WEBVTT - Brad Setser on the Damage From Trump's Gigantic Tariff Shock 0:00:02.480 --> 0:00:16.360 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.160 Hello and welcome to another episode of the All Thoughts Podcast. 0:00:21.280 --> 0:00:22.599 I'm Tracy Allaway. 0:00:22.440 --> 0:00:23.640 And I'm Joe Wisenthal. 0:00:24.800 --> 0:00:27.520 Joe Another Day, another emergency podcast. 0:00:27.880 --> 0:00:30.880 We're gonna do a lot. This is a fact, this is. 0:00:30.840 --> 0:00:33.960 The I should just resign myself to this inevitability. 0:00:34.040 --> 0:00:34.240 Right. 0:00:34.680 --> 0:00:38.760 The story of the tariffs, the market reaction, the global 0:00:38.800 --> 0:00:41.560 reaction is the central story of our time, one of 0:00:41.640 --> 0:00:45.400 the biggest stories of our entire career. I think, perhaps, 0:00:45.479 --> 0:00:48.199 depending on how they could go, a bigger story than 0:00:48.280 --> 0:00:51.400 the past two big stories of the Great Financial Crisis 0:00:51.840 --> 0:00:54.240 and the COVID shock. We're going to be doing a 0:00:54.280 --> 0:00:56.360 lot of episodes about what this all means. 0:00:57.320 --> 0:01:00.040 This is what is mind blowing to me, because in 0:01:00.120 --> 0:01:03.120 two thousand and eight happened. I remember thinking this was 0:01:03.200 --> 0:01:06.280 the biggest thing that ever happened in modern finance and 0:01:06.360 --> 0:01:09.240 the modern economy. And then in twenty twenty, I remember 0:01:09.280 --> 0:01:12.480 there was a very vibrant debate about whether or not 0:01:12.720 --> 0:01:15.440 the pandemic and the market selloff would end up being 0:01:15.560 --> 0:01:19.119 the central crisis for a new generation. And I think 0:01:19.120 --> 0:01:23.080 in retrospect it certainly was a lot more people remember 0:01:23.120 --> 0:01:25.280 twenty twenty than they remember two thousand and eight. Now 0:01:25.680 --> 0:01:28.160 and here we are, you know, just five years later, 0:01:28.600 --> 0:01:32.360 having another discussion about how big this is inevitably going 0:01:32.440 --> 0:01:35.080 to be. So on that note, we are recording this 0:01:35.280 --> 0:01:39.880 on Friday, April fourth, the market is selling off yet again. 0:01:40.200 --> 0:01:44.360 We had Trump's new tariff announcements. Those were released on Wednesday, 0:01:44.400 --> 0:01:48.680 April second, Liberation Day. Investors have been I mean, I 0:01:48.720 --> 0:01:54.040 would say pretty much panicking since then. Yeah, and what's more, overnight, 0:01:54.200 --> 0:01:57.160 coming into Friday morning, we've started to see some reaction 0:01:57.280 --> 0:02:01.120 from other countries. Notably China is one of the US's 0:02:01.120 --> 0:02:04.800 biggest trading partners, and they say they're instituting a thirty 0:02:04.840 --> 0:02:08.919 four percent reciprocal tariff on US goods. So things seem 0:02:09.000 --> 0:02:10.440 to be escalating totally. 0:02:10.520 --> 0:02:10.680 You know. 0:02:10.720 --> 0:02:13.720 I'm just gonna make one short comment here, which is 0:02:13.760 --> 0:02:15.760 why I think this might be end up being a 0:02:15.800 --> 0:02:19.400 bigger story than the Great Financial Crisis potentially, and that 0:02:19.520 --> 0:02:23.200 is banking crisis happen. They happen around the world, they've 0:02:23.240 --> 0:02:25.239 happened in the US. They've even happened in the US 0:02:25.320 --> 0:02:28.480 between massive crises, and there is a playbook, and there's 0:02:28.520 --> 0:02:31.000 a response and you try to reflate the economy and 0:02:31.040 --> 0:02:34.960 you stuff like this. This is different because this is 0:02:35.000 --> 0:02:40.720 a policy choice purposely aimed to completely reorient America's relationship 0:02:40.720 --> 0:02:44.480 with the rest of the world and reorient the internal economy. 0:02:44.919 --> 0:02:47.400 And so it's very different than sort of like, oh, 0:02:47.440 --> 0:02:49.200 you have a run on the bank, which happens for 0:02:49.320 --> 0:02:51.000 we had one in March twenty twenty three. We had 0:02:51.000 --> 0:02:53.440 a run on the bank. You know, this is very 0:02:53.480 --> 0:02:56.880 different in terms of the entire relationship of both the 0:02:56.880 --> 0:02:59.840 internal and the external economy, and it may end up 0:02:59.840 --> 0:03:03.160 being more consequential for better or worse. 0:03:03.480 --> 0:03:06.080 Than I don't disagree with you, but I'm just gonna 0:03:06.080 --> 0:03:08.080 say one thing. Number one, that's not a short comment. 0:03:08.400 --> 0:03:12.519 Number two, you're right. This is an entirely self inflicted 0:03:12.600 --> 0:03:15.880 own goal basically by the Trump administration. Like it is 0:03:15.960 --> 0:03:20.400 their decision to do this, and they presumably knew what 0:03:20.440 --> 0:03:22.600 the results were going to be, right, they decided not 0:03:22.680 --> 0:03:26.800 to hold the tariff press conference while the markets were open. 0:03:27.120 --> 0:03:29.240 They knew that coming out was something that was worse 0:03:29.280 --> 0:03:32.480 than a lot of professional economists and analysts had expected, 0:03:32.560 --> 0:03:34.760 was going to have this impact on the market. And 0:03:34.840 --> 0:03:37.200 here we are. So this is something that the administration 0:03:37.360 --> 0:03:42.160 has chosen to do. Obviously, there's lots going on. Obviously 0:03:42.200 --> 0:03:44.520 we have a lot of questions. Who do we turn 0:03:44.600 --> 0:03:47.800 to when we have trade questions? We do, in fact 0:03:47.800 --> 0:03:49.800 have the perfect guest. We're going to be speaking with 0:03:49.920 --> 0:03:54.240 Brad Setzer, senior fellow at the Council on Foreign Relations 0:03:54.320 --> 0:03:57.320 and a long time trade expert. One of our favorites 0:03:57.360 --> 0:03:59.320 to talk to. The last time we saw him was 0:03:59.360 --> 0:04:03.040 actually at our pre election event at a live show 0:04:03.160 --> 0:04:07.240 in New York, and Brad, I remember speaking to you there. 0:04:07.480 --> 0:04:10.120 There were a lot of concerns about what Trump could 0:04:10.120 --> 0:04:13.840 do on trade. How has the reality shaped up to 0:04:14.120 --> 0:04:15.119 expectations here? 0:04:16.120 --> 0:04:20.760 Well, look, Trump did campaign on an agenda that was 0:04:20.880 --> 0:04:25.640 tariffs and more tariffs. He campaigned on a ten percent 0:04:25.680 --> 0:04:29.520 across the board tariff and prohibitive tariffs on trade with China, 0:04:30.040 --> 0:04:32.800 and at times he did suggest that ten percent was 0:04:32.839 --> 0:04:38.960 the minimum. That said, a lot of people close to Trump, 0:04:39.000 --> 0:04:41.520 a lot of people who found their way into the administration, 0:04:42.360 --> 0:04:47.360 were sending different messages privately to people in the financial markets. 0:04:48.040 --> 0:04:51.279 People like Scott Bessett were talking about how the Trump 0:04:51.480 --> 0:04:55.200 Trump's plan was escalate to de escalate the tariffs were 0:04:55.200 --> 0:04:58.960 a negotiating tool, they weren't a tool to up end 0:04:59.040 --> 0:05:02.599 the global economy. I think what the announcement on Wednesday 0:05:02.640 --> 0:05:08.000 showed is that the decision of the administration, not surprisingly, 0:05:08.440 --> 0:05:11.440 was to follow President Trump's instincts, not the instincts of 0:05:11.520 --> 0:05:15.520 his more moderate advisors, to go all in, and that 0:05:15.640 --> 0:05:18.080 the goal really is to, as you guys suggested at 0:05:18.120 --> 0:05:22.839 the beginning, to radically restructure the US and global economies 0:05:22.920 --> 0:05:27.200 using tariffs as a tool, with some flexibility, perhaps negotiate 0:05:27.240 --> 0:05:31.560 at the edges, but fundamentally this is a test of 0:05:31.560 --> 0:05:34.720 what you can and cannot do with tariffs, and there 0:05:34.839 --> 0:05:38.279 was very little restraint I would say a part for 0:05:38.960 --> 0:05:43.240 strangely enough, Canada and Mexico USMCA on the level of 0:05:43.279 --> 0:05:45.320 the tariffs. So the tariffs are set at levels which 0:05:45.360 --> 0:05:47.440 are just going to frankly be painful. 0:05:48.560 --> 0:05:51.120 You know, Tracy mentioned that we talked to the night 0:05:51.160 --> 0:05:53.680 before the election, and one thing that's interesting about talking 0:05:53.680 --> 0:05:56.520 to you is you are not a sort of naive 0:05:57.360 --> 0:06:01.600 you know, all trade it fine, fair economists, yeah, or 0:06:01.680 --> 0:06:03.760 just like you know everything was fine in the global 0:06:03.800 --> 0:06:07.040 trading system, and you've been talking for years that like 0:06:07.120 --> 0:06:10.279 this is an unhealthy relationship that the US has with 0:06:10.400 --> 0:06:13.039 China specifically, and that night that we talked to you 0:06:13.080 --> 0:06:15.919 before the election, and you're like, the answer is to 0:06:16.040 --> 0:06:20.719 really deepen the trading relationship with our allies, our friends, 0:06:20.720 --> 0:06:22.800 so that would be Europe, Canada and so forth, and 0:06:22.880 --> 0:06:27.080 really build up a coherent open trading block that would 0:06:27.160 --> 0:06:29.839 stand to something different to China, which you've said, which, 0:06:29.880 --> 0:06:32.599 as you've said, has had unfair trade practices for a 0:06:32.600 --> 0:06:35.520 long time. Trump says the same thing, we haven't. So 0:06:35.560 --> 0:06:40.159 what are the consequences of closing it, fragmenting what you 0:06:40.279 --> 0:06:43.479 saw as the potential open trading block to counter China. 0:06:44.960 --> 0:06:50.680 Well, obvious point is elections do have consequences. Look, I 0:06:50.720 --> 0:06:54.400 do think that trade with China is very difficult for 0:06:54.520 --> 0:06:58.960 most countries that aren't just commodity exporters. If you look 0:06:59.000 --> 0:07:03.279 at China's pattern of trade over the last six years, 0:07:04.080 --> 0:07:08.920 China's imports of manufacturers increased on average by fifteen one 0:07:09.120 --> 0:07:13.520 five billion dollars a year, essentially nothing. China's exports of 0:07:13.600 --> 0:07:17.560 manufacturers over the last six years increased on average by 0:07:17.600 --> 0:07:20.280 one hundred and seventy five billion dollars a year, ten 0:07:20.360 --> 0:07:25.400 times as much so. China became an economy, particularly in 0:07:25.640 --> 0:07:28.119 respond because of the way it responded to COVID because 0:07:28.160 --> 0:07:31.080 of the real estate crisis, that was exporting but not 0:07:31.160 --> 0:07:34.680 importing when it came to manufacturers, and China's trade surplus 0:07:34.760 --> 0:07:38.160 surge to be in about a trillion. It's a little 0:07:38.160 --> 0:07:41.520 over a trillion dollars now about a percent of world GDP. 0:07:42.000 --> 0:07:45.440 It's manufacturing surplus is two percent of world GDP. These 0:07:45.480 --> 0:07:50.240 are really unprecedented numbers, and so you know, my view 0:07:50.400 --> 0:07:53.520 was that, hey, we don't have to abandon all the 0:07:53.560 --> 0:07:57.880 benefits of trade. We can maintain the benefits of relatively 0:07:58.040 --> 0:08:02.880 integrated trade among like minded I guess I don't like 0:08:02.920 --> 0:08:06.640 that term, actually amongst countries that have similar economic systems, 0:08:07.200 --> 0:08:13.160 similar politics, and that that was a better way of 0:08:13.200 --> 0:08:15.760 both putting pressure on China, because the pressure is really 0:08:15.800 --> 0:08:20.000 on China, and also avoiding the costs that come from 0:08:20.080 --> 0:08:23.520 fully disengaging from the world economy. I think the choice 0:08:23.640 --> 0:08:26.000 was made was essentially an American to go with in 0:08:26.040 --> 0:08:29.840 America alone policy, where we're going to give up a 0:08:29.840 --> 0:08:32.960 lot of the benefits of trade with our neighbors and 0:08:33.000 --> 0:08:36.199 with long standing friends. And I think the net effect 0:08:36.240 --> 0:08:37.680 of that. Yes, it's going to put a lot of 0:08:37.679 --> 0:08:40.840 pressure on China, the tariff's on Vietnam or in some 0:08:40.880 --> 0:08:44.040 ways tariffs on indirect Chinese exports as well, But it 0:08:44.080 --> 0:08:46.520 does so at a very very high cost, and it 0:08:47.080 --> 0:08:49.880 sort of gives up the benefits that I thought the 0:08:49.960 --> 0:08:52.320 US had for being at the center of a much 0:08:52.360 --> 0:08:54.920 bigger block than China was going to be at the center. 0:08:54.960 --> 0:08:58.280 We've kind of the vision here is at least shrinking 0:08:58.320 --> 0:09:00.800 to within North America and maybe ranking to within the 0:09:00.880 --> 0:09:04.120 United States. That's just fundamentally a different vision, and I 0:09:04.120 --> 0:09:06.719 think it's a more costly form of disengagement. 0:09:23.080 --> 0:09:26.040 So you mentioned Vietnam there, and I think this is 0:09:26.080 --> 0:09:29.640 one of the big differences between tariffs this time around 0:09:29.679 --> 0:09:33.440 and tariffs in the first Trump administration. So we did 0:09:33.440 --> 0:09:36.840 see a lot of production that basically circumvented the China 0:09:36.960 --> 0:09:43.240 tariffs post twenty eighteen, that increased production in places like Vietnam, 0:09:43.360 --> 0:09:46.200 lots of Chinese components going into Mexico and then finding 0:09:46.200 --> 0:09:50.280 their way into the US from there. Is there any 0:09:50.360 --> 0:09:54.800 wriggle room left in the current constellation of the new 0:09:55.080 --> 0:09:58.480 export limitations the new tariffs. Is there any wriggle room 0:09:58.559 --> 0:10:02.920 to kind of reorient and potentially American imports that way, 0:10:03.120 --> 0:10:06.080 or are there ways maybe to I don't know, figure 0:10:06.120 --> 0:10:10.600 out lower tariff bands by like arbitraging between one country 0:10:10.840 --> 0:10:13.640 and another, or are they so sweeping that a lot 0:10:13.679 --> 0:10:15.760 of that ability has just been wiped out. 0:10:16.360 --> 0:10:20.880 There are two potential arbitrages that have opened up if 0:10:21.000 --> 0:10:25.520 Wednesday Night is maintained. So the first is there are 0:10:25.520 --> 0:10:29.000 a set of countries, generally countries which have now relatively 0:10:29.080 --> 0:10:32.800 balanced trade with the US that only got the baseline 0:10:32.800 --> 0:10:37.920 ten percent tariff. So if you reoriented your supply chains 0:10:37.960 --> 0:10:40.760 and took the increase in shipping costs and found a 0:10:40.800 --> 0:10:44.520 bunch of, say workers in Brazil, you could employ those 0:10:44.559 --> 0:10:48.760 workers in Brazil to put together components from China and 0:10:48.880 --> 0:10:50.719 send them to the US and only pay a ten 0:10:50.760 --> 0:10:55.040 percent tariff. That's better than Vietnam's forty five percent tariff 0:10:55.080 --> 0:10:59.400 and the fifty five percent tariff ballpark China that any 0:10:59.400 --> 0:11:02.640 good from China faces, with some goods facing iron tariffs. 0:11:03.080 --> 0:11:07.360 So opportunity number one is basically move production or at 0:11:07.440 --> 0:11:11.439 least final assembly to countries that already have balance trade 0:11:11.480 --> 0:11:14.760 with the US and thereby only have a ten percent tariff. 0:11:15.080 --> 0:11:17.840 Note the ironing that if these countries become centers for 0:11:17.920 --> 0:11:22.480 final assembly, bilateral trade will no longer stay balanced. It'll 0:11:22.520 --> 0:11:28.720 quickly shift the other big exception again for now, and 0:11:29.000 --> 0:11:31.480 it doesn't apply to autos, and it doesn't apply to steel, 0:11:31.520 --> 0:11:34.120 and it doesn't probably won't apply to pharmaceuticals, and it 0:11:34.160 --> 0:11:37.800 probably won't apply to some other sectors. Is that for now? 0:11:37.840 --> 0:11:39.800 And I mean I do find it a bit shocking 0:11:39.840 --> 0:11:44.240 given how much emphasis President Trump has placed on Canada 0:11:44.280 --> 0:11:47.200 in the first two months of its administration. For now, 0:11:47.920 --> 0:11:51.440 most trade with Mexico and Canada, outside of autos is 0:11:51.480 --> 0:11:56.199 still relatively low tariff. It has to be us MCA compliant. 0:11:56.760 --> 0:12:01.280 You can generally achieve that the USMCA compliance. You know 0:12:01.320 --> 0:12:03.400 a lot of people weren't doing it because there was 0:12:03.440 --> 0:12:07.080 no advantage in say electronics, because electronics tariffs were zero 0:12:07.559 --> 0:12:12.040 inside USMCA and zero for Vietnam. Now there's a huge 0:12:12.080 --> 0:12:14.079 incentive to be the USMCA compliant. 0:12:14.520 --> 0:12:15.240 So if you can do. 0:12:15.280 --> 0:12:20.760 Us MCA compliant production assembly in Mexico, there's no really 0:12:20.880 --> 0:12:23.679 right now, but it'll probably change over time. Limits on 0:12:23.720 --> 0:12:27.120 how many Chinese parts can be included in that operation. 0:12:27.920 --> 0:12:29.559 For now, you get around the tariff. 0:12:29.840 --> 0:12:30.000 Now. 0:12:30.040 --> 0:12:32.880 I think there will be a renegotiation of USMCA that 0:12:32.920 --> 0:12:35.040 will make some of this a bit harder over time, 0:12:35.800 --> 0:12:39.440 but that at least is the opportunity that would be 0:12:39.640 --> 0:12:44.600 open for now if nothing more changes. But it doesn't 0:12:44.640 --> 0:12:47.280 feel fully consistent with the president's intent either. 0:12:48.360 --> 0:12:51.840 You know, you've been talking about trade for your entire career, 0:12:51.920 --> 0:12:55.680 et cetera. You know, on that Wednesday announcement, every country 0:12:55.800 --> 0:12:58.120 got a tariff slapped on it, and it was basically 0:12:58.200 --> 0:13:03.920 a strict function of the amount of surplus then divided 0:13:04.120 --> 0:13:08.559 by exports and then divided by Yeah, so China, for instance, 0:13:08.720 --> 0:13:11.200 trade surplus of two hundred and ninety five billion last 0:13:11.280 --> 0:13:13.960 year on exports of four hundred and thirty eight billion, 0:13:13.960 --> 0:13:16.040 a ratio of sixty eight percent, and then they divided 0:13:16.080 --> 0:13:17.800 by two and that's how they got thirty four percent. 0:13:18.000 --> 0:13:20.079 And that's how they did it every country down the line. 0:13:20.120 --> 0:13:23.400 And the theoretical idea here seems to be that if 0:13:23.400 --> 0:13:26.760 we run a bilateral trade surplus with you any country 0:13:26.760 --> 0:13:29.720 in the world, then that must be some proxy for 0:13:29.800 --> 0:13:32.719 the amount that you're cheating, either through tariffs or non 0:13:32.800 --> 0:13:36.560 tariff trade barriers or currency manipulation or something like that. 0:13:37.000 --> 0:13:40.280 This seems to be the intellectual logic. And what I'm 0:13:40.360 --> 0:13:44.720 curious from you is, in all your knowledge of sort 0:13:44.720 --> 0:13:48.040 of the theory of world trade, is this something that 0:13:48.080 --> 0:13:51.080 people have talked about. Is a reasonable way or a 0:13:51.120 --> 0:13:55.439 reasonable proxy to measure the amount with which a country 0:13:55.720 --> 0:13:58.000 quote cheats in the rules of free trade? 0:13:58.880 --> 0:14:02.040 The simple answer is, as you know, Joe, no, this 0:14:02.120 --> 0:14:05.640 felt like a group of economic advisors who had put 0:14:05.640 --> 0:14:08.080 off doing a term paper until really late at night 0:14:08.600 --> 0:14:11.640 and were scrambling to come up and then use chat 0:14:11.679 --> 0:14:15.880 GPT right, perhaps, but I mean, essentially, it certainly seems 0:14:16.160 --> 0:14:20.640 from the tiktoks that the President himself asked for tariffs 0:14:20.640 --> 0:14:23.800 on not just fifteen countries, but seventy countries or something, 0:14:24.200 --> 0:14:26.280 and people had to come up with a formula because 0:14:26.320 --> 0:14:29.440 it was clear that USTR and others didn't have the 0:14:29.480 --> 0:14:34.119 capacity to do true assessments of all of the countries 0:14:34.480 --> 0:14:37.200 that were covered by this announcement. But it does feel 0:14:37.240 --> 0:14:40.240 like a term paper that went horribly wrong because it 0:14:40.320 --> 0:14:42.600 was written at four in the morning and had to 0:14:42.600 --> 0:14:47.960 be submitted at six. There are some obvious weirdness that 0:14:48.040 --> 0:14:52.400 comes from this formula. The most significant of which, in 0:14:52.440 --> 0:14:58.000 my view, is that small Asian economies that generally have 0:14:58.120 --> 0:15:03.600 current account deficits, they're trade deficits overall, often run surpluses 0:15:03.640 --> 0:15:07.080 with the United States because they're relatively poor, they don't 0:15:07.120 --> 0:15:10.400 can't afford many of our goods, and they can still 0:15:10.480 --> 0:15:14.000 produce clothing more or less for the US market. So 0:15:14.120 --> 0:15:17.560 hence we put really quite heavy tariffs on a country 0:15:17.600 --> 0:15:21.440 like Sri Lanka, on a country Bangladesh, you know, countries 0:15:21.480 --> 0:15:25.880 where I don't think there was any significant concern about 0:15:25.920 --> 0:15:28.840 the pattern of trade. I'm sure there were some concerns 0:15:28.840 --> 0:15:32.560 about sweatshops and labor rights and so forth and so on, 0:15:32.960 --> 0:15:35.120 but no one was sort of in the US economy 0:15:35.240 --> 0:15:38.520 was you know, hey, hey ho ho, competition from Sri 0:15:38.640 --> 0:15:42.160 Lanka has to go. This was just a function of 0:15:42.720 --> 0:15:46.200 a formula applied without thought, and so you end up 0:15:46.200 --> 0:15:50.560 having heavy tariffs on countries that are just producing clothes 0:15:50.760 --> 0:15:54.280 which realistically won't be produced in the US. So there's 0:15:54.320 --> 0:16:00.240 an element of pure pointlessness that comes out of this formula. Now, 0:16:00.280 --> 0:16:02.600 I will say that there is some value in looking 0:16:02.640 --> 0:16:05.360 at bilateral trade patterns. I mean, I've certainly learned a 0:16:05.360 --> 0:16:08.280 lot from trying to understand why the US runs such 0:16:08.320 --> 0:16:11.720 a large deficit with Ireland. I think the answer is 0:16:11.720 --> 0:16:14.240 not that Ireland is an unfair trader. I think the 0:16:14.320 --> 0:16:18.280 answer is we have a tax policy that incentivized American 0:16:18.320 --> 0:16:21.760 companies to produce in Ireland, to reduce their US tax 0:16:21.840 --> 0:16:24.480 rate from twenty one to ten and a half percent. 0:16:24.560 --> 0:16:27.160 And so in some cases you can learn from the 0:16:27.200 --> 0:16:30.240 pattern of bilateral trade. I certainly think you can learn 0:16:30.240 --> 0:16:34.240 something from looking at global trade surpluses, not bilateral trade surpluses. 0:16:34.680 --> 0:16:38.000 And the global surplus is pointing to a problem with China. 0:16:38.560 --> 0:16:40.760 China really has been growing on the back of net 0:16:40.800 --> 0:16:44.360 exports for the last four or five years. China's trade 0:16:44.400 --> 0:16:47.640 surplus with the world really is big. And in a sense, 0:16:47.680 --> 0:16:51.960 the bilateral deficit with China now understates our reliance on 0:16:52.040 --> 0:16:55.600 Chinese supply because of all this re routing through third countries. 0:16:56.200 --> 0:17:01.200 But just using this simple formula produced some obvious absurd results. 0:17:01.640 --> 0:17:03.400 And you know it was done late at night because 0:17:03.440 --> 0:17:06.480 we ended up tariffing islands that only produced penguins. 0:17:07.240 --> 0:17:07.880 Yeah. 0:17:08.119 --> 0:17:12.080 Yeah, make the penguins sign up for better trade terms, certainly, Okay, 0:17:12.280 --> 0:17:13.960 So on this note. I mean this is actually the 0:17:14.000 --> 0:17:18.080 thing that I find most depressing slash disturbing about all 0:17:18.160 --> 0:17:21.000 of this. It's the arbitrariness with which some of these 0:17:21.040 --> 0:17:24.040 seem to have be been designed. And I know I 0:17:24.080 --> 0:17:26.600 wrote about it in the newsletter yesterday, so Joe's aware 0:17:26.600 --> 0:17:29.200 of this. But like the example I've been reaching for 0:17:29.320 --> 0:17:32.639 is Nahru. So you know, thirty percent tariffs on this 0:17:32.800 --> 0:17:36.640 tiny island state in the middle of the South Pacific Ocean, 0:17:36.920 --> 0:17:40.480 and they, you know, they export like one to two 0:17:40.560 --> 0:17:45.240 million worth of pig meats and some computer parts every 0:17:45.320 --> 0:17:49.639 year to the US. I just cannot fathom what the 0:17:49.800 --> 0:17:53.159 US wants from a country like Nahru, or in what 0:17:53.359 --> 0:17:56.760 way the US economy is at all threatened by a 0:17:56.800 --> 0:17:59.080 country like Naru. And as you point out, Brad, it's 0:17:59.080 --> 0:18:01.879 not like the islanders are suddenly going to be buying 0:18:02.200 --> 0:18:04.480 a bunch of Fords from the US, right like they 0:18:04.480 --> 0:18:07.159 have twelve miles worth of road What exactly are they 0:18:07.160 --> 0:18:10.080 going to be buying from America? That disturbs me a lot. 0:18:10.119 --> 0:18:13.240 But beyond that, you know, you might have realized already 0:18:13.359 --> 0:18:15.520 Joe certainly has that. I'm a little bit cranky and 0:18:15.600 --> 0:18:20.040 tired this morning, Joe's very exhilarated by watching a history 0:18:20.119 --> 0:18:22.920 change in real time. I just got kind of kind 0:18:22.960 --> 0:18:25.960 of sad and tired. But for my benefit, can you 0:18:26.000 --> 0:18:29.480 maybe describe is there any path where you see this 0:18:29.720 --> 0:18:35.160 going reasonably well or at least not completely terribly. 0:18:37.280 --> 0:18:37.720 Well. 0:18:38.080 --> 0:18:41.240 There are long parts. Is a path to de escalation. 0:18:41.840 --> 0:18:45.359 The path to de escalation is one where you know, 0:18:45.400 --> 0:18:48.200 in some sense, the Trump administration decides not to make history. 0:18:48.280 --> 0:18:50.760 Joe's going to be a bit bored. Just doesn't turn 0:18:50.840 --> 0:18:53.159 out to be the glow, the repeat of the global 0:18:53.160 --> 0:18:56.560 financial crisis. It turns out to be a more ordinary 0:18:56.640 --> 0:19:00.320 trade war, maybe with a few Trumpian flourishes and maybe 0:19:00.320 --> 0:19:05.040 with a bit more revenue collection. But if the administration 0:19:05.280 --> 0:19:08.879 concludes that it overshot, that they are worried about throwing 0:19:08.880 --> 0:19:12.280 the US economy into a self induced recession, that they 0:19:12.280 --> 0:19:16.560 don't have political support for this particular trade war, and 0:19:16.600 --> 0:19:19.679 they want to back off, They've left a little space 0:19:19.720 --> 0:19:23.679 to do quote unquote phenomenal deals. And so if there 0:19:23.680 --> 0:19:27.399 are phenomenal deals done with China, with Europe, with Japan, 0:19:28.119 --> 0:19:32.040 if there's some agreement that is reached with Mexico and 0:19:32.119 --> 0:19:35.840 Canada that rolls back some of the auto protection, which 0:19:35.880 --> 0:19:39.679 is actually significant in its own terms, even if the 0:19:39.720 --> 0:19:42.960 rest of not the rest, but even if the consumer 0:19:43.040 --> 0:19:47.680 goods and non metal based part of North American trade 0:19:47.720 --> 0:19:51.240 is still relatively untariffed, if you reach deals with them, 0:19:51.440 --> 0:19:54.400 reach deals with Southeast Asia, reach deals with the UK 0:19:54.640 --> 0:19:58.320 and so forth and so on, you could generally perhaps 0:19:58.400 --> 0:20:01.439 fall back to something that's closer to a ten percent 0:20:01.520 --> 0:20:06.600 tariff across the board, which is significant but not as disruptive. 0:20:07.160 --> 0:20:10.440 And then whatever your deal with China leaves you with, 0:20:10.920 --> 0:20:13.399 you kind of play a trade war out with China 0:20:13.520 --> 0:20:15.919 using the three zho one tool, and you really just 0:20:16.000 --> 0:20:19.639 focus on China. So that is the most plausible path 0:20:20.000 --> 0:20:24.320 towards de escalation. I think right now, though Joe's in luck, 0:20:24.400 --> 0:20:27.439 we're on a path where the President does seem fairly 0:20:27.480 --> 0:20:32.040 committed to changing the fundamental structure of the US and 0:20:32.119 --> 0:20:35.200 North American economies. And if you want to achieve that 0:20:35.320 --> 0:20:39.240 deep change through policy, you have to impose policies that 0:20:39.280 --> 0:20:42.840 are are disruptive and painful and so and other countries 0:20:42.880 --> 0:20:46.359 are going to react, and the US basically is taking 0:20:46.400 --> 0:20:49.040 policy steps, then on one hand, risk throwing the US 0:20:49.040 --> 0:20:51.399 into recession. And are almost starting to throw some of 0:20:51.440 --> 0:20:55.640 our major trading partners into recession. And countries generally don't 0:20:55.680 --> 0:20:59.960 want to be pushed into recession by policy choices made abroad, 0:21:00.320 --> 0:21:02.720 So the natural reaction is going to be to try 0:21:02.760 --> 0:21:05.960 to reduce your dependence on the US market. Now that's 0:21:06.040 --> 0:21:09.200 really hard because the US is the only big, big, 0:21:09.240 --> 0:21:12.480 big country that runs really big deficits, I guess along 0:21:12.480 --> 0:21:14.879 with the UK. So it is just really hard for 0:21:14.920 --> 0:21:18.280 all the surplus countries to find an alternative source of demand. 0:21:18.520 --> 0:21:20.440 The US has really been supplying a lot of demand 0:21:20.480 --> 0:21:23.439 to the global economy. But if Trump is determined to 0:21:23.600 --> 0:21:26.440 close the trade deficit and willing to do so by 0:21:26.440 --> 0:21:29.399 shrinking the US economy, and is more or less given 0:21:29.480 --> 0:21:33.480 up on the idea of growing exports as a way out, 0:21:33.880 --> 0:21:36.679 and then I think, a we're making history because we 0:21:36.720 --> 0:21:40.520 are carrying apart something that has grown up organically over 0:21:40.560 --> 0:21:44.720 eighty years, something that the US actually helped. It's a 0:21:44.760 --> 0:21:46.879 trite statement, but it is true. It's the system the 0:21:47.000 --> 0:21:50.119 US after World War two more or less created. And 0:21:50.160 --> 0:21:52.760 then the cost of that system, in Trump's view eyes, 0:21:52.800 --> 0:21:54.399 got to be too big, and so he made a 0:21:54.440 --> 0:22:00.840 decision to radically step away from current trade patterns and 0:22:00.880 --> 0:22:03.400 trade policies. I mean, this is a real break. It's 0:22:03.800 --> 0:22:07.680 a much bigger break than just doing a targeted action 0:22:08.520 --> 0:22:11.560 against China, which is his term one trade policy. You know, 0:22:11.840 --> 0:22:13.240 I'm not sure it's going to be bigger than the 0:22:13.240 --> 0:22:18.120 global financial crisis anything. I was unfortunately around then, and 0:22:18.440 --> 0:22:22.200 I remember, you know, the panic in New York when 0:22:22.240 --> 0:22:25.600 the big institutions were on the edge of going busts 0:22:25.720 --> 0:22:28.520 and the five percent fall in the US economy and 0:22:28.560 --> 0:22:33.600 the very very slow recovery. You just do normal economic analysis, 0:22:33.680 --> 0:22:36.119 you maybe get a shock of a third of that 0:22:36.320 --> 0:22:39.320 size from what we're doing now. We're not so integrated 0:22:39.320 --> 0:22:42.720 into the global economy. We haven't stopped all trade, We've 0:22:42.760 --> 0:22:45.760 just taxed it at a very high rate. But yeah, 0:22:46.080 --> 0:22:48.840 it will play out over a much longer period of time. 0:22:48.960 --> 0:22:53.000 A financial crisis, you know, risk disaster, but it forces 0:22:53.040 --> 0:22:56.479 you to respond quickly. This is a more slow moving 0:22:56.680 --> 0:23:00.480 and as you indicated, it's a result of a conscious 0:23:00.520 --> 0:23:04.520 policy choice. So therefore it has a very different dynamic. 0:23:05.480 --> 0:23:08.600 Lots and lots and lots and lots and lots of 0:23:08.680 --> 0:23:10.919 trade episodes to come in our future. 0:23:11.000 --> 0:23:12.000 We'll talk to you next week. 0:23:12.000 --> 0:23:12.440 Brad. 0:23:13.080 --> 0:23:14.640 Yeah, Brad, thank you so much. 0:23:14.720 --> 0:23:16.840 Well, let's talk about capital flows. 0:23:17.480 --> 0:23:24.280 Uh, you know, Canadian pension funds and Taiwan in the 0:23:24.320 --> 0:23:28.960 trade war and Taiwan, Taiwan the good old days they are. 0:23:29.119 --> 0:23:31.240 They are still interesting, Joe. They are still. 0:23:32.720 --> 0:23:35.960 The good old days of Taiwanese life insured mysteries. All right, Brad, 0:23:35.960 --> 0:23:37.600 thank you so much, Really appreciate it. 0:23:38.400 --> 0:23:53.200