We Are in a Reactive Phase, Alden Says

On Sunday, the president's senior trade advisors said the President does not want any nation excluded from these tariffs, said to be imposed as early as this week, the President tweeting earlier this morning, we have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for the United States. For Mary a massive relocation of companies and jobs. Tariffs on steel and aluminum will only come off if new and

fair nafter agreement is signed. Joining me now here in New York City, I'm pleased to say, is Luigi Zingalis. Here's the University of Chicago Booth School of Business, Professor, professors and Gala. Is great to have you with us this morning. So to begin with the question of whether we've seen heard the starting shot of a trade war?

Have we? UM? I hope not. I think that we are used now to present Trump being a bit bombastic in his statements, and uh, I hope this is uh a bit of propaganda to start the negotiation of NAFTA from his Tonga position. UM. And they will not lead to a major trade war. But you know, nobody knows, Professor. A lot of people questioning the approach of this administration. Let's just talk about whether there is a problem. Is there a problem in your mind that needs addressing, UH,

a problem in trade or probably the administration problem in trade? UM. I think that the United States is concerned about not having fair trading with other partners. I think there are as twach in other countries. I'm also sure that the best way to go about doing that is UH introducing tithes or making the statements the president makes. I think those statements are more directed to the political ward and to his supporters, rather than to achieve the final goal.

What is the best approach? I think the best approach is trying to walk with various partners to make sure that there are conditions of fair trade on both sides UH, and that American goods can reach consumers in other countries as easily as UH foreign goods which our market. The international response so far as stank of hypocrisy for a

lot of people. Europe trying to take the moral high ground on trade when there are significant barriers to entry into the European Union at this point, Why it's doing more of the same going to turn out any differently than it already has over the last couple of decades. Um, I think that you're wasting a good point, But I'm not so sure that fighting the way a person and

Trump goes about fighting will deliver about outcome. Well, I just wonder what it is the right approach because ultimately, professors, so far all have heard is more of the same, and I felt to see how more of the same

actually generates a different result. In fact, for many people, there is a strong argument here that maybe the likes of the European Union needed a serious reality check in the way that it's behaved over the last few years, and that maybe China needs one too, that China can no longer continue to be a leach on the international training system, and that something needs to change. Um, that's fair.

But I'm also sure that by going after Canada, for example, because these tires end up penalizing particular Canada, going after Canada without a wheel explanation, I don't think that we are retaliating against Canada's targets or anything like that will lead to a better outcome. I think that having a more aggressive stance on trade justify based on what the other countries do. I think that that would be a better approach. Just because the time you're no, John's got

a ton of questions for you as well. The tweet this weekend where he wants to go after foreign automobiles European automobiles. Explain to our audience the trade of going after BMW if they're also located in South Korea South South Carolina as well. I mean two one is the zip code. How do you go after Germany and BMW cars if x per cent of them are made in

South Carolina? So one one inter petition you want a more cost to be made in South Carolina, And it says clearly the ties will not affected the cost produce in South Carolina, and so b n W well increases production here. If you were to to shut off or restrict imposts. But the experience we have seen in other countries is not that great. It's Brazil um as very high ties to the outside ward. But the biggest beneficial of these ties ex actually Fiat, which is a phone

company located in Brazil. They are plans in Brazil and they can sell their cars at the higher price and make higher profits as a result of the restriction to trade. So the solution trade end up very often benefiting aquiiforon corporation. John, I want you to jump in here, but I'm glad to tell you, John that we've already talked to coach Singals about Italy enough. Thank you, thank you, and the knock on effect of that to the Italian What what is Professors and Goals have to say about that? How

do you tie up the World Cup and the Italian election? Professor? Actually, I think that the performance of ealing the World Cup, both in the US tool where was eliminated in the first round and is in the coming one where we're not even participating, is an indication of the inefficiency of the training system and inefficiency in the management selection system. Are in the Italian Soccer Federation, which reflects the inefficiency

in selection of Italy at large. I think that we need more matocracy, We need a change in in the if you want ruling elite, and that's exactly what the selections are trying to achieve. I'm not so sure that they were, but I think there is a deep dissatisfaction with the establishment um and uh, and I think that

the vote yesterday indicates that very clearly. I think that's a sense of complacency after having one of the best teams in the world for for a couple of decades as well, professor, and I wonder whether that applies to the markets this morning, complacency that we've gotten used to an ECP that has taken care of everything for us, and that we can wake up and have gridlock in the third largest economy in Europe and in the market you can barely tell um. I think that the ocket

this pretty smart. They know that votes are not that important, that the decision I'm making Frankfurt anyway, and so nothing changes. Antila Maya Dragi is Chairman of the European Central Bank. Nothing changes later would be interesting to see when I look, Luigi, where we are and just folks the headlines of the last few hours. I want to go back and revisit why Steve Bannon is enjoying the Italian elections so much.

And the tine here is of a different kind of democratic process, not fascism, that's media inflammatory, but what kind of stringent democracy is making Mr Bannon so happy with Italian politics? So I think there is a clear attention between globalization democracy and national sovereignty, and I think that this is coming to a clear crash in Italy. Italy feels that the European Union is not taking care of

its problems, starting with immigration. I heard earlier the new Ministry of Health in Germany saying that Europe should deal with the immigration problem. They should, but at the moment all the issues are to the countries at the borders. Is like in the United States, we let New Mexico deal with the problem of immigration and the rest of the country. I knows it, and and I think that

that generated a lot of resentment in Italy. And the second is what we're saying earlier with Jonathan in Basically we are under supervision by the European Central Bank. So the country feels that it is not really a complete democracy because no matter what you vote in Rome, you're gonna add the decision making Frank Foot. So, I think that that that is a big anti European Philly that expressed itself in the vaut yesterday, and I guess that Steve Bannon is uh seeing that as a sign of

the anti globalization trend all over the world. Professor Luig is In Gardas of the University of Chicago Booth School, I'm going to continue the conversation on trade as the tension continues to escalate between the United States and the rest of the world. For more inside, I'm pleased to say we're joined by Debra Lear of the Polston Institute, the vice chair of the Polston Institute, joining us from New Orleans. Debre, great to have you with us on

the program. I asked this question at the top of the hour, and I'll ask it of you. Whether we've heard the first shot of potentially a trade water come well. Obviously very interesting idea. I mean, looking at the issues China, the tariffs actually don't have a significant impact, and what the Chinese have been doing um is taking very much

a wait and see attitude. They've been following the rhetoric, but waiting to see what the actual actions will be before deciding what their own retaliation or next steps will be. Do you anticipate that that will be action? Well, you know, it's hard to predict that with this president um Already this morning he said that if there can be an

apt to agreement, they will take the tariffs off. When it comes to China, China has already announced that they're planning to move forward with their own package of marketing opening measures. I'm sure in part they're hoping that that takes some of the wind out of the sales of the administration when it comes to trade action against them specifically.

Ms Larry, you have you have worked with Secretary Paulson for years and here at the Paulson Institute, but far more importantly than that, you have been in direct advise it through Golden Sex and other entities in advising corporations. We haven't really covered that the last forty two business hours forty eight business hours. How would you expect corporations to adapt and adjust to presidential tweets? That can't ignore them,

can they? Well, you know, it's very interesting. I was with a group of business leaders this past week who were talking about the fact that corporations are now taking on rules that they hadn't in the past, and climate change is a very good example of that, where they're taking on certain responsibilities that go beyond just being a making a profit for their shareholders. And we seem to see them moving into that same space when it comes

to policy and trade policy. Certainly, in the past, corporations have always taken a stand. I've worked with corporations for the past, you know, twenty plus years in terms of what their advocacy has been in terms of US China relations in the economic relationship. But they really are taking a much greater role these days. Help me then, with a company that you advise that you know it can be fer Johnson and Johnson and other big fancy names. What does Tory Birch do with trade tariffs? Tory Birch

isn't worried. This is a for those of you not know, this is a clothing line that you have to buy for your house to keep closets full. Um Debora. Tory Birch doesn't care about steel or aluminum. But they've got to care about import and export dynamics, don't they well, of course, and they care about the overall bilateral relationship with China, which is the most important in the world, and any negative backlash is going to have an impact

on their business. Now that said, certainly there are a number of US businesses are very unhappy about the fact that China has not opened its markets as quickly as we had expected them to do. We've not seen significant market opening in the past ten years, so there is the frustration with that and a frustration with their level of intellectual property rights protection. Hopefully we'll see those all

increase over the next five years. Debra, I'm still waiting for someone to tell me what is the best approach to deal with China to get them to drop these barriers to entry. What is it if it's not the one that this administration is currently pursuing. Look, I I was a trained negotiator in the ninety nineties under the Clinton administration, uh, And I think that it's a combination of two things. I think you have to be very clear and what it is that you want, and you

have to be tough to take action if not. And we negotiated three three oh one agreements very successfully. Um too on intellectual property rights. Well, certainly there are still issues with it. What the agreements did was create the framework for protection, helping them establish first a world class legal structure, which is what you need before you can

then hold them to implementation and enforcement. So I think it has to be a combination of one being very clear in your demands, but two being very tough if they don't follow through on their commitments. The conclusions so far those that the approach of previous administrations didn't work. Are you saying it did well? I think it's been,

you know, a combination of things. One, certainly, we were able in the in the nineties to make significant progress on trade and bring China into the World Trade Organization. I think that was a very important step, and I know that this administration has different views, but I think that if you look at the overall results, services exports from the United States have been up over a thousand percent and US goods experts have grown over five since

China came in. One of the failings has been that of the w t O to keep up with today's modern world of trade and to be able to handle a mega economy like China. So I think it's much a failing of some of the international institut tuitions as it is China's inability or lack of movement on opening up.

If you look at what has happened, and there's obviously a lot of debate about Hi jimping and him taking consolidating control, but one of his biggest challenges has been his inability to ensure that policy is implemented on a consistent basis and the provinces and in the municipalities, and that was Jugentao's challenge, and we saw no significant market opening under Jugentile. Now, part of it is that the

Obama administration did not push hard on these issues. They were willing to trade concessions on the environment for movement on market access. But also was Jugentao's inability to overcome some of the powerful forces who were opposing further competition

from foreign firms. A lot of people might argue, actually that the Chinese have been fantastic just leveraging the rest of the world and their open markets or perceivably much more open markets than the Chinese market itself, and just haven't dropped their own barriers to entry, and that actually it's a very deliberate, a very deliberate policy of the Chinese to do so. In fact, you mentioned the nineties.

The nineties probably not a very good comparison because the Chinese weren't the force that they are now in the nineteen nineties, and here and now quite clearly the policies of the nineties just don't apply today. Well, I think you're absolutely right that China is a very different animal than it was in the nineteen nineties, and it's much

more powerful economically. But certainly the European Union in the United States have a lot of leverage with China to this day, and part of our leverage is their ability to access our own market. I've felt very strongly that we should be having bilateral negotiations with the Chinese to push them for further market opening. Those did not take place under the Obama administration until the last two years

when we started bilateral investment treaty negotiations. Those were progressing very well, but they left it too late and it ran into the politics of the presidential election. Explained that bro and I was in Washington for the first meeting of Secretary Paulson with the Chinese, and it was an historic moment, and you know, there was a lot of talking and give and take. For those listening who are skeptical about bilateral meetings getting anything done, explain their value.

I think it's several things. One, it's clear that you need to establish personal relations when you're doing negotiations because it brings about a certain level of trust and to build momentum towards addressing some of the larger and more complicated issues. Secretary Paulson will argue, of course, that the Strategic Economic Dialogue was making very good progress until the financial crisis hit and we moved away from pushing for reform of their financial sector, which was not the right

time to be discussing that. To him, act really having very good cooperation with his Encounterport Vice Premier Jane Sean in taking steps that were very important to make sure that the financial the global financial system did not crash. Devil Lair, thank you so much for the pulse and institute greatly greatly appreciated. UH this morning right now with

a brilliant research note is Shahab Jalanus of Credit Suite. Shab, congratulations to you and your team, not only on foreign exchange and on the VIX blow up, but buried in your note our phenomenal charts about the dynamics of capital goods. Our capital goods imports into America a bad thing. Tom Well, Ultimately, imports are necessary if you can't produce enough of the

products that you need to grow your economy. Um and if capital goods of a better quality can come from overseas, or if there's some demand is so strong domestically that you need to import more from overseas than you produce locally, then they shouldn't really be a bad thing. So there's always obviously a political dimension to considering this issue. But in my view, no, that it's not a bad thing. To me. The heart of the matter, and I would love to be corrected by inn Wall is the word

you just use, which is demand for goods. Isn't the boosted imports into America at a first order basis a question about our success and our demand for stuff? I think so. And I think the other dimension to consider here is if it's possible to spend more than you earn or consume more than you produce. It's partly because foreigners are prepared to either lend you money or invest

in your country. So the other side of the trade deficit is obviously a financial accounts surplus, which reflects a willingness by feigners to invest in your country, and that's very important on many levels. But also when you look at the dollar, it's extremely important because the biggest risk to the currency would be a sudden loss of confidence from overseas investor. We say good morning to all listen and serious, serious actemption on one nineteen and digitally across

steel and aluminum America. And we don't mean to belittle in any way the challenges of that industry. But all through the weekend reading shab was the idea that the president, with good intentions, is going to crush so many other industries. Does Credit Suite buy that idea? But the issue really is this is the direct GDP input from these industries from steel aluminum very very small, well below one percent of the sea even as a percentage of imports, you're

looking at less than two percent of total imports. The question though, is this is firstly, clearly there's a direct role in terms of the input of these products into other industries, and that's a key concern, and you're seeing that reflected in the prices of equities of consuming companies for example. But beyond that, as well. I think one of the biggest issues here is what's the purpose of these tariffs. On the one hand, you here some advisers

argues about national security. Other team to talk about China's production as a potentially of total steel production, which does seem to be unrelated to this issue. Others talk about nafter and today we've had suggestions that the US will lean on these tariffs as one form of negotiating new nafter arrangements. That the point, though, is what's the purpose? And secondly, how is the policy being formed? Is it

through a cohesive approach? Is it just emotion? And these are issues that will disturb investors until we get better answers, especially when we know that there could be retaliation the point down the line. And so there's a good foundation to the key discussion then is with shahab Jaalin is with credit suite and foreign exchange. Then it's worth the dollar. And I did see in the literature this week and an ambiguity about dollar week, dollar strong, I would respectfully

suggest consensus is tilting dollar week? Do I have that right? I think so that there's technical economic arguments that could be made around the lines of a smaller trade deficit down the line, if it were to materialize being something that obviously reduces some of the dollar outflows from the import balance. On the other hand, you know, you do have a lot of money that flows to the phone exchange markets that we're flect the capital account to reflect

financial assets. And if you follow policies that globally are seen as destructive and at the same time you're a large beneficiary of global capital inflows, if those were to be hurt by following policies that are unpopular globally, then I think the dollar would suffer, and that's probably what we were lucky to see down the line. Well, well, then that in suffering. You know. By the way, I'd love to get you on set sometime on television and

radio with your colleague in crime, James Sweeney. I think that would be just a very smart discussion to benefit Bloomberg worldwide. What but hub The idea here is dollar dynamics and maybe what Secretary Minution or President Trump would say is a weak dollar in a gradual trend is good for America. How do you respond to that. Well, again, it's it's uh a question of passing through the sectoral effect as well as the political signals that you get.

So clearly a week of dollar would benefit exporting companies. On the other hand, if you are the US government and you are looking to borrow large amounts of money overseas, which is going to be potentially essential given the spending plans and the tax changes that have been made in the US, a weekly dollar may make things more difficult because foreigners may require higher real interest rates from you in order to Can you have a week dollar? This

is critical? Can you have a week dollar and higher interest rates? Yes? I mean in the in the end, that's what we will probably end off with, in the sense that you need to make US financial assets, particularly US government debt, attractive to foreigners. And there's two different ways of doing that. One is to think in the currency. The second is to offer them higher real interest rates. And we've seen this story in emerging markets over the

years again and again countries like in Turkey. This is typical. It's not typical of the US, certainly in last twenty to thirty years. So this is a new dynamic. The market will have to get used to this, folks. What you just heard there, I've been railing pim Fox was so angry at me this week and he said, Tommy, you shut up about income and substitution affect microeconomics. Chah,

have you just nailed the microeconomics. It seems to be devoid in the Trump administration in that within any dynamic foundation, including interest rates, dollar at the minimum, within the Euclidean model, a Cartesian model X y axis at the minimum, there's two paths. There's the income effect in the substitution effect, and you can get this oddity of higher interest rates

and weaker dollar. Right. Oh, yes, we've certainly had it in play since September at least, we've already had six months of this, so uh, you know, it's it's something that the show can persist down the line, and particularly you even have the foundation for it in terms of theory, because at the end of the day, if you are going to push larger and larger government deficits and you're trying to find foreigners, then you have to offer them back and that is a weekly dollar in higher interest rates.

Now where this theory would be wrong. My theory would be if the economy generates such high tax revenues through growth, for example, that you don't end up needing foreign invent but we're skeptical about that. Okay, folks, what you've just heard there? And and I'm not going to attach Shab's name to this, because you know, I don't want to

get him in trouble with his general counsel. But Pim, I'm going to put out on Twitter the distinction between the hicksie in and slut skin income substitution effects and is you know him? We have wonderful informed guests. I am so done with Shahab rich lose him. Um. Shahab just killed it there with credit sweez. The book is Failure to Adjust. We had the honor of speaking with Edward Alden one to five, ten times, but never more important than now on trade tariffs, on our myths, on

the fictions that we have ted. Failure to Adjust. You open it in nineteen sixty one. You open it with the nostalgia of another America. I think everybody listening, whether they support or don't support the president, would suggest he is steeped in a nostalgia for another time and place. What's the president most get wrong about? Diving back to nineteen sixty one, Well, we we are a different economy. I mean in almost of American workers worked in manufacturing

in one way or another. The rest of the world was still pretty flat on its back. So so we didn't have any real competitors. I mean, the labor unions in thought expanded trade was a great idea because we made everything better than anybody else. So so what's the problem. We just live in a very different world now, and I and I understand some of that nostalgia. I mean, it was a more equal world if you look at people's incomes. The pace and the pressure were probably lower

back then. I mean I was a little kid, so there was a little pressure on me. But but I can understand the nostalgia. It's just not where we are anymore. And you've got to do with reality. It was a closed economy coming off of two major world wars, and one in particular coming out of you know, we just had on Ben Steel and the Marshall Plan and his magnificent new book on that, Ted Alden. We're not in a closed economy anymore, are we? No? I mean we

weren't exactly closed then. We just, as I say, made everything better, so we didn't face a lot of competition. Now we live in a truly global economy, and there are a lot of benefits from that's only a lot of benefits for American consumers. There's been, you know, huge growth of wealth around the world, people moving out of probably a lot of great things about it. It's over the weekend in the Washington Post, Pim Fox, David Lynch

his magnificent article in Ashtabula, Ohio. It was iron ore and then in they invented the arc welder type electric furnace for steel and new Cord picked it up and ran with it. Mini Mills ted Alden. Is it too late? Is it too late? When it comes to I mean, if we're going into a land of trade wars right now, does that signal that we really have uh sort of walked away from any substantive response to globalization in the United States. I mean, I hope not, because I hope

is one thing. I got that, But I mean, you know how the system, you know how the system works, and now we're in a reactive face. We are in a reactive phase, and I fear there could be a lot of damage done. I mean, the world trading system is not that robust. It's fragile in a lot of ways, and I think we could see a lot of dangerous backsliding over the next couple of years. I mean, it's not going to solve any of the problems, and so we're gonna have to deal with this one way or another.

I just worry we're gonna be digging out of an even deeper hole than the one we're in at the moment. Well, that's where I was going with this. How do you do that? I mean, what what would you advise people who, let's say, have the ability to make decisions about where to either deploy their capital or where to educate their children. Uh,

let me take the ladder. I'm in the middle of a big project right now with Penny Pritzker, the comment former Commerce secretary, and John Engler, the former Michigan governor, on exactly that. I mean, our educational systems need to be far more closely aligned with working opportunities. You look at companies complaining about their inability to get the right

sort of skilled workers. You look at the lack of opportunities for people to only high school education, when if we could just get them through community college, the doors open up. There are so many things that could be done on that front. You look around the country. They're great state initiatives in places like Colorado and elsewhere. So there's a lot to be optimistic about. But but Washington's got to start waking up to some of this stuff.

Linolnroviding these stupid wards Lincoln, the linkage Pim Fox on trade dynamics and children and education. That's the trade policy called tuition where you export dollars and you import homework, like six hours of homework a weekend. That kind of well, and you hope that it leads to some kind of

critical thinking skills. But I mean you mentioned Colorado and no, I mean specifically, Ted Alden, what would you recommend to people to do who I'm trying to plan their future when they feel they have absolutely no control over the outcare question, I think you've got You've got to learn how to be adaptable in a modern economy, right, which is you need to arm yourself with a set of skills that carry you through your life. You're gonna have

to relearn things, uh throughout your life. And and this is hard for people, and I'm not it is hard, and and part of the responsibility government is to help make those tools available for America's not handouts but make it possible to get the education they need. Make sure that, you know, say they're working in the gig economy rather than working a full time job, that they have some basic set of benefits that they can look forward to a retirement, that if they're sick, they've got some kind

of cover. There are ways to design our systems to work in the fast moving economy that we're part of. We're just not doing that of the country. Why don't we have what I'm gonna call job credits, almost back to the sixties, for direct foreign rather direct domestic investment to create domestic jobs. That you know, it's almost like an LBJ kind of thing that Republicans get their arms around. Why a job credit? I mean, I think we could

do versions of that. I actually, I mean there are aspects of the tax bill, quite honestly, that I like that that gives some incentives for companies to invest here in the United States. The part of the Trump agenda that I've liked is the constant jaw boning for companies to invest back here in the United States and take some ownership of this economy, not just to see themselves as global citizens. So anything that pushes in that direction.

I think it is very positive, but you don't need to do that by declaring a trade war with the rest of the world. Again, we got to work with our allies while we're looking after our own. Ted oldn't thank you so much. Greatly appreciated. Can't say enough, folks about failure to adjust. How wic it's got left behind it is? It very important. It reads densely but very informative, with minimal mathematics. It's not like a heavy mathlift as well.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.