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Speaker 2: Also, I think the question that becomes all the sequencing
Speaker 2: we're going to get from a President trub administration and
Speaker 2: sort of when that winds up affecting equity markets. Right,
Speaker 2: you have tax cuts versus tariffs, Right, you have immigration
Speaker 2: versus deregulation. Like what comes first could also dictate thats.
Speaker 1: And I think the market might be waiting a little bit. Obviously,
Speaker 1: the inauguration here in the United States is until January twentieth.
Speaker 1: Then we have to kind of see whether he makes
Speaker 1: good on all those promises or whether it was just
Speaker 1: all talk.
Speaker 2: Yeah, so let's get a little bit into that. Because
Speaker 2: Bloomberg Economics crunch the numbers on what would happen to
Speaker 2: GDP in different countries based on whether or not all
Speaker 2: partners retaliated in an event of a trade war, or
Speaker 2: only if China retaliates, And you can see Mexico getting
Speaker 2: hit the hardest right after Canada with a GDP wiped
Speaker 2: out by about two percent. The US comes next with
Speaker 2: about one and a half percent negative to GDP. And
Speaker 2: the question that becomes we talk all about China and
Speaker 2: what it means for Europe, but the impact on the
Speaker 2: rest of North America could be huge, particularly for any
Speaker 2: sort of goods coming in from China through Mexico and Canada.
Speaker 2: So joining us now to discussed at Eshwar Prasad Tolani,
Speaker 2: Senior Professor at Trade Policy at Cornell University and Senior
Speaker 2: Fellow at New Century Chair International Economics at the Brookings Institution.
Speaker 2: It's great to get your perspective. Thank you for joining us,
Speaker 2: Happy New Year. What's your bas case for trade wars?
Speaker 2: This year.
Speaker 3: Trump has gotten increasingly specific about the amount of titles
Speaker 3: he is going to Levy, the country, city is going
Speaker 3: to Levy Ton right off the bat. So I suspect
Speaker 3: this is not all bluster. Now for the rest of
Speaker 3: the world, I think this could be seen as a
Speaker 3: bit of a bargaining stance. And the reality that is
Speaker 3: quite different from the first Trump administration is that the
Speaker 3: US is on a very strong footing because economy here
Speaker 3: has been doing remarkably well over the last few years
Speaker 3: in the COVID period. But in addition, the rest of
Speaker 3: the world is really floundering in terms of economics performance.
Speaker 3: If you look at China, Europe, including powerhouses like Germany, Japan,
Speaker 3: and even India, which was roaring along until recently. None
Speaker 3: of these countries can really withstand the effects of a
Speaker 3: significant increase in trade sanctions around the world, so they're
Speaker 3: going to be on the back foot. So it's going
Speaker 3: to be a very interesting bargaining game. But my bet
Speaker 3: is that we're going to see at least a small
Speaker 3: increase in tariffs, perhaps some symbolic amounts, but especially targeted
Speaker 3: towards China. And what the world does to retaliate, I
Speaker 3: think is the key question at hand exactly.
Speaker 2: And if we just focusing on North America for a moment,
Speaker 2: I can make an argument that, you know what, it's
Speaker 2: legit because if you have stuff coming from China through
Speaker 2: Mexico and Canada, you're not going to want to get
Speaker 2: that into the US Versus the other side, which is
Speaker 2: you're really going to hurt your partners in trading within
Speaker 2: North America. What do you think the downside potential is
Speaker 2: here for that?
Speaker 3: Now, for the US, there are some significant downsides. The
Speaker 3: imposition of tariffs generally ends up with the customers a
Speaker 3: significant portion of the tariff, so that could, along with
Speaker 3: the reduction and immigration flows, lead to an increase in
Speaker 3: inflation in the US. On the other hand, you could
Speaker 3: have a stronger dollar resulting from the imposition of tariffs,
Speaker 3: which are at least partially offset the increase in prices.
Speaker 3: But the bigger concer really is going to be about
Speaker 3: the disruption in global trade. And here too, there are
Speaker 3: some very important differences. You know, in the previous Trump administration,
Speaker 3: there was this notion of the US imposing tariffs not
Speaker 3: just on rivals like China, but even on traditional allies
Speaker 3: including Canada, Mexico, and Europe, and we're seeing some rumblings
Speaker 3: of that as well. In the past, China and these
Speaker 3: other countries could perhaps take on the US together, But
Speaker 3: right now China's economy is not doing very well and
Speaker 3: whatever growth they're getting is really coming from the production
Speaker 3: side rather than the consumption side. So the rest of
Speaker 3: the world is very concerned about becoming the dumping ground
Speaker 3: for export export some China, which it really needs in
Speaker 3: order to sustain growth. So there is a fracturing of
Speaker 3: the potential alliances among other countries, which again puts the
Speaker 3: US in a strong position. But certainly disruption in supply
Speaker 3: chains and in production is going to be at cost
Speaker 3: with US manufacturers and manufacturers around the world are going
Speaker 3: to have to.
Speaker 1: Bear with some of those governments, though, the ones that
Speaker 1: have to deal with China, for that matter, the ones
Speaker 1: that have to deal with the US. Is there any
Speaker 1: sense here that they will be able to find some
Speaker 1: sort of common ground between the two, meaning are they
Speaker 1: going to have to choose between a relationship with the
Speaker 1: US versus a relationship with China, or is there a
Speaker 1: way that they can sort of thread that needle and
Speaker 1: appease both nations.
Speaker 3: That's a very complicated issue for many countries that are
Speaker 3: stuck in the middle. For some countries, like India, it's
Speaker 3: somewhat easier because they're not that reliant on exports and
Speaker 3: they could benefit from this geopolitical realignment which shifts foreign
Speaker 3: direct investment flows to India and away from China. But
Speaker 3: the reality is that moving supply chains away from China
Speaker 3: to other countries is going to be very difficult, especially
Speaker 3: in the very shortened but the margin we are beginning
Speaker 3: to see changes now. A couple of the other things
Speaker 3: that the Trump administrations likely do is to shut down
Speaker 3: the ability of China to reroot it's exports through countries
Speaker 3: like Vietnam and Mexico, which have benefited actually from investment
Speaker 3: flows from China in order to undertake that routing. So
Speaker 3: those channels are going to be shut off as well.
Speaker 3: So I think it's going to be difficult for many
Speaker 3: of these countries caught in the middle.
Speaker 1: Well, I'm glad you brought that up here, because whenever
Speaker 1: we talk about TIFF, so you always sort of look
Speaker 1: at it from that blunt instrument aspect of it, and
Speaker 1: the idea that it's just some blanket percentage that they
Speaker 1: put on goods. But there are a lot of areas
Speaker 1: that the Trump administration could exploit, so I guess create
Speaker 1: a little bit more pain for some of those importers.
Speaker 1: And the idea that doing what you just did, which is,
Speaker 1: like I said, closing out some of those loopholes, but
Speaker 1: even certain things like kind of this obscure you know,
Speaker 1: postal war that allows companies like Timu and others to
Speaker 1: kind of ship kind of lower price goods, if you will,
Speaker 1: to the US at basically no cost, or at least
Speaker 1: marginal costs. That's something that could be relatively quickly close.
Speaker 1: I think he still has to go through Congress, but
Speaker 1: it is something that he could do relatively easy.
Speaker 3: That's exactly right. I think even if he doesn't raise
Speaker 3: tariff's closing many of these loopholes will significantly affect China's
Speaker 3: ability to reroot trade through other countries into the US,
Speaker 3: and that's going to hurt countries like Mexico and Vietnam,
Speaker 3: which have recently been benefiting from this trade diversion. Now,
Speaker 3: there are many countries that are very strong relationships with
Speaker 3: the US and with China would like to maintain them,
Speaker 3: but I think at the moment, one of the key
Speaker 3: factors driving the dynamic in this relationship is that it
Speaker 3: is the US consumer. There is powering growth in the
Speaker 3: world economy, Chinese consumers are really not stepping up to
Speaker 3: the plate, so you have substantial access capacity building up
Speaker 3: in China. So I think much of the world is
Speaker 3: much warier about China using them as dumping around so
Speaker 3: it's exports, than they are about US tabs. But certainly
Speaker 3: for countries in the middle, they're getting pinched from both sides,
Speaker 3: and it's going to be a very complicated situation, not
Speaker 3: just in the short term but in the years to come.
Speaker 2: Right, which also makes it difference from back in twenty
Speaker 2: eighteen when it was a different consumer and a different
Speaker 2: fed hiking cycle versus cutting for example ashwar. When you
Speaker 2: take a look at the profound effects of this, the
Speaker 2: whole point is to nearshore stuff or to bring industry
Speaker 2: home to the US. Is this all going to work.
Speaker 3: It's going to happen in the long term, and we
Speaker 3: are seeing those changes already. Like I mentioned, we are
Speaker 3: seeing greater investment flows into India from countries that are
Speaker 3: more closely aligned with the US. China, on the other hand,
Speaker 3: is trying to invest more in countries that are more
Speaker 3: closely aligned with it. So we're going to see a
Speaker 3: fragmentation of foreign direct investment flows and perhaps other types
Speaker 3: of financial flows, including equity flows as well, because countries
Speaker 3: like China and many other rivals of the US are
Speaker 3: concerned that the sort of sanctions that Russia has been
Speaker 3: subjected to could be applied to them as well. So
Speaker 3: I think this geopolitical conflict is going to spill over
Speaker 3: into the economic dimension, both in terms of trade and finance,
Speaker 3: which is going to lead to much more fracturing of
Speaker 3: both trade and finance along geopolitical lines, which may not
Speaker 3: be great for global stability down the road.
Speaker 1: All right, Always an insightful conversation with you. We'll have
Speaker 1: to leave it there. Eshwar Prasad, a professor of trade
Speaker 1: policy over at Cornell University. A closer look here at
Speaker 1: the incoming presidential administration here in the US and what
Speaker 1: it could mean for trade and tariffs.