1 00:00:02,520 --> 00:00:10,639 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and 2 00:00:10,720 --> 00:00:13,320 Speaker 1: this is Here's Why, where we take one news story 3 00:00:13,360 --> 00:00:15,520 Speaker 1: and explain it in just a few minutes with our 4 00:00:15,560 --> 00:00:17,280 Speaker 1: experts here at Bloomberg. 5 00:00:21,280 --> 00:00:25,160 Speaker 2: April second, twenty twenty five will forever be remembered as 6 00:00:25,200 --> 00:00:31,280 Speaker 2: today American industry was reborn, the day America's destiny was reclaimed, 7 00:00:31,920 --> 00:00:36,880 Speaker 2: and the day that we began to make America wealthy again. 8 00:00:38,600 --> 00:00:42,159 Speaker 1: The American economy is richer, more innovative, and for more 9 00:00:42,200 --> 00:00:44,760 Speaker 1: than a decade, has grown at a faster rate than 10 00:00:44,800 --> 00:00:48,760 Speaker 1: most of the developed world. But uncertainty over the effects 11 00:00:48,760 --> 00:00:52,800 Speaker 1: of Donald Trump's policies, particularly on trade, as many people 12 00:00:52,800 --> 00:00:56,120 Speaker 1: asking if the outperformance of the US economy could be 13 00:00:56,160 --> 00:00:57,200 Speaker 1: coming to an end. 14 00:00:57,840 --> 00:01:01,400 Speaker 3: A very broad, crude consensus was that the US administration 15 00:01:01,520 --> 00:01:03,720 Speaker 3: was going to be brilliant for the US economy and 16 00:01:03,840 --> 00:01:06,720 Speaker 3: terrible for everywhere else, quite simply put. And so what 17 00:01:06,760 --> 00:01:09,319 Speaker 3: we're seeing so far this year is question marks on 18 00:01:09,319 --> 00:01:12,160 Speaker 3: both sides of that. When we know consumer spending drives 19 00:01:12,200 --> 00:01:15,480 Speaker 3: about sixty five percent seventy percent of GDP in the US, 20 00:01:15,800 --> 00:01:18,120 Speaker 3: that's something that we're going to watch very very closely. 21 00:01:18,640 --> 00:01:21,880 Speaker 2: We do see that consumer confidence has deteriorated quite. 22 00:01:21,640 --> 00:01:23,520 Speaker 4: Fast anywhere you slice it. 23 00:01:23,560 --> 00:01:27,080 Speaker 3: That none of this looks to be positive for growth 24 00:01:27,120 --> 00:01:28,440 Speaker 3: or inflation in the short run. 25 00:01:29,319 --> 00:01:31,720 Speaker 1: In just a few short months in office, the US 26 00:01:31,800 --> 00:01:35,760 Speaker 1: President has upended the global trade in goods that's worth 27 00:01:35,840 --> 00:01:40,759 Speaker 1: some twenty four trillion dollars. Here's why tariffs could make 28 00:01:40,800 --> 00:01:46,360 Speaker 1: America less exceptional. Our head of economics and Government and 29 00:01:46,400 --> 00:01:49,800 Speaker 1: host of the Trump Andomics podcast, Stephanie Flanders, joins me 30 00:01:49,880 --> 00:01:53,640 Speaker 1: now for more. Stephanie, first of all, for context, how 31 00:01:53,720 --> 00:01:57,200 Speaker 1: much better has the American economy been doing than the 32 00:01:57,200 --> 00:01:58,960 Speaker 1: rest of the world up until now? 33 00:02:00,120 --> 00:02:02,120 Speaker 4: I think, you know, we're often HARKing back to the 34 00:02:02,120 --> 00:02:05,080 Speaker 4: global financial crisis, because, certainly in the UK, but also 35 00:02:05,240 --> 00:02:07,800 Speaker 4: a lot of other countries, that was when there seemed 36 00:02:07,800 --> 00:02:10,360 Speaker 4: to be a kind of step shift slowed down in 37 00:02:10,440 --> 00:02:15,280 Speaker 4: growth and productivity in most developed economies, and the US 38 00:02:15,280 --> 00:02:17,440 Speaker 4: has just not suffered from that in the same way. 39 00:02:17,520 --> 00:02:21,160 Speaker 4: So even since two thousand and eight, its average real 40 00:02:21,200 --> 00:02:23,960 Speaker 4: growth rate has been just under two percent, maybe one 41 00:02:24,000 --> 00:02:25,960 Speaker 4: point eight percent, not quite as good as it had 42 00:02:25,960 --> 00:02:29,480 Speaker 4: been in previous years, but still much better than both 43 00:02:29,520 --> 00:02:32,040 Speaker 4: the European Union or the UK, which has been sort 44 00:02:32,080 --> 00:02:34,560 Speaker 4: of just over one percent. And I think it's even 45 00:02:34,600 --> 00:02:38,679 Speaker 4: more striking since COVID, where the US has more or 46 00:02:38,720 --> 00:02:41,320 Speaker 4: less continued that rate of growth since COVID, and the 47 00:02:41,360 --> 00:02:44,040 Speaker 4: economy is probably fifteen percent bigger now than it was 48 00:02:44,080 --> 00:02:46,760 Speaker 4: at the end of twenty nineteen before the pandemic, and 49 00:02:47,240 --> 00:02:49,680 Speaker 4: both the EU and the UK have not come anything 50 00:02:49,800 --> 00:02:50,480 Speaker 4: like close to that. 51 00:02:50,919 --> 00:02:54,080 Speaker 1: So what will tariffs mean for that trajectory? For the 52 00:02:54,200 --> 00:02:56,800 Speaker 1: US economy who feels their effect most. 53 00:02:57,000 --> 00:03:00,160 Speaker 4: There's an immediate hit, and obviously we're still sort of 54 00:03:00,280 --> 00:03:02,959 Speaker 4: passing through. As you've probably gathered, some of the numbers 55 00:03:03,000 --> 00:03:06,359 Speaker 4: weren't quite as advertised. There's even some sort of basic 56 00:03:06,480 --> 00:03:08,920 Speaker 4: elements of these tariffs where we don't know whether to 57 00:03:08,960 --> 00:03:11,880 Speaker 4: add them up or just consider them as totals for 58 00:03:11,919 --> 00:03:14,240 Speaker 4: each country. I know that sounds completely basic, but it 59 00:03:14,240 --> 00:03:16,320 Speaker 4: seems to be something that even some officials in the 60 00:03:16,320 --> 00:03:19,520 Speaker 4: White House aren't entirely clear about. But insofar as we 61 00:03:19,560 --> 00:03:21,680 Speaker 4: can put these numbers into the models, the sort of 62 00:03:21,760 --> 00:03:25,560 Speaker 4: rough model of the US economy would suggest that it 63 00:03:25,560 --> 00:03:29,320 Speaker 4: would reduce GDP by between two and three percent, so 64 00:03:29,560 --> 00:03:33,040 Speaker 4: not nothing at all, and raise the level of prices 65 00:03:33,160 --> 00:03:36,080 Speaker 4: by around one and a half percent, But of course 66 00:03:36,080 --> 00:03:40,200 Speaker 4: a lot depends on what importers do. Do they pass 67 00:03:40,240 --> 00:03:44,360 Speaker 4: on these effectively tax increases, the tariff increases at the 68 00:03:44,400 --> 00:03:47,640 Speaker 4: border to consumers, or do they do what actually has 69 00:03:47,720 --> 00:03:50,640 Speaker 4: been happening in the first round of tariffs in the 70 00:03:50,680 --> 00:03:52,960 Speaker 4: last few months. They've been generally kind of taking it 71 00:03:53,000 --> 00:03:55,160 Speaker 4: on the chin, and obviously that means that that would 72 00:03:55,160 --> 00:03:57,040 Speaker 4: have a less impact on inflation. So I think as 73 00:03:57,400 --> 00:03:59,760 Speaker 4: we're fairly confident of the hit to growth, I think 74 00:04:00,120 --> 00:04:04,000 Speaker 4: how large and how long lasting the inflation impact is 75 00:04:04,040 --> 00:04:06,080 Speaker 4: a real question mark, which obviously is going to matter 76 00:04:06,080 --> 00:04:08,000 Speaker 4: a lot for the Central Bank, for the Federal Reserve 77 00:04:08,040 --> 00:04:08,440 Speaker 4: as well. 78 00:04:08,720 --> 00:04:11,320 Speaker 1: On that question of how long things will last. As 79 00:04:11,360 --> 00:04:13,760 Speaker 1: you say, there's so much that we still need to know. 80 00:04:13,840 --> 00:04:18,159 Speaker 1: What negotiations might yield, perhaps a change in position around 81 00:04:18,200 --> 00:04:21,200 Speaker 1: certain sectors or certain industries. What will be the key 82 00:04:21,240 --> 00:04:24,279 Speaker 1: factors to watch to determine whether or not this will 83 00:04:24,279 --> 00:04:26,960 Speaker 1: have a lasting effect on the American economy. 84 00:04:27,520 --> 00:04:30,480 Speaker 4: As I mentioned, there's one aspect which is that how 85 00:04:30,520 --> 00:04:32,839 Speaker 4: do importers sort of deal with this? Do they just 86 00:04:32,920 --> 00:04:36,440 Speaker 4: squeeze their margins because they're worried about losing out in competition. Well, 87 00:04:36,480 --> 00:04:38,560 Speaker 4: that that would be good for inflation. But if you 88 00:04:38,600 --> 00:04:40,599 Speaker 4: think if you're Donald Trump and you actually wanted to 89 00:04:40,680 --> 00:04:45,240 Speaker 4: boost US production and US companies through doing this, that's 90 00:04:45,279 --> 00:04:47,240 Speaker 4: not going to help very much if the importers are 91 00:04:47,320 --> 00:04:51,000 Speaker 4: just absorbing any of the increase in price. But I 92 00:04:51,000 --> 00:04:53,800 Speaker 4: think there's a sort of broader factor. I mean, Donald 93 00:04:53,800 --> 00:04:56,599 Speaker 4: Trump has said he wants a lot of production for 94 00:04:56,640 --> 00:04:59,680 Speaker 4: things like cars to just come back to the US. Well, 95 00:05:00,040 --> 00:05:03,360 Speaker 4: there's a reason why many of these parts and even 96 00:05:03,400 --> 00:05:06,760 Speaker 4: the cars themselves, often the production had moved overseass because 97 00:05:06,760 --> 00:05:10,000 Speaker 4: it's much cheaper, and if you bring everything back to 98 00:05:10,040 --> 00:05:12,880 Speaker 4: the US, then the unit cost of these things is 99 00:05:12,920 --> 00:05:16,240 Speaker 4: going to be more expensive over a long period. So 100 00:05:16,279 --> 00:05:18,360 Speaker 4: I think that's what the Federal Reserve is kind of 101 00:05:18,560 --> 00:05:21,000 Speaker 4: trying to work out. They wouldn't often they would have 102 00:05:21,040 --> 00:05:23,400 Speaker 4: said this was just a short term thing, and that 103 00:05:23,480 --> 00:05:26,040 Speaker 4: prices it'll just be a step change and the level 104 00:05:26,080 --> 00:05:29,640 Speaker 4: of prices. But if it changes the underlying dynamics of 105 00:05:29,680 --> 00:05:33,000 Speaker 4: the economy that we're now making things more expensively than 106 00:05:33,040 --> 00:05:35,880 Speaker 4: we were when we're making them abroad, well that could 107 00:05:35,880 --> 00:05:37,920 Speaker 4: be an ongoing increase in inflation. 108 00:05:38,400 --> 00:05:41,520 Speaker 1: Are there certain industries or part of the American economy 109 00:05:41,560 --> 00:05:44,200 Speaker 1: that will do better as a result of tariffs. 110 00:05:44,640 --> 00:05:47,080 Speaker 4: I mean, if you look at what happened in the 111 00:05:47,120 --> 00:05:51,640 Speaker 4: first Trump term, steel was hit very early on with tarifs, 112 00:05:52,160 --> 00:05:55,279 Speaker 4: and that's happened again in this term. I think that 113 00:05:55,360 --> 00:05:58,400 Speaker 4: the President considers steel to be a sort of fundamental 114 00:05:59,160 --> 00:06:03,400 Speaker 4: symbol of of US industrial might, and he's trying to 115 00:06:03,440 --> 00:06:06,359 Speaker 4: protect what is now a very shrunken steel industry in 116 00:06:06,400 --> 00:06:09,599 Speaker 4: the US. Well, that is a sector which will potentially 117 00:06:09,640 --> 00:06:14,240 Speaker 4: do quite well. US produced cars. Tesla's one of the 118 00:06:14,279 --> 00:06:16,760 Speaker 4: few car companies that does make the cars sold in 119 00:06:16,800 --> 00:06:20,600 Speaker 4: the US almost entirely made in the US. Those companies 120 00:06:20,640 --> 00:06:23,160 Speaker 4: will gain, those sectors will gain. But if you think 121 00:06:23,200 --> 00:06:27,400 Speaker 4: of something like steel, there's vastly more parts of the 122 00:06:27,440 --> 00:06:30,920 Speaker 4: economy that you steal as an input than produce steel. 123 00:06:30,960 --> 00:06:32,720 Speaker 4: You know, it's a tiny part of the economy, it's 124 00:06:32,720 --> 00:06:36,160 Speaker 4: a tiny share of employment, but the amount of manufacturing 125 00:06:36,160 --> 00:06:38,320 Speaker 4: and other parts of the economy that you steal is 126 00:06:38,480 --> 00:06:40,360 Speaker 4: enormous and a lot of jobs are affected. So what 127 00:06:40,360 --> 00:06:42,200 Speaker 4: we found in the first term is even the much 128 00:06:42,200 --> 00:06:46,920 Speaker 4: more limited tariffs he had then actually cost jobs overall. 129 00:06:47,320 --> 00:06:50,320 Speaker 4: And indeed the government was having, in many cases for agriculture, 130 00:06:50,360 --> 00:06:54,240 Speaker 4: for example, having to subsidize farmers for their losses, and 131 00:06:54,320 --> 00:06:57,000 Speaker 4: these tariffs which kind of meant, you know, everything was 132 00:06:57,000 --> 00:06:57,320 Speaker 4: a bit. 133 00:06:57,240 --> 00:06:57,960 Speaker 3: Of a wash. 134 00:06:58,080 --> 00:07:00,359 Speaker 1: It's often said that if America sneezes, the rest of 135 00:07:00,360 --> 00:07:03,720 Speaker 1: the world catches a cold. What does a weaker American 136 00:07:03,760 --> 00:07:05,920 Speaker 1: economy mean for the rest of US. 137 00:07:06,320 --> 00:07:08,080 Speaker 4: Well, of course, a lot of people have been making 138 00:07:08,120 --> 00:07:11,480 Speaker 4: the comparison with the nineteen thirties, the famous or infamous 139 00:07:11,480 --> 00:07:14,920 Speaker 4: Smooth Hawley increase in tariffs, which was it was quite 140 00:07:15,000 --> 00:07:18,520 Speaker 4: similar in magnitude. We think that the average effective tariff 141 00:07:18,600 --> 00:07:20,680 Speaker 4: rate for the US has gone up by about twenty 142 00:07:20,760 --> 00:07:23,280 Speaker 4: percentage points, which is more or less what happened in 143 00:07:23,320 --> 00:07:27,000 Speaker 4: the thirties, and then that started a global trade war, 144 00:07:27,400 --> 00:07:30,720 Speaker 4: everybody retaliating against each other, and global trade fell by 145 00:07:30,800 --> 00:07:35,440 Speaker 4: sixty percent this time. Because this is the US unilaterally 146 00:07:35,480 --> 00:07:39,000 Speaker 4: doing this. Although some countries are obviously weighing up whether 147 00:07:39,040 --> 00:07:42,040 Speaker 4: to retaliate against the US, we obviously don't anticipate them 148 00:07:42,080 --> 00:07:45,800 Speaker 4: retaliating against each other because this has been triggered by 149 00:07:45,840 --> 00:07:48,360 Speaker 4: the US. So in that sense, we don't think it 150 00:07:48,400 --> 00:07:50,360 Speaker 4: is going to be on the same scale and obviously 151 00:07:50,400 --> 00:07:53,120 Speaker 4: goods is a much smaller share of our overall economy 152 00:07:53,160 --> 00:07:54,720 Speaker 4: now than it was back in the thirties. We have 153 00:07:54,760 --> 00:07:57,120 Speaker 4: all these services which make up the majority of most 154 00:07:57,120 --> 00:08:01,240 Speaker 4: developed economies, so it's not the nineteen thirty but it 155 00:08:01,360 --> 00:08:03,480 Speaker 4: is a significant hit. I mean, we think in the 156 00:08:03,520 --> 00:08:07,200 Speaker 4: European Union the exports to the US could have and 157 00:08:07,240 --> 00:08:10,760 Speaker 4: that will be a hit to GDP, you know, potentially 158 00:08:10,840 --> 00:08:13,600 Speaker 4: a sort of half a percentage point, which the European 159 00:08:13,640 --> 00:08:17,080 Speaker 4: Central Bank might have to respond to by cutting interest rates. 160 00:08:17,400 --> 00:08:20,040 Speaker 4: The UK, the central Bank has a bit less room 161 00:08:20,080 --> 00:08:23,320 Speaker 4: for maneuver, but it certainly it puts a small proportion 162 00:08:23,440 --> 00:08:26,360 Speaker 4: of GDP on the line, and certainly some jobs in 163 00:08:26,400 --> 00:08:30,080 Speaker 4: sectors like the car industry particularly, so it is a hit. 164 00:08:30,280 --> 00:08:34,280 Speaker 4: It's not enough in itself to trigger a global recession, 165 00:08:34,400 --> 00:08:35,880 Speaker 4: but as we said at the start, you know, a 166 00:08:35,880 --> 00:08:38,200 Speaker 4: lot of countries are not in the strongest shape coming 167 00:08:38,240 --> 00:08:42,160 Speaker 4: into this, so it definitely is could definitely do without it. 168 00:08:42,160 --> 00:08:45,000 Speaker 1: It's Deephanie Flanders, Bloomberg's head of Economics and Government and 169 00:08:45,120 --> 00:08:49,440 Speaker 1: host of the Brilliant Trumponomics podcast. Thank you for more 170 00:08:49,559 --> 00:08:52,559 Speaker 1: explanations like this from our team of three thousand journalists 171 00:08:52,559 --> 00:08:55,040 Speaker 1: and analysts around the world go to Bloomberg dot com 172 00:08:55,080 --> 00:09:00,199 Speaker 1: slash explainers. I'm Stephen Carroll. This is here's why. I'll 173 00:09:00,240 --> 00:09:02,400 Speaker 1: be back next week with more. Thanks for listening.