WEBVTT - Cornell University Professor Eswar Prasad Talks Tariffs 0:00:02.360 --> 0:00:06.640 Bloomberg Audio Studios, podcasts, radio news. 0:00:06.760 --> 0:00:08.920 Also, I think the question that becomes all the sequencing 0:00:08.960 --> 0:00:11.040 we're going to get from a President trub administration and 0:00:11.080 --> 0:00:13.440 sort of when that winds up affecting equity markets. Right, 0:00:13.440 --> 0:00:16.360 you have tax cuts versus tariffs, Right, you have immigration 0:00:16.960 --> 0:00:20.160 versus deregulation. Like what comes first could also dictate thats. 0:00:20.000 --> 0:00:22.440 And I think the market might be waiting a little bit. Obviously, 0:00:22.520 --> 0:00:25.439 the inauguration here in the United States is until January twentieth. 0:00:25.480 --> 0:00:27.319 Then we have to kind of see whether he makes 0:00:27.360 --> 0:00:29.680 good on all those promises or whether it was just 0:00:29.720 --> 0:00:30.040 all talk. 0:00:30.160 --> 0:00:31.680 Yeah, so let's get a little bit into that. Because 0:00:31.680 --> 0:00:34.360 Bloomberg Economics crunch the numbers on what would happen to 0:00:34.600 --> 0:00:37.880 GDP in different countries based on whether or not all 0:00:37.960 --> 0:00:40.760 partners retaliated in an event of a trade war, or 0:00:40.800 --> 0:00:43.880 only if China retaliates, And you can see Mexico getting 0:00:43.920 --> 0:00:47.120 hit the hardest right after Canada with a GDP wiped 0:00:47.120 --> 0:00:50.000 out by about two percent. The US comes next with 0:00:50.000 --> 0:00:52.960 about one and a half percent negative to GDP. And 0:00:52.960 --> 0:00:54.920 the question that becomes we talk all about China and 0:00:54.960 --> 0:00:57.680 what it means for Europe, but the impact on the 0:00:57.720 --> 0:01:00.400 rest of North America could be huge, particularly for any 0:01:00.440 --> 0:01:03.800 sort of goods coming in from China through Mexico and Canada. 0:01:03.840 --> 0:01:06.360 So joining us now to discussed at Eshwar Prasad Tolani, 0:01:06.480 --> 0:01:09.360 Senior Professor at Trade Policy at Cornell University and Senior 0:01:09.400 --> 0:01:13.560 Fellow at New Century Chair International Economics at the Brookings Institution. 0:01:13.880 --> 0:01:16.120 It's great to get your perspective. Thank you for joining us, 0:01:16.360 --> 0:01:19.200 Happy New Year. What's your bas case for trade wars? 0:01:19.200 --> 0:01:19.800 This year. 0:01:21.200 --> 0:01:25.600 Trump has gotten increasingly specific about the amount of titles 0:01:25.640 --> 0:01:27.600 he is going to Levy, the country, city is going 0:01:27.640 --> 0:01:31.040 to Levy Ton right off the bat. So I suspect 0:01:31.040 --> 0:01:34.440 this is not all bluster. Now for the rest of 0:01:34.480 --> 0:01:36.399 the world, I think this could be seen as a 0:01:36.400 --> 0:01:39.240 bit of a bargaining stance. And the reality that is 0:01:39.959 --> 0:01:43.240 quite different from the first Trump administration is that the 0:01:43.400 --> 0:01:46.280 US is on a very strong footing because economy here 0:01:46.280 --> 0:01:50.000 has been doing remarkably well over the last few years 0:01:50.000 --> 0:01:53.960 in the COVID period. But in addition, the rest of 0:01:53.960 --> 0:01:57.640 the world is really floundering in terms of economics performance. 0:01:57.640 --> 0:02:03.360 If you look at China, Europe, including powerhouses like Germany, Japan, 0:02:03.440 --> 0:02:06.840 and even India, which was roaring along until recently. None 0:02:06.880 --> 0:02:09.600 of these countries can really withstand the effects of a 0:02:09.639 --> 0:02:13.440 significant increase in trade sanctions around the world, so they're 0:02:13.480 --> 0:02:15.000 going to be on the back foot. So it's going 0:02:15.000 --> 0:02:18.080 to be a very interesting bargaining game. But my bet 0:02:18.480 --> 0:02:20.600 is that we're going to see at least a small 0:02:20.680 --> 0:02:25.960 increase in tariffs, perhaps some symbolic amounts, but especially targeted 0:02:26.000 --> 0:02:29.040 towards China. And what the world does to retaliate, I 0:02:29.080 --> 0:02:32.000 think is the key question at hand exactly. 0:02:32.240 --> 0:02:35.080 And if we just focusing on North America for a moment, 0:02:35.639 --> 0:02:37.040 I can make an argument that, you know what, it's 0:02:37.120 --> 0:02:39.400 legit because if you have stuff coming from China through 0:02:39.480 --> 0:02:41.320 Mexico and Canada, you're not going to want to get 0:02:41.360 --> 0:02:43.519 that into the US Versus the other side, which is 0:02:43.560 --> 0:02:46.960 you're really going to hurt your partners in trading within 0:02:47.040 --> 0:02:50.360 North America. What do you think the downside potential is 0:02:50.400 --> 0:02:50.919 here for that? 0:02:52.280 --> 0:02:55.600 Now, for the US, there are some significant downsides. The 0:02:55.600 --> 0:03:00.200 imposition of tariffs generally ends up with the customers a 0:03:00.240 --> 0:03:03.200 significant portion of the tariff, so that could, along with 0:03:03.320 --> 0:03:07.919 the reduction and immigration flows, lead to an increase in 0:03:07.919 --> 0:03:10.320 inflation in the US. On the other hand, you could 0:03:10.360 --> 0:03:14.400 have a stronger dollar resulting from the imposition of tariffs, 0:03:14.400 --> 0:03:18.280 which are at least partially offset the increase in prices. 0:03:18.600 --> 0:03:20.840 But the bigger concer really is going to be about 0:03:20.840 --> 0:03:24.080 the disruption in global trade. And here too, there are 0:03:24.120 --> 0:03:27.920 some very important differences. You know, in the previous Trump administration, 0:03:28.639 --> 0:03:31.800 there was this notion of the US imposing tariffs not 0:03:32.080 --> 0:03:36.520 just on rivals like China, but even on traditional allies 0:03:36.920 --> 0:03:41.320 including Canada, Mexico, and Europe, and we're seeing some rumblings 0:03:41.320 --> 0:03:44.040 of that as well. In the past, China and these 0:03:44.080 --> 0:03:47.160 other countries could perhaps take on the US together, But 0:03:47.360 --> 0:03:50.520 right now China's economy is not doing very well and 0:03:50.600 --> 0:03:53.120 whatever growth they're getting is really coming from the production 0:03:53.240 --> 0:03:55.800 side rather than the consumption side. So the rest of 0:03:55.840 --> 0:03:58.760 the world is very concerned about becoming the dumping ground 0:03:58.800 --> 0:04:02.680 for export export some China, which it really needs in 0:04:02.760 --> 0:04:07.040 order to sustain growth. So there is a fracturing of 0:04:07.080 --> 0:04:10.800 the potential alliances among other countries, which again puts the 0:04:10.920 --> 0:04:14.360 US in a strong position. But certainly disruption in supply 0:04:14.520 --> 0:04:16.599 chains and in production is going to be at cost 0:04:16.880 --> 0:04:20.320 with US manufacturers and manufacturers around the world are going 0:04:20.360 --> 0:04:20.760 to have to. 0:04:20.720 --> 0:04:23.200 Bear with some of those governments, though, the ones that 0:04:23.240 --> 0:04:24.840 have to deal with China, for that matter, the ones 0:04:24.839 --> 0:04:27.040 that have to deal with the US. Is there any 0:04:27.040 --> 0:04:30.240 sense here that they will be able to find some 0:04:30.240 --> 0:04:32.320 sort of common ground between the two, meaning are they 0:04:32.320 --> 0:04:34.520 going to have to choose between a relationship with the 0:04:34.600 --> 0:04:37.440 US versus a relationship with China, or is there a 0:04:37.440 --> 0:04:39.279 way that they can sort of thread that needle and 0:04:39.320 --> 0:04:40.400 appease both nations. 0:04:41.600 --> 0:04:45.280 That's a very complicated issue for many countries that are 0:04:45.320 --> 0:04:48.200 stuck in the middle. For some countries, like India, it's 0:04:48.320 --> 0:04:52.320 somewhat easier because they're not that reliant on exports and 0:04:52.360 --> 0:04:56.760 they could benefit from this geopolitical realignment which shifts foreign 0:04:56.760 --> 0:05:00.160 direct investment flows to India and away from China. But 0:05:00.200 --> 0:05:03.880 the reality is that moving supply chains away from China 0:05:03.960 --> 0:05:07.159 to other countries is going to be very difficult, especially 0:05:07.160 --> 0:05:09.680 in the very shortened but the margin we are beginning 0:05:09.680 --> 0:05:12.000 to see changes now. A couple of the other things 0:05:12.000 --> 0:05:14.880 that the Trump administrations likely do is to shut down 0:05:15.600 --> 0:05:19.680 the ability of China to reroot it's exports through countries 0:05:19.720 --> 0:05:23.640 like Vietnam and Mexico, which have benefited actually from investment 0:05:23.680 --> 0:05:27.200 flows from China in order to undertake that routing. So 0:05:27.279 --> 0:05:29.400 those channels are going to be shut off as well. 0:05:29.600 --> 0:05:31.960 So I think it's going to be difficult for many 0:05:31.960 --> 0:05:33.359 of these countries caught in the middle. 0:05:33.520 --> 0:05:36.520 Well, I'm glad you brought that up here, because whenever 0:05:36.560 --> 0:05:38.360 we talk about TIFF, so you always sort of look 0:05:38.400 --> 0:05:40.840 at it from that blunt instrument aspect of it, and 0:05:40.880 --> 0:05:43.240 the idea that it's just some blanket percentage that they 0:05:43.320 --> 0:05:45.120 put on goods. But there are a lot of areas 0:05:45.160 --> 0:05:49.360 that the Trump administration could exploit, so I guess create 0:05:49.360 --> 0:05:51.560 a little bit more pain for some of those importers. 0:05:51.560 --> 0:05:54.280 And the idea that doing what you just did, which is, 0:05:54.320 --> 0:05:56.800 like I said, closing out some of those loopholes, but 0:05:56.920 --> 0:05:59.359 even certain things like kind of this obscure you know, 0:05:59.400 --> 0:06:02.480 postal war that allows companies like Timu and others to 0:06:02.560 --> 0:06:05.120 kind of ship kind of lower price goods, if you will, 0:06:05.160 --> 0:06:07.200 to the US at basically no cost, or at least 0:06:07.240 --> 0:06:10.920 marginal costs. That's something that could be relatively quickly close. 0:06:11.720 --> 0:06:13.200 I think he still has to go through Congress, but 0:06:13.240 --> 0:06:16.080 it is something that he could do relatively easy. 0:06:17.360 --> 0:06:19.760 That's exactly right. I think even if he doesn't raise 0:06:19.839 --> 0:06:24.640 tariff's closing many of these loopholes will significantly affect China's 0:06:24.680 --> 0:06:28.159 ability to reroot trade through other countries into the US, 0:06:28.200 --> 0:06:30.800 and that's going to hurt countries like Mexico and Vietnam, 0:06:31.080 --> 0:06:36.400 which have recently been benefiting from this trade diversion. Now, 0:06:36.440 --> 0:06:39.479 there are many countries that are very strong relationships with 0:06:39.520 --> 0:06:42.080 the US and with China would like to maintain them, 0:06:42.320 --> 0:06:44.400 but I think at the moment, one of the key 0:06:44.520 --> 0:06:47.560 factors driving the dynamic in this relationship is that it 0:06:47.640 --> 0:06:50.800 is the US consumer. There is powering growth in the 0:06:50.800 --> 0:06:54.640 world economy, Chinese consumers are really not stepping up to 0:06:54.680 --> 0:06:57.720 the plate, so you have substantial access capacity building up 0:06:57.720 --> 0:06:59.840 in China. So I think much of the world is 0:07:00.120 --> 0:07:04.680 much warier about China using them as dumping around so 0:07:04.800 --> 0:07:08.040 it's exports, than they are about US tabs. But certainly 0:07:08.360 --> 0:07:11.000 for countries in the middle, they're getting pinched from both sides, 0:07:11.040 --> 0:07:14.040 and it's going to be a very complicated situation, not 0:07:14.120 --> 0:07:16.080 just in the short term but in the years to come. 0:07:16.360 --> 0:07:18.320 Right, which also makes it difference from back in twenty 0:07:18.360 --> 0:07:20.400 eighteen when it was a different consumer and a different 0:07:20.400 --> 0:07:24.160 fed hiking cycle versus cutting for example ashwar. When you 0:07:24.200 --> 0:07:26.680 take a look at the profound effects of this, the 0:07:26.720 --> 0:07:29.520 whole point is to nearshore stuff or to bring industry 0:07:29.520 --> 0:07:31.720 home to the US. Is this all going to work. 0:07:33.280 --> 0:07:35.120 It's going to happen in the long term, and we 0:07:35.160 --> 0:07:37.880 are seeing those changes already. Like I mentioned, we are 0:07:37.880 --> 0:07:41.840 seeing greater investment flows into India from countries that are 0:07:41.880 --> 0:07:44.200 more closely aligned with the US. China, on the other hand, 0:07:44.320 --> 0:07:46.800 is trying to invest more in countries that are more 0:07:46.840 --> 0:07:49.160 closely aligned with it. So we're going to see a 0:07:49.240 --> 0:07:54.400 fragmentation of foreign direct investment flows and perhaps other types 0:07:54.400 --> 0:07:58.480 of financial flows, including equity flows as well, because countries 0:07:58.600 --> 0:08:01.480 like China and many other rivals of the US are 0:08:01.600 --> 0:08:04.640 concerned that the sort of sanctions that Russia has been 0:08:04.640 --> 0:08:07.160 subjected to could be applied to them as well. So 0:08:07.240 --> 0:08:10.520 I think this geopolitical conflict is going to spill over 0:08:10.560 --> 0:08:13.960 into the economic dimension, both in terms of trade and finance, 0:08:14.000 --> 0:08:16.800 which is going to lead to much more fracturing of 0:08:16.880 --> 0:08:20.760 both trade and finance along geopolitical lines, which may not 0:08:20.920 --> 0:08:24.160 be great for global stability down the road. 0:08:24.760 --> 0:08:27.520 All right, Always an insightful conversation with you. We'll have 0:08:27.520 --> 0:08:30.280 to leave it there. Eshwar Prasad, a professor of trade 0:08:30.280 --> 0:08:33.320 policy over at Cornell University. A closer look here at 0:08:33.320 --> 0:08:36.800 the incoming presidential administration here in the US and what 0:08:36.840 --> 0:08:38.280 it could mean for trade and tariffs.