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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: A market economy, particularly global one, needs actors who believe

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Speaker 2: that they can have confidence about how policy is going

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Speaker 2: to work over the next five to ten years. We

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Speaker 2: had that in monetary affairs, we had it in trade policy,

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Speaker 2: and I think after the last twenty years, I think

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Speaker 2: we risk losing it.

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Speaker 1: I'm Stephanie Flanders, head of Government and Economics at Bloomberg.

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Speaker 1: Welcome to Trumponomics, the podcast that looks at the economic

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Speaker 1: world of Donald Trump, how he's already shaped the global economy,

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Speaker 1: and what on earth is going to happen next. So

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Speaker 1: it's the Eve of Liberation Day as we record this

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Speaker 1: Tuesday afternoon, the day before Donald Trump announces what looks

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Speaker 1: set to be a barrage of tariffs on America's trading

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Speaker 1: partners around the world, all in the net aim of

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Speaker 1: fixing a global trading system that he considers broken and

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Speaker 1: unfair to the US. All this being Trumpernomics, we could

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Speaker 1: spend the next twenty twenty five minutes talking about the

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Speaker 1: potential economic impact of those tariffs in the US and overseas.

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Speaker 1: We've done a bit of that in the last few weeks.

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Speaker 1: Spoiler alert's probably going to be negative. We could also

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Speaker 1: talk about whether these particular tariffs are the most efficient

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Speaker 1: way to raise trillions of dollars in tax revenues for

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Speaker 1: the US, as the President has suggested, or bring manufacturing

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Speaker 1: production back home. Spoiler again probably not, certainly not both.

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Speaker 1: But I'm sure you've heard a lot of that in

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Speaker 1: the past few weeks, and you certainly will in the

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Speaker 1: next few days. So instead, I thought, for today only,

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Speaker 1: we could engage in a bit of the economic version

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Speaker 1: of blaming the victim, because there are two sides to

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Speaker 1: every story, and there are definitely two sides to every

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Speaker 1: trade balance. And if you look at the countries now

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Speaker 1: in the firing line with the biggest trade setpluses with

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Speaker 1: the US, Germany, for example, well that deficit isn't there

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Speaker 1: by accident. It's a conscious choice by successive German politicians

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Speaker 1: to have an economy driven very largely around exports. That's

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Speaker 1: a choice that many economists have been telling them for

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Speaker 1: years was indeed an accident waiting to happen. Martin Wolfe

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Speaker 1: is the chief economics commentator of the FT and he

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Speaker 1: has been particularly consistent on this point over the years.

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Speaker 1: He's also been described as the most important economics commentator

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Speaker 1: in Britain and arguably the world, and for his services

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Speaker 1: to financial journalism, Martin was awarded the cbe in Yer

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Speaker 1: two thousand. He's the author of several very impressive books

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Speaker 1: and I'm delighted he's here with me for this episode. Martin,

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Speaker 1: thank you very much for talking to us, and I'm

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Speaker 1: particularly grateful because we're talking on Tuesday afternoon, which is

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Speaker 1: a crucial moment for you, where you've finished your column

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Speaker 1: for the Financial Times, and you'd probably be expecting to

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Speaker 1: have a cup of tea, so I appreciate it.

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Speaker 2: It will be a pleasure. I'm sure.

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Speaker 1: I was looking back and you have been warning about

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Speaker 1: global imbalances and what it could lead to for a

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Speaker 1: long time, and I'm talking now about the sort of

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Speaker 1: systemic trade imbalances across the global economy, not just the

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Speaker 1: ones with the US, although those are pretty the obvious.

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Speaker 1: I found a particular quote from you. I think it's

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Speaker 1: a two thousand and eight column. You say, in the

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Speaker 1: long run, the global economy will have to rebalance. If

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Speaker 1: the surplus countries do not expand domestic demand relative to

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Speaker 1: potential output, the open world economy may even break down

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Speaker 1: as in the nineteen thirties. This is now a real

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Speaker 1: danger now. That was in two thousand and eight, and

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Speaker 1: that was when we were going through a particular moment

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Speaker 1: that you've argued that global financial crisis was partly related

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Speaker 1: to those imbalances. But just talk us through a little

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Speaker 1: bit how big surpluses imbalances can potentially lead to an

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Speaker 1: unstable global economy and even potentially the kind of protectionism

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Speaker 1: that we're now seeing from Donald Trump.

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Speaker 2: The story goes back really to a very well known

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Speaker 2: British Knesan economist, Joan Robinson back in the thirties, and

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Speaker 2: this is about what she and the Kainsians generally called

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Speaker 2: beggar my neighbor policies, and the beggar my name of

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Speaker 2: policies consisted of essentially fixing your exchange rate at an

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Speaker 2: undervalued level. That meant exports tended to grow very strongly,

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Speaker 2: imports were rather weak, and as a result, you generate

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Speaker 2: you to trade surplus and other things equal to current

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Speaker 2: account surplus that of course sustains your demand. A significant

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Speaker 2: part of your demand is then being imported from your

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Speaker 2: trading partners. That's sort of clear. You're selling more exports

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Speaker 2: than you're spending on imports. That's a net stimulus to demand.

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Speaker 2: That means, of course, you do have to curb domestic demand,

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Speaker 2: so economic policy is required. And most countries that do

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Speaker 2: this sort of thing have one or two characteristics. Either

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Speaker 2: they run very tight fiscal policies, and the most famous

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Speaker 2: example of that of a significant economy in the last

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Speaker 2: twenty years is Germany, but there are other much smaller

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Speaker 2: ones like Singapore which would also fall into that category.

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Speaker 2: They just don't have the global significance. Germany has run

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Speaker 2: a very tight fiscal policy really for twenty five years

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Speaker 2: since the end of unification. Other countries do it, and

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Speaker 2: China is the of its example here by having arrangements,

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Speaker 2: you would say, their income distribution arrangements which generate huge

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Speaker 2: surplus savings in the private sector or in the household

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Speaker 2: and non central government sector China. Distinguishing the private from

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Speaker 2: the public sector in China is a bit complicated, and

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Speaker 2: so China is a country where the national savings rate

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Speaker 2: has been over forty percent of GDP for indefinitely indefinite

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Speaker 2: bout thirty or forty years and investing productively forty percent

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Speaker 2: of GDP in a country growing at ten percent is

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Speaker 2: just about possible, but as it slows it becomes really impossible.

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Speaker 2: So they've got surplus savings and they've had to find

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Speaker 2: a way of absorbing them, and one of the ways

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Speaker 2: they found of absorbing them is to have an undervalued

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Speaker 2: exchange rate. In this case, they actually intervened in the

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Speaker 2: currency market substantially, particularly in the first decade of this century,

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Speaker 2: and that gave them a colossal expert surplus. At its peak,

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Speaker 2: they ran a current account surplus of ten percent of GDP,

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Speaker 2: which was far and away the biggest in the world.

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Speaker 2: So again it was a policy choice, and in both

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Speaker 2: cases crucially. I'm just going to focus on China and

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Speaker 2: Germany because they're the most obvious ones. But one of

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Speaker 2: the consequences is China and Germany both have a comparative

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Speaker 2: advantage in manufacturing, so that generated a huge surplus in

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Speaker 2: the output of manufacturers over the consumption of manufacturers, even

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Speaker 2: more than they would have had normally, because in addition

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Speaker 2: to paying for their imports, that also paid for the

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Speaker 2: foreign assets they were inevitably accumulating as a result of

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Speaker 2: their trade and current account surviluces. So that's their side

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Speaker 2: of the story. Now, look at what's going on in

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Speaker 2: the rest of the world. Well, the rest of the

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Speaker 2: world is importing recession. Essentially, if they're importing demand from

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Speaker 2: the rest of the world, the rest of the world

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Speaker 2: has to be importing a recession or at least weak

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Speaker 2: demand to meet more precise so they have to upset

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Speaker 2: this and that's exactly what the countries you would say,

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Speaker 2: are expecting. And they have set this by spending more

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Speaker 2: than their income. So they run counterpart deficits that shows

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Speaker 2: itself up as a trade and current account deficit. I

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Speaker 2: won't go into the relationship between them now, and so

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Speaker 2: to do that, they have to borrow. Either the government

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Speaker 2: has to borrow so it has to run a deficit,

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Speaker 2: or the private sector has to borrow, or both most

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Speaker 2: usually both. So what happens then in the country on

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Speaker 2: the other side of this is they run expansiory fhyscal

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Speaker 2: policy with huge physical deficits, and they run relatively loose

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Speaker 2: monetary policy, which generates lots and lots of private sector

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Speaker 2: dead and then low and behold debt starts accumulating. You

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Speaker 2: could have inflationary pressure that's contained by the deficits, but

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Speaker 2: ultimately you run the risk of going bankrupt, and that

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Speaker 2: case you have a horrible recession. And that's what happened

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Speaker 2: to the US in the aftermath of the financial crisis,

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Speaker 2: and crucially with Germany. And I argued this throughout that

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Speaker 2: period the Eurozone crisis. The Eurozone crisis was, in my view,

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Speaker 2: an internalization within the Eurozone of the consequences of the

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Speaker 2: German exports surpluses. So this, I know, won't sound like

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Speaker 2: it is a very simple explanation of the underlying argument.

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Speaker 1: There's obviously a lot there. I mean, we should say

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Speaker 1: that the peak of all these imbalances was indeed in

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Speaker 1: the lead up to the global financial crisis, and as

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Speaker 1: you said, many people did think there was going to

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Speaker 1: be a sort of dollar crisis as a result of this,

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Speaker 1: and in the end it worked the way broadly that

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Speaker 1: you've described. But then they started picking up again in

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Speaker 1: the last few years, as the US was running its

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Speaker 1: big budget deficits with all that stimulus of the economy,

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Speaker 1: we saw imbalances kind of come into view again. And

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Speaker 1: of course now we've have Donald Trump really focusing on

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Speaker 1: those particular manifestations, which is those trade deficits with the US. Again,

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Speaker 1: if we just go back to what the implications are

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Speaker 1: for the countries themselves. I mean, if you look at

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Speaker 1: Germany this long period where they had these big current

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Speaker 1: account surpluses, and for the last twenty years there's been

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Speaker 1: almost no year where it's been less than six seven

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Speaker 1: eight percent of GDP. The implication of that is not

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Speaker 1: just that you have a tight government budget, as you said,

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Speaker 1: and we now see them with much lower debt than

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Speaker 1: most other European countries. It also means you're really crimping

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Speaker 1: domestic consumption. I think German consumption didn't grow at all

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Speaker 1: for several years in the two thousands. Consumers seem to

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Speaker 1: have lost out from this export led model. But at

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Speaker 1: the same time you've got Donald Trump saying these very

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Speaker 1: aggressive exporting countries have helped hollow out US manufacturing. I mean,

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Speaker 1: do those two go together.

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Speaker 2: I think here we need to introduce quite an important

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Speaker 2: distinction between Germany and China. I think it's an important

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Speaker 2: distinction that the Chinese, I think will disagree. The big

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Speaker 2: parcel in Germany is that investment in the private sector

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Speaker 2: has been so weak. I mean, nobody was stopping the

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Speaker 2: German corporate sector from borrowing what was effective the very

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Speaker 2: high savings of their private sector. The households and corporation

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Speaker 2: for that matter, are high savers, not by Chinese standards,

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Speaker 2: but by normal standards. My memory is that overall gross

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Speaker 2: national savings in Germany are about twenty seven to twenty

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Speaker 2: eight percent of that's very high for a developed country.

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Speaker 2: The only one close to it is Japan, and the

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Speaker 2: corporate sector above all didn't invest very much, so that

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Speaker 2: left them with this huge surplus. Now China is somewhat different.

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Speaker 2: They have capital controls. A lot of the intervention in

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Speaker 2: capital markets was government. They clearly had a policy of

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Speaker 2: keeping the exchange rates down, and they clearly had a

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Speaker 2: policy of trying to keep savings up. My friend Michael Pettis,

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Speaker 2: who's been arguing this for years, is I think in

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Speaker 2: this case largely correct. And for them, the obvious counterpart

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Speaker 2: was going to be the US, the only market big

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Speaker 2: enough to run really large deficits where the financial sector

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Speaker 2: was sufficiently dynamic to do so. And indeed, as you say,

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Speaker 2: the counterpart has to be some weakening of the manufacturing sector,

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Speaker 2: which is probably mustn't exaggerate this, it's probably about three

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Speaker 2: percentage points of GDP three P Send of GDP or

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Speaker 2: so smaller than would other wise be, which is roughly

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Speaker 2: a quarter of the manufacturing sector, which is shrinking in

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Speaker 2: its employment anyway anyway, so we wouldn't exaggerate. But those

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Speaker 2: are I think slightly different stories.

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Speaker 1: Donald Trump has a claim in sort of macro terms

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Speaker 1: that the global trading system that the US helped to

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Speaker 1: underpin all those years after World War II has ended

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Speaker 1: up giving the US a raw deal. I think probably

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Speaker 1: both of us would say the US has done extremely

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Speaker 1: well out of this system, and he exaggerates the harm

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Speaker 1: that was done. But he is right to say that

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Speaker 1: some of these countries identified by their big surpluses generally

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Speaker 1: have done, as you suggest, destabilizing things for that system,

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Speaker 1: not least running large surpluses, but things that were also potentially,

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Speaker 1: in the case of Germany, not so great for its

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Speaker 1: own citizens.

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Speaker 2: I think the same is true active China. I mean

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Speaker 2: my own view, who has been for twenty years, that

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Speaker 2: the Chinese could perfectly well run the economy with a

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Speaker 2: significantly lower national saving trade, maybe five to ten percent

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Speaker 2: points of GDP. They'd still be able to invest like

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Speaker 2: crazy and grow like crazy. The current account surplus would

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Speaker 2: more or less disappear and consumption would be very significantly higher,

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Speaker 2: which would be very good for lots of poor Chinese people,

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Speaker 2: lots of poor people who could enjoy the same rate

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Speaker 2: of growth of GDP in my view, because a lot

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Speaker 2: of the investment is wasted and they would be permanently

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Speaker 2: better off. So I think both sides could benefit from

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Speaker 2: a somewhat different range. And similarly, I think the Eurozone

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Speaker 2: would be more dynamic and more stable if Germany, the

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Speaker 2: most credit worthy country, was able to generate higher domestic demand.

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Speaker 2: I've been making these arguments forever, and I'm very pleased

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Speaker 2: that mister Metz at least has got a little bit

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Speaker 2: of that, with a desire to improve our infrastructure investment

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Speaker 2: and of course the defense spending. But I do want

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Speaker 2: to underline the crucial point you made. It is impossible

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Speaker 2: to argue that though this has created problems for macroeconomic management,

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Speaker 2: that this is immensely immiserized or impoverished in the US.

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Speaker 2: It does seem rather ridiculous. And what is even more

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Speaker 2: ridiculous is to complain about this. Will be absolutely insistent,

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Speaker 2: as Donald Trump is that the dollar should retain every

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Speaker 2: aspect of its superior status in the world, which is

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Speaker 2: one of the reasons this has happened.

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Speaker 1: We've had a previous episode where we were trying to

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Speaker 1: get our heads around some of that and what a

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Speaker 1: potential new role for the dollar might be that would

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Speaker 1: satisfy Donald Trump. I'm not sure we came up with

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Speaker 1: a consistent answer, But to your point, we've seen in

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Speaker 1: China a move in the last few months, an apparent

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Speaker 1: embrace of more stimulus for consumption and more consumption driven approach,

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Speaker 1: at least relative to the past. We have seen new

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Speaker 1: leadership in Germany suggest that both in the defense spending

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Speaker 1: and through infrastructure investment, that there will be more domestic demand,

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Speaker 1: which at least in theory, could mean a smaller surplus

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Speaker 1: in future. So, you know, is there a parallel here

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Speaker 1: with the argument we tend to make about Donald Trump

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Speaker 1: when it comes to NATO, that although he's not gone

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Speaker 1: about it the right way, he has ended up prompting

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Speaker 1: countries to do, the case of Germany, quite explicitly, things

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Speaker 1: that they probably wouldn't have done otherwise but were a

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Speaker 1: long time coming.

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Speaker 2: Well, I think there's no doubt that if you engage

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Speaker 2: in what seems from the point of view of the

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Speaker 2: other side of this debate to be an act of war,

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Speaker 2: things will happen, and he's quite right. One of the

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Speaker 2: problems here is it's quite difficult to relate the various

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Speaker 2: dimensions of Donald Trump's policy objectives, the security objective, the

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Speaker 2: trade objective, how they these are supposed to fit in.

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Speaker 2: But I think it is true. In fact, just finished

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Speaker 2: the writing a column myself on this theme. The Chinese

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Speaker 2: and the Germans will have to decide that a greater

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Speaker 2: part of the demand for their output will have to

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Speaker 2: come from home. The rest of the world will not

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Speaker 2: absorb it. I think that's particularly obvious with China, which

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Speaker 2: is a superpower and a continuing to grow as far

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Speaker 2: as we know, at a reasonable rate, though nothing like

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Speaker 2: the rate it used to. Foreign demand is just not

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Speaker 2: enough to keep the economy going. With households having only

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Speaker 2: sixty percent of GDP after household disposable income, getting away

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Speaker 2: from the investment dependence is really impossible. But that's also

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Speaker 2: an opportunity. They could raise that run a proper welfare

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Speaker 2: state or something much closer to it, improve public consumption

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Speaker 2: and private consumption simultaneously, make the Chinese better off, and

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Speaker 2: the manufacturing sector will still be the biggest in the world.

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Speaker 2: They've got a huge comparative advantage in manufacturers. Even if

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Speaker 2: they had balanced trade, that will be the case. So

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Speaker 2: I think it is sensible for the Chinese and the

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Speaker 2: Germans to consider a different path because the rest of

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Speaker 2: the world is not going to absorb these surpluses.

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Speaker 1: But Martin, I've known you long enough to know, and

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Speaker 1: I've certainly read your columns long enough to know that

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Speaker 1: what countries ought to do and what they actually do

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Speaker 1: are often very different things, which is why you often

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Speaker 1: had to write the same column more than once and

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Speaker 1: telling them to do it. So what chance is from here,

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Speaker 1: from this very bombastic new chapter in global trade, what

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Speaker 1: chance that we will be moving smoothly to that more

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Speaker 1: stable outcome for everybody that you just described.

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Speaker 2: But I think it is possible that Trump's pressure will

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Speaker 2: change these policies in relevant countries because the alternative is

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Speaker 2: just unworkable for them. It could be very messy, obviously,

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Speaker 2: and lots of the tariots are irrelevant. He should be

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Speaker 2: just targeting the big surplus countries, but he's not at all.

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Speaker 1: Well, to be fair, we don't, as we say, as

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Speaker 1: we speak, we have no idea what he's going to do,

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Speaker 1: because we're still getting very.

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Speaker 2: Completely We sort of know that Canada and Mexico have

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Speaker 2: been attacked, which aren't huge countries. To put it mildly,

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Speaker 2: we don't even know whether the UK is going to

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Speaker 2: be a target, which is assistant deficit country like the US.

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Speaker 2: But I think it is arguable that at least in

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Speaker 2: the case of China, they are going to be forced

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Speaker 2: to recognize that running gigantic trade surpluses forcing others to

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Speaker 2: run huge trade deficits will not work unless it's with

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Speaker 2: developing countries and they're prepared to finance it. In other words,

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Speaker 2: they're prepared to lose a lot of money on the

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Speaker 2: export credit they're providing, and their experience with the Belton

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Speaker 2: Road initiative has shown that's where it will tend to

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Speaker 2: end up. Neither the US nor the EU, which are

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Speaker 2: the only really big markets that are relevant to them,

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Speaker 2: are going to run huge trade deficits in manufactures consistently

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Speaker 2: has certainly not growing ones, and the Chinese really do

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Speaker 2: now have to recognize it. Chinese are very good at

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Speaker 2: responding to crisis, and so we've seen with unification, and

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Speaker 2: now are the Germans and so maybe a result of

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Speaker 2: global pressure, US pressure, changing world, we are going to

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Speaker 2: see this problem disappear.

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Speaker 1: But it's interesting you think the US, the actions that

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Speaker 1: Donald Trump is about to take, the uncertainty associated with

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Speaker 1: his policies, the inconsistencies associated with his policies, as he

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Speaker 1: appears to want to really blow up the system that

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Speaker 1: America underpinned all those years. You don't think that long

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Speaker 1: term will necessarily damage America's role in the global economy.

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Speaker 2: One set of questions is how we resolve the current

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Speaker 2: and capital account distortions, which I think there are in

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Speaker 2: the system, certainly visibly China. How do you absorb this

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Speaker 2: beer moth into the world economy. There's a big challenge.

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Speaker 2: But the danger to the US position in the world,

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Speaker 2: in my view, lies somewhere else. Although this is a

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Speaker 2: reflection of it, which is that I think it is

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Speaker 2: perfectly plausible that the US is going to under Trump

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Speaker 2: damage very considerably the perception that the rule of law

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Speaker 2: functions in the US. That this is the country with

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Speaker 2: the most reliable, deep seated set of legal institutions containing

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Speaker 2: and constraining the government in the world. It's the biggest

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Speaker 2: economy by far that has those characteristics, so it's the

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Speaker 2: safest place in the world to put money, And of

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Speaker 2: course that means holding dollars or assets which are denominating

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Speaker 2: in dollars or convertible into dollars, both real and nominal,

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Speaker 2: bonds and all the rest of it. Now, if you

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Speaker 2: make people feel that these institutions of the law are

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Speaker 2: not going to work because the Trump government thinks that

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Speaker 2: it is above the law, that it's not bound by

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Speaker 2: what the judiciary the courts say, and they have done

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Speaker 2: and said things that suggest they do believe that. Then

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Speaker 2: if suddenly it becomes seriously dangerous to do this, and

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Speaker 2: that would certainly weaken the currency, and you won't have

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Speaker 2: a problem with capital inflows, and you would probably solve

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Speaker 2: the trade balance problem, but you would create a much

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Speaker 2: bigger problem, it seems to me, for the US, because

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Speaker 2: it subverts the basic source of its prosperity.

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Speaker 1: Well, as you say, that is a much bigger question.

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Speaker 1: Very briefly, as a last question, we don't know what's

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Speaker 1: going to happen in the next few days, and we

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Speaker 1: certainly don't know how any of these tariff negotiations that

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Speaker 1: we must expect now will happen, will be resolved. But

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Speaker 1: what does your gut say, in a few months from now,

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Speaker 1: we will feel like we have dodged a bullet as

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Speaker 1: people are now talking in such sort of apocalyptical terms

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Speaker 1: about the impact of these tariff wars, or do you

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Speaker 1: think it really could be quite serious?

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Speaker 2: I think the question is what the next stage and

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Speaker 2: the stage after that. If at the end of it

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Speaker 2: we end up with let's say, twenty or thirty percent

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Speaker 2: tariffs by the US towards basically everybody and retaliation of

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Speaker 2: the same scale, then trade is going to shrink a lot,

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Speaker 2: and that will have undoubtedly sizeable consequences. How big depends

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Speaker 2: on the consequent macroeconomic policy choices, which are difficult to predict,

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Speaker 2: but it will be very disruptive in the world economy.

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Speaker 2: We would end up somewhat smaller than it is. I mean,

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Speaker 2: it's not on itself enough to create a depression, far

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Speaker 2: from it, but it would be noticeable, and it would

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Speaker 2: also have created an enormous amount of ill will. And

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Speaker 2: there will be no credibility to those current tarriffs because

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Speaker 2: you think that might all change tomorrow. So business will

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Speaker 2: reorder itself to an autarchic world, a more autarchic world.

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Speaker 2: That would be a very very large cost, particularly for

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Speaker 2: smaller economies and poor economies. It would worry me a

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Speaker 2: great deal. And it is possible that even if we

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Speaker 2: go away from these tarots that people will be worried

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Speaker 2: they're going to come back again. The WTO's system has

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Speaker 2: gone and it could all start again. So I think

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Speaker 2: there will be a permanent impact on trade, confidence in

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Speaker 2: trade as it were at the microeconomic roots of the

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Speaker 2: world economy. But possibly some of these macro forces, which

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Speaker 2: I've never thought that huge since the financial crisis, will

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Speaker 2: be slightly better. But it comes back really to in

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Speaker 2: the end to what worries me about this is the

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Speaker 2: lawlessness of it, the unpredictability of it. A market economy,

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Speaker 2: particularly global one, needs actors who believe they can have

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Speaker 2: confidence about how policy is going to work over the

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Speaker 2: next five to ten years. We had that in monetary affairs,

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Speaker 2: we had it in trade policy, and I think after

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Speaker 2: the last twenty years, I think we risk losing it.

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Speaker 1: Martin Wolf, chief economic commentator for the Financial Times, Thank

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Speaker 1: you very much thanks for listening to Trump andomics from Bloomberg.

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Speaker 1: It was hosted by me Stephanie Flanders, I was joined

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00:24:09,359 --> 00:24:13,280
Speaker 1: by Martin Wolf of The Financial Times. Trumpnomics is produced

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00:24:13,280 --> 00:24:16,240
Speaker 1: by Samasadi and Moses and Am with help from Chris

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00:24:16,240 --> 00:24:19,480
Speaker 1: mart Lou and Amy Keene. The sound design is by

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00:24:19,560 --> 00:24:24,359
Speaker 1: Blake Maples. Brendan Francis Newnham is our executive producer. Please

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00:24:24,400 --> 00:24:27,520
Speaker 1: do help other people find this brilliant show, rate and

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Speaker 1: review it highly wherever you listen to podcasts