Bloomberg Audio Studios, podcasts, radio news. When you look at that tariff chart and say, oh, well, wait a minute, you know, how do the tariffs today compare to what we're announced and so forth, you have to also look at the flip side and recognize that we're at the point where, you know, the very largest corporations and our trading partners have said, yes, this is working, this is going to happen. But now, of course it does have to actually happen.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is Trump Economics, the podcast that looks at the economic world of Donald Trump, how he's already shaken the global economy and what on earth is going to
happen next. In the Fog of War, the anniversary of Donald Trump's Liberation Day announcement of tariffs on goods entering the US barely registered, we thought we'd correct that this week, analyzing how the president's tariff policies in his second term have affected the economy, and just as important, whether they've succeeded in the goals the administration set for them, which were to raise federal revenues, cut the US trade deficit
and start to revive US based manufacturing. As we record this on Monday, April thirteenth, it is clear that the deep blow to growth that many feared on that day in the Rose Garden just over a year ago has not materialized. Global trade has held up, and US imports have shifted rather than tanked. Tariffs have also raised hundreds of billions of dollars in new federal revenues, albeit not
quite enough to really lower the federal deficit overall. But the mainstream take of economists would be tariffs have not done much to revive domestic manufacturing, and that if the economy showed unexpected resilience last year, well that was despite the tariffs, not because of them. That's the standard take, But there are respected voices who disagree, and Orncass is
one of them. Arn's been on the show before. He's a prolific economist, writer, and commentator, chief economist at the American Compass, and author of the Understanding America newsletter, and pleased to have him back to debate this issue with our chief US economist, Anna Wong, well known to regular listeners, who served both at the Federal Reserve and mister Trump's
Council of Economic Advisors in his first term. Anna, great to have you, happy to be here, and Auran, thanks very much for coming back.
Oh, thank you for having me and great to be here with Anna.
Aran.
You wrote recently that the case for Donald Trump's tariffs had strengthened, said celeberation day. How do you see that.
Well, I think it goes exactly to the point that you were making in the introduction, that all of the terrible catastrophes that were promised by so many economists simply didn't materialize. I think the best way to think about tariffs, and of course tariffs are one facet of this broader effort at reindustrialization, is that, in a sense, it's an investment. It is a policy that assumes some amount of upfront cost and disruption and is intended to deliver long term
benefits that are much greater. To the extent that the costs are simply not nearly as high as people who were warning they would be, that obviously makes it a much more attractive investment case. And so do we get the long term benefits? To some extent, you have to
wait and see. To some extent, I think you can see positive signals, but to the extent that the case against doing this was you'll disrupt the global economy, you'll destroy growth, you'll create runaway inflation, et cetera, et cetera. Those things just aren't true, and so certainly compared to what you were thinking a year ago, I think you have to be a lot more optimistic now.
You mentioned in the piece that I was citing just now, one of the arguments is that the tariffs has had less impact because relative to what was announced in the Rose Garden over a year ago, many of them have not actually been implemented. I think forty three percent of
I imports not subject to tariffs. A lot of key exemptions were introduced in the days after that announcement, So you know that's obviously one response to what you're saying is just that when there's been a lot of pushback, they have been withdrawn, especially in key aras like semiconductive chips and electronics.
Well, I think if you look at the criticism and predictions of doom leading up to the Liberation to announcement, frankly, they were all anchored to an assumption of much less than what Trump actually announced on Liberation Day. I mean, you can go all the way back to what economists were saying during the campaign simply about Trump's proposal for a ten percent global tariff, and even that they were saying would be disastrous. I think adamposing from Petersen's to
call it lunacy. And if you look at the chart of the tariff rates as they've evolved over the year, and you just imagine XA and showing that to economists and saying what do you think of this? I think we all know they would have made the exact same claims and predictions of disaster. And conversely, to the extent that economists are looking at the tariffs they've actually unfolded and admitting well, yes, sure this actual trajectory is reasonable
and not disastrous, then that's certainly fine with me. I will I will take that and put it in my pocket.
Right. Well, I guess the sort of other things equal, I guess is going to kind of come into play here, because a lot of those forecasts were about what the impact on the economy is other things equal, and it turns out there were a lot of other things going on. But Anna, what's your take overall on this point?
Well, I think certainly on GDP growth and inflation, that it's not as disastrous as Aren said, as most economists think, though, I have to say it came almost exactly as we expected on inflation front, because we did expect that core PC would get to three percent at the end of the year on Liberation Day, and it did get to three percent at the end of the year, but not higher than that. However, that doesn't mean that there's no
negatives from it. Our team does calculate that about zero point two two point three percentage point increase on the unemployment rate could be due to firms eating the tariff in their profit margin enhance slower hiring as a result. So I think there is some negative impact from the tariffs.
Lauren's responding to the mainstream view and pointing out that it was wrong in the sort of magnitude of the impact. I guess it feels like a less positive argument to say it's damage less than expected as opposed to helping
the economy. So I quite like to get into where you see the potential for that long term shift in the structure of the economy that the administration was looking for with this understanding that it would have just happened in a year or what would you point to in when you talk about we don't yet know whether that investment is going to pay off. You know, what are the encouraging pieces for you?
Well, I think the way to think about it is to map out what would we expect success to look like and then hold ourselves accountable to that. And so, in my mind anyway, the theory of the case has always been imposing tariffs is going to shift relative prices. It's going to shift business cases for where you want to produce and deliver for the American market. And so the initial thing you're going to see is shifts in
demand for domestic production. Because prices have shift, You're going to start to see more demand for industrial production in particular, you're going to start to see output rise. Hopefully you're going to start to see productivity gains in existing factories.
But then what you really need is, okay, people to respond by saying we are actually going to build new capacity in the United States and going from concluding that things have in fact change to figuring out what that means to making plans to putting shovels in the ground. That's a year or two process right there, and so I think one year in the question has to be okay,
did the manufacturing sector get healthier or weaker? And then as we head into years two and three, you have to actually see those large scale new investments taking place. And on that basic question, did the manufacturing sector get healthier? And again, this is a place where you had widespread predictions that this will actively harm manufacturing, this will weaken the sector. I think it's clear that the sector has strengthened. We've seen real productivity growth for the first time in
a long time, reversing a long downward trend. We've seen output growth again for the first time in a long time, reversing a downward trend. And on the more subjective measures, the so called purchaser manager indices that survey people in the industry and ask about conditions, we've seen an uptick significantly, really bringing it all the way back to the very peak of coming out of COVID when things were at
their strongest. So those are what I would be looking for, and I would say, frankly, I wish the investment numbers were a little higher right now. It's certainly not all roses, but it all points to a manufacturing sector that is responding to tariffs in the way we would want it to respond, not sort of weakening and getting counterproductive effects.
Do you think, by and large, though, the response is slightly to be if only because of the need to compete in the world, there's going to be much more around automation than around creating jobs. I mean, we have seen still another eighty thousand manufacturing jobs go since the beginning of last year, and that's continuing a long trend.
Well, I think you know those things are not mutually exclusive, automation and employment to the country. I think they're complementary. The decline in productivity in US manufacturing has made it less competitive, has made those jobs worse jobs. It is increasing automation, increasing productivity that is going to make the US sector more competitive and effective and is going to increase demand and output. And that's what's going to create
the employment opportunities. And so you know, it's certainly not the case that you're going to employ as many people in the United States in manufacturing as you would if it were nineteen sixty. You were using nineteen sixty technology and trying to produce twenty twenty six output. But that's never been the history of manufacturing for a long period of time, we got strong manufacturing productivity gains with very
strong employment in the sector. The question is whether you're getting demand for domestic manufacturing and you're getting healthy growth and output, And that's what I think the tariffs really focus on.
You know, a lot of people would say the test of this is whether or not lower the trade deficits just on that understanding that it's a long term thing, and there's lots of factors. Well, has happened to the US trade deficit since Donald Trump came into office.
So in twenty twenty four, the trade deficit as a share of GDP was hovering around the three percent figure of GDP, and in the first quarter it was even four point two percent of GDP as firms were front running the tariffs. So since then, the trade deficit has fallen to more like around two point five percent ish of GDP. But if you look at the details, what's even more striking is that all US imports in non strategic sector non semiconductor goods, non capital goods has fallen
roughly ten percent below pre twenty twenty five trend. What is actually keeping the trade deficit as large as it is right now is actually US imports of capital goods like semi conductors, which is even stronger, much stronger than the years before. So with that AI story, the US trade deficit probably would have narrowed much more nana.
One thing that you've highlighted throughout the year has been all this investment in data centers and the AI investments really kind of juicing the rest of GDP, and that is explicitly a sector that has been more or less excluded from tariffs. Just very soon after the Rose Garden announcement, all of those in Nvidia chips from Taiwan in and other aspects of that were made tariff free. If we hadn't had that data center boom ongoing in the US,
would we be saying something different? Would it be clearer that damage or perhaps more noticeable the damage from the tariffs? And I guess the related thing is if that's the big success story, it's a success story that has been completely independent of tariffs and seem to have benefited from being without tariffs.
I think most economists, including our team, would agree that the AI boom contributed to almost one percentage point of GDP in the first half of twenty twenty five during the quarter when there was the Liberation Day shock, So definitely AI served as a key cushioning factor to this shock. But I think to the question of are we seeing improvement in the manufacturing sector as a result of the
tariff policies? So maybe a good way to look at it is to look at exactly where which pockets in the manufacturing sector is seeing some upturn, and for sure semi conductors, but we are also seeing improvement in aerospace and defense, very strong in fact, improvement in aerospace and
defense and metals and mining. And I thought the metals and mining is the most interesting one because for decades, mining industry in the US has been decimated, and now we have fifty percent tariffs on steel and aluminum, And as an economist, I would say that to disentangle the effect of tariffs, metals is the place where it's relatively
cleaner than all the other things. I think that the story that Oran is telling about increased capacity orders for factory capacity building coming online in twenty twenty six and beyond, I see, and I'm reading as anyone would these industry reports on steel and aluminum, and there are definitely factories coming online. For example, just the aluminum US does not have aluminum smelting capacity for decades, and there was an announcement last year that they are going to finally start
to start smelting aluminum in the US. So I think the way I would qualify Oran's argument a bit by saying that there are pockets of strength in the manufacturing sector, driven perhaps by domestic protectionalism. We saw a similar effect on metals industry in twenty eighteen as well, So when the stealing aluminum terrors came on, then you see increased
production and capacity in this sector. However, the story of twenty eighteen and twenty nineteen that tear wave is that when the Section three or one for China came on and that led to a more broad based trade uncertainty shock on everything else, then investment of everything else shark going down, which offset the gains from the metals industry. So I think an ongoing question for this year Ferocity evaluate is whether this year we're going to see the trade policy uncertainty shock go away.
We keep saying that Peter, it will, but then there's a whole other round we'll see.
I guess yes, yes, and theoretically, investment, whatever delayed investment happened because of these uncertainty should be rebouncing. And if Orange's thesis holds true, then the tapering of uncertainty, combined with these hiron incentives to produce should lead to a very strong, more broader based manufacturing gains outside of steel and aluminum and these metals industries.
I like the fact that we're just getting onto the goals of the administration when it comes to the restarting domestic production in these strategic sectors, and whether this is the right way to do it, but whether there are other things that have been going on to support some of those sectors. Do you buy what Anna's saying about the sort of nuance in which bits of manufacturing and
which parts of industry are doing better? And I guess the related thing when you think about the strength of the defense industry, for example, I mean, obviously there's other things going on there. There's the state of the world, but also a big increase in defense spending in the US. Are there ways of encouraging these strategic sectors if that is the goal, that will have fewer downsides than this very broad brush approach to tear.
I agree entirely with Anna about sort of looking at it in this sector bisector way, and I would highlight two other things related to that. One is it speaks to the way that tariffs are one piece of a broader strategy, and for instance, on critical minerals and mining, you're seeing significant investments that are being pushed by an active industrial policy out of Washington, by very aggressive multilateral agreements that they're in the process of establishing. And so
it's not tariffs alone. Obviously, in the semiconductor space, yes, the Trump administration exempted a lot of incoming chips, but that's in the context of the Chips Act and the very aggressive effort that is leading to a massive investment
boom and expansion of productive capacity in advanced semiconductors. And so if you look at what the administration has said it wants to do now, they are proposing to explicitly establish a policy that says you get those execs from the tariffs as long as you are actively investing in bringing capacity online in the US. And so you know there is a sort of broad, blunt baseline underneath the tariff policy, but there are a lot of strategic choices
being made on top of it. The second thing I think it's very important to keep in mind about these tariffs is that many of them very clearly were and have been used as negotiating tariffs, by which I mean the rates announced on Liberation Day were very clearly not
intended to be permanent rates. They were intended to be a new backstop against which the administration wanted to negotiate these bilateral deals, and it's done so, and in those deals, it has gotten significant concessions on market access, on purchases, especially with East Asian countries, on large amounts of foreign direct investment that were committed and are just now starting
to move through the planning phase into reality. And so again, when you look at that tariff chart and say, oh, well, wait a minute, you know, how do the tariffs today compare to what we're announced and so forth, you have to also look at the flip side and recognize that this was much closer to the long run status quo that had been envisioned, and it's now coming with these potential very significant investments not just on chips, on shipbuilding,
on pharma, in a whole range of areas. And so I think that's what we should be looking at is okay, are those things working. We're at the point where, you know, the very largest corporations and our trading partners have said, yes, this is working, this is going to happen. Now, of course it does have to actually happen.
Content my memory is when we've had those kind of promises in the past, they haven't always come through. I mean, when you look at these big numbers coming out of these press conferences, sometimes the deals end up not actually being signed because both sides have different views of, you know,
what was actually agreed. But there has been quite a lot of skepticism about whether those headline numbers are going to materialize and what do you think we're going to see all of that FDI that coming out of those deals.
I think Bloomberg did a big take on it, right. I think there are a lot of people who were citing this any numbers ranging from five trillion to ten trillion of investment coming online, and there was a Bloomberg team that examined those numbers, and I think they found that even excluding the ones that is likely not going to come through, the number is still massive, on the order of trillions.
Well, and just to add to that, so I think that's exactly right. And I mean there's a question bulk of how rapidly capital flows could actually move in that way. There's a question of how quickly, you know, the US has the capacity to actually build stuff, right. I think it's important to think of this as a decade long process and where if you actually start to see these things moving forward, I think there's a way in which
the logic will sort of build on itself. You know, this is something that we saw with the Chips Act certainly, where you know, once TSMC puts the first fab there and it actually works, that builds the logic now for a lot more. That starts to bring back the ecosystem for engineering, That brings back the supply chains, and now the next investment makes more sense. It's also the story of the Japanese auto industry in the US. You know, this is back from the early nineteen eighties when Reagan
actually did something very similar. Under the threat of tariffs, Japan committed to pretty much moving its auto manufacturing into the US, and what started as a few assembly factories from Honda and Toyota then became entire supply chains. The quote has only lasted a few years, but long after the quotes were gone, it didn't matter. Once that was there, it made sense to bring more over to build that
entire ecosystem. And now we just take that for granted as a healthy part of a successful story for US industry. But that started from exactly that same type of process.
You have a nice line in your column or and I guess, amazingly I seem to have forgotten to mention that it was in the Financial Times. But you say, economists often observe the real world and ask, but does it work in theory? Globalization worked flawlessly in theory but failed in fact. On this first anniversary of Liberation Day,
the alternative is showing greater promise. One of the reasons why the traditional sort of economic view of the world has not liked protectionism tariffs is the micro effects on people's incentives, the incentive to try and lobby for exemptions, which we've seen a lot, of the complexity that it introduces, and the red tape. We know people are struggling to calculate, for example, what their aluminum tariff is and what they have to pay, and introduced a lot of complexity for
producers up and down the supply chain. And it's also I mean, we have some evidence, quite strong evidence just in the gap between what China says it's exporting and what US custom thinks it's importing, you know, one hundred and twelve billion dollars gap, which at least a big
chunk of which could be evading those tariffs. So, you know, just from a sort of standard economics perspective, surely one has to also be thinking about those costs in thinking about whether or not it works in practice, even if it's not supposed to work in theory.
Well, I guess I start just by looking at your typical free trade agreement, right, it's what five thousand pages long, negotiated by how many corporate lobbyists over how many years.
You know.
The idea that you sort of could have this genuinely quote free trade and it really is just one common market again is something that is maybe appealing in theory, but does not exist in fact. I think what you're seeing is much more a transition where, yes, as we move back to having higher tariffs, as we have an initial year where things were moving around a lot. Some
I wish had not happened, some was necessary. Yes, of course, people are going to be frustrated, and that is one of the upfront costs in going through this sort of transition.
But if we actually land on a stable new model, that's not going to be any different than the process of liberalization, of the process of reducing tariffs, a process of signing all the free trade agreements, which of course I don't recall any of these corporations complaining about is somehow unworkable, and the last thing I would just say
about it. It is important to keep in mind one of the reasons that genuine free trade is appealing in theory but does not exist in fact, is that, to the extent you really do just open your market up to the world, you are importing all of the world old's distortions. It may be a lot of fun to go make everything in China, but if you're someone who did want to make something in the United States, being told you'd better pay attention to what the Chinese Communist
Party's subsidy policy is every week isn't any better. And so, to the extent we do care about having a healthy, robust domestic industrial economy, I would argue that the direction we are headed is actually a much more stable and plausible environment than the one that we had been pushing toward.
Well.
To Ora's point, I remember Christian Friedan when she was trade at that time Trade Minister for Canada, negotiating Canada's deal with the European Union. She did say quite publicly she'd gone into those negotiations thinking it was going to be sort of talking about the gains for both sides and everything else. She said, it's just a bare knuckle fight where everyone's still trying to protect everybody else to you, and that which is why it always ends up in
thousands of pages. Annaud nearly run out of time. But I think, just on that same point that I raised with Oran, if one is trying to restart domestic production, I mean, you've said to me, you think the question is the counterfactually, were there better ways to do that? Or was this kind of mixed approach of both sticks and carrots. Maybe if you're really focused on that, maybe it has been effective.
Yeah. I think that the way to bring supply chain resilience in the US, which is definitely a goal this country should in for its own national interest, is to use a combination of carrots and sticks. I thought that the way to incentifize metals mining had been pretty effective by putting in a price floor, for example, for producers
to shield them from predatory pricing from other countries. I mean, a well known tactic by China is to flood the market was supply, to crash the price to make it unprofitable by producers to produce, and as a result, the metal mining industry in the US has been decimated but for decades. But I think tariff is but one of them.
There are rice floor policies to help with this, and I think the point that you guys made in this podcast so far that that is the real question is how do you make sure that these foreign firms will be willing to invest over a period of ten years, which is a long time, and you need to have some kind of strategic advantage of producing in the US. What is that advantage? And I think one that US has that China does not have despite China's cheap labor
is energy independence. And this Iran war really highlight this point because manufacturing is a very energy intensive process and the EIA says that thirty eight percent of manufacturing costs came from energy natural gas, and this country has a tremendous amount of natural gas which is oversupplied, and if US can maintain this advantage, it can offset the higher cost coming from labor or even coming from the cost
producing steel metals. And I think that that is the question that I think the Trump administration and future administration need to safeguard, like how do you create this cost advantage in the US?
Yeah, and that's a very good point. And you pointed out to me today the natural gas. We're very focused on gasoline prices, and it's very irritating to all of us that it uses the same word gas for both. But the natural gas price in the US having fallen by over twenty percent since last year, and significantly just since the beginning of the Ranian War, I think is very striking, especially for those of us sitting in Europe
who where that is definitely not the case. Lurin, I should leave the last word with you, And Anna was sort of putting that same frame on it. One positive factor that could help encourage this domestic revival that you are talking about, And you think we have laid some of the seeds for is going to be the cheap energy? Is energy self sufficiency? What do you worry could get
in the way. I think the last time you were on we were talking about the significant controls on immigration and whether that would have affect the ability to get up and running with some of this manufacturing. But do you worry about getting in the way of this?
I guess I would look at two things, and this is a little bit connected to the immigration point. Is just workforce. Where we see success. It is tied to major investments in developing the workforce, both for the sake of the workers, equipping people with the skills to take the good jobs, but also for the sake of the employers who need a skilled workforce. And that is just an area where the US has not done well for
a long time. Our college for all model is completely mismatched to what we need and so our ability to actually build a system. We just did a paper with a whole bunch of case studies looking at what does it look like when it works from the high school to the technical college, to the employer to the union American Compass report called Learning by Doing. We have to
get that right. The case stayers are out there. It is not a difficult thing in terms of policy making, but it is a major cultural shif certainly for the US. And then I think the other big question is just the stability of the policy regime itself. For people to make these long term investment plans, there does need to be a long term commitment by the United States to
maintain some of these barriers, to maintain these supports. And on one hand, we've obviously seen a lot of uncertainty, a lot of swings, a lot of unpredictability over the last year. On the other hand, I do think we've started to see a quite clear overall direction, and I think there are a lot of ways in which this is all becoming quite entrenched. You know, we are seeing even with the Supreme Court striking down some of the tariffs, none of the trading partners came back and said, oh,
that got struck down, we want to redo our deal. Right, Everyone sort of understands this is and to sic extent have even acknowledged that these imbalances do need to be addressed. So I think that has an effect. I think, certainly, you know a little bit to your point about special trust and so forth, there's something good actually about building up special interests that want domestic manufacturing and as investments
do start to happen. As you do have more workers, communities, firms tied to this model, they are going to be a very strong constituency for continuing it. And then the final point is the revenue. Once you have the revenue, it gets built into the budget and if you want to change course, you have to come up with what you're going to cut spending on or what you're going
to raise taxes on instead. And I do think we need to make some of this more formally permanent through legislation, and that should be a huge priority for the next few years. But I do think we are getting that kind of shift in underlying consensus on what this is going to look like, both in the US and around the world, and if we can maintain that, then I think we will be headed in the right direction.
Well, shift in perspective for sure, and a conversation which for once is not about what on earth is going to happen in the straight of horror moves and how that can have the global economy. So Oorn cass Anna won.
Thank you so much. This was great, Thank you, Thank you.
Thanks for listening to Trumponomics from Bloomberg. It was hosted by me Stephanie Flanders, and I was joined by American Compass chief economist and commentator Orn Cass and Bloomberg's Chief US economist, Anna wom Trumponomics was produced by Summer Sadi and Moses And with help from Amy Keen, and sound design was by Blake Maples and Kelly Gary. Please help others find us and enjoy Trumpannomics by reviewing it wherever you listen to podcasts reviewing it highly obviously