The other side of trade
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Pushkin.

Look, we try not to talk about Donald Trump on this show all the time, but, you know, two things. One, he's the leader of the free world. Two, he has a whole bunch of economic policies up his sleeve that matter enormously to markets, and that is very much our jam.

And the latest curveball has landed on the market for metals. The president wants a massive 25% tax on all US imports of steel and aluminium, or aluminum if you prefer, wherever it comes from, China, Europe, UK, whatever. This has sent metals markets a little bit bananas. Today on the show, we're breaking down for you what is going on here, why we should all care, and how this fits into the broader trade strategy.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, and I'm joined by our dynamic duo today. In the blue corner, down the line from New York City, the bruiser from the Unhedged newser, Rob Armstrong. Greetings. But also...

In the red corner, a newbie on this podcast, the undisputed heavyweight trade nerd of the FT, Alan Beattie, here in the London studio with me. Alan, welcome to the show. Thank you. Why am I in the red corner? I don't know. Okay. So look, all these years you've been nerding out on trade and now suddenly, like, are these the best of days or the worst of days for you? Someone in the trade world said it's kind of like...

We've all been working in this quiet corner of the library. Nobody's bothered us. No one else wanted to take those books out. And suddenly the doors open, all these people crash in, pulling books off the shelves and all the rest of it. You've got to suppress the temptation just to go, shh. And also, these are my books. Get out of here. Get out of here. Instead of which, you've got to try to open up, turn around and go, let me tell you about tariffs. Now, children, sit down while I explain to you what's going on. So let's start with the metal stuff.

What is the latest proposal and is it serious? There's a thing I always say about trade under Donald Trump, which is what the screenwriter William Goldman, who wrote The Princess Bride, among other things, said, which is in Hollywood, nobody knows anything. Nobody knows anything. Because with Trump, he thinks about five contradictory things. He has about eight people around him who also think things that contradict each other and indeed themselves. So who knows?

What is true is that, you know, he did put on steel and aluminum tariffs in his first term, 25% for steel and 10% for aluminum. Now, he suspended a bunch of those. Biden negotiated some sort of suspensions and loopholes and so forth. But he does have form in putting them on. Yeah, so there's all sorts of like little kind of loopholes and exemptions and whatnot that came in the last administration. And now he's saying, right, all that is gone, 25% on everything. Alan, why steel and aluminum? Why not?

Pears and stuffed animals, if you know what I mean. Why this? It's always, always steel. Steel screws up the entire global trading system for everyone else. I annoy people massively when I say this. I actually have people from the Biden administration saying, "Alan, if you understood the lives of steel workers, you might not be so dismissive about it." Pointed out to them, "I grew up 10 miles away from a steel mill. I know what steel mills are. They've grown up about 600 miles away from a steel mill. This is why I had no friends in the Biden administration."

But it is a symbol of industrial strength. It's a symbol of manufacturing. It's men doing things in hot places with big hammers and stuff. We all think steel is cool. It's also really concentrated. If a steel mill closes down, as it did near me, and you get 3, 4, 5, 6,000 jobs gone, bang, in a day, that's really dramatic in a way that losing jobs across the service sector is not...

It's not only dramatic, it attaches to a very specific political power center. That representative, that senator, whatever, you know, has a serious bone to pick. That's certainly true in the U.S., not everywhere, not everywhere, but certainly in the U.S. You know, that's the other thing, Wisconsin, Pennsylvania, these are the swing states. I mean, it's absolutely true that the Biden administration, Catherine Tai, a

According to people who have spoken to her, they told me that she or certainly USGI explicitly said to them, you've got to help us win Pennsylvania. You've got to give us what we want on steel because you've got to help us win Pennsylvania. Right, right. So it's almost like an emotional issue and it's a very political issue.

It's very emotional, it's very political, it's very symbolic, and I say it's been screwing up the trading system for decades. I think listeners are probably familiar with the standard argument against steel tariffs, that whatever you gain in terms of steel jobs, you lose in terms of other manufacturing jobs.

by making input costs in industries that make things out of steel higher. That's absolutely true. The estimates are something like 80 jobs in downstream steel using industries for every job in steel. Yeah. So it's terrible. I'm interested to hear the kind of worldwide or geopolitical implications of this, and indeed the whole Trump tariff set. What is the rest of the world...

How much does it matter to them? What are they going to do in response? What is the state of play in terms of responses from the rest of the world? You are stealing all of my questions. Okay, I'm sorry. I'm just curious. I'm a curious man. We have an expert here. I'm just pushing ahead with the discussion, Katie. Go.

Go for it. So if this was only metals, right, I don't think everyone would be as quite alarmed as they are because, you know, as I say, there's always a lot of stuff about steel and metals and so on. For example, there's almost no Chinese steel actually circulating in the US because there's so much effort has been made to keep it out with various tariffs or so forth. It's not just that. It's the fact that

Trump is trying to use tariffs for a whole bunch of other reasons, right? He suddenly comes up with these coercive tariffs on Canada and Mexico. 25% tariffs are going to be implemented in, what was it, 72 hours to stop an almost non-existent flow of fentanyl across the Canadian border. And...

to encourage them to do stuff on immigration they're already doing. For Mexico and Canada, that's enormous. And that's just delayed, right? In theory, that's still happening. In theory, that's delayed until March the 4th. So who knows whether they'll come up with something else to buy him off. I think they've already appointed a fentanyl czar. Cool. So I don't know if they just, I don't know how you escalate that. I would love to. Maybe a fentanyl emperor. Yeah.

Or a vizier. You know something, I'd like to be a grand vizier of fentanyl. I wouldn't actually like to do the work, just do the advice. It'd look great on your LinkedIn. It would, wouldn't it? Yeah.

First fentanyl lord. But all things being equal, right? So say this happens, right, the steel tariffs, then what is the impact on industry? Because as you say, it's great if you happen to be a steel worker. It's not that great if you happen to be someone who makes cars or puts food in cans for a living, right? That's right. It will hit the car industry. It will hit all of those industries. But the thing is, it doesn't hit any of them directly.

dramatically enough that they really complain that much. You know, I've always wondered, why does the car industry in America not complain more, given that it's one of its basic inputs? And people always say, yeah, but the thing is, the car industry benefits a lot from what they call trade remedies, right, from blocks on cheap imports as well. So they don't necessarily want to bring the whole system down because they kind of benefit from it as well. Right. But it's just like a pain in the arse.

So what we're already seeing is that like consumers of metals in the US, because US is a net importer of these metals, they're already paying a higher price for copper, for example, which isn't in the current set of new tariff proposals, but probably will be. So they're paying, already they're paying a higher price for copper, aluminium and steel. I insist on keeping calling it aluminium.

Aluminium. Is that a different metal than aluminum? Is that like really good aluminum? Yes, it's posh aluminum. So they're already paying what's known as the Midwest premium to get hold of this metal because they want to get ahead of these tariffs and buy these metals quicker. So yeah, I guess I kind of don't get either why people are not up in arms and saying, what the hell? You've just raised our production costs. I think Alan has given us part of the answer, which is that the benefits of tariffs are concentrated.

and the costs are diffuse. This is true. And it's also, they don't actually know whether he's going to go ahead with them or not. Yeah. If you actually start throwing stuff out of the pump. And also, do you want to cross Donald Trump? Really? We've seen what happens to people who cross Donald Trump. It's not very pleasant sometimes. So if you're going to actually really come out publicly and take a pop at the administration, you might want to wait until you're sure these things are actually hit rather than looking a bit of an idiot by coming out, burning a whole load of bridges,

And it's not going to happen anyway. How does the rest of the world respond, Alan? Strategically, what moves are they making and are they intelligent? So if we look more broadly, because it's not just steel and I will say aluminum. You know, in deference, in deference to Rob. Rob used to be my boss. He told me to say aluminum. Never show deference to Rob. He told me I would be fired if I didn't say aluminum. He was a vicious boss. He really was.

So they're having to deal with a whole bunch of stuff. If you're Canada and Mexico, you're dealing with these 25%. You're dealing with the metals tariffs. You're dealing with this wacky plan they've got for reciprocal tariffs. I don't understand what they are. Tell me what they are. Yes, let's have a pause to talk about reciprocal tariffs. This is an important point.

Funnily enough, this is actually written down on his policy platform, his campaign platform, unlike most of this. Quite simply, you set the US tariffs equivalent to the product of any given trading partner. So if you are trading with the EU on cars, the US has a 2% or 2.5% tariff on most cars. We'll go on to that. And the EU has 10%. So you say to the EU, right, either you cut your...

10% tariff to two, or we raise our 2% tariff to 10. So it's just a tit for tat. I have a question in the back. What about countries where things don't match? Like we match kind of Europe in cars, but like with Colombia...

We take their coffee and presumably their cocaine, but I don't think there's a cocaine tariff. And they take our whatever it is we send to them. I don't know if it's chicken or whatever we send. And so like what they tariff us on coffee and what we tariff them on whatever it is we send to them presumably doesn't matter to the other party. Shut up, Rob. Rob, shut up. Shut up. Shut up. Shut up.

Don't tell them that, okay? They haven't worked it out and it's going to be really funny when suddenly everyone's drinking really expensive coffee or snorting a really expensive coke and it will have... And amazingly enough, the great coffee growers of the upper Wisconsin mountains do not in fact benefit from this. Exactly. Exactly.

It's not thought through for a bunch of reasons. The other reason it's not thought through even more so is it's kind of predicated on this idea that American tariffs are always lower, right? And Americans believe this. They believe they're a free trade country they're taking advantage of by the rest of the world, blah, blah, blah. By and large, they are lower. There are a bunch of places, particularly in agriculture, they are very much not. So classic one being sugar, right? The cane grow is down in Florida, right?

Politically very powerful. I think it's now pretty well established that Bill Clinton, when he was enjoying private time in the Oval Office with Monica Lewinsky, took a call from the Florida press

sugar growers, that's how important they are. Now, the tariffs on that sugar in the US are actually quite high. I got someone to run the numbers and they came up with numbers above 40%. What? Because, you know, if you're a rich country, that's what you can afford to do. You basically say, we can afford to protect these particular bunch of farmers who, until quite recently, were in a swing state. Right.

So that's why they get their protection. You wrote something about pickup trucks too. Is this another example of this? We tariff the foreign pickup truck? This is the so-called chicken tax, which LBJ put on light trucks, including pickup trucks from Europe in a rage. In fact, from everywhere in a rage because Europeans put taxes, put tariffs on American chicken. That dispute, by the way, in a slightly different guise is still going on. So that's a 25% tariff on pickup trucks. And I'm told that's the only bit of Detroit that actually makes money.

So let's say the US does do this and it cuts its own tariffs, right, if it's going to be fair. So it's going to cut its sugar tariffs down to Brazilian levels, which are like, I think, 16%. And if Brazil has any wit, they'll cut their tariffs to nil and then they'll have a nil percent tariff. The US will be absolutely flooded with Brazilian sugar. Nobody grows sugar cheaper than the Brazilians.

If they cut their light truck tariff from 25% down to European levels, which are 10%, or if Europeans, which they've offered to do actually, cut their car tariffs down to 2%, which is the American level, then suddenly Detroit loses all of its protection. So what you've got to assume is there's going to be a load of hypocrisy going on here, right?

No. I know, I know. We've never seen it before in trade. Say it ain't so. We've never seen it before, but here it is. It's very sad. I think it's all these new people coming in. It's almost as if none of this stuff makes any sense, Alan. So let me ask you, what does this mean for the rest of the world in the sense that the German steelmaker ThyssenKrupp was saying...

If the US tariffs do come into effect, then what we're going to end up with is loads more Chinese steel flooding, if steel can flood, into the European market. And so it kind of screws Europe, right? Like, what are the sort of knock-on effects in other places in the world? I mean, it does. I don't think they're using a very good example there. As I say, there's hardly any Chinese steel in the US anyway. But yeah, there were a bunch of low-cost steel producers, India and Turkey and so on. And if steel is kept out, then you get it washing around. And so everyone then starts putting on

Tariffs to protect their workers now Europe is is nothing like as in hock to its steel industry as the US's and in fact I'm told again the Americans kept saying to the Europeans Why don't you put these high steel tariffs on the Europeans were like it's a bad idea and like But your steel industry has told you they want it and they appear to be utterly baffled by the idea that you wouldn't Instantly do what your steel industry told you to do Is there any chance Alan? that

the rest of the world, as it were, rejects the approach that the US has taken and starts to trade more freely with one another, isolating the United States before its tariff falls. So that would be ideal. And it's not impossible and it is kind of happening. One funny thing is that the US is quite a closed economy, by which I don't mean they have very high tariffs, but they- Make a lot of their own stuff.

Makes a lot of its own stuff. It's got food. It's got all sorts of stuff. They can produce a lot of things. So although it's, you know, what is it, a quarter or so of the world economy, it's only 15%, 16% of global imports. So it's not that important. And that could be squeezed out. So yeah, they could trade a lot with each other. One of the problems that the rest of the world has is that what you really need is someone to do the final consumption, right? So China can sell stuff to Malaysia. They can sell stuff on to Indonesia. You have a whole factory production zone. You need someone to do the final consuming.

And until now, that's often been the US. The US has a bigger proportion of actual final demand. The question is, who's going to do that consuming? Because this comes at a really bad time when...

China has actually shifted back to its export-led growth model because its domestic demand is in such a mess because of the property bubble and all the rest of it. So somebody said to me the other day, there's a battle of competing mercantilisms, right? You have the US and China both trying to export. So, I mean, yeah, they absolutely can do this, but this would be an excellent time for the EU to do some more consumption. It would be an excellent time, in fact, for China to try and build a consumption model. But it hasn't come at a great time from that point of view.

To your mind, Alan, you have been covering this stuff for a really long time. Is it worth almost chasing every headline on this? Because so far we've had tariffs put on Colombia, tariffs taken off Colombia a few hours later. We've had the threat of tariffs against Canada and Mexico. That was taken off before they even started. We have got the additional tariffs against China. But it just feels like you're just chasing your tail at this point. How much of this...

policy that we've heard so far do you think is actually going to materialize in real life or do you think this is all just a massive exercise at keeping you busy? I mean obviously nobody knows anything

I keep saying this to people and I don't think it gets less irritating any time I said it. If anything more irritating, it's like I said it. I think this is an excellent time to be a columnist and a really bad time to be a news reporter. Because, yeah, if you're a news reporter, you have to chase this. I mean, you have to. One interesting thing, I think, you've not seen massive market reactions. No. I mean, if they're serious about this reciprocal stuff, right, that tears up the entire post-war narrative.

trading order, which is all based on, you know, you offer the same tariff to everyone, most favored nation, not individually. And it could lead to really massive tariffs and dislocation. And not just that, it's just sort of, you know, dramatic of an administration that kind of doesn't know what it's doing and is out of control. But markets don't seem to be pricing that in. No. And I think part of it, you put your finger on it before, where markets are in wait and see mode.

They're not discounting the event. They're just waiting to see what will happen, right? That's point number one. Point number two, and I'd very much like to hear your view on this, Alan, is that people are making the assumption that companies, especially big companies, can be quite clever about adjusting to tariffs and protecting their profit margins and their earnings in the face of tariffs. Is that our experience of tariffs in the past, the kind of corporate economies that

reform in a new way and business goes on? Or is that a naive and hopeful? It is.

No, it is given what we've seen so far. So, I mean, in the Trump one administration, he did put a bunch of tariffs on big tariffs on China in particular, and also the steel and aluminum tariffs were big tariffs on China. And all that happened is supply chains reorganized themselves. So instead of China exporting to the US, they exported through Vietnam, either just, you know, shuffling it through Vietnam warehouses, or they did actually move some of the value added there. And so you had countries, the IMF calls them connector countries like Vietnam and Mexico and so on, who did very well.

So, yeah, supply chains have been amazingly flat. And as I always say to people, I have been doing this on and off for a long time and I

continually hearing people writing off globalization, right? And I've actually sort of kept a list in my head of the things which were definitely going to end globalization. Bursting of the first tech bubble at the end of the 2000s. 9-11, that was definitely going to end globalization, right? The SARS-Navion flu outbreaks in the 2000s. The global food crisis, definitely. The global financial crisis, obviously. The Icelandic ash cloud. That was a good one. That's one for the hipsters. Now, that is one for the globalization hipsters. That was totally going to do it.

Trump was going to do it and then COVID was going to do it. The massive surge of inflation was going to do it. And nonetheless, it slowed, but I don't think it's actually much to do with those shocks. But goods trade has actually carried on. It's extraordinarily resilient. I just got this vision of my mind of all of these shocks being like Wiley Cotey.

and the global economy, the goods trade being the roadrunner, and just tries to drop anvils on them and blows themselves up with explosives. And at the end of all of these episodes, it's just beep, beep. And the roadrunner's still going. Well, I pity the poor Wall Street strategists, right, are out there. And they are... I'm trying hard to feel sympathy for the Wall Street strategists. They are forced to make some kind of back-in-the-envelope calculation of

If there are 25% universal tariffs, how much will S&P 500 earnings per share change? And they say, okay, percent of global trade and then input costs and then multiply by the thing. And the whole model is about eight lines long and they come out and they say 6% Eureka!

I just don't believe a word of it. 6% plus or minus 10 percentage points. Yeah, exactly. I just don't. It's one of those things. It's like you have to wait and see how the great plastic organism that is the corporate economy reforms in the face of this stuff. So a little thought experiment for you. Say someone was successful in reducing a trade deficit to zero already.

That might sound like a nice number, but what would it actually mean in real life? Well, the way you would do this without having sort of massive dislocation is to recognise this is a macro issue. It's not a trade issue. You run current account deficits...

because you don't save enough. So if you've got saving up and saving investment balance back into balance, then you could do it gradually. The mad thing is if you try and do it with trade, because all that happens for a start, all that happens is your currency would tend to go up. It wouldn't really work. The only way it would work is by crunching back domestic demand. That's how you would stop. You would say, we're not going to import anything anymore.

And the effect of that would be that the economy would really slow. I mean, the aim of it, of course, is to say all the stuff that's being produced overseas, we produce here. The problem is you can't just instantly move stuff overseas to here. Apart from that, you might not be very good at it. It might be very expensive. So what is likely to happen instead is just that you'll bring the whole capacity of the economy right down.

Enough to reduce the trade deficit, which means a massive, massive crunching recession. Yeah, sounds not ideal. To wrap up, Alan, I want to ask you one last question. Imagine you are Johnny on the spot, right? You are in charge of the UK and European response to what Trump is currently fleshing out as his trade policy. In like a sentence, what is your advice to the government's?

You need to do something. What Mexico and Canada did was smart because they moved quickly. And it's hard for the EU in particular to do that.

I think you need to have something which can respond as quickly as possible. Canada and Mexico got to the point where at the moment Trump was going to put their 25% tariffs on a minute past midnight on Tuesday, they could have retaliated immediately. Now they had presidential authority in Mexico and the constitutional authority in Canada, which the EU doesn't do. The EU moves much more slowly. But I think...

Just preparing something, something which looks quite scary. So think smart, think quickly, but be ready to respond. Essentially, be ready to respond. Because at the moment when he puts the tariffs on, you want in his mind to be, OK, this has a cost. Right. That is more than one sentence, but I'm going to let you off because we have borrowed your brain. We're going to be back in a sec with Longshot.

In the short term, there's going to be a lot of volatility. But in the end, I think what we've seen is that the underlying aspects of productivity may end up being the more profound driver than the fears of government impact from the fiscal or the monetary side for that matter. To learn more about macroeconomic disruption, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

Already it's time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. I will go first. I am long eggs. Go yolk, go broke, folks. That's what I say. So apparently the cost of a dozen eggs in America or the wholesale price is $8. Like egg prices have gone completely bananas. They are quite literally egg-spensive. Bird flu, the whole thing.

This is very much a pocketbook issue, as they say in the States. And I see riots on the street about these egg prices. I'll follow up on that. Because of eggs, among many other macro-eggonomic factors, I am long...

The neutral rate of interest. We were having this debate in the unhedged newsletter in lots of places. It was particularly intense a year or two ago. Like, is the kind of neutral rate, the kind of ambient level of interest rates in the economy going up? And just judging by the recent inflation reports and the kinds of, you know, a whole lot of other factors, it does seem like we hit an inflection point. And

The neutral interest rate is going higher. Yeah. We're not going back. We're not going back. To the days of zero to one and a half percent rates. I blame eggs. So, Alan, you can't have eggs and you can't have interest rates. What are you long or short of? I'm disappointed I can't have eggs because I had a whole thing about shell companies. I mean, I'm just going to go for the classic. For about 20 years now, I have been publicly, very publicly short the giant panda. Yes. Pandas. It's one of your defining...

It really is. Somebody actually said that will be my epitaph. Here lies Alan Beatty. He hated pandas. Simple as that. And, you know, they can't, they don't eat the right thing. What's wrong with pandas? They're cute. They can't, they can't eat. They pretend to be cute, but only people like you for it. They, you see, he's not my boss anymore. I can say this. They, they, they're no good at reproducing. They eat the wrong stuff. They have way too much money and attention lavished on them. They're useless. Short the panda.

Yeah, short pandas. That's what we get Alan Beattie on the podcast for, boys and girls. Alan, it's been an absolute pleasure. Next time Trade Policy Goes Bananas, we'll get you on again. Rob, pleasure doing business with you as usual. Listeners, we will be back in your ears on Tuesday.

Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.