The Roots of Trump’s Global Trade War with Martin Wolf
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A market economy, particularly a global one, needs actors who believe they can have confidence about how policy is going to work over the next five to 10 years. We had that in monetary affairs. We had it in trade policy. And I think after the last 20 years, I think we risk losing it.

I'm Stephanie Flanders, Head of Government and Economics at Bloomberg. Welcome to Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. So it's the eve of Liberation Day as we record this, Tuesday afternoon, the day before Donald Trump announces what looks set to be a

barrage of tariffs on America's trading partners around the world, all in the name of fixing a global trading system that he considers broken and unfair to the US. Well, this being Trumponomics, we could spend the next 20-25 minutes talking about the potential economic impact of those tariffs in the US and overseas. We've done a bit of that in the last few weeks. Spoiler alert, it's probably going to be negative.

We could also talk about whether these particular tariffs are the most efficient way to raise trillions of dollars in tax revenues for the US, as the President has suggested, or bring manufacturing production back home. Spoiler again, probably not. Certainly not both. But...

I'm sure you've heard a lot of that in the past few weeks and you certainly will in the next few days. So instead, I thought for today only, we could engage in a bit of the economic version of blaming the victim, because there are two sides to every story and there are definitely two sides to every trade balance. And if you look at the countries now in the firing line with the biggest trade surpluses with the US, Germany, for example, well, that deficit isn't there by accident. It's

It's a conscious choice by successive German politicians to have an economy driven very largely around exports. That's a choice that many economists have been telling them for years was indeed an accident waiting to happen. Martin Wolf is the chief economics commentator at the FT and he has been particularly consistent on this point over the years.

He's also been described as the most important economics commentator in Britain and arguably the world. And for his services to financial journalism, Martin was awarded the CBE in the year 2000. He's the author of several very impressive books. And I'm delighted he's here with me for this episode. Martin, thank you very much for talking to us. And I'm particularly grateful because we're talking about

on Tuesday afternoon, which is a crucial moment for you where you finished your column for the Financial Times, and you'd probably be expecting to have a cup of tea. So I appreciate it. It will be a pleasure, I'm sure. I was looking back and you have been warning about global imbalances and what it could lead to for a long time. And I'm talking now about the sort of systemic imbalance

trade imbalances across the global economy, not just the ones with the US, although those are pretty obvious. I found a particular quote from you. I think it's a 2008 column. You say, in the long run, the global economy will have to rebalance. If the surplus countries do not expand domestic demand relative to potential output,

the open world economy may even break down. As in the 1930s, this is now a real danger. Now, that was in 2008, and that was when we were going through a particular moment that you've argued that the global financial crisis was partly related to those imbalances. But just talk us through a little bit how...

Big surpluses, imbalances can potentially lead to an unstable global economy and even potentially the kind of protectionism that we're now seeing from Donald Trump.

The story goes back really to a very well-known British Keynesian economist, Joan Robinson, back in the 30s. And this is about what she and the Keynesians generally called beggar-my-neighbor policies. And the beggar-my-neighbor policies consisted of essentially fixing your exchange rate at an undervalued level.

That meant exports tended to grow very strongly, imports were rather weak, and as a result, you generated a trade surplus and other things equal the current account surplus. That, of course, sustains your demand.

a significant part of your demand is then being imported from your trading partners. It's sort of clear you're selling more exports than you're spending on imports. That's a net stimulus to demand. That means, of course, you do have to curb domestic demand. So macroeconomic policy is required. And most countries that do this sort of thing have one or two characteristics. Either they run very tight fiscal policies, and the most famous example of that is

of a significant economy in the last 20 years is Germany, but there are other much smaller ones like Singapore, which would also fall into that category. They just don't have the global significance. Germany has run a very tight fiscal policy really for 25 years since the end of unification. Other countries do it, and China is the obvious example here, by having arrangements

You would say their income distribution arrangements, which generate huge surplus savings in the private sector or in the household and non-central government sector. China, distinguishing the private from the public sector in China is a bit complicated. And so China is a country where the national savings rate has been over 40% of GDP for the indefinite past 30 or 40 years.

And investing productively, 40% of GDP in a country growing at 10% is just about possible. But as it slows, it becomes really impossible. So they've got surplus savings. And they've had to find a way of absorbing them. And one of the ways they found of absorbing them is to have an undervalued exchange rate

In this case, they actually intervened in the currency markets substantially, particularly in the first decade of this century. And that gave them a colossal export surplus. At its peak, they ran a current account surplus of 10% of GDP, which was far and away the biggest in the world. So again, it was a policy choice.

And in both cases, crucially, I'm just going to focus on China and Germany because they're the most obvious ones. But one of the consequences is China and Germany both have a comparative advantage in manufacturing. So that generated a huge surplus in the output of manufacturers over the consumption of manufacturers, even more than they would have had normally, because in addition to paying for their imports, that also paid for the foreign assets they were inevitably accumulating and

as a result of their trade and current account surpluses. So that's their side of the story. Now look at what's going on in the rest of the world.

Well, the rest of the world is importing recession. Essentially, if they're importing demand from the rest of the world, the rest of the world has to be importing a recession or at least weak demand, to be more precise. So they have to offset this. And that's exactly what the surplus countries, you would say, are expecting. And they offset this by spending more than their income.

So they run counterpart deficits that shows itself up as a trade and current account deficit. I won't go into the relationship between them now. And so to do that, they have to borrow. Either the government has to borrow, so it has to run a deficit, or the private sector has to borrow, or both, most usually both.

So what happens then in the country on the other side of this is they run expansionary fiscal policy with huge fiscal deficits, and they run relatively loose monetary policy, which generates lots and lots of private sector debt. And then, lo and behold, debt.

Debt starts accumulating. You could have inflationary pressure that's contained by the deficits. But ultimately, you run the risk of going bankrupt. And in that case, you have a horrible recession. And that's what happened to the US in

the aftermath of the financial crisis, and crucially with Germany, and I argued this throughout that period, the Eurozone crisis. The Eurozone crisis was, in my view, an internalization within the Eurozone of the consequences of the German export surpluses. So this, I know, won't sound like it. It's a very simple explanation of the underlying argument.

There's obviously a lot there. I mean, we should say that the peak of all these imbalances was indeed in the lead up to the global financial crisis. And as you said, many people did think there was going to be a sort of dollar crisis as a result of this. And in the end, it worked the way broadly that you've described. But then they started picking up again in the last few years as the US was running its big

budget deficits, with all that stimulus of the economy, we saw imbalances kind of come into view again. And of course, now we've had Donald Trump really focusing on those particular manifestations, which is those trade deficits with the US. Again, if we just go back to what the implications are for the countries themselves, I mean, if you look at Germany...

This long period where they had these big current account surpluses, and for the last 20 years, there's been almost no year where it's been less than 6%, 7%, 8% of GDP. The implication of that is not just that you have a tight government

government budget, as you said, and we now see them with much lower debt than most other European countries. It also means you're really crimping domestic consumption. In fact, I think German consumption didn't grow at all for several years in the 2000s. Consumers seem to have lost out from this export-led model.

But at the same time, you've got Donald Trump saying these very aggressive exporting countries have helped hollow out US manufacturing. I mean, do those two go together? I think here we need to introduce quite an important distinction between Germany and China. I think it's an important distinction that the Chinese, I think, will disagree. The big puzzle in Germany is that investment in the private sector has been so weak that

I mean, nobody was stopping the German corporate sector from borrowing what was effectively the very high savings of their private sector. The households and corporations, for that matter, are high savers, not by Chinese standards, but by normal standards.

My memory is that overall gross national savings in Germany are about 27%, 28% of GDP. That's very high for a developed country. The only one close to it is Japan. And the corporate sector, above all, didn't invest very much. So that left them with this huge surplus. Now, China is somewhat different. They have capital controls. A lot of the intervention in capital markets was government.

They clearly had a policy of keeping the exchange rate down, and they clearly had a policy of trying to keep savings up. My friend Michael Pettis, who's been arguing this for years, is, I think, in this case, largely correct.

And for them, the obvious counterpart was going to be the US, the only market big enough to run really large deficits, where the financial sector was sufficiently dynamic to do so. And indeed, as you say, the counterpart has to be some weakening of the manufacturing sector, which is probably...

You mustn't exaggerate this. It's probably about three percentage points of GDP, three percent of GDP or so smaller than it would otherwise be, which is roughly a quarter of the manufacturing sector, which is shrinking in its employment anyway. So we mustn't exaggerate. But those are, I think, slightly different stories.

Donald Trump has a claim in sort of macro terms that the global trading system that the U.S. helped to underpin all those years after World War II has ended up giving the U.S. a raw deal. I think probably both of us would say the U.S. has done extremely well out of this system and he exaggerates the harm that was done.

But he is right to say that some of these countries, identified by their big surpluses generally, have done, as you suggest, destabilising things for that system, not least running large surpluses, but things that were also potentially, in the case of Germany, not so great for its own citizens.

I think the same is true, actually, of China. I mean, my own view has been for 20 years that the Chinese could perfectly well run the economy with a significantly lower national savings rate.

maybe 5% to 10% of points of GDP. They'd still be able to invest like crazy and grow like crazy. The current account surplus would more or less disappear. And consumption would be very significantly higher, which would be very good for lots of poor Chinese people, lots of poor people who could enjoy the same rate of growth of GDP, in my view, because a lot of the investment is wasted. And the

they would be permanently better off. So I think both sides could benefit from a somewhat different range. Similarly, I think the eurozone would be more dynamic and more stable if Germany, the most creditworthy country, was able to generate higher domestic demand. I've been making these arguments forever. And I'm very pleased that Mr. Merz at least has got a little bit of that with a desire to improve our infrastructure investment and, of course,

defense spending. But I do want to underline a crucial point you made. It is impossible to argue that though this has created problems for macroeconomic management, that this is immensely immiserized or impoverished in the US. It does seem rather ridiculous. And what is even more ridiculous is to complain about this.

while being absolutely insistent, as Donald Trump is, that the dollar should retain every aspect of its superior status in the world, which is one of the reasons this has happened. We've had a previous episode where we were trying to get our heads around some of that and what a potential new role for the dollar might be that would satisfy Donald Trump. I'm not sure we came up with a consistent answer. But

To your point, we've seen in China a move in the last few months, an apparent embrace of more stimulus for consumption, a more consumption-driven approach, at least relative to the past.

We have seen new leadership in Germany suggest that both in the defence spending and through infrastructure investment, that there will be more domestic demand, which at least in theory could mean a smaller surplus in future. So, you know, is there a parallel here with the argument we tend to make about Donald Trump when it comes to NATO, that although he's not gone about it the right way, he has ended up prompting countries to do

the case of Germany quite explicitly, things that they probably wouldn't have done otherwise, but were a long time coming. Well, I think there's no doubt that if you engage in what seems from the point of view of the other side of this debate to be an act of war, things will happen. And he's quite right. One of the problems here is it's quite difficult to relate

the various dimensions of Donald Trump's policy objectives, the security objective, the trade objective, how these are supposed to fit in. But I think it is true. In fact, I'll just finish writing a column myself on this theme. The Chinese and the Germans will have to decide that a greater part of the demand for their output will have to come from home.

The rest of the world will not absorb it. I think that's particularly obvious with China, which is a superpower and continuing to grow as far as we know at a reasonable rate, though nothing like the rate it used to. Foreign demand is just not enough to keep the economy going. With households having only 60% of GDP, roughly household disposable income,

Getting away from the investment dependence is really impossible. But that's also an opportunity. They could raise that, run a proper welfare state or something much closer to it, improve public consumption and private consumption simultaneously, make the Chinese better off. And the manufacturing sector will still be the biggest in the world. They've got a huge comparative advantage in manufacturers. Even if they had balanced trade, that will be the case.

So I think it is sensible for the Chinese and the Germans to consider a different path because the rest of the world is not going to absorb these surpluses.

But Martin, I've known you long enough to know, and I've certainly read your columns long enough to know that what countries ought to do and what they actually do are often very different things, which is why you often had to write the same column more than once and telling them to do it. So what chances from here, from this very bombastic new chapter in global trade, what chance that we will be moving smoothly to that more stable outcome for everybody that you just described? Well,

But I think it is possible that Trump's pressure will change these policies in relevant countries because the alternative policy

is just unworkable for them. It could be very messy, obviously, and lots of the tariffs are irrelevant. He should be just targeting the big surplus countries, but he's not at all. Well, to be fair, as we speak, we have no idea what he's going to do because we're still getting very conflicting messages. We sort of know that Canada and Mexico have been attacked, which aren't huge surplus countries, to put it mildly. We don't even know whether the UK is going to be a target, which is a persistent deficit country like the US.

But I think it is arguable that, at least in the case of China, they are going to be forced to recognize that running gigantic trade surpluses, forcing others to run huge trade deficits, will not work unless it's with developing countries and they're prepared to finance it.

In other words, they're prepared to lose a lot of money on the export credit they're providing. And their experience with the Belt and Road Initiative has shown that's where it will tend to end up. Neither the US nor the EU, which are the only really big markets that are relevant to them, are going to run huge trade deficits in manufacturers consistently, and certainly not growing ones. And the Chinese really do now have to recognize it. The Chinese are very good at responding to crisis. And so it's...

we've seen with unification and now are the Germans. And so maybe a result of global pressure, US pressure, changing world, we are going to see this problem disappear. But it's interesting, you think the US, the actions that Donald Trump is about to take, the uncertainty associated with his policies, the inconsistencies associated with his policies, as he appears to want to really blow up the system that America underpins,

underpinned all those years. You don't think that long term will necessarily damage America's role in the global economy?

One set of questions is how we resolve the current and capital account distortions, which I think there are in the system, certainly visibly China. How do you absorb this behemoth into the world economy? That's a big challenge. But the danger to the US position in the world, in my view, lies somewhere else, although this is a reflection of it, which is

That I think it is perfectly plausible that the U.S. is going to, under Trump, damage very considerably the perception that the rule of law functions in the U.S., that this is the country with the most reliable law.

deep-seated set of legal institutions containing and constraining the government in the world. It's the biggest economy by far that has those characteristics. So it's the safest place in the world to put money. And of course, that means holding dollars or assets which are denominated in dollars or convertible into dollars, both real and nominal bonds and all the rest of it. Now, if you

make people feel that these institutions of the law are not going to work because the Trump government thinks

that it is above the law, that it's not bound by what the judiciary and the courts say, and they have done and said things that suggest they do believe that, then suddenly it becomes seriously dangerous to do this. And that would certainly weaken the currency. And you won't have a problem of capital inflows. And you would probably solve the trade balance problem. But you would create a much bigger problem, it seems to me, for the US because it subverts the basic source of its prosperity.

Well, as you say, that is a much bigger question. Very briefly, as a last question, we don't know what's going to happen in the next few days. And we certainly don't know how any of these tariff negotiations that we must expect now will happen will be resolved. But what does your gut say in a few months from now, we will feel like we have dodged a bullet as people are now talking in such sort of apocalyptic terms about the impact of these tariff wars? Or do you think it really could be quite serious?

I think the question is, what's the next stage and the stage after that? If at the end of it, we end up with, let's say, 20 or 30% tariffs by the US towards basically everybody and retaliation of the same scale, then trade is going to shrink a lot.

And that will have undoubtedly sizable consequences. How big depends on the consequent macroeconomic policy choices, which are difficult to predict, but it will be very disruptive in the world economy. We would end up

somewhat smaller than it is. I mean, it's not on itself enough to create a depression far from it, but it would be noticeable. And it would also have created an enormous amount of ill will. And there will be no credibility to those current tariffs because you think they might all change tomorrow. So business will reorder itself.

to an autarkic world, a more autarkic world. That would be a very, very large cost, particularly for smaller economies and poorer economies. It would worry me a great deal. And it is possible that even if we go away from these tariffs, that people will be worried they're going to come back again. The WTO system is gone and it could all start again. So I think there will be a permanent impact

on trade, confidence in trade, as it were, at the microeconomic roots of the world economy. But possibly some of these macro forces, which I've never thought of that huge since the financial crisis, will be slightly better. But it comes back really in the end to what worries me about this.

is the lawlessness of it, the unpredictability of it. A market economy, particularly a global one, needs actors who believe they can have confidence about how policy is going to work over the next five to 10 years. We had that in monetary affairs, we had it in trade policy, and I think after the last 20 years, I think we risk losing it. Martin Wolf, Chief Economic Commentator for the Financial Times, thank you very much. Thank you.

Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders. I was joined by Martin Wolff of the Financial Times. Trumponomics is produced by Sam Asadi and Moses Andam with help from Chris Martlew and Amy Keene. The sound design is by Blake Maples. Brendan Francis Newnham is our executive producer. Please do help other people find this brilliant show. Rate and review it highly wherever you listen to podcasts.

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