Bloomberg Audio Studios, podcasts, radio news.
Also, I think the question that becomes all the sequencing we're going to get from a President trub administration and sort of when that winds up affecting equity markets. Right, you have tax cuts versus tariffs, Right, you have immigration versus deregulation. Like what comes first could also dictate thats.
And I think the market might be waiting a little bit. Obviously, the inauguration here in the United States is until January twentieth. Then we have to kind of see whether he makes good on all those promises or whether it was just all talk.
Yeah, so let's get a little bit into that. Because Bloomberg Economics crunch the numbers on what would happen to GDP in different countries based on whether or not all partners retaliated in an event of a trade war, or only if China retaliates, And you can see Mexico getting hit the hardest right after Canada with a GDP wiped out by about two percent. The US comes next with
about one and a half percent negative to GDP. And the question that becomes we talk all about China and what it means for Europe, but the impact on the rest of North America could be huge, particularly for any sort of goods coming in from China through Mexico and Canada. So joining us now to discussed at Eshwar Prasad Tolani, Senior Professor at Trade Policy at Cornell University and Senior Fellow at New Century Chair International Economics at the Brookings Institution.
It's great to get your perspective. Thank you for joining us, Happy New Year. What's your bas case for trade wars? This year.
Trump has gotten increasingly specific about the amount of titles he is going to Levy, the country, city is going to Levy Ton right off the bat. So I suspect this is not all bluster. Now for the rest of the world, I think this could be seen as a bit of a bargaining stance. And the reality that is quite different from the first Trump administration is that the US is on a very strong footing because economy here has been doing remarkably well over the last few years
in the COVID period. But in addition, the rest of the world is really floundering in terms of economics performance. If you look at China, Europe, including powerhouses like Germany, Japan, and even India, which was roaring along until recently. None of these countries can really withstand the effects of a significant increase in trade sanctions around the world, so they're going to be on the back foot. So it's going
to be a very interesting bargaining game. But my bet is that we're going to see at least a small increase in tariffs, perhaps some symbolic amounts, but especially targeted towards China. And what the world does to retaliate, I think is the key question at hand exactly.
And if we just focusing on North America for a moment, I can make an argument that, you know what, it's legit because if you have stuff coming from China through Mexico and Canada, you're not going to want to get that into the US Versus the other side, which is you're really going to hurt your partners in trading within North America. What do you think the downside potential is here for that?
Now, for the US, there are some significant downsides. The imposition of tariffs generally ends up with the customers a significant portion of the tariff, so that could, along with the reduction and immigration flows, lead to an increase in inflation in the US. On the other hand, you could have a stronger dollar resulting from the imposition of tariffs, which are at least partially offset the increase in prices. But the bigger concer really is going to be about
the disruption in global trade. And here too, there are some very important differences. You know, in the previous Trump administration, there was this notion of the US imposing tariffs not just on rivals like China, but even on traditional allies including Canada, Mexico, and Europe, and we're seeing some rumblings
of that as well. In the past, China and these other countries could perhaps take on the US together, But right now China's economy is not doing very well and whatever growth they're getting is really coming from the production side rather than the consumption side. So the rest of the world is very concerned about becoming the dumping ground for export export some China, which it really needs in
order to sustain growth. So there is a fracturing of the potential alliances among other countries, which again puts the US in a strong position. But certainly disruption in supply chains and in production is going to be at cost with US manufacturers and manufacturers around the world are going to have to.
Bear with some of those governments, though, the ones that have to deal with China, for that matter, the ones that have to deal with the US. Is there any sense here that they will be able to find some sort of common ground between the two, meaning are they going to have to choose between a relationship with the US versus a relationship with China, or is there a way that they can sort of thread that needle and appease both nations.
That's a very complicated issue for many countries that are stuck in the middle. For some countries, like India, it's somewhat easier because they're not that reliant on exports and they could benefit from this geopolitical realignment which shifts foreign direct investment flows to India and away from China. But the reality is that moving supply chains away from China to other countries is going to be very difficult, especially in the very shortened but the margin we are beginning
to see changes now. A couple of the other things that the Trump administrations likely do is to shut down the ability of China to reroot it's exports through countries like Vietnam and Mexico, which have benefited actually from investment flows from China in order to undertake that routing. So those channels are going to be shut off as well. So I think it's going to be difficult for many of these countries caught in the middle.
Well, I'm glad you brought that up here, because whenever we talk about TIFF, so you always sort of look at it from that blunt instrument aspect of it, and the idea that it's just some blanket percentage that they put on goods. But there are a lot of areas that the Trump administration could exploit, so I guess create a little bit more pain for some of those importers.
And the idea that doing what you just did, which is, like I said, closing out some of those loopholes, but even certain things like kind of this obscure you know, postal war that allows companies like Timu and others to kind of ship kind of lower price goods, if you will, to the US at basically no cost, or at least marginal costs. That's something that could be relatively quickly close. I think he still has to go through Congress, but it is something that he could do relatively easy.
That's exactly right. I think even if he doesn't raise tariff's closing many of these loopholes will significantly affect China's ability to reroot trade through other countries into the US, and that's going to hurt countries like Mexico and Vietnam,
which have recently been benefiting from this trade diversion. Now, there are many countries that are very strong relationships with the US and with China would like to maintain them, but I think at the moment, one of the key factors driving the dynamic in this relationship is that it is the US consumer. There is powering growth in the world economy, Chinese consumers are really not stepping up to the plate, so you have substantial access capacity building up
in China. So I think much of the world is much warier about China using them as dumping around so it's exports, than they are about US tabs. But certainly for countries in the middle, they're getting pinched from both sides, and it's going to be a very complicated situation, not just in the short term but in the years to come.
Right, which also makes it difference from back in twenty eighteen when it was a different consumer and a different fed hiking cycle versus cutting for example ashwar. When you take a look at the profound effects of this, the whole point is to nearshore stuff or to bring industry home to the US. Is this all going to work.
It's going to happen in the long term, and we are seeing those changes already. Like I mentioned, we are seeing greater investment flows into India from countries that are more closely aligned with the US. China, on the other hand, is trying to invest more in countries that are more
closely aligned with it. So we're going to see a fragmentation of foreign direct investment flows and perhaps other types of financial flows, including equity flows as well, because countries like China and many other rivals of the US are concerned that the sort of sanctions that Russia has been
subjected to could be applied to them as well. So I think this geopolitical conflict is going to spill over into the economic dimension, both in terms of trade and finance, which is going to lead to much more fracturing of both trade and finance along geopolitical lines, which may not be great for global stability down the road.
All right, Always an insightful conversation with you. We'll have to leave it there. Eshwar Prasad, a professor of trade policy over at Cornell University. A closer look here at the incoming presidential administration here in the US and what it could mean for trade and tariffs.