Global partners face a dilemma on whether to retaliate or play by U.S.'s new trade rules 🤔.
• Markets reflect confusion and caution towards the U.S.'s tariff strategy 🔍.
• AI's role in shaping these disruptive tariff strategies raises eyebrows 🤖.

Key Takeaways

• Trump's tariffs announced on 'Liberation Day' could be the biggest trade shock in history 📈.
• The tariffs are calculated using a bizarre method based on trade deficits rather than careful economic assessment 🤔.
• This tariff policy was partly crafted with faulty AI logic ⚙️.
• Targeted tariffs are causing economic uncertainty, challenging U.S. and global markets 📉.
• Krugman suggests that retaliatory actions by other countries should be diversified 🔄.
• Markets' lack of confidence in U.S. economic policy is noticeable 🙄.
• Economic uncertainty could potentially trigger a recession due to erratic policies 🚧.
• Attempts to fix supposed trade imbalances are based on misunderstanding economics 😬.

Overview

Chapters

• 00:00 - 01:00: Introduction to Trump's Tariffs The chapter titled 'Introduction to Trump's Tariffs' begins with a discussion on how people feel about their economic freedom under Donald Trump's tariff policies. The speaker expresses feelings of being 'unliberated' due to the negative impacts of these tariffs, such as higher prices and instability in the stock market, which contrast with sensible economic policies. The chapter continues by detailing Trump's 'liberation day,' where he announced an unexpectedly large and confusing package of tariffs. It concludes with a mention of the tariff impact on various countries, including Switzerland, Indonesia, Malaysia, and Cambodia.
• 01:00 - 01:30: Paul Krugman Joins the Discussion This chapter introduces Paul Krugman, a Nobel Prize-winning economist and long-time columnist at the New York Times. The narrator expresses admiration for Krugman's work, particularly his expertise in trade, and mentions Krugman's current writing on Substack. The chapter hints at a discussion involving trade statistics concerning countries like Cambodia, Brazil, and Bangladesh, emphasizing the simplicity Krugman brings to complex topics.
• 01:30 - 03:00: Analysis of Trump's Tariff Announcement In this chapter, renowned economist Paul Krugman discusses the implications of Donald Trump's recent tariff announcement, which he made on a notably contentious day in American economic policy history. The conversation aims to unravel the complexities of the announcement and assess its potential impact, as Krugman provides his analytical perspective on what transpired on 'Liberation Day.'
• 03:00 - 04:30: Understanding Trade Deficits In this chapter, the focus is on understanding trade deficits. The discussion begins with the concept of tariffs and the initial expectation of a uniform tariff imposition across all countries. However, the outcome was a more complex system where different tariffs were applied to each country, with some rates much higher than anticipated, averaging around 23%. This chapter highlights the significance of these high tariffs by comparing them to historical U.S. tariffs post-Smoot-Hawley Act, noting the increased magnitude relative to current trade dependencies.
• 04:30 - 06:30: Market Reactions and Implications The chapter titled 'Market Reactions and Implications' delves into the economic shock caused by trade tariffs, highlighting its significance as potentially the largest trade shock in history since 1930. The discussion includes how tariffs are calculated country by country, as well as insights from Trump's Rose Garden speech regarding the barriers imposed by countries. The podcast commentary stresses the surprise and complexity in understanding the origins and implications of these economic policies.
• 06:30 - 09:00: Global Responses and Retaliation The chapter discusses the complex process of calculating tariffs and other related trade policies imposed by different countries. It highlights the challenges in assessing these policies accurately, particularly given the massive scope of evaluating trade policies on a country-by-country basis. The narrative suggests skepticism about the feasibility of conducting such an exhaustive evaluation, hinting that it seemed almost impossible that anyone could successfully carry out such a detailed analysis.
• 09:00 - 11:00: Impacts of Uncertainty on Economy The chapter titled 'Impacts of Uncertainty on Economy' discusses a calculation method for determining a country's de facto tariff rate based on its bilateral trade deficit with the United States and its import volume. This method involved dividing the trade deficit by imports and halving the result. It is described as unconventional and not a typical approach learned in standard trade courses.
• 11:00 - 13:00: Contradictions and Motivations Behind the Tariffs The chapter discusses the unique and original calculation method used to determine tariffs, which is applied on a country-by-country basis. It delves into the rationale behind imposing tariffs on the United States and how these tariffs can affect the flow of goods and services into other countries. Furthermore, the chapter explores the underlying concept that trade deficits with any country can justify the implementation of tariffs. The discussion highlights the nuanced differences between general perceptions of tariffs and the actual motivations driving their imposition.
• 13:00 - 15:00: Discussion on Re-industrialization and Manufacturing The chapter titled 'Discussion on Re-industrialization and Manufacturing' focuses on the concept of trade deficits and trade balances. The transcript suggests that these economic terms are often misunderstood and could be perceived as evidence of market discrimination. It raises the question of whether having a trade deficit is necessarily negative, by explaining the basic economic activity where countries engage in exporting and importing goods. The dialogue further implies that the re-industrialization discussion involves addressing misconceptions about trade imbalances and potentially correcting market dynamics perceived as unfair.
• 15:00 - 17:00: National Security and Trade Policies The chapter discusses the concept of bilateral trade imbalances, explaining that these imbalances, which are the difference between a country's imports from and exports to another country, do not necessarily have to be balanced. There is extensive research and literature examining the reasons behind these imbalances, but they are not automatically indicative of unfair practices.
• 17:00 - 19:00: The Role of the Dollar and Global Financial System The chapter discusses the belief held by the Trump administration regarding US trade policy, which is rooted in the concept of reciprocity. This principle has been foundational in the formation of trade agreements for the past 90 years, starting with the Reciprocal Trade Agreements Act of 1934. Initiated by FDR, this act established a framework in which the United States would negotiate mutual tariff reductions with other countries. This approach has largely been followed, with only a few exceptions among countries.
• 19:00 - 21:20: Contradictions in American Power Perception The chapter explores the contradictions in American perceptions and policies regarding international trade. It highlights the peculiar situation where the U.S. claims to advocate for lower tariffs, aligning with other advanced countries, despite already having low tariffs in place. The policy seems redundant and raises questions about its purpose. Additionally, the chapter discusses a policy where running a trade surplus with the U.S. is interpreted as a sign of malpractice, indicating an inconsistent approach in evaluating trade relationships.
• 21:20 - 24:00: Republican Response to Tariff Policies This chapter discusses the Republican response to certain tariff policies. It highlights the discrepancies between the initial intentions behind the policy as publicly declared and the actual implementation measures perceivable in practice. The chapter also touches upon social media discussions that involve utilizing AI programs such as ChatGPT, Gemini, and Claude to suggest simple methods for calculating tariffs on foreign countries, hinting at the complexity and contentious nature of enacting tariff policies without clear, transparent strategies.
• 24:00 - 27:00: Critique of Global Trade Regime and Alternative Views This chapter delves into the global trade regime, raising questions about the implications of advice provided by AI-trained systems. It ponders whether recent economic crises have been exacerbated by over-reliance on simplified economic calculations possibly influenced by machine learning algorithms. The chapter seeks to understand if there is merit in the straightforward methods suggested by AI, reflecting a broader critique of dogmatic approaches to economic policy that fail to capture complex realities.
• 27:00 - 30:00: Recommended Reading by Paul Krugman The chapter discusses the issue of tariffs imposed on other countries and how liberals might be overlooking certain aspects. It humorously references the Terminator movie series, suggesting a scenario where AI, similar to Skynet, would give poor tariff advice instead of starting a nuclear war. The text touches on the challenges posed by large language models in AI, highlighting their tendency to adopt certain narrative patterns.

What Trump’s Tariffs Will Actually Do | The Ezra Klein Show Transcription

• 00:00 - 00:30 so scale of 1 to 10 how liberated are you feeling right now I am feeling pretty unliberated I'm not excited about my freedom from lower prices from a stable stock market from an economic policy that makes sense But we had Donald Trump's liberation day anyway where he put forward a huge package of tariffs bigger than was expected and also more confusing than was expected Uh if you look at Switzerland 61% to 31% Indonesia Malaysia Cambodia oh look at
• 00:30 - 01:00 Cambodia Brazil 10% 10% Bangladesh is 74% Very simple Can't get any simpler than that When I saw them it was pretty obvious to me who I wanted to talk to about this Paul Krugman was a columnist a colleague of mine here at the New York Times for 25 years He is a Nobel Prizewinning economist who has specialized in trade over his career and he's now writing an absolutely excellent Substack under his name If you've not been reading it I really suggest that
• 01:00 - 01:30 you do And he's kind enough to come on the show and walk us through his thoughts on one of the most tumultuous days of economic policymaking in American history Paul Krugman welcome back to the show Hi Good to be on again So let's just start with what Donald Trump actually announced on Liberation Day Wow I think most people thought it was
• 01:30 - 02:00 going to be some kind of across the board tariff uh the same on everybody or maybe two or three different types of tariffs Instead he announced this whole complicated uh different tariff for every country um at levels much higher than the smart money or the money that thought it was smart was betting something like 23% average tariff now which is huge It's higher than US tariffs after smooth holy was passed and um trade is a much bigger part of the
• 02:00 - 02:30 economy now than it was in 1930 So this is the biggest trade shock in history How does the tariff country by country seem to have been calculated Okay Uh that was interesting because on on the first thing was where the hell sorry but yeah you know where the heck are they That's a podcast We we put the little explicit tag Yeah But where is this coming from And in the Rose Garden speech Trump said "This is all based on you know we've examined the the barriers that countries are are putting up and
• 02:30 - 03:00 this is our calculation of their tariffs plus other things that count as tariffs and we're trying to figure out what where is that coming from?" And uh that's a I mean it wasn't inherently implausible right it who who would be doing that careful assessment of other count's trade policies country by country that's a massive undertaking and uh it seemed implausible that you know basically impossible that they could have done that and it turned out that
• 03:00 - 03:30 they basically took um each country's trade balance with the United States the bilateral trade deficit that we have with them divided by the amount of their imports and that we said was their de facto tariff rate and then they cut it in half So it was this kind of weird calculation not grounded in any you know in anything that that um that uh back in the days when I used to teach trade courses that I would ever have put in but they they came up with this uh sort
• 03:30 - 04:00 of uh out ofthe- blue u calculation method that is country by country and it's u it certainly original I guess you could say that the the implication of it is that you you can understand why you might say a tariff on America is ad that's locking up uh the the goods that might flow into another country or service that might flow into another country But what they're saying is something subtly different which is that if we have a trade deficit with anybody
• 04:00 - 04:30 that is bad and it should be treated as evidence of market discrimination or at least something we want to fix So uh this gets as you like to say won but what is a trade deficit What is a a trade balance and is it a bad thing when we have one with someone else Okay So yeah we we sell you know we every country has stuff that it sells to other countries has stuff that it buys from other countries The trade balance within
• 04:30 - 05:00 a particular country is what we buy from them uh minus what what we sell to them There's no particular reason to think that these numbers should be balanced country by country All kinds of things can go on So it's it's there's a whole you know discussion uh there's a whole literature in the research on what explains bilateral trade imbalances but nothing that says that they are ipso facto evidence of of foul play which is
• 05:00 - 05:30 what the Trump people seem to believe US trade policy has been based upon reciprocity uh the you know the legal basis for all of these trade agreements that we've had these past 90 years is the reciprocal trade agreements act of 1934 which is FDR establishing a system where the United States would negotiate that we will cut our tariffs if other countries cut their tariffs Um and for the most part there are a few exceptions or few countries that actually do have
• 05:30 - 06:00 substantially higher tariffs than we do but other advanced countries actually like us have very low tariffs So it was really kind of strange that that was the claimed policy because that was you know if that was the policy then there was nothing to do cuz we'd already done it And then they have this other thing which basically says if you are you know running a trade surplus with us um then we're going to take that as evidence of bad behavior anyway We're we're going to
• 06:00 - 06:30 try and we're going to kick at you if you do that And that's a that wasn't at all at least in the in the selling of this policy and what they were what they said they were going to do One of the things flying around social media has been that if you went and you asked the various leading AI programs chat GPT and and and Gemini and and Claude and you said what's a pretty simple way to calculate tariffs on all other countries it will offer you the basically this
• 06:30 - 07:00 calculation that you used and I think that raises two questions which is one did we just have an global economic crisis created by some doge turns asking Chacht how to calculate uh tariffs but two if that's what these systems trained on the inhaled output I guess of all economist writing online say you should do is there something to it is there some steelman case that this is a pretty straightforward simple way to think
• 07:00 - 07:30 about tariffs on other countries that the liberals are missing as we sort of point out differences between you know words and and policies here Yeah So I mean the you know Terminator whatever with the Terminator 7 the movie with the um actually uh Skynet doesn't bother starting a nuclear war It just gives bad tariff advice So um the uh uh so look it this is part of the problem in general with what we're calling AI with large language models is that they pick up
• 07:30 - 08:00 what's out there without necessarily being able to discriminate what's sensible and what is not There's certainly no paper uh I would imagine in any e economics journal saying do this So but maybe some people out there are saying something like this but it it really is not uh it's not something you would recommend if you know anything about how trade works which chat GPT does not And so it it really is kind of weird that that it would come up with
• 08:00 - 08:30 this Um and by uh putting different tariffs on for different countries you create an immediate problem So we just put a much higher tariff on goods from the European Union than from Britain So if something from the European Union uh crosses the English Channel spends 5 minutes in an English port and then heads for America is that a British good or is that a European good you would have to have what we call rules of origin which are very ownorous There's a
• 08:30 - 09:00 the amount of of paperwork involved in enforcing rules of origin is huge So this is a anyone who knew anything about trade would say wait you know wildly different tariff rates on seemingly similar countries is a big big problem Probably a lot of EU goods trans shipped through Northern Ireland to get the lower tariff rate that applies to Great Britain And you know it's crazy Um so this is just a very this this
• 09:00 - 09:30 recommendation you know if it really is coming from large language models from AI uh this is a kind of it's more of a cautionary tale about AI that is something about economics how are markets responding and what do you take from their response one one thing that I have thought is when you listen to their justifications they'll say things like well we're trying to rebuild American manufacturing we've shipped American manufacturing overseas and then I'll go look at an index of stocks that reflect American manufacturing companies which I
• 09:30 - 10:00 guess in theory are meant to benefit here and they don't look like they're doing well to me Um if you look at BYD the big Chinese electric vehicle car company they are way up since Trump's inauguration they've gone from around 70 to around $96 um per share Tesla's way down There's a lot of reasons for that I'm not an efficient markets guy I don't think markets in absorb all information but you would expect them I think if they believe this was going to grow the US economy dramatically to favor some US
• 10:00 - 10:30 stocks that they thought were going to grow dramatically I'm not seeing anything like it Yeah it's almost as if the markets actually think that the economics textbooks are right and this kind of protectionism was a really bad idea Um and specifically I mean there there are multiple reasons why this whole notion that tariffs are going to restore US manufacturing are wrong but one of them is that you know we we've had now decades of integrating American manufacturing with other countries
• 10:30 - 11:00 particularly know there is no US auto industry there's a North American auto industry which is sprawled across Canada and the United States and when you say okay we're not going to allow the components factory here to send goods over to the assembly factory there Um you're raising the cost the whole thing enormously You're creating huge disruption So it ends up being bad for the US auto industry you know for for for those auto plants And there's you know there are other there are layers
• 11:00 - 11:30 and layers of wrongness here But the most immediate one is right away this is actually hugely disruptive to US manufacturing not a support for it How should other countries respond I mean I've seen economists arguing they should do nothing because to place down further tariffs only hurts them as well I've heard them say they should do specific forms of tariffing that you know hurt things that are important to the US maybe Tesla Um I've heard people say "No they should go all out because you're trying to create a equilibrium where the
• 11:30 - 12:00 US can't bully everyone." If if these heads of state were coming to you and saying you know what should we do Paul What would you tell them Yeah So there's an old argument that says you should not respond uh that it's because other countries have rocky coast should we block up our own harbors That's the way uh it's sometimes put and in straight economics 101 that is mostly right Um but uh first of all there is still some hope of swaying Trump from this course
• 12:00 - 12:30 And then look uh other countries this is a problem Americans really have We tend to not think of other countries as real Uh but they are they have they're real They have their own national identity They have their pride Economists have a you know a standard argument for free trade which does say you should always do free trade regardless That has never worked politically We did not get to our world of relatively free trade through by convincing politicians to read David Ricardo We got to a world of relatively free trade by actually exactly the thing
• 12:30 - 13:00 that Trump is claiming to do by reciprocity I would not advise Mark Carney the Canadian prime minister You know that I could imagine I actually do know him for for once I actually know somebody with who is uh is is actually governing a country And um I would not advise Carney to turn the other cheek towards US tariffs even though on a straight costbenefit uh position that might make sense because uh you have to respond to that You have
• 13:00 - 13:30 to do something that uh that is uh appeals to Canadian national pride which very much exists So I I would say that there there's a pretty good case for retaliatory stuff Yeah If you can target it if you can go after Tesla that might help But um for retaliatory stuff partly just to uh and some hope of of changing US policy and also with some hope of um at least offering some satisfaction to
• 13:30 - 14:00 national concerns How bad can this tit fortat get How likely at this point do you think a US recession is How likely do you think a global recession is kicked off by this trade war Okay now there's a funny thing here which is that ordinarily I would say that while tariffs are bad they don't cause recessions You you it makes the economy less efficient You turn to higher cost domestic sources for stuff instead of
• 14:00 - 14:30 lower cost foreign sources and foreigners turn away from the stuff you can produce cheaply So that just but that's a that's that's a reduction in the economy's efficiency not a shortfall in demand Um what's unique about this situation is that the protectionism is unpredictable and unstable Uh and it's that uncertainty that is the recessionary force If you were a manufacturing company in the United States um and your next
• 14:30 - 15:00 investment is going to be well let's say a components plant or something and well should you put that components plant in Mexico where it's cheaper Well not if there's a 25% tariff but should you put it in the United States where it's more expensive Well what if the tariff comes off And so either way you run a substantial risk of just having stranded investments And that's happening across the board So this is uh the instability of policy The fact that nobody knows
• 15:00 - 15:30 what's coming next uh is I think makes a you know it makes a recession certainly a whole lot more likely I I feel like you're going to remember this with some of the same anger that I remember it But I remember in the years after the Great Recession when Washington wanted to turn to austerity when you still had high unemployment and what you began hearing from the Republican party and lord how many words I spilled trying to rebut this was oh the the future deficits were
• 15:30 - 16:00 creating so much economic uncertainty the corporations couldn't possibly invest and the way to unlock the economy again was to you know cut spending you know maybe for uh you more of the centric side raise taxes and it was that certainty about future path of government fiscal policy that was needed for corporations to hire again that turned out to be and was obviously at the time not true but now you have that same party creating a level of like such
• 16:00 - 16:30 genuine uncertainty I can't imagine being a company right now trying to decide where to place a factory or whether or not to make investments nobody even believes these tariffs are going to be the same in a year as best I can tell as they are right now And so I don't know there there's this argument I think got a little bit discredited because it was used in such bad faith and then all of a sudden the same people who made it in many cases are at least accepting or promoting this tariff policy which has created a like a
• 16:30 - 17:00 genuinely unfathomable to me level of economic uncertainty Yeah I mean the arguments were very much in bad faith in the aftermath of the great recession It was it was just a an excuse for somehow saying that this fiscal austerity that Republicans in Congress are forcing is not the cause of slow recovery It's all because of Obama and uncertainty and whatever And that was a um and yeah I I became you know viscerally uh hostile to anyone invoking uncertainty But then
• 17:00 - 17:30 along comes this which is like nothing we've ever seen before That's a very Trumpian phrase like you've never seen before Um but I can't recall uh I don't think there is any case in American history uh short of you know onset of World War II or something where there's been so much uh uncertainty about what really important policy will be even like next week let alone over the next couple of years You you could we could imagine if if Trump
• 17:30 - 18:00 had I think probably too late to fix it now but if he had convincingly said we will now have 20% terrorists on everybody from now on um that might have been absorbed as a businesses would start to invest on that basis and yeah we'd pay a price but those stable protection is a is a bad thing but it's probably less does less damage than many people uh imagine it's one of those things where the more you
• 18:00 - 18:30 know about it the less it worries you Um but unstable protectionism coupled with all the other instabilities out there in policy you know how many how many uh programs is do going to axe How many uh federal workers going to be laid off What's going to happen to uh to Medicaid Uh that all creates an environment that is really bad for business One thing I am getting asked by a lot of people in my life is should I buy the
• 18:30 - 19:00 dip And I know you don't offer investing advice but but I think the the intuition is that look the stock market goes like down at times up at times but it always just kind of be keeps its march upward over time And you know how bad can this really get It's just a a kind of spat over tariffs He's going to back off Do you look at the market correction here and say well this is as bad as it can get We're probably at the bottom of this or do you look at the history here and say no you have no idea how bad something like this can get I think I
• 19:00 - 19:30 mean God knows I mean the the uh you 1930s scenario it is is always there Um I guess my concern would be first of all that yeah we we are really in in uh in completely new space in terms of policy There's never been anything like this craziness um in in US history And so that would make you worry And then there are other things I mean how much we've had an incredible boom in tech stocks
• 19:30 - 20:00 and AI and so on And uh I have been you know in this in the punditing business uh since the uh since the '90s.com bubble So I do worry that that these things can be big and they can and they can lead to years of of of painful losses So the Trump administration can see all this They know markets are crashing In his first term Trump was considered to be very sensitive to market reaction They know that various indicators of a future recession
• 20:00 - 20:30 forecasts and this and that are beginning to blink more red They are choosing to take on this pain This is completely optional Why do you think they think they are doing it Or if they is not the right unit here why do you think Donald Trump thinks he is doing it Okay it's always a question What does Donald Trump actually know I mean here's a guy who goes out around saying that his approval rating is in the 70s So yes I mean I'm sure that Scott Bessant at Treasury
• 20:30 - 21:00 knows that those indicators are all flashing yellow or red Um does Trump know it Uh is there anybody who's uh brave enough to go in and say "Mr President this is really working out badly." But he knows the markets He he can see the stock market Well but he may think that they just don't understand the the brilliance of his policy Okay So what what do you think he thinks they don't understand What is to him the brilliance of his policy I think he's got this very crude
• 21:00 - 21:30 uh view that whenever somebody sells more to us than we buy from them that that they're taking advantage and he's going to end that and people will see that he was smarter than everybody else all along So I mean I there's no indication that there's any deeper agenda any deeper thought I mean if if nothing else anyone who thought that there was a bigger agenda uh that there was some subtle reasoning going on here the shape of those tariffs that were announced yesterday should tell you that
• 21:30 - 22:00 no it's it's just uh Donald Trump doesn't like trade deficits and he thinks that tariffs can cure them I I note too there's a a deep contradiction in the way it's been getting justified from two sides of the administration or maybe the Republican party So one which you'll hear is that this is about re-industrializing America and to do that if you believe tariffs could do that which I don't really but but let's put that aside for a minute If you believe they could do that what you need is a highly stable tariff regime And
• 22:00 - 22:30 then there's another justification you're hearing John Thun the the Senate majority leader said something like this which is that these are all a negotiating tool to get a better deal out of other countries This is more the sort of reciprocity argument It's also the he lays down tariffs and he gets something on you know fentinel trafficking enforcement um get something on immigration But if these are all negotiating tools then they're not a stable cost structure that companies can use to decide if they're going to reinvest in in America And then I guess
• 22:30 - 23:00 there's this third one which is that the tariffs are going to raise money so they can cut income taxes or pay for Donald Trump's tax cuts Uh and the Treasury Secretary said the money would be used to get rid of the tax on tips and social security So really this is a tax cut for the working class And again in that case then they have to stay on and be at a pretty high level if they're going to finance that So these are these are contradictory policies that require different tariff regimes but I'm seeing them sort of all invoked basically constantly Yeah I
• 23:00 - 23:30 think what you need to bear in mind is that the the starting point for all of this is Donald Trump wants tariffs and then and people around him are going to give him those tariffs and then everything else is kind of backfilled trying to rationalize what they're doing And there's no reason to believe that any of this is actually motivating what they're doing This is just who they are and what they want to do So I don't I mean I yes there there are multiple layers of uh internal contradictions in
• 23:30 - 24:00 what we're hearing from the Trump administration and its supporters but not clear that any of that is is real That's just all problems with the stories they're telling But the the fundamental policy is we're going to slap on a lot of terrorists Is it possible in any tariff regime to do the re-industrialization of manufacturing that I think is the most emotionally resonant of their arguments There are two levels to that One
• 24:00 - 24:30 is can tariffs really reduce the trade deficit a lot and the answer is it's really hard there's a lot of stuff offsetting forces so that even lots of tariffs won't do much to reduce the trade deficit but if you put them high enough if you basically shut off international trade then yeah you can't run a trade deficit if you can't trade So there's a there's a a bit of a story there But then there's the second level which is even if we eliminated the trade
• 24:30 - 25:00 deficit would we re re-industrialize or you know would we reindustrialize to an extent that you would notice Germany runs enormous trade surpluses and even Germany has seen a law a large decline in manufacturing as a total as the share of total employment So if we were to raise somehow raise oursel to German levels of manufacturing people would still say what happened to the industrial nation we used to be Then there's a calculation which I probably I won't inflict on our listeners here but
• 25:00 - 25:30 the uh but if you try and figure out how much um additional manufacturing we get if we could somehow eliminate the trade deficit Yeah it's significant but it would get us like from 10% of of employment to maybe 12 a.5% of employment but not back to the 30% of employment that used to be once upon a time And you know basically the decline in manufacturing employment is mostly driven by automation and productivity growth not by the trade deficit Well
• 25:30 - 26:00 well that gets to though there there are two things you might want to restore in manufacturing One which I think you hear a lot of in politics is manufacturing jobs You want to go back to the economy of 1965 or something Yeah The other is that what you want to restore is manufacturing capacity Um my colleague your former colleague Tom Friedman was just in in in China and was really astonished at the kind of campuses that Huawei is building the speed with which phone companies are becoming car companies And basically everybody I know who goes to China or writes seriously about their manufacturing sector will
• 26:00 - 26:30 now tell you that what they're doing is not just low-wage labor leading to um cheap manufactured consumer goods that they have now have incredible levels of supply chain uh expertise that allow them to do things we maybe can't at a speed we certainly can't And that that in terms of you know the balance of of of geopolitical power is a very dangerous thing for us in the long run And so very high costs are worth paying
• 26:30 - 27:00 to rebuild that capacity even if it's all automated right because you do not want to be so dependent and for the world to be so dependent on on Chinese manufacturing What do you think of that argument I mean it's fine as a you know as a principle you know the international trade is governed by something called the general agreement on tariffs and trade and uh it which goes back to the 40s and uh article 21 basically says forget about everything
• 27:00 - 27:30 else we said here if your national security is at risk do whatever you feel you have to do now we can ask whether being so dependent upon semiconductors from Taiwan was wise and I actually think probably not and given given Although those are exempted from the tariffs Yeah Because there would be such a huge cost you know so there is just obvious how much would it would it would raise costs But in fact we we well we have the the chips act which is supposed to uh make us more among other things more independent on semiconductors and
• 27:30 - 28:00 but Trump says that's terrible If you were asking what does our national securityoriented industrial policy that tries to keep production of strategically important stuff in the United States look like It looks like the chips act It looks like what the Biden people were trying to do Now probably bigger than that in an ideal world we'd be doing substantially more but that's how you do it The idea you know putting high tariffs on imports of clothing from
• 28:00 - 28:30 Bangladesh is exactly what you shouldn't be doing That's the kind of thing that is disruptive raises the cost of living for American consumers does nothing to make us more secure There is a national security rationale for domestic production but also for French shoring and for nearshoring because stuff that's close by is a lot easier to secure uh if that's what we were wanting to do then we would not be levying tariffs on Vietnam and Bangladesh and we would certainly not be putting tariffs on
• 28:30 - 29:00 Canada and Mexico So if one of the things you're trying to do is as a national security play make our sort of supply chains more robust from China it seems you wouldn't want to be tariffing our friends and allies in a way that pushes them to pull away from us and integrate more and move into sort of common economic defense with China Yeah I mean again if you go back to the you know how did we end up with the trading system that Trump is
• 29:00 - 29:30 now demolishing it was actually it was partly about economic efficiency but it was also very much about a kind of uh enlightened broad view of national security Go back all the way to uh Cordell Hull uh FDR Secretary of State He w he viewed enhanced economic linkages across the free world as a way to draw us closer together as a way to make to create greater solidarity among democracies against the at that point
• 29:30 - 30:00 the threat of of Stalinism And uh so this is what we're doing is is tearing up partially in the name of national security a policy that was actually partially intended precisely to enhance national security Um no question that that the that the US is alienating its its allies or its earthw wild allies by doing all of this and in some cases making it they're making common cause with our potential enemies I mean this
• 30:00 - 30:30 policy does look to me like what happens when nobody will tell the king no Yeah And and worse than that maybe that when the king begins to favor the people who he knows aren't suppressing the no right that that there there are people in any room who you can kind of tell don't really agree with you and are trying to uh humor you and then there's you know the intern the the the mid-level person who you can tell is really into what you
• 30:30 - 31:00 want to do and and maybe you charge them with it This just doesn't feel to me like a constructed policy And it's hard because I think that like our tools are usually to try to track back the policy rationale but there's there are too many policy rationals None of them actually fit Well we have even we have some direct evidence that that's what's happened I mean Peter Navaro who is sort of Trump's trades I don't know if he's still called that but effectively um at least according to some of the
• 31:00 - 31:30 reporting he was recruited cuz they basically sent Jared Kushner out to search through Amazon to find somebody who'd written books hostile to China right And so they they actually looked for people who were would would tell the king what he wanted to hear Um one one of the stories I find really interesting There's this you know about it I'm sure but listeners probably don't Bob Lighheiser who's this longtime you know contrarian protectionist voice in Washington and uh generally regarded as
• 31:30 - 32:00 kind of a and my friends as a sort of dark satanic force in the trade policy debate but but is respected because he clearly knows his stuff and people had sort of assumed that he would play a big role in this administration and he was passed over and almost for sure that's because he is independent He this he is his own man He didn't come to this be out of feelalty to Donald Trump He uh and so he might actually say to the king "No no not not not terrorists on Bangladesh." And so um this is clearly
• 32:00 - 32:30 this is a kind of cordierdriven catering to and Donald Trump has been a you know has has had this thing about tariffs going back 40 years So here we are Uh the idea that there's some master plan or some deeper strategy It just tortures uh it requires torturous ignoring of what's very clearly happening Well one of my broader views about this administration I keep
• 32:30 - 33:00 meaning to write a piece about this is that you can really tell the story of Trump one and Trump two by which is the other most powerful member of the family And in Trump one it's Jared Kushner Yeah And Kushner brings in very mainstream people your Gary Cones you know is a Goldman Sachs uh president your HR McMasters people who act as inhibitors of the very disinhibited Donald Trump And in Trump too it's not Jared Kushner it's Dawn Jr who's been marinating in the fever swamps of MAGA in the interim
• 33:00 - 33:30 years who helped bring in people like JD Vance who you know said like the the the real intention of Trump's second term was we will vet everybody to make sure there's nobody's going to stand in his way um Elon Musk and and Russ Vod are sort of out there trying to traumatize the federal bureaucracy destroy any deep state resistance or frankly just any deep state capacity And so you have people around Trump now who are accelerants not inhibitors And this is what you get when you get a bunch of people telling Trump "No no no Go further right You're right You've always
• 33:30 - 34:00 been right You were saved from an assassin's bullet by God to make this country great again Follow your instincts don't listen to the markets the naysayers the critics the media They don't know anything Like if we've learned anything it's that your judgment is right Yeah I mean there was a moment a day or so ago I guess when uh Ron John's not Ron Johnson Ron Ron Johnson Mike Mike uh Johnson the speaker of the house uh was asked about how how this
• 34:00 - 34:30 tariff thing is going to work And he said "We must trust the president's instincts." And I was like "This is America." You know we're not supposed to believe in the mysterious godlike uh divination powers of the leader There there's an essay by by John Mayor Kayanes in which he says uh that uh economics although no one will believe it is a difficult technical subject and you know the uh uh Trump doesn't presumably doesn't
• 34:30 - 35:00 understand how feedback from your economic policies can come back and bite you on the rear Uh and uh left to himself he just thinks I I know this I'm a businessman and I'm I' and God God backs me And so you get these without somebody who can say no to him and everybody could say no is gone Uh then he's going to do very strange stuff So behind all this there is
• 35:00 - 35:30 there's been a set of theories that have taken root that are not well expressed in the tariffs but I think have become increasingly influential in Washington in in the media You know I hear talk of this Mara Lago accord and they have a lot to do with this idea of the dollar and whether or not having the dollar as a world's reserve currency has led to the de-industrialization of America And so when I hear then people in the Trump administration begin to say well what we're doing here is a
• 35:30 - 36:00 fundamental realignment of the global financial system while it may all start with Donald Trump's intuitions I think it's made a lot of them very ambitious uh this idea that maybe they can be part of the next bread and woods that that there's something you can do here Can you talk through for people who are confused by it What is the role of the dollar here How should we understand the the relationship between the dollar being the world's reserve currency and America losing some of its manufacturing base if there is one Okay this is by the way this is a topic
• 36:00 - 36:30 that uh is there's tremendous amount of mysticism about it and u you wouldn't believe how hard it was for me to write a substack post about the uh about this the role of the dollar um because I kept on wanting to stuff too much too many things into it and and basically had my my editor-inchief otherwise known as my wife um saying no no that's too many charts It's too many tables Um so okay uh look the dollar
• 36:30 - 37:00 is very special A lot of international commerce is conducted in dollars even between countries you know even even trade between non US countries A lot of a lot of international lending and borrowing is in dollars Um and one of the things is that countries that want to hold a stockpile of foreign currency to be able to intervene in the markets in times of need a lot of that something like 60% of those stock piles are held
• 37:00 - 37:30 in dollars and that's the or dollar dollar assets So that's the dollar is reserve currency Um the United States also attracts a lot of inflow of foreign capital and the we have a trade deficit as the counterpart of that The balance of payments always balances So the fact that that we sell more assets than we buy has as its counterpart that we buy more goods than we sell that's the sort of ne has to be the arithmetic tells you that must be true Um how much of that
• 37:30 - 38:00 capital inflow is caused by the special role of the dollar and the answer most of us most of the of us who do follow these things is a little but not much The idea that the trade deficit is sort of a onetoone relationship with the dollar's role as reserve currency is much much weaker It's maybe a fraction of the story but it's really not the main story The main story is that
• 38:00 - 38:30 America is a has been an attractive place to invest and that's why we have a trade deficit Foreigners want foreign companies want to build uh plants in the United States foreign investors want to buy US stocks and that's what that's the main reason we have that keeps the dollar strong and makes means that we have a trade deficit Um but the idea that you can do a sort of magic fix that you can somehow tell foreign countries to not stockpile so many dollars and that that will re-industrialize America is
• 38:30 - 39:00 very appealing because it's feels it's I think it's partly if it it feels important that the one of the I I have quoted uh multiple occasions my old teacher Charles Kindleberger who said anyone who spends too much time thinking about international money goes a bit mad Um it is it sounds important It sounds uh sophisticated and it's also kind of antiseptic If we can just have an international monetary conference and that will solve the problem of USD-industrialization that sounds a lot
• 39:00 - 39:30 easier than having to muck around with industrial policy and all of that So it's it's a very appealing prospect to a lot of people but it's it's not realistic It's it there's no I mean we could undermine the dollar's role as a reserve currency We may be doing that as we speak because of who wants to hold a you know an unreliable Iranic country's currency as as as a reserve but that's not going to solve anything any other major problems
• 39:30 - 40:00 When I try to dive into MAGA World's thinking here something that that I tend to hear is a somewhat contradictory relationship or a troubled relationship to American power And so on the one hand they want America to be stronger more feared more dominant And on the other hand there's a a broad view that we have overextended ourselves said on the one hand financially we've made the dollar the
• 40:00 - 40:30 reserve currency We've allowed all these other countries to you know um buy our assets and and and buy our money even as the our industrial base float out And then on the military side this idea that we have these bases all over the world we have all these troops in Europe You know we're part of NATO We're spending more you know as a percentage of GDP than some of these other countries And that too is part of why we can no longer take care of our people And so on the one hand there's this feeling that well for America to be stronger it can't be
• 40:30 - 41:00 operating this global umbrella of financial and military protection But then do you say well do you want the dollar to not be the reserve currency and they say no no no we we definitely want to keep it the reserve currency Do you want America's military to be weaker Do you want people to not you know be tied to us in the way they are now No we actually want more leverage over them There's something here that I think is very strange and very unresolved between this in this movement that wants both
• 41:00 - 41:30 more dominance and somehow at the same time to pull back from the actual architecture of that dominance and leverage Yeah I would say you know America attack the packs Americana You know we have been a kind of imperial power Some people say more than kind of We've been an imperial power in in many ways since the end of World War II But it's a very strange it's not like any previous empire The patch americana you know starts with the Marshall Plan
• 41:30 - 42:00 Instead of plundering our defeated enemies we rebuild them And then we build a system of alliances And um we have NATO we have the international economic institutions like the International Monetary Fund which are all you know they do actually kind of reflect US interests but at least on paper they're we're at most first among equals So we don't we we are a uh a polite uh low-key relatively generous
• 42:00 - 42:30 imperial power uh that is a very hard role for many people to understand It's sort of uh the take you know Greenland uh yeah Greenland it's there are stories under which Greenland could become strategically important It's a territory of Denmark which is an ally under NATO So we actually have the right and the ability to maintain military bases there It doesn't have to be US territory
• 42:30 - 43:00 That's a little too hard for a lot of people to wrap their minds around They want us to be uh they on the one hand don't want us to be spending resources supporting our allies On the other hand they want us to be exercising power but they want something that's a uh that that's war direct They want us to be a lot more like a traditional imperial power Uh which is foolish I mean we we the the thing that we built the thing that that the um the old US
• 43:00 - 43:30 establishment built after World War II with this uh soft uh soft imperial status and uh was was a pretty good one We we were able to build a world that was comfortable for us to live in um without bloodshed without um without um a lot of the the downsides of empire but it's it is subtle and it subtle is not something that MAGA does I've wondered a
• 43:30 - 44:00 bit if we're not going to see Republicans begin to grow a bit of spine here So I was surprised to see Chuck Grassley and Maria Kentwell Chuck Grassley being a a Republican in the Senate come out with a bill to restore congressional authority on tariffs Then Mitch McConnell tweeted "As I have always warned tariffs are bad policy and trade wars with our partners hurt working people most Tariffs drive up the cost of goods and services They are attacks on everyday working Americans Preserving the long-term prosperity of the American industry and workers requires working with our allies
• 44:00 - 44:30 not against them Now that's not what we're hearing from most Republicans but it's uh it seems to me like an early signal part after Republicans lost that Supreme Court uh fight in Wisconsin election in Wisconsin that you know as the economy suffers here they may not be all that excited about standing by him Well the problem is that the thing about everybody you mentioned is they're all
• 44:30 - 45:00 very old and don't have much of a a future political career just because they're they're very old And uh anyone who I mean many people have over the years uh over this past decade uh kept on waiting for the Republican grown-ups to stand up against Donald Trump And anybody who's made that bet has been very very badly wrong again and again So I don't think you should count on that It's it seems to me much more likely
• 45:00 - 45:30 that when in the end these guys will cave as they always have They'll cave and and Mike Johnson and John Thun control the respective chambers and if they break with Trump that will be the end of their leadership Yeah Yeah No that I mean in both cases it's it's hanging by thread And look we we've seen this that that anyone uh who Donald Trump certainly has will retain until until the the end of his days will retain the ability to destroy
• 45:30 - 46:00 the career of any Republican who opposes it We've been talking here about the MAGA case against the sort of global trade regime and I think it's pretty easy to pick it apart because the policies don't make sense and they're not going to work and the arguments are contradictory and and as you've said a couple times on your on your Substack this is a case where Donald Trump has an intuition and all these people are coming behind him to try to apply theory to it Yeah And
• 46:00 - 46:30 but but there is been a w there has been a wider disillusionment with the global trade regime Jake Sullivan the the national security adviser for Joe Biden said that the postulate that deep trade liberalization would help America export goods not jobs and capacity was a promise made but not kept Is there a version of the critique against the trading regimes we have uh an argument for tariffs maybe truly reciprocal tariffs that you
• 46:30 - 47:00 buy I don't really I don't really buy a tariff argument and you know again it's really important to understand that we have reciprocal tariffs You know we have a free trade agreement with Canada and Mexico I guess we've just ripped it up that that Donald Trump negotiated that Donald Trump negotiated He took an existing agreement and and changed a few semicolons and they called it his agreement Um but we have a uh you know um Europe has very low tariffs on our exports just as we have very low tariffs
• 47:00 - 47:30 on their exports and so on So we we actually have reciprocal trading regime We do have persistent trade deficits um which are not uh in a lot of ways you could say that they are actually a reflection of US strength Money flows to the United States You know over the past uh 25 years as the US has had persistent large trading trade deficits we've also had much faster productivity growth than
• 47:30 - 48:00 other advanced countries we've really pulled away from uh from Europe in particular We have better demography uh because we have somewhat higher fertility but also immigration which has meant that our economy has grown a lot faster The US is a has actually you know we uh we have basically maintained our share of world GDP despite the growth of China because we've we've grown so much faster than the rest of the advanced world So you if you just looked at the economic performance we're doing fine Um
• 48:00 - 48:30 now there is a question of wages of ordinary workers uh have not grown as much as we'd like We've had rising income inequality and that some of that some of that is due to imports and and you know that's that actually is trade economics 101 that that trade can have effects on income distribution So yeah there's something there but the idea that uh it's again comes down to this um talking about globalization
• 48:30 - 49:00 sounds like it's must be it's it's sophisticated It's important It's global Uh you I when I was much younger my parents got me a sweatshirt that that said global mobile on it And they asked I asked why They said we were always going on to some conference and when we ask you what it's about they you say global So you know Global Schmobble is a very appealing story People like to talk about it Um it's probably sort of well behind more mundane things like
• 49:00 - 49:30 productivity growth and um and for that matter labor policy uh in terms of of causing inequality But yeah they they're look if um I think I can tell this story I think you can too whatever it is Yeah I was at I was I was visiting in Oxford uh um back about 10 years ago and uh and uh
• 49:30 - 50:00 it's extremely rude to step out of a dinner party in Oxford to take a phone call unless the phone call is from the president of the United States complaining about the op-ed you just wrote uh cuz I I I came out against TPP which Obama was was advocating and I I just said I don't I don't think this is a really good idea and I think it's particularly you really shouldn't be spending political capital on this and so you know a lot of us had were feeling unease that that the sort of uncritical
• 50:00 - 50:30 pro- globalization argument had gone too far So um the yeah to to say we need to step back and and we did I mean the again the Biden administration had some significant nationalistic uh economic policies but that's a it's a far cry between saying yeah we do need to think a little bit more about uh by American we need to think both both national security and to some extent worker uh concerns and but there's a
• 50:30 - 51:00 world of difference between that and you know what we're getting now I think that's a good place to end then Uh always a final question as a veteran of the show you know it Uh what are three books you'd recommend to the audience Okay Well I just read it's it's been out for a while but I just read and had a discussion Zack Carter's uh the price of peace uh which is about John Mayer Kanes and his his role in in the world and then beyond Fantastic book Um the uh my
• 51:00 - 51:30 friend the uh uh uh fund manager Barry Rith Holtz has a great book called How Not to Invest which believe it or not is is interesting Even if you aren't in investing he's just he's just uh really a lot of fun Um and oh yeah I'm just reading the latest uh book by Phillips O'Brien who's a military historian and uh he has a new book called War and Power and he is uh
• 51:30 - 52:00 always uh fantastic He's pretty scathing actually about even about Biden administration policy But anyway he's he it it's a really interesting book Paul Krugman thank you very much Thank you home