Big Technology Podcast: "Trump, Tariffs, Trade War, And Technology — With Alan Deardorff"

Release Date: November 4, 2024
Host: Tomer Cohen
Guest: Professor Emeritus Alan Deardorff, University of Michigan

Introduction: Setting the Stage for Trade Wars

In this pivotal episode of the Big Technology Podcast, host Tomer Cohen delves into the looming uncertainty surrounding U.S. tariffs and the potential trade war, especially in the wake of the recent presidential election. Joined by Professor Alan Deardorff, a seasoned expert in international economics and public policy, the discussion navigates the intricate web of international trade's impact on Silicon Valley and the broader U.S. economy.

The Escalating Tariff Threats

Tomer Cohen initiates the conversation by highlighting the stark differences between the tariff strategies proposed by then-presidential candidates Trump and Kamala Harris:

• Trump's Proposal: Cohen outlines Trump's aggressive stance, which includes a potential 20% tariff on all imports and up to a staggering 60% on goods from China. He references Trump's characterization of tariffs as "the most beautiful word in the dictionary" (00:32).
• Harris/Biden's Approach: While less extreme, the Biden administration already imposes a 25% tariff on semiconductors, with plans to increase it to 50% by 2025 (04:09).

Professor Deardorff concurs on the gravity of tariffs, emphasizing their significant role in disrupting global supply chains crucial for Silicon Valley's tech giants. He notes, "The technology sector depends very, very heavily on imports into the United States as well as trade through the supply chains all over the world" (02:49).

Semiconductors: The Critical Outlier

A substantial portion of the discussion centers on semiconductors, a backbone of modern technology. Cohen raises concerns about the viability and timeline of domestic semiconductor production, citing Intel CEO Pat Gelsinger's admission that building new plants could take five years or more (08:39).

Professor Deardorff challenges the notion of shifting semiconductor production to the U.S., arguing from an economic standpoint that "the world is better off if countries produce what they do best and not try to produce everything" (09:32). He warns against the high costs associated with relocating production, especially when current global dependencies are not immediately jeopardized.

Trade Wars: Historical Parallels and Potential Escalations

Cohen draws parallels between the current trade tensions and historical events, questioning whether a trade war could spiral into more severe conflicts, such as China blocking Taiwan's semiconductor exports (07:17).

Deardorff acknowledges the potential for escalation, noting, "World War II with Japan, in fact, started largely because of restrictions we were putting on Japan" (07:46). He speculates that heightened tensions could lead to assertive actions against Taiwan, although he expresses skepticism about the likelihood under the Harris administration compared to Trump's more aggressive posture.

The Shift from Free Trade to Protectionism

A critical segment examines the evolving political landscape regarding trade policies. Cohen observes a growing rift between free trade economists and protectionist politicians, especially since Trump's tenure.

Deardorff elaborates, "Up until Trump came along, the Republican party in the US... has tended to be pro-free trade" (13:16). He attributes the current protectionist shift to political alignment pressures, where politicians side with Trump's tariffs to secure their positions, despite their economic reservations.

Impact on Local Economies: The Michigan Example

Focusing on his home state of Michigan, Cohen discusses the tangible effects of trade policies on communities reliant on manufacturing, particularly the auto industry. The relocation of factories due to agreements like NAFTA has led to job losses and population declines in areas once thriving with high-paying manufacturing jobs (17:02).

Deardorff responds by emphasizing the broader economic benefits of free trade, stating, "The net benefits are going to consumers all over the country" (17:39). He acknowledges the hardships faced by specific sectors but argues that overall, the economy benefits from lower prices and increased efficiency.

Specific Corporate Implications: Amazon, Shein, Temu, and Apple

The conversation shifts to how major companies may navigate the turbulent trade environment:

• Amazon: Cohen inquires about the potential fallout for Amazon, which heavily relies on Chinese imports. Deardorff predicts that while Amazon may face increased costs, their ability to adapt by sourcing from countries like Vietnam could mitigate severe impacts. He suggests, "It's going to hurt Apple if they let it happen... but [Apple] is a big enough company that I can easily imagine that they would lobby effectively" (31:38).

• Shein and Temu: These Chinese e-commerce giants, known for their low-priced goods on platforms like Amazon, could face significant challenges. However, Deardorff maintains that tariffs would likely affect all players uniformly, ensuring that consumer prices rise across the board.

• Apple: A focal point, Apple’s heavy reliance on Chinese assembly poses vulnerabilities. Cohen notes that Apple might secure exemptions to continue manufacturing in China, as it did during Trump's administration (32:11). Deardorff agrees, hypothesizing that Apple would "lobby effectively to get Trump not to do it on their product" (33:28).

The Broader Economic Landscape: Inflation and Manufacturing Trends

Addressing broader economic concerns, Deardorff differentiates between short-term inflation spikes caused by tariffs and long-term inflation trends managed by the Federal Reserve. He asserts that while tariffs will increase consumer prices, they won't necessarily drive sustained inflation or poverty (40:02).

When questioned about the potential return of manufacturing jobs, Deardorff remains skeptical, attributing the decline in manufacturing employment to technological advancements rather than trade policies (41:03).

Currency Concerns: The Myth of Currency Debasement

In a final segment, the discussion touches on fears of the U.S. dollar’s value declining due to increased government spending. Deardorff dismisses the direct link between government debt and currency devaluation unless there's a default on debt repayments. He reassures that the U.S. dollar remains the world's trusted reserve currency, maintaining its strength despite fiscal challenges (42:13).

Conclusion: Navigating Uncharted Trade Waters

As the episode wraps up, Cohen and Deardorff reflect on the uncertainties of the current trade climate. Deardorff laments the shift away from a free trade consensus, predicting increased isolation for the U.S. while global trade continues to thrive independently (39:52). He underscores the importance of strategic economic policies to balance protectionist impulses with the undeniable benefits of international trade.

Cohen concludes by emphasizing the importance of informed decision-making based on expert insights, promising upcoming discussions with other trade analysts to further decode the election's economic implications.

Notable Quotes

• Tomer Cohen: "Tariff is the most beautiful word in the dictionary. More beautiful than love, more beautiful than respect." (00:32)

• Alan Deardorff: "The technology sector depends very, very heavily on imports into the United States as well as trade through the supply chains all over the world." (02:49)

• Alan Deardorff: "The world is better off if countries produce what they do best and not try to produce everything." (09:32)

• Alan Deardorff: "We're still shooting in both directions between us and China with our tariffs, and he's going to raise them. So we're going to shoot more and they're going to shoot more." (06:41)

• Tomer Cohen: "The perception is that Michigan has lost a ton of jobs from people who are making good money, stable jobs in auto factories... Those jobs are gone." (17:02)

• Alan Deardorff: "The net benefits are going to consumers all over the country. That's a much bigger group." (17:39)

• Alan Deardorff: "It's horrible. It's not a disaster like a shooting war, but it is really unfortunate for the well-being of people all over the world." (39:52)

Final Thoughts

This episode of the Big Technology Podcast offers a comprehensive analysis of the potential ramifications of U.S. tariffs and a trade war on the tech industry and the broader economy. Professor Deardorff's economic insights provide a counterbalance to the politically driven protectionist narratives, emphasizing the complex interplay between policy decisions and economic realities. As the U.S. stands at a crossroads in its trade policies, understanding these dynamics becomes crucial for businesses, consumers, and policymakers alike.