Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and
Speaker 1: this is Here's Why, where we take one news story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg.
Speaker 2: April second, twenty twenty five will forever be remembered as
Speaker 2: today American industry was reborn, the day America's destiny was reclaimed,
Speaker 2: and the day that we began to make America wealthy again.
Speaker 1: The American economy is richer, more innovative, and for more
Speaker 1: than a decade, has grown at a faster rate than
Speaker 1: most of the developed world. But uncertainty over the effects
Speaker 1: of Donald Trump's policies, particularly on trade, as many people
Speaker 1: asking if the outperformance of the US economy could be
Speaker 1: coming to an end.
Speaker 3: A very broad, crude consensus was that the US administration
Speaker 3: was going to be brilliant for the US economy and
Speaker 3: terrible for everywhere else, quite simply put. And so what
Speaker 3: we're seeing so far this year is question marks on
Speaker 3: both sides of that. When we know consumer spending drives
Speaker 3: about sixty five percent seventy percent of GDP in the US,
Speaker 3: that's something that we're going to watch very very closely.
Speaker 2: We do see that consumer confidence has deteriorated quite.
Speaker 4: Fast anywhere you slice it.
Speaker 3: That none of this looks to be positive for growth
Speaker 3: or inflation in the short run.
Speaker 1: In just a few short months in office, the US
Speaker 1: President has upended the global trade in goods that's worth
Speaker 1: some twenty four trillion dollars. Here's why tariffs could make
Speaker 1: America less exceptional. Our head of economics and Government and
Speaker 1: host of the Trump Andomics podcast, Stephanie Flanders, joins me
Speaker 1: now for more. Stephanie, first of all, for context, how
Speaker 1: much better has the American economy been doing than the
Speaker 1: rest of the world up until now?
Speaker 4: I think, you know, we're often HARKing back to the
Speaker 4: global financial crisis, because, certainly in the UK, but also
Speaker 4: a lot of other countries, that was when there seemed
Speaker 4: to be a kind of step shift slowed down in
Speaker 4: growth and productivity in most developed economies, and the US
Speaker 4: has just not suffered from that in the same way.
Speaker 4: So even since two thousand and eight, its average real
Speaker 4: growth rate has been just under two percent, maybe one
Speaker 4: point eight percent, not quite as good as it had
Speaker 4: been in previous years, but still much better than both
Speaker 4: the European Union or the UK, which has been sort
Speaker 4: of just over one percent. And I think it's even
Speaker 4: more striking since COVID, where the US has more or
Speaker 4: less continued that rate of growth since COVID, and the
Speaker 4: economy is probably fifteen percent bigger now than it was
Speaker 4: at the end of twenty nineteen before the pandemic, and
Speaker 4: both the EU and the UK have not come anything
Speaker 4: like close to that.
Speaker 1: So what will tariffs mean for that trajectory? For the
Speaker 1: US economy who feels their effect most.
Speaker 4: There's an immediate hit, and obviously we're still sort of
Speaker 4: passing through. As you've probably gathered, some of the numbers
Speaker 4: weren't quite as advertised. There's even some sort of basic
Speaker 4: elements of these tariffs where we don't know whether to
Speaker 4: add them up or just consider them as totals for
Speaker 4: each country. I know that sounds completely basic, but it
Speaker 4: seems to be something that even some officials in the
Speaker 4: White House aren't entirely clear about. But insofar as we
Speaker 4: can put these numbers into the models, the sort of
Speaker 4: rough model of the US economy would suggest that it
Speaker 4: would reduce GDP by between two and three percent, so
Speaker 4: not nothing at all, and raise the level of prices
Speaker 4: by around one and a half percent, But of course
Speaker 4: a lot depends on what importers do. Do they pass
Speaker 4: on these effectively tax increases, the tariff increases at the
Speaker 4: border to consumers, or do they do what actually has
Speaker 4: been happening in the first round of tariffs in the
Speaker 4: last few months. They've been generally kind of taking it
Speaker 4: on the chin, and obviously that means that that would
Speaker 4: have a less impact on inflation. So I think as
Speaker 4: we're fairly confident of the hit to growth, I think
Speaker 4: how large and how long lasting the inflation impact is
Speaker 4: a real question mark, which obviously is going to matter
Speaker 4: a lot for the Central Bank, for the Federal Reserve
Speaker 4: as well.
Speaker 1: On that question of how long things will last. As
Speaker 1: you say, there's so much that we still need to know.
Speaker 1: What negotiations might yield, perhaps a change in position around
Speaker 1: certain sectors or certain industries. What will be the key
Speaker 1: factors to watch to determine whether or not this will
Speaker 1: have a lasting effect on the American economy.
Speaker 4: As I mentioned, there's one aspect which is that how
Speaker 4: do importers sort of deal with this? Do they just
Speaker 4: squeeze their margins because they're worried about losing out in competition. Well,
Speaker 4: that that would be good for inflation. But if you
Speaker 4: think if you're Donald Trump and you actually wanted to
Speaker 4: boost US production and US companies through doing this, that's
Speaker 4: not going to help very much if the importers are
Speaker 4: just absorbing any of the increase in price. But I
Speaker 4: think there's a sort of broader factor. I mean, Donald
Speaker 4: Trump has said he wants a lot of production for
Speaker 4: things like cars to just come back to the US. Well,
Speaker 4: there's a reason why many of these parts and even
Speaker 4: the cars themselves, often the production had moved overseass because
Speaker 4: it's much cheaper, and if you bring everything back to
Speaker 4: the US, then the unit cost of these things is
Speaker 4: going to be more expensive over a long period. So
Speaker 4: I think that's what the Federal Reserve is kind of
Speaker 4: trying to work out. They wouldn't often they would have
Speaker 4: said this was just a short term thing, and that
Speaker 4: prices it'll just be a step change and the level
Speaker 4: of prices. But if it changes the underlying dynamics of
Speaker 4: the economy that we're now making things more expensively than
Speaker 4: we were when we're making them abroad, well that could
Speaker 4: be an ongoing increase in inflation.
Speaker 1: Are there certain industries or part of the American economy
Speaker 1: that will do better as a result of tariffs.
Speaker 4: I mean, if you look at what happened in the
Speaker 4: first Trump term, steel was hit very early on with tarifs,
Speaker 4: and that's happened again in this term. I think that
Speaker 4: the President considers steel to be a sort of fundamental
Speaker 4: symbol of of US industrial might, and he's trying to
Speaker 4: protect what is now a very shrunken steel industry in
Speaker 4: the US. Well, that is a sector which will potentially
Speaker 4: do quite well. US produced cars. Tesla's one of the
Speaker 4: few car companies that does make the cars sold in
Speaker 4: the US almost entirely made in the US. Those companies
Speaker 4: will gain, those sectors will gain. But if you think
Speaker 4: of something like steel, there's vastly more parts of the
Speaker 4: economy that you steal as an input than produce steel.
Speaker 4: You know, it's a tiny part of the economy, it's
Speaker 4: a tiny share of employment, but the amount of manufacturing
Speaker 4: and other parts of the economy that you steal is
Speaker 4: enormous and a lot of jobs are affected. So what
Speaker 4: we found in the first term is even the much
Speaker 4: more limited tariffs he had then actually cost jobs overall.
Speaker 4: And indeed the government was having, in many cases for agriculture,
Speaker 4: for example, having to subsidize farmers for their losses, and
Speaker 4: these tariffs which kind of meant, you know, everything was
Speaker 4: a bit.
Speaker 3: Of a wash.
Speaker 1: It's often said that if America sneezes, the rest of
Speaker 1: the world catches a cold. What does a weaker American
Speaker 1: economy mean for the rest of US.
Speaker 4: Well, of course, a lot of people have been making
Speaker 4: the comparison with the nineteen thirties, the famous or infamous
Speaker 4: Smooth Hawley increase in tariffs, which was it was quite
Speaker 4: similar in magnitude. We think that the average effective tariff
Speaker 4: rate for the US has gone up by about twenty
Speaker 4: percentage points, which is more or less what happened in
Speaker 4: the thirties, and then that started a global trade war,
Speaker 4: everybody retaliating against each other, and global trade fell by
Speaker 4: sixty percent this time. Because this is the US unilaterally
Speaker 4: doing this. Although some countries are obviously weighing up whether
Speaker 4: to retaliate against the US, we obviously don't anticipate them
Speaker 4: retaliating against each other because this has been triggered by
Speaker 4: the US. So in that sense, we don't think it
Speaker 4: is going to be on the same scale and obviously
Speaker 4: goods is a much smaller share of our overall economy
Speaker 4: now than it was back in the thirties. We have
Speaker 4: all these services which make up the majority of most
Speaker 4: developed economies, so it's not the nineteen thirty but it
Speaker 4: is a significant hit. I mean, we think in the
Speaker 4: European Union the exports to the US could have and
Speaker 4: that will be a hit to GDP, you know, potentially
Speaker 4: a sort of half a percentage point, which the European
Speaker 4: Central Bank might have to respond to by cutting interest rates.
Speaker 4: The UK, the central Bank has a bit less room
Speaker 4: for maneuver, but it certainly it puts a small proportion
Speaker 4: of GDP on the line, and certainly some jobs in
Speaker 4: sectors like the car industry particularly, so it is a hit.
Speaker 4: It's not enough in itself to trigger a global recession,
Speaker 4: but as we said at the start, you know, a
Speaker 4: lot of countries are not in the strongest shape coming
Speaker 4: into this, so it definitely is could definitely do without it.
Speaker 1: It's Deephanie Flanders, Bloomberg's head of Economics and Government and
Speaker 1: host of the Brilliant Trumponomics podcast. Thank you for more
Speaker 1: explanations like this from our team of three thousand journalists
Speaker 1: and analysts around the world go to Bloomberg dot com
Speaker 1: slash explainers. I'm Stephen Carroll. This is here's why. I'll
Speaker 1: be back next week with more. Thanks for listening.