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Equinor.co.uk Trump is back. And that means so are wild tariff threats. Ideally shared on social media in capital letters, making America's allies, multinational companies... And journalists jump. And look, I've heard the chitter-chatter. I know there are some people out there who think, come on, aren't these economists just being a bit hysterical? Tariffs would take time to have their full effects.
Last time, the Trump administration just paid off the farmers who got hurt most, and inflation barely budged. And then when the Biden administration came in, they didn't even remove the China tariffs. They're still there. And the sky hasn't fallen in last time I checked. This week, we're going to ask, would Trump's tariffs really be that bad?
This is The Economics Show with Samaya Keynes. I'm joined here in the studio by Kimberly Klausing, currently a professor at UCLA, formerly lead economist in the Biden administration's Office for Tax Policy, and author of the book Open, The Progressive Case for Free Trade. immigration, and global capital. Kimberly, hello. Hello. Nice to be here. Well, it is great to have you. Okay, so on this show, we start with a stupid question. So on a scale of 1 to 10, where 1 is the best ever,
And 10 is the worst ever. How damaging do you think Trump's international economic policies were in his first term? In his first term, I might give it a 6. Is 5 neutral? Yeah. Okay, I'll give it a six. Six. Okay, so bad but not catastrophic. Okay, and just to recap his promises this time around, he has promised a broad tariff of at least 10% on all America's trading partners and a special...
60% tariff on imports from China. Have I missed out anything important there? Not on the trade front. I think his deportation policies and his tax policies and his challenging of central bank independence would also influence my number. Okay, well, last week we covered the deportation policies. So just focusing on the trade policies for now, how damaging would those be on a scale of 1 to 10? I think all by themselves, I might give them an 8.
But when you couple them with the deportation and the fiscal policy changes and the challenges to Fed independence, I would give it more like a 9.5. Okay, so negative. Quite negative, yes. Okay, well now for the proper questions. So I thought in the conversation we're about to have, I could sort of play a role. And so what I'm going to try to do is...
to make the case that this really wouldn't be so bad. And you were going to react to that, right? Sounds good. So that is my role. Okay, so argument one. He's not actually going to do all of this, right? And I guess one justification might be that he doesn't even have the executive authority to put a 10% tariff on everyone. That's quite extreme. Congress would intervene. There would be a legal challenge.
What's your response to that? Well, the executive branch has at least three authorities that he would probably lean on to do tariffs if he wanted to do it. solely through executive action. There's national security, Section 232 is the code. There is harmful trade practices and responding to those, which is Section 301. And then there's a broader emergency. AIPA is the acronym. Authority as well. So he would probably make the case that one of those three authorities covered...
just about anything he wanted to do. There has been some news reporting that suggests that there's been conversations already with House Ways and Means about how to... account for tariff revenue in the forthcoming tax debate. And one possibility is that the House could actually legislate the tariffs. They haven't done that since 1930s Smoot-Hawley tariff. They haven't increased tariffs. through legislation in quite a while, almost a century.
They could do that. I think there's some risks associated with doing that. It's going to be a very narrow margin in the House. If one peels off just a few Republican votes, which wouldn't be that hard to do on an issue of this magnitude, then I think it would be subject to defeat in the House. So an alternative would be maybe have...
the U.S. Treasury write a letter that says the tariffs are going to raise a lot of revenue and then use that letter as a justification for the large tax cuts that they've proposed. So there's different routes. I think one constraint is the... urge to be able to count the revenues in these coming fiscal battles, which might limit the reliance on the executive-only approach, but there's workarounds there.
Okay, so if he wanted to, he could do this. I guess the other reason it might not be as bad as he's... promised on the campaign trail is that there could be some people around him who persuade him actually this would be extremely economically damaging. Maybe one of the hedge fund billionaires who are circulating in his orbit. I think last time it was the Treasury Secretary.
agricultural secretary who were trying to persuade him that actually this would be very, very damaging to his supporters. And that did temper some of his wildest threats on trade stuff. Do you think that kind of thing could happen again? Well, that's certainly my hope. I usually don't hope for business interests to co-opt the policy process, but in this instance, I would love for business interests to co-opt the policy process because I think the ideas are quite...
poor and quite damaging to the economy, and it would be best if the business community talked him out of that. Whether that's likely or not is another... There are some people around him, like Elon Musk, who benefit from open trade and markets. But there's a lot fewer reputable people in the future Trump administration than there would have been in the...
prior Trump administration. And so if you're counting on kind of the adults in the room to talk him back, it seems a little wistful when we look at the current people who are surrounding him. He's also made it abundantly clear on the campaign trail that he's very enamored with tariffs as a policy instrument. He's called them his favorite word in the dictionary. He's evoked them as a pay for for almost anything he wants to do.
So his intentions seem really crystal clear, and it's hard to fully imagine him walking that back at this point, no matter who whispers in his ear. Yeah, though I guess on that last time he did, you know, he promised to... withdraw from NAFTA and ultimately was persuaded not to. So there are examples where he was fairly emphatic and then did change his mind. That's true. Again, we could hope, the best we could possibly hope for is that he basically rebrands the internet.
national trade system without altering its substance. He just declares victory on the economy, taking credit for an economy that's already quite strong. And saber rattles a bit, but doesn't actually... follow through. I think that would be excellent, but kind of the best we could possibly hope for. But I also... I think there's just a fundamental misunderstanding in the Trumpian worldview, which is rooted in—
grievance and the concern that the United States has been taken advantage of. And unless it can be talked out of that perspective, it's hard to imagine him backing away from all of these campaigns. promises, in which he's promised to be far more bold and disruptive on trade than he was in the first term. Yeah, sorry, I just zoned out there for a second because I was thinking about what...
Geneva officials would think about rebranding the World Trade Organization as the world's Trump Organization. I hope it doesn't come to that. Yeah. I mean, it might be a fairly cheap way of doing it. Right. So the other reason this might not happen is I think. one that is present in the minds of European officials, right? And so the argument is, yeah, Trump's going to threaten all this stuff, and then America's trading partners will unveil their proposed retaliation.
And it will be so bad for America that he will be persuaded to come to the negotiation table and hold off on some of these tariffs. I mean, you know, you mentioned Elon Musk. Maybe Tesla could become a target. You know, alternatively, there's the carrot approach, right? Allies might come to the U.S. and say, hey, you're amazing at golf. Isn't that amazing? You want to win a few rounds against me? Or, hey, we'll get a bye.
all this American stuff that we probably would have bought anyway. But you don't need to worry about that. You know, I think his first term showed that he was amenable to doing deals, especially if the US featured prominently in the name. Couldn't that happen? Couldn't trading partners negotiate their way out of it?
That's a good question. I mean, we do know that some countries are already developing lists of goods that they would retaliate against, and that makes perfect sense, given the rhetoric on the campaign trail. those lists would be enough to stop Trump from levying tariffs. I'm a bit suspicious they wouldn't be. You know, I think you can kind of wave a list around and he'll just call your bluff and start a trade war.
I think what keeps a lot of economists up at night when contemplating this scenario is that it could easily lead to spiraling rounds of retaliation, much like we saw. In the 1930s, when the U.S. levied tariffs and other countries followed suit, you could imagine a similar scenario playing out and risks worldwide. stagflation because everybody's raising prices of their domestic products by levying tariffs and causing shocks in each other's economies by cutting off trade.
That's like the gains from trade in reverse. You're going to see losses throughout the world economy in productivity and growth at the same time you have this higher price. So I think that scenario is not vanishingly small. I think it's the sizable probability that we end up in that really bad equilibrium. So I think it would behoove the entire world to sort of think about this moment. seriously and how best to respond. Okay, so I think your argument is...
yes, he really is going to do this. You can't just wish away or negotiate away these tariffs. There is going to be some kind of trade action incoming. The next round of comforting arguments is that, okay, he might... do this. He might impose these sweeping tariffs. But the effects won't be that bad, right? And so actually this was sort of highlighted in the opening of Robert Lighthizer's recent op-ed in the FT. Lighthizer was the former U.S. trade representative, Trump's chief negotiator.
in his first term. And so in this piece, he said, critics of Donald Trump's popular tariff proposals claim that they will be inflationary and harm the economy. The fact that this never happened during Trump's first term, when we raised tariffs, is reason enough to be skeptical of such criticisms. What is your response to that?
So first, I think the magnitude of what we're talking about here is far in excess of what we saw in the Trump administration. During 2018 and 2019, Trump raised tariffs by about... 20 percentage points on a selection of Chinese products that together were around $300 billion worth of trade. At present, he's suggesting raising tariffs 10 to 20 percent, and at times he's mused...
even higher. For instance, in a recent conversation with the Economic Club of Chicago, I believe he said they might need to go up to 50% across the board. So we... Import right now about $3.1 trillion worth of goods. So if you imagine tariffs of that magnitude on all of U.S. trade, that's going to be 10 times the tax base of what we saw in round one.
And another thing to bear in mind is that if you're tariffing one country, you know, you can always divert the trade, reshuffle it, so the U.S. might import more from Mexico and Vietnam as a response, and China might sell to... other players. But when you're tariffing the entire world, it's not like the US can open intergalactic trade to get around this, right? We have to trade with somebody. We can't make every item in the United States. So this is going to create...
some serious shocks for the U.S. economy. On the consumer front, in work that I've done with Mary Lovely at Peterson, we found that the typical household will bear a higher cost of about $2,600 on import goods alone. But it's also a lot of shocks on the production side of the economy. And that's, I think, what Lighthizer and others are...
They might think, well, it's worth paying a little more at the store if we can have an industrial renaissance that makes typical workers' lives better off. But there's no reason to think... that that would be the case. Because if you look at U.S. imported goods, over half of them are intermediate products. So the first thing you're doing is you're making supply chains more expensive and less productive in the United States compared to what they would be.
in other countries. And then as you mentioned earlier, foreign jurisdictions will of course retaliate, which will directly hurt U.S. export industries. So when we looked at round one of the... Trump tariffs in 2018 and 2019, you saw very little job creation in the tariff sectors, but you saw job loss in U.S. manufacturing and in those sectors where retaliation was a factor. So there was a net...
job-destroying effect of this. Now make it 10 times larger, now tariff all the trade. That's going to be an enormous recessionary impulse in the U.S. economy coupled with higher prices. And it'll be very hard for the central bank. to know what to do in that circumstance. Do you try to boost demand because we're in a recession? Or do you try to rein in inflation because prices are rising? It's going to be a very difficult issue before we even get to Trumpian threats on Fed.
which are, of course, another very real threat to the U.S. economy at present. Okay, but can I just press on this magnitude point, right? Because... Yes, what you're describing is enormous, but surely in the practical policymaking process, there will be particular countries, products that will be carved out that will make this much, much less of a big deal. Yes. You know, one can hope for that, but one also has to bear in mind that that very process creates a level of...
political dysfunction and clientelism, where you are kind of approving certain companies or certain countries or certain jurisdictions for exemptions. And so a lot of resources will then get spent on... effectively rent-seeking or seeking to be the ones avoiding the harms that are introduced by these tariffs. So I would expect a lot of companies to come and ask for special favors. I would expect Trump.
given his general disposition to be quite happy with the situation where he's the one who gets to... pass out candy or punish right um he can favor those that he feels deserve favorable treatment and punish those he feels deserve punishment but if you look at that whole process i don't think this makes it less costly right what it does is it sort of introduces new types of distortions where people are spending more on lobbying and where certain industries are getting a tilt in the playing field
in their favor simply because of political connections, not because they're the most efficient industry. So I think to some extent that mechanism adds insult to injury, even though it seems like a safety valve. Okay, can I also just press you on this inflation point, right? Because, I mean, Lighthizer's right in that the first time round...
I think there were some price effects, but they didn't show up in terms of the Fed losing control of inflation. There are reasons to think, you know, the U.S. is a really big economy. Lots of foreign exporters want to be able to supply its market. It is possible that some of them may lower their prices in order to...
sustain access to that U.S. market. It's possible that the effects of the broader tariffs could be different to the first round. What would you make of that sort of skepticism that... the inflationary effects would be that dramatic? Well, first I'd point out the magnitudes here are larger. So even if foreigners adjust the prices to the U.S. market,
we're still starting with an impetus that is many-fold the scale of what we saw the first time around. But second, let's look at this question of whether... foreign exporting firms would offer lower prices in the U.S. market. In part, it depends on sort of the balance of market power between the exporter and the importer. The U.S. right now is about 13% of world manufacturing or goods imports. If you look at our market power, 13% is a decent share, but...
87% is not from the U.S. So if you're a seller worldwide, you'll have some... reason to lower your prices to achieve U.S. customers, but you're not going to lower them a lot because you still have the whole rest of the world that's going to pay you full price. So why would you sell to less in the U.S. market? when you could get the full price somewhere else. So there may be some...
magnitude of price reductions for U.S. consumers coming through that channel, but I would expect that it would be nowhere near one for one. And every single study of the 2018-2019 tariffs and their... have been many very high-quality studies, including updates that looked at the longer-term effects a few years down the road. But every single one said U.S. buyers of imports paid.
100% of the additional cost. So this could be a different time, but I sure wouldn't count on it if I were a U.S. policymaker. I don't think we have strong theoretical or empirical reasons to think. that this time is different. Yeah, I mean, I guess just on that. You said buyers of imports for the cost of the tariffs. That's not necessarily consumers, right? So the importing company did it. It's much harder to tell the extent to which those...
price increases were passed on to consumers. It's harder to tell, but let's stop and do a little reality check here too, right? Because if we're putting tariffs of 20% on a buyer and we're saying, oh, the firm is just going to eat it. I don't know many firms that have a 20%.
profit margin who are just delighted to give that up. So it might be hard to tell the manner in which it's being passed on to consumers, and they might have an incentive, for instance, if one good gets more expensive, to spread some of that. price increase across other goods, too. But most companies in the U.S. are pretty competitive, and they won't have the room to absorb the tariff themselves. So it's inevitable that the consumers will end up with a large part of this.
Okay, so then the other argument is that the exchange rate would adjust. And actually, I think we've already seen some strengthening of the dollar, you know, that all else equal means that... The purchasing power of U.S. buyers has increased. Couldn't that offset the effects of these tariffs? Yes, there's maybe three things to bear in mind on the exchange rate.
question. The first thing I would point out as someone who taught international finance for a few decades is the exchange rate is one of the least... predictable economic variables out there even if you give economic models the like prohibitive advantage of forecasting with actual or explaining the past with actual data the models tend to not perform better than around
So we're never entirely sure what the exchange rate's going to do. So that's the first thing. The second thing to note is that a lot of U.S. imports are priced in dollars. So it will take some time. for this exchange rate strengthening to help, right? We'll need the actual price. to adjust in dollar terms. Right. And just to explain, so, you know, you're an importer, you've agreed your contract with a foreign supplier, and you've set the price in dollars, right? So...
If the dollar goes up in value relative to that foreign currency, it doesn't matter. You've set the price in dollars. It's not going to change. In a couple of years, it might when you say, look, hey, you're getting more dollars for this product. But that's why it would take a long time. You'd have to renegotiate that contract. Indeed.
Yeah, and that makes the U.S. a bit exceptional compared to many other countries in the world that don't price their trade in their local currency. And a third issue here is that the exchange rate is an important variable that's determined by myriad factors. not just tariffs. So a few examples. The stance of the central bank, right, in terms of whether it's lowering or raising interest rates will help determine the exchange rate.
If you look at the US macroeconomy and some of the other Trumpian policies, they're likely to have some possibility of actually causing... depreciation pressure on the U.S. dollar. And let me give you two examples. One is his budgetary stance has been very prone to wishful thinking. He wants to not just extend the tax cuts I talked about earlier, but...
to propose a bunch of other additional tax cuts. He's mentioned no specific spending cuts to go with that. He's talked vaguely about spending cuts, but that part is always harder. And at times he's mused that the U.S. could even default on... its debt or pay it with crypto or very odd sort of non-standard approaches to U.S. debt management.
Investors worldwide may or may not have the same full faith in the credit of the United States government going forward to the extent that investors demand a higher risk premium for U.S. debt. that can have exchange rate effects on the dollar tending to depreciate it. And Trump, as a candidate, has also suggested that he thinks the Fed has too much independence and that he likes...
to see them be more expansionary. If he manages to bully the Fed into a more expansionary stance, that can also have effects on the currency that would depreciate it.
So we don't know for sure what will happen to the U.S. dollar under a Trump presidency. What we do know is that exchange rates are difficult to predict, that multiple influences here could move the exchange rate, and that... U.S. imports are often priced in dollars and all of those together lead me to the conclusion that I wouldn't count on the exchange rate to save U.S. consumers from higher prices.
Okay, well, I want to throw to a break now. And when we get back, I'm going to throw at you some of the more Trumpy arguments. And again, you will react. Sounds good. I'm James King. And in the new series of Tectonic from the Financial Times, I'm going inside the miracle of modern chip manufacturing. It's the technology at the heart of the prosperity and security of nations. And there's a battle going on over who controls the chip-making industry. Listen to Tectonic.
wherever you get your podcasts. We are back from the break. Okay, so just sort of... analyzing, thinking about some of the Trump team's arguments about tariffs. One of the big bugbears you hear about is the size of the U.S. trade deficit, right? And so this idea is that it's very large. I'm not talking about bilateral trade deficits here. I'm talking about the overall trade deficit. The idea is that that is the product of kind of global imbalances. Something needs to happen to get it in check.
Various imperfect options, tariffs are the best one. It's quite unclear to most economists that look at this situation that the tariffs roll on net. improve the U.S. trade deficit. So let me explain why that's unclear. First, we'd need to know not just what happened. to the volume of U.S. imports, but what happens to the value of U.S. imports if we're buying fewer of them at a higher price, right? That doesn't change the total value of the imports. Second, we need to know what happens next.
If our trading partners retaliate to our tariffs, that undoes the positive effects on the trade balance through the export channel. But perhaps even more fundamentally than those two questions I just raised, Trade deficits are basically the flip side of a...
savings and investment imbalance. So let me explain that. The U.S. every year consumes more than it produces, right? We don't save enough to fund all of our investment. And because of that, we must borrow from abroad. And the flip side of that... borrowing from Rudd is a large trade deficit. If you look at... why it is that we consume more than we produce, a big factor there is the U.S. budget deficit. And we're forecast to have budget deficits in excess of 6% of GDP.
for every one of the next 10 years, and that's before you take into account any tax cuts, including the extensions that we spoke of earlier. So the U.S. has this massive fiscal imbalance and doesn't have high saving rates, yet we want to blame the rest of the world for the fact that we're borrowing from them. So there's something a little bit hypocritical about that.
Now, you may say, okay, well, some other countries have imbalances of their own. China, Germany tend to run surpluses because they have distortions in their own economy. And so the U.S. is just this... recipient of all this excess savings abroad and you know I'm sympathetic to elements of that argument but I just don't think you can say that
The U.S. Congress is deciding every year to spend 6% of GDP more than it raises in taxes because people in China and Germany have saved a lot. I just don't see the mechanism. there. Maybe because that drives down global interest rates and therefore the deficit doesn't seem as challenging, but I don't think if you've met a few members of Congress that this is exactly what's motivating that. I think it's much more...
political considerations. So I would suspect that absent... fundamental U.S. macroeconomic adjustment or likewise adjustments in other countries, that our trade deficit will be every bit as large after these tariffs as it would have been before the tariffs, which is, by the way, exactly what we saw with respect.
to the China tariffs. It's true we diverted some trade from China elsewhere, but it didn't reduce the U.S. trade deficit at all. Yeah, I mean, I guess you hear the Trump administration talk about Chinese industrial policy, and this isn't... Crazy, right? I mean, there are many in the Biden administration who are also concerned about the effects of that. And so maybe the tariff threats won't directly...
fix the trade deficit, but maybe they will bring these other countries to the negotiating table and they will change their domestic policy and that will somehow benefit U.S. workers. What do you think of that? Yeah, I think, one, we have to look at history and we can ask, did we have any success with our prior attempts to influence the Chinese government in a unilateral and ad hoc manner? And I would argue...
No, I don't think the Biden administration kept those tariffs because they were successful at achieving any objective. They clearly were not. By any criteria you put out, it didn't help the U.S. trade deficit. It didn't change Chinese trading practices. It didn't help us get along better with anyone else in the world. So I don't think you can label those. So I guess the question is, what is the policy objective, right? If it's a national security one, then we want to be direct at...
what products and what industries we think are most relevant to national security. If it's a China question, then we want to be direct at what is the most... successful and effective way to influence Chinese trade practices. But if our concern is with trade writ large, right, that is a much harder...
problem to solve concurrent with solving the other problems, right? Because we're going to be a less safe world and we're going to be less united in our joint concerns regarding China if we're simultaneously lashing out with our closest partners. So I think this is a fundamentally... deeply misguided approach, even though I am sympathetic to aspects of some of the underlying policy concerns. Okay. Well, look, I think this is my last argument. You may be relieved to hear. And this is the...
For decades, US trade policy has been run... for the benefits of big companies, right? And so when people are talking about the effects of trade liberalization over decades, often people talk about lower prices for consumers and how that was great. But actually, one of the other effects was that it helped kind of corporate profit margins. And so now...
You're going to hear a lot of multinational companies complaining about the effects of tariffs, but ultimately they're not paying enough tax. It's time for them to cough up. What say you? Yeah, so that argument, I think, is also fundamentally misguided. I think if we're worried about multinational corporate profits relative to the gains of workers, there's a very simple and direct...
Way to handle that. You can raise the corporate tax rate. You can address international profit shifting and tax competition by joining the international tax agreement. You can have tougher international tax rules. At present, the U.S. tax system actually provides a huge...
tax benefit for foreign production relative to U.S. production. You don't see the Trump administration worried about that one. You don't see them saying, okay, well, why is it that we charge half as much on foreign income as we do on domestic income for multinational companies? never raised that and I think the fact that they never raised that is a tell right they're not actually worried about that this nationalist economic policy is really a way to divert attention from
a policy platform that is fundamentally redistributing away from the poor and the middle class and up towards corporations. And you saw that in the Tax Cuts and Jobs Act that he enacted in 2018. And you see that with it. suggested tax policy proposals going forward.
If you wanted to help workers, you would tax companies more and you would expand the earned income tax credit. You'd expand the child tax credit. You'd actually be cutting taxes lower in the income distribution, not raising them through tariffs. So I think this... Policy platform is fundamentally regressive, and it's not even going to come with a side helping of job creation. It's going to instead...
cause stagflationary pressures for both the U.S. and the world. So I'm quite pessimistic, I must say. That explains my early low rating of the taxes and trade policies of this administration. I hope... sincerely that I'm wrong, but I think most economic evidence suggests that I'm not. Okay, well, on that note, we should go in. Think about tariffs. Thank you so much for joining me, Kimberly. Thanks so much for having me. A huge pleasure.
That is all for this week. You have been listening to The Economics Show with Samaya Keynes. If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen. This episode was produced by Edith Russelo with original music from Breen Turner and sound engineering by Joe Salcedo. It is edited by Brian Erstad. Our executive producer is Manuela Zaragoza. Cheryl Brumley is the FT's global head of audio. I'm Samir Caines. Thanks for listening.
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