Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Canadians are always greaming
Speaker 1: up a lot of ways to ruin our lives.
Speaker 2: The metric system for the love of God, Chelseius really
Speaker 2: young Rider.
Speaker 3: Of course, I'm right.
Speaker 1: It was crazy abousts.
Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 2: and that was a reminder of a satirical comedy from
Speaker 2: thirty years ago, a rare foray into feature filmmaking by
Speaker 2: the documentary maker Michael Moore. It revolves around a clearly
Speaker 2: absurd fictional scenario where a US president decides to overcome
Speaker 2: failing approval ratings by inciting a mad conflict with Canada.
Speaker 2: Welcome to Trump. It's the Bloomberg podcast that looks at
Speaker 2: the economic world of Donald Trump, how he's already shaped
Speaker 2: the global economy, and what on earth is going to
Speaker 2: happen next. We're taking a moment to digest the flurry
Speaker 2: of tariff news this weekend, involving two of America's closest neighbors.
Speaker 2: The threats, the negotiations, the pauses. We've had all of it,
Speaker 2: and in Canada's case, we've also had a flurry of
Speaker 2: hastily produced footage of helicopters at the border. Our goal
Speaker 2: isn't to retread all of that ground, but to answer
Speaker 2: a bigger question in his onslaught of tariff threats and
Speaker 2: trade wars, what exactly is Donald Trump trying to accomplish.
Speaker 2: We've got some of the best minds on the subject
Speaker 2: with us this week to talk that through making his
Speaker 2: Trump and Nomic's debut. Sean Donnan joins US. Sean is
Speaker 2: a senior writer with Bloomberg. He reports on the US
Speaker 2: and global economies, and before joining US, he spent feels
Speaker 2: like half a lifetime covering trade for the Financial Times. Sean,
Speaker 2: you must feel like you've already worked a five day
Speaker 2: week and it's only Tuesday.
Speaker 1: It's been a day or two of work.
Speaker 2: Con we'll get into some of the lessons that you've
Speaker 2: learned in the long hours, but you've certainly had to
Speaker 2: write many words on it. And we have Trumponomics regular
Speaker 2: Anna Wong, chief US economists at Bloomberg Economics. She's worked
Speaker 2: at the FED and did serve in the Trump White
Speaker 2: House in twenty nineteen and twenty twenty on se comment
Speaker 2: at the Council of Economic Advisors and it's brilliant to
Speaker 2: have you back. And I'm trying to know what you've
Speaker 2: made of the last few days, but we'll get into
Speaker 2: that in a minute. Thanks for joining us, Hi, glad
Speaker 2: to be here. So on Monday, North America came within
Speaker 2: hours of a multi billion dollar trade war, a trade
Speaker 2: war that could yet swing a wrecking ball through the
Speaker 2: economies of Mexico and Canada and in the process raise
Speaker 2: questions about that regional compact which sits at the foundation
Speaker 2: of America's global competitiveness and economic power. Now it's true,
Speaker 2: President Trump has agreed to delay the twenty five percent
Speaker 2: tariffs on his neighbors that he had threatened after both
Speaker 2: Canada and Mexico agreed to take tougher measures to combat
Speaker 2: migration and drug trafficking at the border. But Trump's ten
Speaker 2: percent tariffs on China did take effect, and the Chinese
Speaker 2: government did retaliate already with tariff's on natural gas, goal
Speaker 2: and other products, and also a curious threat of an
Speaker 2: anti monopoly investigation against Google, which doesn't do a whole
Speaker 2: lot of business in China. Sean, I was quoting there
Speaker 2: from a piece that you wrote. Was thinking about all
Speaker 2: the economic relationships at stake in this war. From your
Speaker 2: reporting this weekend, what have we learned about President Trump's
Speaker 2: trade strategy? Are we clearer or are we more confused?
Speaker 1: I think we're more confused. And I think that's partly
Speaker 1: because the trade policy has colliding goals as you kind
Speaker 1: of look at what Trump has threatened through the campaign
Speaker 1: and in recent weeks and what some of his advisors,
Speaker 1: people like Howard Latning, the incoming Commerce Secretary and Scott Bessant,
Speaker 1: the Treasury Secretary, has said. There are really three goals
Speaker 1: to tariffs under this new Trump administration. One is that
Speaker 1: kind of art of the deal, that very familiar piece
Speaker 1: that we had from the first Trump administration of using
Speaker 1: terroriffs to extract leverage and some kind of concessions from
Speaker 1: trading partners. We've already seen that play out in the
Speaker 1: last few days with Canaban, Mexico, and we are seeing
Speaker 1: a kind of supercharged version of that. In effect, Trump
Speaker 1: over the last few days kind of threatened nuclear war
Speaker 1: against his neighbors and got him to add a few
Speaker 1: more border guards in response, and you know, and the
Speaker 1: trade equivalent of nuclear war. The second goal that he
Speaker 1: has is this kind of rebalancing trade. That's the familiar
Speaker 1: one from going back to twenty fifteen, this whole idea
Speaker 1: that trade deficits, that the US has, whether its major
Speaker 1: trading partners are unfair, and that you need to rebalance
Speaker 1: trade with them, and tariffs are a tool to do that.
Speaker 1: And then the third one is a new one kind
Speaker 1: of this cycle, and that's the idea of revenues. Trump
Speaker 1: starting in the campaign, has talked about the billions of
Speaker 1: dollars he can raise with tariffs. In fact, Republicans on
Speaker 1: Capitol Hill were very quickly pointing to the billions of
Speaker 1: dollars and revenues that would come from these tariffs on Canada, Mexico,
Speaker 1: and China as a positive thing. But if you are
Speaker 1: using tariffs as leverage and you don't expect to really
Speaker 1: deploy them, that doesn't make them a very reliable source
Speaker 1: of revenue. Likewise, if you're trying to rebalance trade, inevitably
Speaker 1: you're going to reduce the amount of imports that which
Speaker 1: are subject to tariffs, which again makes the tariffs a
Speaker 1: less reliable source of revenues. What you kind of end
Speaker 1: up with is a phenomenon that we saw during the
Speaker 1: first Trump Trade wars in twenty sixteen, and that is
Speaker 1: this huge uncertainty around Trump's trade policy and its goals
Speaker 1: and where it's going. And that is probably the most
Speaker 1: toxic thing for the economy because businesses really then stop
Speaker 1: making investments, they stop hiring, and you start to get
Speaker 1: a slowed down, not just in Canada and Mexico, which
Speaker 1: would get hit hard by tariffs, but in the US economy.
Speaker 2: Just to feel the pain of global businesses trying to
Speaker 2: think about the implications of this for their supply chains.
Speaker 2: In the first term, you got the message loud and
Speaker 2: clear from Donald Trump, be careful of putting all your
Speaker 2: eggs in the China basket tick that was kind of
Speaker 2: underscored under President Biden. But with the addition that you
Speaker 2: could be friend shoring, you could be orienting your production
Speaker 2: to the friends of the US. Of course, if you're
Speaker 2: now questioning whether friends is a safe strategy, and unless
Speaker 2: you think, oh, well, we should just take everything into
Speaker 2: the US, well not if you want to export, right,
Speaker 2: because you're going to get retaliation potentially from these other countries.
Speaker 2: So I think that uncertainty must be enormous at this stage.
Speaker 2: But Anna, we've spoken to you during the transition, about
Speaker 2: how you thought the administration would approach trade, having seen
Speaker 2: it close up, how the tariffs unfolded in that first term,
Speaker 2: and you know the degree to which it was actually
Speaker 2: quite strategic and careful about the economic consequences. What have
Speaker 2: you been thinking about that as you saw some of
Speaker 2: these threats come out of the out of the White
Speaker 2: House in the last week or so.
Speaker 3: Yeah, So, Stephanie, my view about what the end game
Speaker 3: of this trade war, version two is has evolved in
Speaker 3: the times since we spoke. You know, if you asked
Speaker 3: me two months ago, I thought that with Kevin has
Speaker 3: to come returning to the White House, that we have
Speaker 3: a voice there that would strongly advocate for a targeted
Speaker 3: approach toward tariff. But since then we have seen Trump
Speaker 3: announce the twenty five percent in Canada, and that made
Speaker 3: me paid more attention to what the rhetoric not just
Speaker 3: of Trump, but of people like Scott Bestant and also
Speaker 3: people who are holding key economic advisor's role in this
Speaker 3: White House. I think what's different about this version two
Speaker 3: trade war is that Trump he's thinking about creating his legacy.
Speaker 3: He's not going to run for a re election again.
Speaker 3: So what is the end game, right. So I think
Speaker 3: at the end of the day, his approach the time
Speaker 3: around is actually very close to the theoretical underpinnings of
Speaker 3: the old trade war literature and the academic literature. So
Speaker 3: forget what you read about the impact of trade war
Speaker 3: starting in twenty eighteen or thereafter, because the academic literature
Speaker 3: from that point on was completely dominated by discussions of
Speaker 3: who bore the cost of trade war? But before that,
Speaker 3: in the even twenty to thirty years before that, that
Speaker 3: was a very calm and boring literature on optimal tariffs,
Speaker 3: on how to think about trade war, and from a
Speaker 3: game theoretical perspective, and I think that the game theory
Speaker 3: look of terriff is exactly how Trump thinks about it.
Speaker 3: If you think about US China trade war, it's actually
Speaker 3: a prisoner's dilemma's game. And in this game, the Nash equilibrium,
Speaker 3: which is the outcome where two countries are not cooperating,
Speaker 3: and this is the outcome where given the opponent's strategy,
Speaker 3: what is your best choice? The nashquilibrium is actually a
Speaker 3: trade war outcome. In this outcome, both countries are worse off.
Speaker 3: But if US is able to impose unilateral taros without
Speaker 3: inviting one for one retaliation, the US actually wins. From
Speaker 3: Donald Trump's perspective, the past twenty years of trade liberalization
Speaker 3: has been in that matrix where you have US committing
Speaker 3: to free trade and China cheating and not committing to
Speaker 3: free trade, and the payoff in that stage is actually
Speaker 3: bad for US, good for China. And so I think
Speaker 3: he is trying to use this trade war basically remove
Speaker 3: us from the cooperative equilibrium where you have these institutions
Speaker 3: like WTO and GATT which are monitoring and enforcing cooperation.
Speaker 3: He broke them all, moved that away from that co
Speaker 3: cooperative of equilibrium, get us to the non cooperative equilibrium,
Speaker 3: which is the mutually destructive everybody trade war equlobrim. But
Speaker 3: from his perspective, as long as the retaliation is not
Speaker 3: one on one, US overall relatively one. And this is
Speaker 3: what's very interesting about these executive orders he started recently.
Speaker 3: It has a retaliation escalation class we have not seen
Speaker 3: this before, which is that if the foreign partner retaliate
Speaker 3: in a response, then US will ratcheted up, move us
Speaker 3: into that matrix payoff where US on net is relatively
Speaker 3: more well off than the partners.
Speaker 2: I can see how that might apply to China, But
Speaker 2: to have this threat of twenty five percent tariffs hanging
Speaker 2: over those trading partners, which could quite clearly have produced retaliation.
Speaker 2: Canada announced the retaliation it was going to do if
Speaker 2: these tariffs went into force. Just assuming that it's going
Speaker 2: to be unilateral seems pretty one. Yeah.
Speaker 3: I mean, I see the threats on Canadian and Mexican
Speaker 3: goods as a sequel to the first administration. Recall that
Speaker 3: in the first administration it was also a very close
Speaker 3: call with Mexico. He threatened to use the same powers
Speaker 3: in twenty nineteen on Mexico also on concerns about immigration,
Speaker 3: but that was also averted in the last minute. And
Speaker 3: at the time, I was also working at the FED,
Speaker 3: and I remember the International Finance Division. We were very
Speaker 3: worried about the tariffs on automakers coming from Mexico and Canada.
Speaker 3: And I think it remains to be seen whether he
Speaker 3: is truly serious about the tariffs on our neighbor, because
Speaker 3: that is the piece that does not make sense to me.
Speaker 3: And now actually things makes more sense that he decided
Speaker 3: to delay those tariffs.
Speaker 2: It makes more sense if if it was all about
Speaker 2: posturing and the fact that he quite likes trolling justin true.
Speaker 2: I mean, there is an element of that which it
Speaker 2: just seems to have been quite performative.
Speaker 1: What we've forgotten about the last few days is that
Speaker 1: the US just imposed a ten percent tariff on all
Speaker 1: imports from China, including consumer goods that it stayed away
Speaker 1: from tariffing during the first Trump administration because it was
Speaker 1: so worried about the impact on US consumers and inflation
Speaker 1: here in the United States. It's kind of hadn't done that,
Speaker 1: and that is enormous in its own right. If we
Speaker 1: had set aside the Canada and Mexico things, if those
Speaker 1: threats had never happened, and what we had seen over
Speaker 1: the last few days was simply a ten percent tariff
Speaker 1: on all goods from China, the alarm bells would be
Speaker 1: ringing all over the place. The pairing of these things
Speaker 1: has kind of hidden this momentous action. I think the
Speaker 1: whole idea of Trump using leverage and hinges on kind
Speaker 1: of his credibility right. And one of the things that
Speaker 1: we've seen just in the first two weeks of his
Speaker 1: administration is his willingness to go to extreme threats in
Speaker 1: terms of economic warfare for relatively small fights. And you know,
Speaker 1: the biggest example of that was Columbia, where we had
Speaker 1: this kind of nine hour trade war where the President
Speaker 1: of the United States essentially threatened not just tariffs but
Speaker 1: kind of Iran level sanctions on an ally with which
Speaker 1: the US has a free trade agreement over two planes
Speaker 1: over essentially a diplomatic skirmish in you know, in the end,
Speaker 1: and it wasn't so that the Colombians were refusing to
Speaker 1: accept these planes with deportees, is that they just wanted
Speaker 1: the deportees not to be shackled while they were on
Speaker 1: board these planes and treated more humanely. So, I mean,
Speaker 1: it's kind of this willingness to escalate. And it's the
Speaker 1: same thing with Canada and Mexico. I'm going to blow
Speaker 1: up one of the greatest regional alliances in the world,
Speaker 1: a real source of US competitiveness. As you said earlier
Speaker 1: on this is and this is what Trump himself said
Speaker 1: when you signed the US MCA. This is you know, Canada,
Speaker 1: Mexico and the US against the rest of the world.
Speaker 1: This is how you compete with China. And to blow
Speaker 1: that all up over Yes, there's you know, there's a
Speaker 1: horrible tragedy around fentanyl deaths and in the United States,
Speaker 1: and you know, the migration issues at the southern border
Speaker 1: in particular have been very real politically here in the
Speaker 1: United States. And that's a core campaign promise for President Trump.
Speaker 1: But to threaten what he threatened on the economic side
Speaker 1: to address these issues that are non economic in many
Speaker 1: ways is really you start to wonder, Okay, where do
Speaker 1: you go next? And then if you play that out
Speaker 1: to other trading partners, right, he has put the EU,
Speaker 1: the European Union in his sites now for for a tariff. Now,
Speaker 1: the EU response, there is no easy way out for
Speaker 1: them in putting ten thousand extra border guards at the
Speaker 1: border at the EU. That's not what Donald Trump is
Speaker 1: going to look for. So how you know, how damaging
Speaker 1: is that going to be? You know, the EU in
Speaker 1: the US trade is almost a trillion dollars annually. It's
Speaker 1: actually bigger than the trade with Canada and Mexico. But
Speaker 1: these two countries have two and a half trillion dollars
Speaker 1: each in foreign direct investment in their economies. If you
Speaker 1: go here in the first two weeks, there's nowhere to
Speaker 1: go up from here.
Speaker 3: If it's going up and it's not sustainable, it's going
Speaker 3: to go down at some point. And the part where
Speaker 3: he decide to de escalate is the part where he's
Speaker 3: ready to make a deal. At that point he's going
Speaker 3: to I think the endgame is for him to seek
Speaker 3: negotiations with all trade partners, where he kind of like
Speaker 3: Phase one deal with China, except with everybody, including EU.
Speaker 3: Because with EU, as John said, there's no board. It's
Speaker 3: not a national security issue. It's more of a commercial issue.
Speaker 3: And Trump had the same attitude toward EU in the
Speaker 3: first trade war. He did not change at all. He
Speaker 3: picked on the same type of sectors and the same
Speaker 3: countries as he did in the first trade war.
Speaker 1: I think there's another thing at play here which we
Speaker 1: need to think about, and that is that he doesn't
Speaker 1: yet have his economic and trade team in place, and
Speaker 1: that the advisors who were in the room with Donald
Speaker 1: Trump as he marched towards these tariffs at the weekend
Speaker 1: were those his most hawkish advisors, Peter Navarro, Stephen Miller.
Speaker 1: That's what we've been hearing. And these are the people
Speaker 1: who are true believers in tariffs and play to also
Speaker 1: to the impulsive side of Donald Trump to that kind
Speaker 1: of testosterone driven You are the strongest man on the block,
Speaker 1: you know, make them bend your way. And by the way,
Speaker 1: these tariffs are great. These are magical tools that will
Speaker 1: bring manufacturing jobs back to the Nish, which, by the way,
Speaker 1: the data doesn't show actually happening in the first Trump
Speaker 1: in series, and he doesn't yet have in place. Howard Lutnik,
Speaker 1: his Commerce secretary, who when he nominated him, Trump said
Speaker 1: would be leading his trade in terariff strategy. Scott Bessen
Speaker 1: was strangely absent from the conversations about this over the
Speaker 1: last few days, and his trade representative Jamison Greer, this
Speaker 1: is your trade negotiator, This is kind of your tariff lawyer.
Speaker 1: Is hasn't yet had his confirmation hearing yet.
Speaker 3: I disagree, Sean. I think if the trade team were
Speaker 3: better in place than what we see right now, he
Speaker 3: would have gone even more hawkish. I think the lack
Speaker 3: of staff in the USTR right now is actually impeding
Speaker 3: the implementation of tariffs. It could have gone faster. On
Speaker 3: the other hand, I think that the lack of voice
Speaker 3: coming from Scott Bessens in this round is trees to
Speaker 3: what happened with that Washington Post leak a couple of
Speaker 3: weeks ago.
Speaker 2: That was the one saying it was going to be phased,
Speaker 2: And yeah, there was pushedback from that from the White House.
Speaker 3: Right when I saw that leak, I thought that these
Speaker 3: trade moderate moderating influence like Scott Bessend and Kevin Hassett
Speaker 3: must be losing ground.
Speaker 1: But that's really interesting in the context of Trump's broader goal,
Speaker 1: which is to bring about this economic golden age in America.
Speaker 1: The reason Scott Besson would want to phase in any
Speaker 1: tariffs is because he would want to moderate the impact
Speaker 1: on the US economy, spread it out over time, and
Speaker 1: because he sees restoring growth or boosting growth in the
Speaker 1: United States as a key element. It's also, you know,
Speaker 1: we get back to the revenue piece. Scott Besson has
Speaker 1: talked about using terrorists to offset tax scots, raising a trillion,
Speaker 1: maybe two trillion dollars over ten years from tariffs to
Speaker 1: offset the four trillion dollar plus costs of extending the
Speaker 1: twenty seventeen tax cuts if you don't have a methodical plan,
Speaker 1: and they actually did lay that out on day one
Speaker 1: in executive order that Trump signed it, which he ordered
Speaker 1: up all of these reports and setting in April first
Speaker 1: deadline and really ordered up this let's go out there
Speaker 1: and study and come up with a plan. And he
Speaker 1: literally ripped that up when he threw out these tariffs
Speaker 1: on Canada, Mexico and China.
Speaker 2: Sean, you made a good point earlier that although we
Speaker 2: maybe missed something quite important with the across the board
Speaker 2: ten percent tariffs on China because of all the fireworks
Speaker 2: over the much bigger threat that was then withdrawn against
Speaker 2: Canada and Mexico, the ten percent tariffs potentially do fit
Speaker 2: in the approach to this strategy, which actually the President
Speaker 2: Trump outlined to our editor in chief last summer when
Speaker 2: they faced with exactly the tension that you raised earlier. Sean,
Speaker 2: that if you if you want to change the trading system,
Speaker 2: you're not going to raise money because importers will have
Speaker 2: moved to the US, so you don't have or will
Speaker 2: have the production will have moved to the US. So
Speaker 2: then you stop making money if you've successfully changed the economy.
Speaker 2: And he said, very interestingly, he said, well, there's some
Speaker 2: things where you just have a low tariff and you're
Speaker 2: raising money, but you don't change behavior. And then other
Speaker 2: things where you really just want to being the production
Speaker 2: back to the US, you have very high tariffs. So
Speaker 2: but with these ten percent tariffs, if that's the case
Speaker 2: and that approach, President Trump is willing to have a
Speaker 2: lot of US consumers and US companies lose out and
Speaker 2: pay quite clearly those tariffs. This weekend we had what
Speaker 2: was I think a perfectly sensible change to reduce that
Speaker 2: or get rid of that day Minimus exception from tariffs,
Speaker 2: which had provided such a capacity for Timu and Sheen
Speaker 2: and other Chinese producers to send goods sort of under
Speaker 2: the radar to the US was eight hundred dollars ceiling
Speaker 2: on sort of tariff free imports. And if you're there'd
Speaker 2: be a lot of Trump supporters who are buying a
Speaker 2: lot of things from Sheen and Timu who are going
Speaker 2: to see that instantly, and that doesn't feel like that's
Speaker 2: going to go away. And equally, there's a lot of
Speaker 2: importers who are going to be paying these tariffs. I mean,
Speaker 2: he's he wanted to create the External Revenue Service to
Speaker 2: create this to collect the tariffs, because we all know
Speaker 2: they're paid by US importers, not by the other countries.
Speaker 2: So and have you sort of changed your view on
Speaker 2: the costs that the political blowback that this president might
Speaker 2: be willing to take.
Speaker 3: Yeah, so I so you know that ten percent universal
Speaker 3: tariff on Chinese goods, So that now covers the list
Speaker 3: for A and four B in the first trade war,
Speaker 3: which is comprised mainly of consumption goods. In the first
Speaker 3: trade war, the Trump administration largely spared the Chinese consumption goods,
Speaker 3: but basically effectively this ten percent raised the list for
Speaker 3: A back to the pre phase one.
Speaker 2: Can we translate that he's imposing it on consumer goods
Speaker 2: in a way that they didn't in the first administration.
Speaker 3: So in the first administration, he left the consumption goods
Speaker 3: from China intact until spring of twenty nineteen. Then he
Speaker 3: created two list four A and four B. And these
Speaker 3: two lists he planned to slap on fifteen percent on
Speaker 3: List four A, which is like a couple hundred billions
Speaker 3: of Chinese consumption good and he did it. And then
Speaker 3: immediately what you saw back then is that the economy
Speaker 3: started slowing very visibly. Fixed business investment immediately start falling,
Speaker 3: and manufacturing employment immediately start falling. And this was after
Speaker 3: that for a list, and then that was in the
Speaker 3: de escalatory phase of that first trade war. I think
Speaker 3: that we're going to start seeing the impact on investment,
Speaker 3: primarily in stock market once that ten percent Chinese trade
Speaker 3: tariffs start to be effect in the next couple of months.
Speaker 1: And just to put that in context, that kind of
Speaker 1: list for A and four B from the first Trumpet musition.
Speaker 1: We're talking about smartphones, we're talking about toys, we're talking furnitures, furniture,
Speaker 1: we're talking about all of the cheap stuff from China
Speaker 1: and America. Really by right, and we're.
Speaker 2: And to be clear that trade is that made on
Speaker 2: economic by ten percent or is ten percent low enough
Speaker 2: for it to continue, but just be more expensive?
Speaker 1: Probably low enough for it.
Speaker 3: Yes, I mean, I mean the trade elasticity from between
Speaker 3: US Chinese trade flow is approximately, by my estimation, one
Speaker 3: point five to three, which means that a ten percent
Speaker 3: increase in terraff will reduce trade flows by either fifteen
Speaker 3: percent to thirty percent over time.
Speaker 2: Okay, last question to you, Anna, were amazed it's taken
Speaker 2: us this long to get to the FED for any
Speaker 2: Bloomberg podcast. I mean, it's it's pretty much mandatory that
Speaker 2: we have to talk about the FED at some point.
Speaker 2: One of the things that was said over the weekend is,
Speaker 2: whatever happens, this puts pay to any idea that there's
Speaker 2: going to be any interest rate cuts from the Federal
Speaker 2: Reserve this year, and if anything, they're going to be
Speaker 2: more concerned about inflation looking going forward. Is what's your
Speaker 2: take on if you just say, we've now got a
Speaker 2: lot of we've got more uncertainty than we thought and
Speaker 2: maybe some new theories about what's going on with Donald
Speaker 2: Trump's trade policy, what are the FED thinking? Anna?
Speaker 3: I think in the fact you have Powell and the others,
Speaker 3: and from the past two press conference I've heard that Powell,
Speaker 3: in fact is a very UH has reviewed as a
Speaker 3: very good grasp of the objective findings in the trade literature,
Speaker 3: which is that number one matters how broad these tariffs are,
Speaker 3: what goods are going to be tariffs, how much retaliation
Speaker 3: there's going to be, and there's just not enough information
Speaker 3: on that. However, within the set arsenal of economic modeling tools,
Speaker 3: they could see two outcomes from trade war. Is at
Speaker 3: first is either the burden of the trade war will
Speaker 3: show up in inflation as higher inflation. That's what every
Speaker 3: obviously what everybody automatically default to the view. However, the
Speaker 3: second view is that if the adjustment turns out to
Speaker 3: be through squeezing profit margins, and the impact on our
Speaker 3: trade partners like China, EU and Canada Mexico turns out
Speaker 3: to be more dire than the impact on US, then
Speaker 3: the global manufacturing cycle with slows, and ultimately the burden
Speaker 3: of the tariffs would be not showing up in higher
Speaker 3: US inflation, but rather in lower real come through lower
Speaker 3: employment and lower wages. And so I think that the
Speaker 3: Fed's optimal response really depends on which of these two
Speaker 3: economic outcomes prevail. Obviously, if inflation spikes, then the FED
Speaker 3: will have to you know, keep frais on hold or
Speaker 3: even hike. However, I don't think that's not my baseline,
Speaker 3: because in order for the economy the inflation to rise
Speaker 3: by that much in response to teriffs, you basically need
Speaker 3: to have inflation expectations be unanchored, and even that's the
Speaker 3: worst of inflation. In twenty twenty two, Powell was adamant
Speaker 3: that all the market indicators, the monitors suggest that inflation
Speaker 3: expectations are very well anchored in the US. In the
Speaker 3: past pressor. He also mentioned that through anecdotes and discussion
Speaker 3: with firms, all the firms are telling them that they
Speaker 3: have no pricing power, So how is it that the
Speaker 3: terriffs could be packed completely passed through to consumer prices.
Speaker 3: So that leads to the second most likely outcome in
Speaker 3: my point of view, which is lower real income over time.
Speaker 3: And the optimal FED policy in response to lower real
Speaker 3: income and a higher unemployment rate is actually to lower
Speaker 3: FED funds rate.
Speaker 1: And I would just point out that we have and
Speaker 1: a lot of FED policy makers were there in twenty
Speaker 1: nineteen when they faced the first Trump trade wars and
Speaker 1: the impacts, and we spent some time looking back through
Speaker 1: the transcripts of those meetings, which were just released in January,
Speaker 1: and one of the things you see is the policy
Speaker 1: makers focusing on a collapse in manufacturing employment, a fallen
Speaker 1: industrial production, a stalling in business investment in the United States,
Speaker 1: and then this impact of uncertainty, and that leads to
Speaker 1: a slowing economy in twenty nineteen. And in twenty nineteen,
Speaker 1: the FED started cutting rates and actually went on cut
Speaker 1: rate three times.
Speaker 2: And that goes to the point that he might think
Speaker 2: it's good news to have lower rates, but not if
Speaker 2: it's for the wrong reasons in his view, not the
Speaker 2: economic weakness. Well, thank you very much, guys. I sort
Speaker 2: of feel like Trumpnomics sometimes is more on the Trump
Speaker 2: and more on the politics. So we've had some real
Speaker 2: oronomics in this episode, which I quite appreciate. Thinking about
Speaker 2: the models for what's going on, I think we're still
Speaker 2: stuck with the fundamental question, does Donald Trump really want
Speaker 2: to change the global economy or just like the real
Speaker 2: estate developer that he is, extract the maximum financial return
Speaker 2: from America's prime real estate within it. Whatever he's trying
Speaker 2: to achieve, we want to think about what economic costs
Speaker 2: might be occurred along the way, and I suspect both
Speaker 2: of you will be back to help me answer that question.
Speaker 2: But in the meantime, thanks for listening to trump Andomics.
Speaker 2: It was hosted by me Stephanie Flanders, and I was
Speaker 2: joined by Annawong and Sean Donald. Trumpnomics is produced by
Speaker 2: Summer Saudi and Moses and with help from Chris Martlou.
Speaker 2: Sound designed by Blake Maple's, with special thanks to Bloomberg, Kilbrooks,
Speaker 2: Amy Morris and Nathan Hager. Brendan Francis Newnan is our
Speaker 2: executive producer and to help others find this show, please
Speaker 2: rate it highly and review it wherever you find your
Speaker 2: podcast