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I'm Stephanie Flanders, head of government and economics at Bloomberg, and that was a reminder of a satirical comedy from 30 years ago, a rare foray into feature filmmaking by the documentary maker Michael Moore. It revolves around a clearly absurd fictional scenario where a US president decides to overcome failing approval ratings by inciting a mad conflict with Canada. ♪
Welcome to Trumponomics, the Bloomberg 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.
We're taking a moment to digest the flurry of tariff news this weekend involving two of America's closest neighbours, the threats, the negotiations, the pauses. We've had all of it, and in Canada's case, we've also had a flurry of hastily produced footage of helicopters at the border. Our goal isn't to retread all of that ground, but to answer a bigger question. In his onslaught of tariff threats and trade wars, what exactly is Donald Trump trying to accomplish?
We've got some of the best minds on the subject with us this week to talk that through, making his Trumponomics debut. Sean Donnan joins us. Sean is a senior writer with Bloomberg. He reports on the US and global economies. And before joining us, he spent, feels like half a lifetime, covering trade for the Financial Times. Sean, you must feel like you've already worked a five-day week and it's only Tuesday.
It's been a day or two of work. We'll get into some of the lessons that you've learned in the long hours, but you've certainly had to write many words on it. And we have Trumponomics regular Anna Wong, chief US economist at Bloomberg Economics. She's worked at the Fed and did serve in the Trump White House in 2019 and 2020 on secondment at the Council of Economic Advisors. Anna, it's brilliant to have you back. And I'm dying to know what you've made of the last few days, but we'll get into that in a minute. Thanks for joining us. Anna?
Hi, glad to be here. So on Monday, North America came within hours of a multi-billion dollar trade war, a trade war that could yet swing a wrecking ball through the economies of Mexico and Canada, and in the process, raise questions about that regional compact which sits at the foundation of America's global competitiveness and economic power. Now, it's true President Trump has agreed to delay the 25% tariffs on his neighbours that he had threatened, but
after both Canada and Mexico agreed to take tougher measures to combat migration and drug trafficking at the border. But Trump's 10% tariffs on China did take effect, and the Chinese government did retaliate already with tariffs on natural gas, gold and other products, and also a curious threat of an anti-monopoly investigation against Google, which doesn't do a whole lot of business in China. Sean, I was quoting there from a piece that you wrote was thinking about all the economic relationships at stake in this war.
From your reporting this weekend, what have we learned about President Trump's trade strategy?
Are we clearer or are we more confused? I think we're more confused. And I think that's partly because the trade policy has colliding goals. As you kind of look at what Trump has threatened through the campaign and in recent weeks and what some of his advisors, people like Howard Lutton, the incoming Commerce Secretary, and Scott Besant, the Treasury Secretary, have said, there are really three goals defined.
to tariffs under this new Trump administration. One is that kind of art of the deal, that very familiar piece that we had from the first Trump administration of using tariffs to extract leverage and some kind of concessions from trading partners. We've already seen that play out in the last few days with Canada and Mexico, and we are seeing a kind of supercharged version of that. In effect, Trump over the last few days kind of threatened
nuclear war against his neighbors and got him to add a few more border guards in response and, you know, the trade equivalent of nuclear war.
The second goal that he has is this kind of rebalancing trade. That's the familiar one from going back to 2015, this whole idea that trade deficits that the U.S. has with its major trading partners are unfair and that you need to rebalance trade with them and tariffs are a tool to do that. And then the third one is a new one, kind of this cycle, and that's the idea of revenues. Trump, starting in the campaign, has talked about the billions of dollars he can raise from
with tariffs. In fact, Republicans on Capitol Hill were very quickly pointing to the billions of dollars in revenues that would come from these tariffs on Canada, Mexico, and China as a positive thing. But if you are using tariffs as leverage and you don't expect to really deploy them, that doesn't make them a very reliable source of revenue. Likewise, if you're trying to rebalance trade, you
inevitably you're going to reduce the amount of imports that are subject to tariffs, which again makes tariffs a less reliable source of revenues. What you kind of end up with is a phenomenon that we saw during the first Trump trade wars in 2016, and that is this huge
uncertainty around Trump's trade policy and its goals and where it's going. And that is probably the most toxic thing for the economy because businesses really then stop making investments. They stop hiring and you start to get a slowdown, not just in Canada and Mexico, which would get hit hard by tariffs, but in the U.S. economy.
Just to feel the pain of global businesses trying to think about the implications of this for their supply chains. In the first term, you got the message loud and clear from Donald Trump, be careful of putting all your eggs in the China basket, tick. That was kind of underscored under President Biden. But with the addition that you could be friend-suring, you could be orienting your production to the friends of the US. Of course, if you're now questioning whether friends is a
safe strategy. And lest you think, oh, well, we should just take everything into the US. Well, not if you want to export, right? Because you're going to get retaliation potentially from these other countries. So I think that uncertainty must be enormous at this stage. But
Anna, we've spoken to you during the transition about how you thought the administration would approach trade, having seen it close up how the tariffs unfolded in that first term and, you know, the degree to which it was actually quite strategic and careful about the economic consequences.
What have you been thinking about that as you saw some of these threats come out of the White House in the last week or so? Yeah, so Stephanie, my view about what the end game of this trade war version two is has evolved in the times since we spoke earlier.
You know, if you asked me two months ago, I thought that with Kevin Hassett returning to the White House, that we have a voice there that would strongly advocate for a targeted approach toward tariffs.
But since then, we have seen Trump announce the 25 percent of Canada. And that made me pay more attention to what the rhetoric, not just of Trump, but of people like Scott Besant and also people who are holding key economic advisers role in this White House. I think what's different about this version to trade war is that Trump, he's thinking about trade.
creating his legacy. He's not going to run for a reelection again. So what is the end game, right? So I think at the end of the day, his approach this time around is actually very close to the theoretical underpinnings of the old trade war literature and the academic literature. So forget what you read about the impact of trade war starting in 2018 or thereafter, because the academic literature, for
from that point on was completely dominated by, you know, discussions of who bore the cost of trade war. But before that, in the even 20 to 30 years before that, that was a very calm and boring literature on optimal tariffs, on how to think about trade war from a game theoretical perspective. And I think that the game theory looked
of terror is exactly how Trump thinks about it. If you think about U.S.-China trade war, it's actually a prisoner's dilemmas game. And
In this game, the Nash equilibrium, which is the outcome where two countries are not cooperating, and this is the outcome where given the opponent's strategy, what is your best choice? The Nash equilibrium is actually a trade war outcome. In this outcome, both countries are worse off. But if U.S. is able to impose unilateral tariffs without inviting one-for-one retaliation,
the U.S. actually wins. From Donald Trump's perspective, the past 20 years of trade liberalization has been in that matrix where you have U.S. committing to free trade and China cheating and not committing to free trade. And the payoff in that stage is actually bad for U.S., good for China. And so I think he is trying to use this trade war effectively
basically remove us from the cooperative equilibrium where you have these institutions like WTO and GATT, which are monitoring and enforcing cooperation. He broke them all, moved that away from that cooperative equilibrium, get us to the non-cooperative equilibrium, which is the mutually destructive, everybody-tried-war equilibrium. But from his perspective,
as long as the retaliation is not one-on-one, U.S. overall relatively one. And this is what's very interesting about these executive orders you signed recently. It has a retaliation escalation clause. We have not seen this before, which is that if the foreign partner retaliate in response, then U.S. will ratchet it up, move us into that matrix payoff where U.S. on net is relatively more well off than the partners.
I can see how that might apply to China, but to have this threat of 25% tariffs hanging over those trading partners, which could quite clearly have produced retaliation. Canada announced the retaliation it was going to do if these tariffs went into force. Just assuming that it's going to be unilateral seems pretty
Yeah, I mean, I see the threats on Canadian and Mexican goods as a sequel to the first administration. Recall that in the first administration, it was also a very close call with Mexico.
He threatened to use the same powers in 2019 on Mexico, also on concerns about immigration. But that was also averted in the last minute. And at the time, I was also working at the Fed, and I remember the International Finance Division, we were very worried about the tariffs on automakers coming from Mexico and Canada. And I think it remains to be seen whether he is truly concerned
serious about the tariffs on our neighbor, because that is the piece that does not make sense to me. And now actually thinks makes more sense that he decided to delay those tariffs. It makes more sense if it was all about posturing and the fact that he quite likes trolling Justin Trudeau. I mean, there is an element of that, which it just seems to have been quite performative. What we've forgotten about the last few days is that
The U.S. just imposed a 10% tariff on all imports from China, including consumer goods, that it stayed away from tariffing during the first Trump administration because it was so worried about the impact on U.S. consumers and inflation here in the United States. It's gone ahead and done that. And that is enormous in its own right. If we had...
set aside the Canada and Mexico things, if those threats had never happened and what we had seen over the last few days was simply a 10% tariff on all goods from China, the alarm bells would be ringing all over the place. The pairing of these things has kind of hidden this momentous action. I think the whole idea of Trump using leverage and hinges on
Right. And one of the things that we've seen just in the first two weeks of his administration is his willingness to go to extreme threats in terms of economic warfare for relatively small money.
And, you know, the biggest example of that was Colombia, where we had this kind of nine-hour trade war where the president of the United States essentially threatened not just tariffs but kind of Iran-level sanctions on an ally with which the U.S. has a free trade agreement.
over two planes, over essentially a diplomatic skirmish. And, you know, in the end, and it wasn't that the Colombians were refusing to accept these planes with deportees, it's that they just wanted the deportees not to be shackled while they were on board these planes.
and treated more humanely. So, I mean, it's kind of this willingness to escalate. And it's the same thing with Canada and Mexico. I'm going to blow up one of the greatest regional alliances in the world, a real source of U.S. competitiveness, as you said earlier on. This is, and this is what Trump himself said when he signed the USMCA. This is, you know,
Canada, Mexico, and the U.S. against the rest of the world. This is how you compete with China. And to blow that all up over, yes, there's a horrible tragedy around fentanyl deaths in the United States, and the migration issues at the southern border in particular have been very real politically here in the United States, and that's a core campaign promise for President Trump. But to threaten China
What he threatened on the economic side to address these issues that are non-economic in many ways is really –
You start to wonder, OK, where do you go next? And then if you play that out to other trading partners, right, he has put the EU, the European Union, in his sights now for a tariff. Now, the EU's response, there is no easy way out for them in putting 10,000 extra border guards at the border with the EU. That's not what Donald Trump is going to look for.
So how damaging is that going to be? You know, the EU and the U.S. trade is almost a trillion dollars annually. It's actually bigger than the trade with Canada and Mexico. But these two countries have $2.5 trillion each in foreign direct investment in their economies. If you go here in the first two weeks,
There's nowhere to go up from here. If it's going up and it's not sustainable, it's going to go down at some point. And the part where he decided to de-escalate
is the part where he's ready to make a deal. At that point, he's going to, I think the end game is for him to seek negotiations with all trade partners where he kind of like face one deal with China, except with everybody, including EU. Because with EU, as John said, there's no border. It's not a national security issue. It's more of a commercial issue. And Trump had the same attitude toward EU in the first trade war. He did not change at all.
He picked on the same type of sectors and the same countries as he did in the first trade war. I think there's another thing at play here, which we need to think about, and that is that he doesn't yet have his economic and trade team in place. And that the advisors who were in the room with Donald Trump as he marched towards these tariffs actually
at the weekend were those, his most hawkish advisors, Peter Navarro, Stephen Miller. That's what we've been hearing. And these are the people who are true believers in tariffs and play to also to the impulsive side of Donald Trump, to that kind of
testosterone-driven, you are the strongest man on the block, you know, make them bend your way. And by the way, these tariffs are great. These are magical tools that will bring manufacturing jobs back to the United States, which, by the way, the data doesn't show actually happening in the first Trump administration. And he doesn't yet have in place...
Howard Lutnick, his Commerce Secretary, who, when he nominated him, Trump said would be leading his trade and tariff strategy. Scott Besson was strangely absent from the conversations about this over the last few days. And his trade representative, Jameson Greer, this is your trade negotiator. This is
Your tariff lawyer hasn't yet had his confirmation hearing. I disagree, Sean. I think if the trade team were better in place than what we see right now, he would have gone even more hawkish. I think the lack of staff in the USTR right now is actually impeding the implementation of tariffs. It could have gone faster, but—
On the other hand, I think that the lack of voice coming from Scott Besson in this round is traced to what happened with that Washington Post leak a couple of weeks ago. That was the one saying it was going to be phased. And yeah, there was pushback from that from the White House. Right. When I saw that leak, I thought that these trade moderating influence like Scott Besson and Kevin Hassett must be losing ground.
But that's really interesting in the context of Trump's broader goal, which is to bring about this economic golden age in America.
The reason Scott Besson would want to phase in any tariffs is because he would want to moderate the impact on the U.S. economy, spread it out over time. And because he sees restoring growth or boosting growth in the United States as a key element. It's also, you know, we get back to the revenue piece. Scott Besson has talked about using tariffs to offset growth.
tax cuts, raising a trillion, maybe $2 trillion over 10 years from tariffs to offset the $4 trillion plus costs of extending the 2017 tax cuts.
If you don't have a methodical plan, and they actually did lay that out on day one in the executive order that Trump signed, in which he ordered up all of these reports setting an April 1st deadline and really ordered up this, let's go out there and study and come up with a plan. And he literally ripped that up when he threw out these tariffs on Canada, Mexico, and China.
Sean, you made a good point earlier that although we've maybe missed something quite important with the across-the-board 10% tariffs on China because of all the fireworks over the much bigger threat that was then withdrawn against Canada and Mexico, the 10% tariffs potentially do fit in the approach that
to this strategy, which actually the President Trump outlined to our editor-in-chief last summer. When faced with exactly the tension that you raised earlier, Sean, that if you want to change the trading system, you're not going to raise money because importers will have moved to the US. So you don't have, or the production will have moved to the US. So then you stop making money if you've successfully changed the economy. And he said, very interestingly, he said, well, there's some things where you just have a low tariff and you're raising money.
but you don't change behavior. And then other things where you really just want to bring the production back to the US, you have very high tariffs. But with these 10% tariffs, if that's the case, on that approach, President Trump is willing to have a lot of US consumers and US companies lose out and pay quite clearly those tariffs. This weekend, we had what was, I think, a
perfectly sensible change to reduce that or get rid of that de minimis exception from tariffs, which had provided such a capacity for Temu and Sheen and other Chinese producers to send goods sort of under the radar to the US. It was $800 ceiling on sort of tariff-free imports.
if you're there'd be a lot of Trump supporters who are buying a lot of things from Sheen and Timmy who are going to see that instantly and that doesn't feel like that's going to go away and equally there's a lot of importers who are going to be paying these tariffs I mean he's he wanted to create the external revenue service to create this to collect the tariffs because we all know they're paid by US importers not by the other countries so
Anna, have you sort of changed your view on the costs that the political blowback that this president might be willing to take?
Yeah, so I see, you know, the 10% universal tariff on Chinese goods. So that now covers the list 4A and 4B in the first trade war, which is comprised mainly of consumption goods. In the first trade war, the Trump administration largely spared the Chinese consumption goods.
But basically, effectively, this 10% raised the list for a back to the pre-phase one. Can we translate that? He's imposing it on consumer goods.
in a way that they didn't in the first administration. So in the first administration, he left the consumption goods from China intact until spring of 2019. Then he created two lists, 4A and 4B. And these two lists, he planned to slap on 15% on list 4A, which is like a couple hundred billions of Chinese consumption good. And he did it.
And then immediately what you saw back then is that the economy started slowing very visibly.
Fixed business investment immediately started falling and manufacturing employment immediately started falling. And this was after that 4A list. And then that was in the de-escalatory phase of that first trade war. I think that we're going to start seeing the impact on investment primarily in stock market once that 10% Chinese drop.
trade tariffs start to be in effect in the next couple of months. And just to put that in context, that kind of list 4A and 4B from the first Trump administration, we're talking about smartphones, we're talking about toys, we're talking about furniture, we're talking about all of the cheap stuff from China that Americans really buy, right? And to be clear, that trade, is that made uneconomic by 10% or is 10% low enough for it to continue but just be more expensive?
Probably low enough for it to continue. Yes. I mean, the trade elasticity between U.S.-Chinese trade flow is approximately, by my estimation, 1.5 to 3, which means that a 10% increase in tariff will reduce trade flows by either 15% to 30% over time.
Okay, last question to you, Anna. We're amazed it's taken us this long to get to the Fed for any Bloomberg podcast. I mean, it's pretty much mandatory that we have to talk about the Fed at some point. Why?
One of the things that was said over the weekend is whatever happens, this puts pay to any idea that there's going to be any interest rate cuts from the Federal Reserve this year. And if anything, they're going to be more concerned about inflation looking going forward. What's your take on if you just say we've now got a lot of we got more uncertainty than we thought and maybe some new theories about what's going on with inflation?
Donald Trump's trade policy. What are the Fed thinking, Anna? I think in the Fed, you have Powell and the others. And from the past two press conferences, I've heard that Powell, in fact, is a very...
has reviewed, has a very good grasp of the objective findings in the trade literature, which is that, number one, it matters how broad these tariffs are, what goods are going to be tariffs, how much retaliation there's going to be, and there's just not enough information on that. However, within the Fed's arsenal of economic modeling tools,
they could see two outcomes from trade war. First is either the burden of the trade war will show up in inflation, as higher inflation. That's what...
But obviously, everybody automatically defaults to the view. However, the second view is that if the adjustment turns out to be through squeezing profit margins and the impact on our trade partners like China, EU, and Canada, Mexico, turns out to be more dire than
But then the impact on us, then the global manufacturing cycle would slow. And ultimately, the burden of the tariffs would be not showing up in higher U.S. inflation, but rather in lower real income through lower employment and lower wages.
And so I think that the Fed's optimal response really depends on which of these two economic outcomes prevail. Obviously, if inflation spikes, then the Fed will have to, you know, keep rates on hold or even hike. However, I don't think...
That's not my baseline. Because in order for the economy, the inflation, to rise by that much in response to tariffs, you basically need to have inflation expectations be unanchored. And even at the worst of inflation in 2022, Powell was adamant that all the market indicators
The monitor suggests that inflation expectations are very well anchored in the U.S. In the past press story, he also mentioned that through anecdotes and discussion with firms, all the firms are telling them that they have no pricing power. So how is it that the tariffs could be completely passed through to consumer prices?
So that leads to the second most likely outcome in my point of view, which is lower real income over time. And the optimal Fed policy in response to lower real income and higher unemployment rate is actually to
lower Fed funds rate. And I would just point out that we have, and a lot of Fed policymakers were there in 2019 when they faced the first Trump trade wars and the impacts. And we spent some time looking back through the transcripts of those meetings, which were just released in January. And one of the things you see is the policymakers'
focusing on a collapse in manufacturing employment, a fall in industrial production, a stalling in business investment in the United States, and then this impact of uncertainty. And that leads to a slowing economy in 2019. And in 2019, the Fed started cutting rates and actually went on to cut rates three times.
And that goes to the point that he might think it's good news to have lower rates, but not if it's for the wrong reasons, in his view, not the economic weakness. Well, thank you very much, guys. I sort of feel like Trumponomics sometimes is more on the Trump and more on the politics. We've had some real anomics in this episode, which I quite appreciate, thinking about the models for what's going on. I think we're still stuck with...
The fundamental question, does Donald Trump really want to change the global economy or just like the real estate developer that he is, extract the maximum financial return from America's prime real estate within it? Whatever he's trying to achieve, we want to think about what economic costs might be occurred along the way. And I suspect both of you will be back to help me answer that question. But in the meantime, thanks for listening to Trumponomics. It was hosted by me, Stephanie Flanders, and I was joined by Anna Wong and Sean Donovan.
Trumponomics is produced by Samar Sadi and Moses Andam with help from Chris Martlew. Sound design by Blake Maples with special thanks to Bloomberg, Cale Brooks, Amy Morris and Nathan Hager. Brendan Francis Newnham is our executive producer and to help others find this show, please rate it highly and review it wherever you find your podcasts.
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