WEBVTT - Here's Why Trump's Tariffs Could Make America Less Exceptional 0:00:02.520 --> 0:00:10.639 Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and 0:00:10.720 --> 0:00:13.320 this is Here's Why, where we take one news story 0:00:13.360 --> 0:00:15.520 and explain it in just a few minutes with our 0:00:15.560 --> 0:00:17.280 experts here at Bloomberg. 0:00:21.280 --> 0:00:25.160 April second, twenty twenty five will forever be remembered as 0:00:25.200 --> 0:00:31.280 today American industry was reborn, the day America's destiny was reclaimed, 0:00:31.920 --> 0:00:36.880 and the day that we began to make America wealthy again. 0:00:38.600 --> 0:00:42.159 The American economy is richer, more innovative, and for more 0:00:42.200 --> 0:00:44.760 than a decade, has grown at a faster rate than 0:00:44.800 --> 0:00:48.760 most of the developed world. But uncertainty over the effects 0:00:48.760 --> 0:00:52.800 of Donald Trump's policies, particularly on trade, as many people 0:00:52.800 --> 0:00:56.120 asking if the outperformance of the US economy could be 0:00:56.160 --> 0:00:57.200 coming to an end. 0:00:57.840 --> 0:01:01.400 A very broad, crude consensus was that the US administration 0:01:01.520 --> 0:01:03.720 was going to be brilliant for the US economy and 0:01:03.840 --> 0:01:06.720 terrible for everywhere else, quite simply put. And so what 0:01:06.760 --> 0:01:09.319 we're seeing so far this year is question marks on 0:01:09.319 --> 0:01:12.160 both sides of that. When we know consumer spending drives 0:01:12.200 --> 0:01:15.480 about sixty five percent seventy percent of GDP in the US, 0:01:15.800 --> 0:01:18.120 that's something that we're going to watch very very closely. 0:01:18.640 --> 0:01:21.880 We do see that consumer confidence has deteriorated quite. 0:01:21.640 --> 0:01:23.520 Fast anywhere you slice it. 0:01:23.560 --> 0:01:27.080 That none of this looks to be positive for growth 0:01:27.120 --> 0:01:28.440 or inflation in the short run. 0:01:29.319 --> 0:01:31.720 In just a few short months in office, the US 0:01:31.800 --> 0:01:35.760 President has upended the global trade in goods that's worth 0:01:35.840 --> 0:01:40.759 some twenty four trillion dollars. Here's why tariffs could make 0:01:40.800 --> 0:01:46.360 America less exceptional. Our head of economics and Government and 0:01:46.400 --> 0:01:49.800 host of the Trump Andomics podcast, Stephanie Flanders, joins me 0:01:49.880 --> 0:01:53.640 now for more. Stephanie, first of all, for context, how 0:01:53.720 --> 0:01:57.200 much better has the American economy been doing than the 0:01:57.200 --> 0:01:58.960 rest of the world up until now? 0:02:00.120 --> 0:02:02.120 I think, you know, we're often HARKing back to the 0:02:02.120 --> 0:02:05.080 global financial crisis, because, certainly in the UK, but also 0:02:05.240 --> 0:02:07.800 a lot of other countries, that was when there seemed 0:02:07.800 --> 0:02:10.360 to be a kind of step shift slowed down in 0:02:10.440 --> 0:02:15.280 growth and productivity in most developed economies, and the US 0:02:15.280 --> 0:02:17.440 has just not suffered from that in the same way. 0:02:17.520 --> 0:02:21.160 So even since two thousand and eight, its average real 0:02:21.200 --> 0:02:23.960 growth rate has been just under two percent, maybe one 0:02:24.000 --> 0:02:25.960 point eight percent, not quite as good as it had 0:02:25.960 --> 0:02:29.480 been in previous years, but still much better than both 0:02:29.520 --> 0:02:32.040 the European Union or the UK, which has been sort 0:02:32.080 --> 0:02:34.560 of just over one percent. And I think it's even 0:02:34.600 --> 0:02:38.679 more striking since COVID, where the US has more or 0:02:38.720 --> 0:02:41.320 less continued that rate of growth since COVID, and the 0:02:41.360 --> 0:02:44.040 economy is probably fifteen percent bigger now than it was 0:02:44.080 --> 0:02:46.760 at the end of twenty nineteen before the pandemic, and 0:02:47.240 --> 0:02:49.680 both the EU and the UK have not come anything 0:02:49.800 --> 0:02:50.480 like close to that. 0:02:50.919 --> 0:02:54.080 So what will tariffs mean for that trajectory? For the 0:02:54.200 --> 0:02:56.800 US economy who feels their effect most. 0:02:57.000 --> 0:03:00.160 There's an immediate hit, and obviously we're still sort of 0:03:00.280 --> 0:03:02.959 passing through. As you've probably gathered, some of the numbers 0:03:03.000 --> 0:03:06.359 weren't quite as advertised. There's even some sort of basic 0:03:06.480 --> 0:03:08.920 elements of these tariffs where we don't know whether to 0:03:08.960 --> 0:03:11.880 add them up or just consider them as totals for 0:03:11.919 --> 0:03:14.240 each country. I know that sounds completely basic, but it 0:03:14.240 --> 0:03:16.320 seems to be something that even some officials in the 0:03:16.320 --> 0:03:19.520 White House aren't entirely clear about. But insofar as we 0:03:19.560 --> 0:03:21.680 can put these numbers into the models, the sort of 0:03:21.760 --> 0:03:25.560 rough model of the US economy would suggest that it 0:03:25.560 --> 0:03:29.320 would reduce GDP by between two and three percent, so 0:03:29.560 --> 0:03:33.040 not nothing at all, and raise the level of prices 0:03:33.160 --> 0:03:36.080 by around one and a half percent, But of course 0:03:36.080 --> 0:03:40.200 a lot depends on what importers do. Do they pass 0:03:40.240 --> 0:03:44.360 on these effectively tax increases, the tariff increases at the 0:03:44.400 --> 0:03:47.640 border to consumers, or do they do what actually has 0:03:47.720 --> 0:03:50.640 been happening in the first round of tariffs in the 0:03:50.680 --> 0:03:52.960 last few months. They've been generally kind of taking it 0:03:53.000 --> 0:03:55.160 on the chin, and obviously that means that that would 0:03:55.160 --> 0:03:57.040 have a less impact on inflation. So I think as 0:03:57.400 --> 0:03:59.760 we're fairly confident of the hit to growth, I think 0:04:00.120 --> 0:04:04.000 how large and how long lasting the inflation impact is 0:04:04.040 --> 0:04:06.080 a real question mark, which obviously is going to matter 0:04:06.080 --> 0:04:08.000 a lot for the Central Bank, for the Federal Reserve 0:04:08.040 --> 0:04:08.440 as well. 0:04:08.720 --> 0:04:11.320 On that question of how long things will last. As 0:04:11.360 --> 0:04:13.760 you say, there's so much that we still need to know. 0:04:13.840 --> 0:04:18.159 What negotiations might yield, perhaps a change in position around 0:04:18.200 --> 0:04:21.200 certain sectors or certain industries. What will be the key 0:04:21.240 --> 0:04:24.279 factors to watch to determine whether or not this will 0:04:24.279 --> 0:04:26.960 have a lasting effect on the American economy. 0:04:27.520 --> 0:04:30.480 As I mentioned, there's one aspect which is that how 0:04:30.520 --> 0:04:32.839 do importers sort of deal with this? Do they just 0:04:32.920 --> 0:04:36.440 squeeze their margins because they're worried about losing out in competition. Well, 0:04:36.480 --> 0:04:38.560 that that would be good for inflation. But if you 0:04:38.600 --> 0:04:40.599 think if you're Donald Trump and you actually wanted to 0:04:40.680 --> 0:04:45.240 boost US production and US companies through doing this, that's 0:04:45.279 --> 0:04:47.240 not going to help very much if the importers are 0:04:47.320 --> 0:04:51.000 just absorbing any of the increase in price. But I 0:04:51.000 --> 0:04:53.800 think there's a sort of broader factor. I mean, Donald 0:04:53.800 --> 0:04:56.599 Trump has said he wants a lot of production for 0:04:56.640 --> 0:04:59.680 things like cars to just come back to the US. Well, 0:05:00.040 --> 0:05:03.360 there's a reason why many of these parts and even 0:05:03.400 --> 0:05:06.760 the cars themselves, often the production had moved overseass because 0:05:06.760 --> 0:05:10.000 it's much cheaper, and if you bring everything back to 0:05:10.040 --> 0:05:12.880 the US, then the unit cost of these things is 0:05:12.920 --> 0:05:16.240 going to be more expensive over a long period. So 0:05:16.279 --> 0:05:18.360 I think that's what the Federal Reserve is kind of 0:05:18.560 --> 0:05:21.000 trying to work out. They wouldn't often they would have 0:05:21.040 --> 0:05:23.400 said this was just a short term thing, and that 0:05:23.480 --> 0:05:26.040 prices it'll just be a step change and the level 0:05:26.080 --> 0:05:29.640 of prices. But if it changes the underlying dynamics of 0:05:29.680 --> 0:05:33.000 the economy that we're now making things more expensively than 0:05:33.040 --> 0:05:35.880 we were when we're making them abroad, well that could 0:05:35.880 --> 0:05:37.920 be an ongoing increase in inflation. 0:05:38.400 --> 0:05:41.520 Are there certain industries or part of the American economy 0:05:41.560 --> 0:05:44.200 that will do better as a result of tariffs. 0:05:44.640 --> 0:05:47.080 I mean, if you look at what happened in the 0:05:47.120 --> 0:05:51.640 first Trump term, steel was hit very early on with tarifs, 0:05:52.160 --> 0:05:55.279 and that's happened again in this term. I think that 0:05:55.360 --> 0:05:58.400 the President considers steel to be a sort of fundamental 0:05:59.160 --> 0:06:03.400 symbol of of US industrial might, and he's trying to 0:06:03.440 --> 0:06:06.359 protect what is now a very shrunken steel industry in 0:06:06.400 --> 0:06:09.599 the US. Well, that is a sector which will potentially 0:06:09.640 --> 0:06:14.240 do quite well. US produced cars. Tesla's one of the 0:06:14.279 --> 0:06:16.760 few car companies that does make the cars sold in 0:06:16.800 --> 0:06:20.600 the US almost entirely made in the US. Those companies 0:06:20.640 --> 0:06:23.160 will gain, those sectors will gain. But if you think 0:06:23.200 --> 0:06:27.400 of something like steel, there's vastly more parts of the 0:06:27.440 --> 0:06:30.920 economy that you steal as an input than produce steel. 0:06:30.960 --> 0:06:32.720 You know, it's a tiny part of the economy, it's 0:06:32.720 --> 0:06:36.160 a tiny share of employment, but the amount of manufacturing 0:06:36.160 --> 0:06:38.320 and other parts of the economy that you steal is 0:06:38.480 --> 0:06:40.360 enormous and a lot of jobs are affected. So what 0:06:40.360 --> 0:06:42.200 we found in the first term is even the much 0:06:42.200 --> 0:06:46.920 more limited tariffs he had then actually cost jobs overall. 0:06:47.320 --> 0:06:50.320 And indeed the government was having, in many cases for agriculture, 0:06:50.360 --> 0:06:54.240 for example, having to subsidize farmers for their losses, and 0:06:54.320 --> 0:06:57.000 these tariffs which kind of meant, you know, everything was 0:06:57.000 --> 0:06:57.320 a bit. 0:06:57.240 --> 0:06:57.960 Of a wash. 0:06:58.080 --> 0:07:00.359 It's often said that if America sneezes, the rest of 0:07:00.360 --> 0:07:03.720 the world catches a cold. What does a weaker American 0:07:03.760 --> 0:07:05.920 economy mean for the rest of US. 0:07:06.320 --> 0:07:08.080 Well, of course, a lot of people have been making 0:07:08.120 --> 0:07:11.480 the comparison with the nineteen thirties, the famous or infamous 0:07:11.480 --> 0:07:14.920 Smooth Hawley increase in tariffs, which was it was quite 0:07:15.000 --> 0:07:18.520 similar in magnitude. We think that the average effective tariff 0:07:18.600 --> 0:07:20.680 rate for the US has gone up by about twenty 0:07:20.760 --> 0:07:23.280 percentage points, which is more or less what happened in 0:07:23.320 --> 0:07:27.000 the thirties, and then that started a global trade war, 0:07:27.400 --> 0:07:30.720 everybody retaliating against each other, and global trade fell by 0:07:30.800 --> 0:07:35.440 sixty percent this time. Because this is the US unilaterally 0:07:35.480 --> 0:07:39.000 doing this. Although some countries are obviously weighing up whether 0:07:39.040 --> 0:07:42.040 to retaliate against the US, we obviously don't anticipate them 0:07:42.080 --> 0:07:45.800 retaliating against each other because this has been triggered by 0:07:45.840 --> 0:07:48.360 the US. So in that sense, we don't think it 0:07:48.400 --> 0:07:50.360 is going to be on the same scale and obviously 0:07:50.400 --> 0:07:53.120 goods is a much smaller share of our overall economy 0:07:53.160 --> 0:07:54.720 now than it was back in the thirties. We have 0:07:54.760 --> 0:07:57.120 all these services which make up the majority of most 0:07:57.120 --> 0:08:01.240 developed economies, so it's not the nineteen thirty but it 0:08:01.360 --> 0:08:03.480 is a significant hit. I mean, we think in the 0:08:03.520 --> 0:08:07.200 European Union the exports to the US could have and 0:08:07.240 --> 0:08:10.760 that will be a hit to GDP, you know, potentially 0:08:10.840 --> 0:08:13.600 a sort of half a percentage point, which the European 0:08:13.640 --> 0:08:17.080 Central Bank might have to respond to by cutting interest rates. 0:08:17.400 --> 0:08:20.040 The UK, the central Bank has a bit less room 0:08:20.080 --> 0:08:23.320 for maneuver, but it certainly it puts a small proportion 0:08:23.440 --> 0:08:26.360 of GDP on the line, and certainly some jobs in 0:08:26.400 --> 0:08:30.080 sectors like the car industry particularly, so it is a hit. 0:08:30.280 --> 0:08:34.280 It's not enough in itself to trigger a global recession, 0:08:34.400 --> 0:08:35.880 but as we said at the start, you know, a 0:08:35.880 --> 0:08:38.200 lot of countries are not in the strongest shape coming 0:08:38.240 --> 0:08:42.160 into this, so it definitely is could definitely do without it. 0:08:42.160 --> 0:08:45.000 It's Deephanie Flanders, Bloomberg's head of Economics and Government and 0:08:45.120 --> 0:08:49.440 host of the Brilliant Trumponomics podcast. Thank you for more 0:08:49.559 --> 0:08:52.559 explanations like this from our team of three thousand journalists 0:08:52.559 --> 0:08:55.040 and analysts around the world go to Bloomberg dot com 0:08:55.080 --> 0:09:00.199 slash explainers. I'm Stephen Carroll. This is here's why. I'll 0:09:00.240 --> 0:09:02.400 be back next week with more. Thanks for listening.