Hello and welcome to the forecast. The trade war has begun, sort of. Now. Donald Trump announced all sorts of tariffs against Mexico and Canada and then put them on hold. But the tariffs against China have gone ahead and China has announced its retaliation.
So already from today, the US coffers are being filled up with dollars as those tariffs are being paid by American importers, not by the Chinese. Remember, that's an amazing slice of hand that he seems to have pulled off with a lot of the American public. So where is this going? When is he going to announce his tariffs on Europe? And where does that leave both Europe and Britain as it tries to work out how it can keep both America and Europe sweet?
Joining me, the Greek economist and former finance minister Yanis Varoufakis, and from the United States Tax Foundation think tank, Erica York. Yanis, first of all, I mean, what do you think is really going on here? Is this a sophisticated economic policy to address the trade deficit and protect American jobs? Or something else? It's definitely something else disguising as a policy for reducing the trade deficit and bringing jobs back to the United States.
As you suggested. It is a hyper weapon. That is his tariffs, which he's deploying quite smartly, I should say, from his perspective, in order to maximize his political clout both domestically and internationally. Is it real political clout? I mean, The thing is that when he makes these announcements, he gets the headlines that say, well, he's forced Mexico to send 10,000 troops to the border and Canada's going to do the same thing and have a fentanyl czar and all this kind.
And then and then it takes a day or two for everyone to go. Mexico already had 10,000 people at the border and Canada did as well. And all they've really done is a point of fentanyl czar, which is one job. So, you know, as a political instrument, you know, is it really as big a deal as it initially seems? Well, judging by his first, it is a potent tool.
Remember that when he was first elected in 2016, very soon after that he tore up the NAFTA agreement, the North Atlantic Free Trade Agreement, and slapped large tariffs on Mexico. And then very soon after that, he managed, I have to say to my surprise, rather rapidly compared to how long it had taken Clinton to create NAFTA, to renegotiate NAFTA. And I can't say that the NAFTA 2.0, which was called something else, was worse for the United States than the original NAFTA.
So let's not make the mistake of underestimating him. He will keep people guessing. This time he introduced the tires. He took them back. I very much expect that he will do the same thing with the European Union. And this time, he's not going to take them back. Right, so, So what? What does he want from the European Union?
Oh, I think that we have to take very seriously his long standing ideological and theoretical opposition to the very concept of the European Union. He dislikes from an isolationist sovereign this point of view which is his ideological foundation. He dislikes the very notion of the European Union and particularly the very large trade surpluses the Germany, but also the rest of the Eurozone have vis a vis the United States. And this is not just a belief by Donald Trump.
I remember having a conversation with Jack Lew, who was the treasury of secretary of Barack Obama, and his position was that Europe is exporting deflation, it is exporting recession to the United States through it's mercantilist policies. So we need to take this very seriously, whatever criticism we may have for Donald Trump. So, So what? What effect will it have both in Europe and America if they go
ahead? Well, it is my considerable opinion that the worst victim of Trump's return to the White House is going to be the European Union. China can very easily take in it's stride the 10% tariffs that have been announced. Their industry is so well technologically advanced and so efficient that they can absorb that easily. Even a 20 percent, 25% tariff, they will be diverting a lot of their net exports to Europe and
to the rest of the world. The United States, on the other hand, have a enormous autarkic economy. They have a remarkable capacity to accumulate the capital, the accumulated profits of the rest of the world, as we know.
But it is Europe which has already been in dynamic of secular stagnation well before Trump was elected because of 15 years of rather silly combination of austerity for the many and socialists for the bankers, and political fragmentation which led to 15 years of no investment. There has been an investment strike in Europe. So we missed and the German industry missed a whole industrial revolution. So even if Trump was not elected, Europe would be stagnating.
But these tariffs are going to create a greater exodus of capital, particularly from Germany to the United States. Erica, I mean, do you agree? I mean, is this going to work economically for America if tariffs with Europe go ahead? I mean, the question is what, what is the goal? And you know, I, I think we have some hints from Trump. I mean, he has written down in a speech in the past and all caps
trade is bad. If you look at his talks going back to the to the 1980s there, there is just an anti trade view that that Trump holds. And so it's not entirely clear whether this is a negotiation strategy or whether this is a change from Trump 1.0 where tariffs were clearly targeted at renegotiating NAFTA and getting US MCA. They were targeted at China's IP theft practices.
Now there seems to be more of an idea of we want tariffs for revenue, we want tariffs to replace the income tax, we want tariffs to attempt to reindustrialize the US manufacturing base. I don't think tariffs are going to be successful on those grounds. If we look at what it is that the US imports, most of more than half of US imports are intermediate inputs or capital goods. I'm so placing tariffs on those directly increases the cost of producing in the United States.
When we invite retaliatory actions against US exports, that hurts our ability to sell on the global market. So it does mean that the US economy turns inward and turning inward is not how we get growth. So I don't think it's a a positive growth strategy. There's also just not enough of a tax base there for it to be a significant revenue source to do the income tax reforms that Trump has talked about either.
I'm so I think in many ways the the strategy will not achieve the goals that that have been outlined. But I mean, like, like Yanis, I mean, you, you seem to be suggesting that it may be the, the, you know, the tariffs are going to stay, that we shouldn't be misled by what's happened with the first few days of Mexico and Canada, where they've been put on hold for now. You know, the the when it comes to Europe and China, they're going ahead.
That's the big question. And you, you can't really have a tariff for negotiation and a tariff for revenue. You, you have to choose one path. We don't really know what path the administration is going to walk down yet. But if you look at the way that Trump's talked about these, the Canada, Mexico tariffs are a
good example. You know, the the national emergency was related to fentanyl, was related to border crossings, but all of the media interviews that Trump did afterwards were talking about the trade deficit. We're talking about these economic reasons which are in stark contrast and contradiction with the national emergency related to these border issues. And so at at some point you have to choose one path. It's it's not clear to me yet that there has been a path chosen.
Janice, I mean, do do you agree that this is straightforwardly bad for the US economy? No, I don't. I I can't say I agree with that because the world we live in is far removed from the textbook world of general equilibrium where you already assume markets working efficiently. The strength of the United States economy is its capacity to accumulate other people's capital.
This is not going to to go away. If anything, remember immediately after 2000 and eight, 2008 was a financial catastrophe that befell the world as a result of things that were happening in New York. And yet the rest of the world's capital flooded New York because this is what happens when capital gets jittery, when uncertainty is in the air, it rushes into the United States. So even if Trump's tariff policy is macroeconomically destabilising and anti growth,
if this creates a sufficient crisis, then there will be even more of a flood of capital in the United States. So those two blocks, mainly the United States and China may very well find that, you know, the, the, the, the commotion that he's creating strengthens the internal dynamic of capital accumulation of innovation. There's no doubt that in China you have massive progress as a result of the CHIPS Act that
Biden introduced. This is a form of impediment of trade and the result was that China got stronger from that. It is not far fetched to imagine that some jobs will return to the United States. But where I do agree with Erica is that long term he is facing a major incongruity. But I don't agree with the particular incongruity that
Erica mentioned. For me, the the greatest incongruity, and I think that these will be the shows upon which the Trumpist ship crashes eventually, not immediately, but in the next 3-4 years, is that even if he's successful at diminishing, shrinking the trade deficit of the United States, which I don't think he will be. But even if he is successful in this, the American trade deficit is operates like a huge vacuum cleaner which sucks into American territory, the net
Expos of Germany, of Japan, of China. And they get paid in dollars and those dollars go back to the to New York where they are invested in real estate and their Stock Exchange. So if he succeeds in shrinking the trade deficit, he will have dealt a major blow at the real estate sector in Miami, in New York, in California and the Stock Exchange. So he would have to choose his
poison. Does he betray the working class which elected him, or does he betray his favorite clans, which are the finances and the Realtors? Erica, I mean, if you look back at history, the last time Trump tried tariffs, he didn't shrink the trade deficit and he didn't save American jobs. Right. And and I agree that we do not live in a standard textbook model. And if you look at what the standard textbook model says about trade, most of those models are based on trade in final goods.
Like I mentioned earlier, most of what we import is not final goods, it's these intermediate inputs. It's these capital goods that we use to produce in the US, So supply chains are much more complicated than just this standard model. Yeah, Alice, Chris Giles in the FT has done a column in which he's looked back at the the history of President McKinley, who Donald Trump sometimes likes to emulate, looking back to the 1890s.
And he he says that one of the things that happened there was that there was a massive fall after the imposition of these massive tariffs in the input of in the import of dutiable goods because people stopped buying them. And that as that fell, so did support for the Republican Party. So I mean this could yet blow up in his face. Well, Chris Giles need to look into his economic history a bit more carefully because yes, it's true, but the 1890s were a period of major international
depression. So it's important to not to confuse correlation for causation. That he that Trump can inflict a lot of damage on the American economy. There's no doubt, but I don't believe we should take it for granted that the manner in which the American economy is finding it possible to regenerate itself and to recalibrate itself through major advances in in the way in which intermediate goods are being used in order to
produce final outputs. You know, this May surprise us in terms of the ultimate effect of Trump's policies, which, of course, we don't even know what they're going to be. The big talking point that we've seen Trump say is that he wants to raise this revenue to offset the cost of further tax cuts. Those tax cuts would have to be enacted by Congress. But there's also some tension there.
If we look at how the tax revenue raised by Trump's first round of tariffs was spent, more than 90% of it went out to direct payments to US AG producers who had been targeted by retaliation. So rather than represent this new source of revenue we can use for new programs, it was revenue to compensate those who were harmed by the retaliatory action. And, you know, somehow that didn't generate political blowback for Trump the first
time around. He was able to message around the tariffs and, and come out on top of that. But I do think if we look back at McKinley and we look back at the, you know, midterm elections after McKinley as Ways and Means chair passed the McKinley Tariff Act, Republicans lost, McKinley lost re election and it was directly tied to the tariff issue. They had been named the billion dollar Congress for taxing and spending.
So if tariffs are significant enough this time around, if they are shocking enough that the American people realize this isn't a tax on China, this isn't a tax on the EU, This is a tax on us. We are paying being we are harmed. Maybe the political story in 2025 is different than it was in 2018 and 2019. Well, that, but that's been one of the most surprising things.
What watching it from here is that how has Donald Trump got away with this narrative that tariffs are something that foreign countries pay when it's American consumers who will pay it? It's a nice political story. It, it lets Trump make an enemy of someone else, lets him tell a story that fits in with the way people want to feel. And most people have not had a, you know, an economics lesson in
tariffs. So I think that's why we've seen the political message went out, even though it's not tied to economic reality. Alice. Well, there are many misconceptions that appeal to the broader public, like for instance, the idea that spending cuts in the middle of the recession is good for the bottom line of the government. You know, the myth of austerity. It's very difficult to get this out of the heads of the the general public. But, you know, I agree.
I agree with Erica. There's a degree of xenophobia as well, because it's easy for a Trumpist to speak of tariffs as attacks on the foreigners. Once you actually say that, that's the end of the conversation. Somebody who is xenophobic and who thrives on xenophobia stops listening. From that moment on, just cheers and moves on. Can we talk about China then and how China is likely to be affected by this?
There's been some commentaries suggesting that China's in a much more difficult position potentially this time round. How is China going to be affected if Trump goes ahead? I mean, if we're, if we're really just talking, you know, 10% tariffs on what the US imports from China, I, I don't think it's going to be dramatic. If, if we're in a world where Trump really follows through and tries to completely cut off ties and decouple with China, then then that's a different
equation. But I, I don't see us moving fully in that direction. So, so it's really uncertain, but I think at least with the actions we've seen so far that the impact is going to be fairly limited. Because their react their their retaliation is also fairly limited, isn't it? Beijing is celebrating. The 10% tariff is much, much lower than what they were expecting. It is a gift if anything,
compared to expectations. I not only is it not going to be a dramatic tariff, but I think that if anything is going to unleash animal spirits in China because it given the awful
expectations that preceded. If anything there will be more investment towards exporting to the United States in Shenzhen, in Shanghai. Beyond that, As for the theory that China is in a worse position today than it was in 2017, I don't buy it. Technologically, China has made important strides, so I don't see anything from Beijing's perspective that if I were them, would have made me worry with the developments of the of the last few weeks.
I suppose it depends if it escalates though, doesn't it? I mean, if you get to 60% or whatever it was that he spoke about during the election, then then you've got trouble. But I mean, are you saying you just don't believe anything big in terms of escalation is possible? There's no way that he is going to impose a 60% tariff on everything from China because if he does that, Walmart is going
to be up in arms. And the people who shop from Walmart, who are mostly Magda followers or mostly, but to a very large extent they will be up in arms if he impose a 60% tariff on electric vehicles come from China. Again, it's no skin of the Chinese's nose because they
don't import. They don't export that many EVs to the United States. Yeah, I think it depends on how far it escalates and then whether the United States takes the position of we're isolating against all of the world, we're putting up tariff barriers against all of the world, or whether the United States tries to lead a new trade bloc that's excluding China. To me, it seems like it's been a conservative approach so far and we have to see if it's if it's
going to escalate and really that that depends what the administration decides to do next. And overall, Yanis, I suppose the Chinese economy has become much more self-sufficient. It's less dependent on exports now than it was 10 years ago. What China is going to do If the United States goes on an all out war against trade, war against China, China is going to start thinking very seriously about rejigging the bricks, expanding the bricks.
Perhaps turning the payment system, which is now just a payment system, into something closer to Bretton Woods and play within bricks the role that the United States played in the 50s and 60s, supporting and backstopping with the US dollar. The Bretton Woods system. They could do the same thing with a bricks equivalent of Bretton Woods, using the one that would be a major change in world affairs.
But Beijing doesn't want to do that and they will only do this if they are pushed and if they are pushed fiercely. Worth just saying that when Yanis talks about BRICS, he's referring to Brazil, Russia, India, China and various other countries that have now joined this alternative economic grouping. And they've already got, as he says, this payments messaging system up and running. And people wonder where it's going to go next. Let's turn, then, to Britain's role in this.
I mean, Yanis, you've warned that, you know, Europe is going to feel the pain. Britain has this dilemma of how it treads the line between being close to Europe and wanting to be a little closer to Europe than under the last government and staying friends with America. Is it possible? There's a major incongruity
there. The other day Keir Starmer was visiting Brussels and I don't think those bags that Donald Trump on that same moment as Keir Starmer was trying to make to make friends again with Brussels said that, well, you know, the Brits, maybe I won't slap any tires on them.
So, you know, this was this was a way of throwing, throwing a hand grenade in the meeting in Brussels between Keir Starmer and the European Union. In fact, we were saying to Keir Starmer, you want to go into bed with them, then you're going to have to to deal with tariffs. So London is caught up between a rock and a hard place. There's no doubt about that.
But even if Trump was not elected, had not been elected, the European Union will have 8 secular stagnation, and so would the United Kingdom. Erica. I think the the big question going forward, both with the United Kingdom, with the EU, with Canada, Mexico versus China, is what is cooperation going to look like? How much multilateralism are we going to have? Is the United States going to step up and lead or is the United States going to shrink back?
And other countries will have to choose, too. What what do they do in the face of this question about the United States versus China? How do you cooperate? In the 2018-2019 trade war, it was kind of easy to not make that choice. You, you didn't have to choose between the US and China. Depending how far the Trump administration pushes the trade war with China, we may be at a, at a point where you, you do have to decide.
I mean, that will also depend on the position of the US and whether we are creating this off ramp for commerce to increase and grow with our allies or whether we are completely turning inward and not moving in the direction of, of cooperation anymore. I. Mean isn't it straightforwardly impossible for Trump to to tariff the UK on the basis of emergency powers? I mean, what what is the threat coming from the UK it?
Doesn't need glasses. Coming from Canada, I. Exactly. I don't think we're in a world where like we're in a world where we are pushing the bounds of emergency power in order to kind of have a fig leaf to get to tariffs. I think tariffs are the goal. Whatever powers are there are going to be used to achieve that goal. Yeah, Alex, you don't think that's a obstacle? No entirely.
I agree entirely. And it's already been shown that the real liberal establishment, the courts, nobody is prepared to challenge the monstrous application of national security emergency propaganda for justifying tariffs. He's not being challenged on that. So yes, he can declare, you know, an emergency for whatever reason he wants in order to slap any tariff he he feels like. So what do you think Keir Starmer should be doing? Well, looking within the limits of the United Kingdom, the the
United Kingdom has a a serious realisation problem. the United Kingdom has for too long relied on a Ponzi scheme that involves house prices that are unsustainable remaining unsustainable for a very long time.
It relies on a flow of capital which does not materialise in the form of productive investments, and the fact that they ditched the Green New Deal, those 20 Watt €5 billion pounds which were not enough even before they got into government, is indicative of the fact that this is a clueless government.
They have no plan to create something like an an investment bank, the equivalent of the European Investment Bank that in association with the Bank of England, could channel the very large amount of liquidity that exists in the City of London in
productive ways. They talk about growth, growth and investment and investment, but there's absolutely nothing I see in there except for recessionary contractionary measures like the English and National Insurance contributions, which was a suicidal move by Rachel Reeves. I think this is the fastest sinking newly elected by its landslide government in the history of the United Kingdom.
Just say what you really think now, Erica, overall is, is it right to say that from your point of view, whatever happens on tariffs, it's going to be bad for growth both in the US and in Europe and Britain? Yes, very clearly I, I don't think you can make a case that tariffs will boost macroeconomic growth for the United States or for the countries that are the target of the tariff action. I agree with that.
I agree with that. But let's not forget that when we did have growth, that was not necessarily in the interest of the majority of people in the majority of countries. And that is the political strength of Trump, that he appeals to the discontent that went hand in hand with growth. Well, maybe a gloomy economic note and possibly a buoyant, tough political note for Trump fans, but we'll leave it there. Erica York, Yanis Varoufakis, thank you very much indeed.