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- [00:01]
KPMG
KPMG makes the difference by creating value. Like developing strategic insights that help drive M and a success or embedding AI solutions into your business to sustain competitive advantage. KPMG make the difference. Learn more at www.kpmg.us.
- [00:20]
Thrivent
Insights Thrivent can help you plan your finances for the people, causes and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future, while also creating opportunities to give back along the way. Visit thrivent.com to learn more. Where Money Means More.
- [00:44]
KPMG
Bloomberg Audio Studios Podcasts Radio News.
- [01:00]
Tracy Alloway
Hello and welcome to another episode of the Ought Thoughts podcast. I'm Tracy Alloway.
- [01:04]
Joe Weisenthal
And I'm Joe Weisenthal.
- [01:07]
Tracy Alloway
Joe, Another Day, another Emergency podcast.
- [01:10]
Joe Weisenthal
We're gonna do a lot. This is a fact.
- [01:13]
Tracy Alloway
I should just resign myself to this inevitability, right?
- [01:17]
Joe Weisenthal
The story of the tariffs, the market reaction, the global reaction is the central story of our time, one of the biggest stories of our entire career. I think perhaps depending on how things could go, a bigger story than the past. Two big stories of the great financial crisis and the COVID shock. We're going to be doing a lot of episodes about what this all means.
- [01:39]
Tracy Alloway
This is what is mind blowing to me because when 2008 happened, I remember thinking this was the biggest thing that had ever happened in modern finance and the modern economy. And then in 2020, I remember there was a very vibrant debate about whether or not the pandemic and the market sell off would end up being the central crisis for a new generation. And I think in retrospect, it certainly was a lot more people remember 2020 than they remember 2008 now. And here we are, you know, just five years later having another discussion about how big this is inevitably going to be. So on that note, we are recording this on Friday, April 4th, the market is selling off yet again. We had Trump's new tariff announcements. Those were released on Wednesday, April 2, Liberation Day. Investors have been, I mean, I would say pretty much panicking since then.
- [02:34]
Joe Weisenthal
Yeah.
- [02:34]
Tracy Alloway
And what's more, overnight, coming into Friday morning, we've started to see some reaction from other countries, notably China. The US is one of the US's biggest trading partners and they say they're instituting a 34% reciprocal tariff on US goods. So things seem to be escalating totally.
- [02:53]
Joe Weisenthal
You know, I'm just gonna make one short comment here, which is why I think this might be end up being a bigger story than the great financial crisis potentially, and that is banking crises happen they happen around the world. They've happened in the U.S. they've even happened in the U.S. between massive crises and there is a playbook and there's a response and you try to reflate the economy and your stuff like this. This is different because this is a policy choice purposely aimed to completely reorient America's relationship with the rest of the world and reorient the internal economy. And so it's very different than sort of like, oh, you have a run on the bank, which happens for. We had one in March 2023, we had a run on the bank. You know, this is very different in terms of the entire relationship of both the internal and the external economy. And, and it may end up being more consequential, for better or worse than the great.
- [03:46]
Tracy Alloway
I don't disagree with you, but I'm just gonna say one thing. Number one, that's not a short comment. Number two, you're right, this is an entirely self inflicted own goal basically by the Trump administration. Like it is their decision to do this and they presumably knew what the results were gonna be. Right. They decided not to hold the tariff press conference while the markets were open. They knew that coming out was something that was worse than a lot of professional economists and analysts had expected was going to have this impact on the market. And here we are. So this is something that the administration has chosen to do. Obviously there's lots going on. Obviously we have a lot of questions. Who do we turn to when we have trade questions? We do in fact have the perfect guest. We're going to be speaking with Brad Setser, senior fellow at the Council on Foreign Relations and a longtime trade expert. One of our favorite to talk to the last time we saw him was actually at our pre election event at a live show in New York. And Brad, I remember speaking to you there, there were a lot of concerns about what Trump could do on trade. How has the reality shaped up to expectations here?
- [04:58]
Brad Setser
Oh look, Trump did campaign on an agenda that was tariffs and more tariffs. He campaigned on a 10% across the board tariff and prohibitive tariffs on trade with China. And at times he did suggest that 10% was the minimum. That said a lot of people close to Trump, a lot of people who found their way into the administration were sending different messages privately to people in the financial markets. People like Scott Besant were talking about how the Trump, Trump's plan was escalate to de. Escalate. The tariffs were a negotiating tool. They weren't a tool to upend the global economy. I think what the announcement on Wednesday showed is that the decision of the administration, not surprisingly, was to follow President Trump's instincts, not the instincts of his more moderate advisors, to go all in. And that the goal really is to, as you guys suggested at the beginning, to radically restructure the US and global economies using tariffs as a tool with some flexibility, perhaps to negotiate at the edges. But fundamentally this is a test of what you can and cannot do with tariffs. And it was, there was very little restraint, I would say, apart for, strangely enough, Canada and Mexico, USMCA on the level of the tariffs. So the tariffs are set at levels which are just going to frankly be painful.
- [06:30]
Joe Weisenthal
You know, Tracy mentioned that we talked to you the night before the election. And one thing that's interesting about talking to you is you are not a sort of naive, you know, all trade armchair economist. Yeah, or just like, you know, everything was fine in the global trading system. And you've been talking for years that like this is an unhealthy relationship that the US has with China specifically. And that night that we talked to you before the election, you're like, the answer is to really deepen the trading relationship with our allies, our friends. So that would be Europe, Canada and so forth, and really build up a coherent open trading bloc that would stand as something different to China, which as you've said, has had unfair trade practices for a long time. Trump says the same thing. We haven't. So what are the consequences of closing, fragmenting what you saw as the potential open trading bloc to counter China?
- [07:27]
Brad Setser
Well, obvious point is elections do have consequences. Look, I do think that trade with China is very difficult for most countries that aren't just commodity exporters. If you look at China's pattern of trade over the last six years, China's imports of manufacturers increased on average by 15, 1 $5 billion a year. Essentially nothing. China's exports of manufacturers over the last six years increased on average by $175 billion a year, ten times as much. So China became an economy particularly in response because of the way it responded to Covid because of the real estate crisis that was exporting but not imported when it came to manufacturers. And China's trade surplus surge to be at about a trillion. It's a little over a trillion dollars now, about a percent of GDP. World GDP is ManU surplus is 2% of world GDP. These are really unprecedented numbers. And so my view was that, hey, we don't have to abandon all the benefits of trade. We can maintain the benefits of relatively integrated trade amongst like minded. I guess that's not, I don't like that term actually amongst countries that have similar economic systems.
- [08:49]
Joe Weisenthal
Sure.
- [08:49]
Brad Setser
Similar politics and that that was a, a better way of both putting pressure on China because the pressure is really on China and also avoiding the costs that come from fully disengaging from the world economy. I think the choice was made was essentially an American to go with an America alone policy where we're going to give up a lot of the benefits of trade with our neighbors and with longstanding friends. And I think the net effect of that, yes, it's going to put a lot of pressure on China, the tariffs on Vietnam or in some ways tariffs on indirect Chinese exports as well. But it does so at a very, very high cost and it sort of gives up the benefits that I thought the US had from being at the center of a much bigger bloc than China was going to be at the center. We've kind of the vision here is at least shrinking to within North America and maybe shrinking to within the United States. That's just fundamentally a different vision and I think it's a more costly form of disengagement.
- [10:05]
KPMG
KPMG makes the difference by creating value like developing strategic insights that help drive M and a success and embedding AI solutions into your business to sustain competitive advantage or deploying tech enabled audits to deliver more accurate and transparent outcomes. Brighter insights, bolder solutions, better outcomes. It's how KPMG makes the difference every day. KPMG make the difference. Learn more at www.kpmg.us insights.
- [10:40]
Thrivent
Thrivent can help you plan your finances for the people, causes and community you love. What makes Thrivent different? A combination of financial services and generosity programs. Thrivent offers advice, investments, insurance, banking and generosity as well as resources to fund service projects or direct dollars to causes you care about. With more than 120 years serving clients, you can plan your finances with confidence. Visit thrivent.com to learn more. Thrivent Where Money Means More so you.
- [11:11]
Tracy Alloway
Mentioned Vietnam there and I think this is one of the big differences between tariffs this time around and tariffs in the first Trump administration. So we did see a lot of production that basically circumvented the China tariffs post 2018 that increased production in places like Vietnam. Lots of Chinese components going into Mexico and then finding their way into the US from there. Is there any wriggle room left in the current constellation of, you know, the new export limitations, the new tariffs? Is there any wriggle room to kind of reorient potentially American imports that way? Or are There ways maybe to, I don't know, figure out lower tariff bans by like arbitraging between one country and another? Or are they so sweeping that a lot of that ability has just been wiped out?
- [12:04]
Brad Setser
There are two potential arbitrages that have opened up if Wednesday night is maintained. The first is there are a set of countries, generally countries which have now relatively balanced trade with the US that only got the baseline 10% tariff. If you reoriented your supply chains and took the increase in shipping costs and found a bunch of, say, workers in Brazil, you could employ those workers in Brazil to put together components from China and send them to the US and only pay a 10% tariff. That's better than Vietnam's 45% tariff and the 55% tariff ballpark that China that any good from China faces with some goods facing higher tariffs. So opportunity number one is basically move production, or at least final assembly to countries that already have balanced trade with the US and thereby only have a 10% tariff. Note the irony that if these countries become centers for final assembly, bilateral trade will no longer stay balanced. It'll quickly shift. The other big exception again for now, and it doesn't apply to autos and it doesn't apply to steel and it doesn't probably won't apply to pharmaceuticals and it probably won't apply to some other sectors. Is that for now. And I mean, I do find it a bit shocking given how much emphasis President Trump has placed on Canada in the first two months of its administration. For now, most trade with Mexico and Canada outside of autos is still relatively low tariff. It has to be USMCA compliant. You can generally achieve that. The USMCA compliance, a lot of people weren't doing it because there was no advantage in say, electronics because electronic tariffs were zero inside USMCA and zero for Vietnam. Now there's a huge incentive to be USMCA compliant. So if you can do USMCA compliant production assembly in Mexico, there's no really right now, but it'll probably change over time limits on how many Chinese parts can be included in that operation. For now, you get around the tariff. Now I think there will be a renegotiation of USMCA that will make some of this a bit harder over over time. But that at least is the opportunity that would be open for now if nothing more changes. But it doesn't feel fully consistent with the president's intent either.
- [14:36]
Joe Weisenthal
You've been talking about trade for your entire career, et cetera. On that Wednesday announcement, every country got A tariff slapped on it and it was basically a strict function of the amount of surplus then divided by exports and then divided by. Yeah, so China for instance, trade surplus of 295 billion last year on exports of 438 billion, a ratio of 68%. And then they divided by two and that's how they got 34% and that's how they did it every country down the line. And the theoretical idea here seems to be that if we run a bilateral trade surplus with you, any country in the world, then that must be some proxy for the amount that you're cheating either through tariffs or, or non tariff trade barriers or currency manipulation or something like that. This seems to be the intellectual logic. And what I'm curious from you is in all your knowledge of sort of the theory of world trade, is this something that people have talked about as a reasonable way or a reasonable proxy to measure the amount with which a country, quote, cheats in the rules of free trade?
- [15:46]
Brad Setser
The simple answer is, as you know Joe, no. This felt like a group of economic advisors who had put off doing a term paper until really late at night.
- [15:56]
Tracy Alloway
And were scrambling to come up and then use ChatGPT. Right?
- [16:00]
Joe Weisenthal
Perhaps.
- [16:01]
Brad Setser
But I mean essentially I it certainly seems from the TikToks that the president himself asked for tariffs on not just 15 countries but 70 countries or something. And people had to come up with a formula because it was clear that USTR and others didn't have the capacity to do true assessments of all of the countries that were covered by this announcement. But it does feel like a term paper that went horribly wrong because it was written at four in the morning and it had to be submitted at 6. There's some obvious weirdness that comes from this formula, the most significant of which in my view is that small Asian economies that generally have current account deficits, their trade deficits overall often run surpluses with the United States because they're relatively poor, they can't afford many of our goods and they can still produce clothing more or less for the US market. So hence we put really quite heavy tariffs on a country like Sri Lanka, on a country like Bangladesh, countries where I don't think there was any significant concern about the pattern of trade. Sure there were some concerns about sweatshops and labor rights and so forth and so on, but no one was in the US economy was hey, hey, ho ho, competition from Sri Lanka has to go. This was just a function of a formula applied without thought. And so you end up having heavy tariffs on countries that are Just producing clothes, which realistically won't be produced in the U.S. so there's an element of pure pointlessness that comes out of this formula. Now, I will say that there is some value in looking at bilateral trade patterns. I mean, I've certainly learned a lot from trying to understand why the US Runs such a large deficit with Ireland. I think the answer is not that Ireland is an unfair trader. I think the answer is we have a tax policy that incentivized American companies to produce in Ireland to reduce their U.S. tax rate from 21 to 10 and a half percent. And so in some cases, you can learn from the pattern of bilateral trade. I certainly think you can learn something from looking at global trade surpluses, not bilateral trade surpluses. And the global surplus is pointing to a problem with China. China really has been growing on the back of net exports for the last four or five years. China's trade surplus with the world really is big. And in a sense, the bilateral deficit with China now understates our reliance on Chinese supply because of all this rerouting through third countries. But just using this simple formula produced some obviously absurd results. And, you know, it was done late at night because we ended up tariffing islands that only produce penguins.
- [18:55]
Joe Weisenthal
Yeah, yeah.
- [18:56]
Tracy Alloway
Make the penguins sign up for better trade terms, certainly. Okay, so on this note, I mean, this is actually the thing that I find most depressing, disturbing about all of this. It's the arbitrariness with which some of these seem to have been designed. And I know, I wrote about it in the newsletter yesterday, so Joe's aware of this. But, like, the example I've been reaching for is Nehru. So, you know, 30% tariffs on this tiny island state in the middle of the South Pacific Ocean. And they, you know, they export like 1 to 2 million worth of pig meats and some computer parts every year to the U.S. i just cannot fathom what the U.S. wants from a country like Nehru or in what way the US economy is at all threatened by a country like Nehru. And as you point out, Brad, it's not like the islanders are suddenly going to be buying a bunch of fords from the U.S. right. Like they have 12 miles worth of road. What exactly are they going to be buying from America? That disturbs me a lot. But beyond that, you know, you might have realized already, Jo certainly has, that I'm a little bit cranky and tired this morning. Jo's very exhilarated by watching history change in real time. I just get kind of sad and tired. But for my benefit, can you maybe describe, is there any path where you see this going reasonably well, or at least not completely terribly.
- [20:25]
Brad Setser
Well? There is a path to de escalation. The path to de escalation is one where, you know, in some sense the Trump administration decides not to make history. Joe's going to be a bit bored. This doesn't turn out to be the glow, the repeat of the global financial crisis. It turns out to be a more ordinary trade war, maybe with a few Trumpian flourishes and maybe with a bit more revenue collection. But if the administration concludes that it overshot, that they are worried about throwing the US economy into a self induced recession, that they don't have political support for this particular trade war and they want to back off, they've left a little space to do phenomenal deals. And so if there are phenomenal deals done with China, with Europe, with Japan, if there's some agreement that is reached with Mexico and Canada, that rolls back some of the auto protection, which is actually significant in its own terms. Even if the rest of, well, not the rest, but even if the consumer goods and non metal based part of North American trade is still relatively untarrified, if you reach deals with them, reach deals with Southeast Asia, breach deals with the uk, you know, so forth and so on, you could generally perhaps fall back to something that's closer to a 10% tariff across the board, which is significant, but not as disruptive. And then whatever your deal with China leaves you with, you kind of play a trade war out with China using the 301 tool and you really just focus on China so that that is the most plausible path towards de escalation. I think right now though, Joe's in luck. We're on a path where the President does seem fairly committed to changing the fundamental structure of the US and North American economies. And if you want to achieve that deep change through policy, you have to impose policies that are disruptive and painful and other countries are going to react. And the US basically is taking policy steps that on one hand risk throwing the US into recession and are almost certain to throw some of our major trading partners into recession. And countries generally don't want to be pushed into recession by policy choices made abroad. So the natural reaction is going to be to try to reduce your dependence on the US market. Now that's really hard because the US is the only big, big, big country that runs really big deficits, I guess along with the uk. So it is just really hard for all the surplus countries to find an alternative source of demand. The US has Really been supplying a lot of demand to the global economy. But if Trump is determined to close the trade deficit and willing to do so by shrinking the US Economy and has more or less given up on the idea of growing exports as a way out, and then I think a, we're making history because we are tearing apart something that has grown up organically over 80 years, something that the US actually helped. It's a trite statement, but it is true. It's a system the US after World War II more or less created. And then the cost of that system, in Trump's view eyes, got to be too big. And so he made a decision to radically step away from current trade patterns and trade policies. I mean, this is a real break. It's a much bigger break than just doing a targeted action against China, which is his term one trade policy. You know, I'm not sure it's going to be bigger than the global financial crisis. I mean, I was unfortunately around then and I remember, you know, the panic in New York when the big institutions were on the edge of going bust and the 5% fall in the US economy and the very, very slow recovery. You just do normal economic analysis. You maybe get a shock of a third of that size from what we're doing now. We're not so integrated into the global economy. We haven't stopped all trade. We've just taxed at a very high rate. But yeah, it will play out over a much longer period of time. A financial crisis, you know, risk disaster, but it forces you to respond quickly. This is a more slow moving and as you indicated, it's a result of a conscious policy choice. So therefore it has a very different dynamic.
- [24:53]
Tracy Alloway
Lots and lots and lots and lots and lots of trade episodes to come in our future.
- [24:59]
Joe Weisenthal
We'll talk to you next week, Brad.
- [25:00]
Tracy Alloway
Yeah, Brad, thank you so much.
- [25:03]
Brad Setser
Let's talk about capital flows, Canadian pension funds. And the dollar has rallied into the trade war. And Taiwan.
- [25:14]
Joe Weisenthal
Taiwanese life is the good old days.
- [25:15]
Brad Setser
Yeah, they are still interesting, Joe. They are still interesting.
- [25:20]
Tracy Alloway
The good old days of Taiwanese life Insurer mysteries. All right, Brad, thank you so much. Really appreciate it.
- [25:25]
Brad Setser
My pleasure. Thank you.
- [25:39]
Tracy Alloway
Joe. I guess, I guess on the plus side, we are making history. All of it is very interesting from an economic intellectual perspective. So there is that. Can you tell I'm trying to make myself feel better?
- [25:51]
Joe Weisenthal
Tracy, we're the best business in the world. This is why we get up in the morning. But I'm just gonna say one comment. There's not really much for me to add I don't have much to add to Brad, but when he said that comment about how the formula for the tariff announcement reminded him of turning in a very bad economics term paper at 4am yeah. The only thing that I could remember was the time that I interviewed for a job with Roubini Global Economics in 2007, and Brad Setzer was my interviewer, and I completely flopped that interview by basically talking about the Argentine economy with the sophistication that he described the tariffs. And I did not get that job. And so when Brad says this is bad economics, I have personal experience with hearing that from Brad. That's all I'm going to say.
- [26:43]
Tracy Alloway
I mean, yes, it does seem to be bad economics in terms of the tariff rollout, but this is the thing that, you know, okay, yes, it's exhilarating, it's interesting to watch, but this is the thing that actually bothers me, because as Brad points out, there are some legitimate grievances over US China trade, and you could go about trying to fix those in a cohesive and potentially effective manner, and instead we've chosen this weird wish list of things that we want that don't seem to be based on anything, like, rational. Here are some numbers that we pulled out at 4am in the morning as we were cramming for this announcement or whatever. And we're also targeting countries from which, like, there can't be anything we want from, like, Kiribati or Nehru. Why exactly are they even included in this thing? What are we doing here?
- [27:35]
Joe Weisenthal
Well, this actually is one thing, you're right, that drives me crazy, which is there's this whole game that gets played where it's like, well, we need more manufacturing and what are we going to do? Be reliant on China for all of our semiconductors and batteries and stuff. That's actually really not great. And we had a policy put in place by the last administration that was specifically targeted. And look, I'll be very clear. I'm totally fine with disagreeing with how the chips act rolled out. And I think there's reasons to think like that is totally like, to my mind, ground for debate. But the idea that no one was talking about the national security implications of heavy reliance on China for manufactured goods up until Wednesday, that part is complete nonsense.
- [28:20]
Tracy Alloway
No, it's crazy. And also, I mean, we know that central to Trump's world vision, or his economic vision of America, is the centrality of private capital, right? You want private capital to fund in and build all these strategically important industries for the US like semiconductors. But at the same time, the magnitude of what he's trying to attempt all at once seems very obviously going to scare a lot of private capital away from building anything in the US. Like, I don't really see why it has to be this shock and awe approach to reorienting US trademark when you could be something that's much more strategic and done perhaps like much more in coordination with a bunch of different constituents, I guess, of the American economy.
- [29:10]
Joe Weisenthal
Don't ask me.
- [29:11]
Tracy Alloway
I'm going back to bed. Okay, this has been another episode of the Oddhots Podcast. I'm Tracy Alloway. You can follow me.
- [29:18]
Joe Weisenthal
Raceyallaway and I'm Jill Wiesenthal. You can follow me at the Stalwart Follow Brad Setzer BradSetzer Follow our producers Carmen Rodriguez at carmenarmen Dashiell Bennett at Dashbot KalebrookSalebrooks. For more Odd Lots content, go to bloomberg.com oddlots where we have all of our episodes and a daily newsletter and you can chat about all of these topics 247 with fellow listeners in our Discord Discord GG oddlots.
- [29:46]
Tracy Alloway
And if you enjoy odd lots, if you like it when we roll out these emergency trade episodes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.
- [30:41]
Thrivent
Something unexpected happened after Jeremy Scott confessed to killing Michelle Schofield in In Bone Valley Season one.
- [30:48]
Brad Setser
Every time I hear about my dad.
- [30:50]
Thrivent
Is, oh, he's a killer.
- [30:51]
Brad Setser
He's just straight evil.
- [30:53]
Thrivent
I was becoming the bridge between Jeremy Scott and the son he'd never known.
- [30:57]
Tracy Alloway
At the end of the day, I'm literally a son of a killer.
- [31:00]
Thrivent
Listen to new episodes of bone Valley Season 2, starting April 9 on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.