Why Tariffs Can’t Fix America's Economic Malaise
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Bloomberg Audio Studios. Podcasts. Radio. News. I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and 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.

And this week, we have something slightly different, a conversation with Richard Baldwin about his new book, The Great Trade Hack, how Trump's trade war fails and the world moves on.

Richard is a professor of international economics at the IMD Business School. The Financial Times once called him one of the most important thinkers in this era of global disruption. And listeners to previous iterations of this podcast might even remember that we've talked to him before as one of the people who has researched and written most deeply about the changing nature of globalisation and trade. And his latest book,

An e-book published by the Centre for Economic Policy Research, as you gather from that title, turns its hand to what Donald Trump is doing or not doing to the world of international trade and what it means for all of us.

As an economist, Richard's joining the long list of economists who believe the protectionism of the Trump administration is not going to fulfill its objectives. But I think what's distinctive is he also delves into the political economy of Trumponomics to explain why it will still continue, and then also thinks about how the rest of the world will engage or should engage with the US as it's part of this grand Trumponomic experiment.

All of which did seem like it was worth a conversation. And I should say, probably full disclosure, the other reason we're doing this is so we could record it today, Friday 23rd of May, ahead of the holiday weekend in the UK and the US and ahead of me going off on a week's holiday. Richard, thank you very much for joining us. It's a great title. What's the Great Trade Hack? Thanks for having me, Stephanie. The hack is...

What Trump did on April 2nd, that was an historic moment. It wasn't an attempt to revise or reform or negotiate anything.

It was an attempt to break through the firewall of the world trading system and disrupt the way it runs, with tariffs that were big, bold, and everywhere at once, violating most WTO rules in one fell swoop with everybody, breaking every trade agreement the U.S. had ever made with anybody, anytime. This wasn't your normal trade war. It looked a lot more like a war on trade.

And that's why I think of it as a hack rather than a beginning of a war or a reform or an effort. It was really one man trying to hack the system. What are you trying to get across intellectually and as an academic when you talk about a hack? I think it's important to distinguish this from other things. For instance, anything to do with the dispute between US and China. And also, it's entirely different than

than what he was doing between his inauguration and April 2nd. Those were piecemeal tariffs, totally in the line of the kind of thinking that many countries get. They're unfair. I'm going to put tariffs on. Then we're going to negotiate. We'll come to a better deal. This thing was completely different. He's trying to change the way

the world works in terms of fair and reciprocal trade in his own mind and reverse the victimhood that he believes and is at least selling politically that the US is facing. You talk about the grievance doctrine as what explains this policy. We've heard a lot about grievances from him, but briefly, what are you thinking about there?

Well, I think many economists around the world and political scientists slapped their heads when they saw this thing. It's like, what is he trying to do? And then it goes up and it goes down and there's this and it's that. Oh, it looks like he's negotiating himself. It looks kind of crazy. It looks chaotic. What I was looking for some sort of coherence. If you read the introduction to the U.S. trade agenda report for 2025, he pretty much lays out this idea

grievance doctrine, which has an origin story of America used to play by the rules and they got played. They were ripped off by globalist elite abroad and globalist traders at home. And it was the middle class who paid the price. And what Trump was doing on April 2nd was payback. So it's like

That uncomfortable uncle you sometimes have at a family gathering who lashes out and says the most outrageous things, upsets everybody, although there's a few people in the room who said, yes, those things needed to be said. That's what these tariffs are. It is not justified on economic analysis or clear thinking about what's going home. I think it's not a million miles away from what drove Brexit.

that people were angry with the way things work and they struck back by voting for something that they thought would be very upsetting to the globalist elite who they feel have rigged the system against them. Trump's tariffs are economically incoherent but emotionally coherent and this grievance doctrine that I have called it is a mythic tale that comes with a moral and a mission. And you can interpret

the nature of the tariffs and his treatment of them afterwards in the negotiations with countries as following his grievance doctrine, not any very clear economic analysis. But you yourself have written about the structural changes that have happened in the global economy and what you call the twin bombs of globalization and automation that have had profound effects for many American workers. So

It's not as though you don't think there's any there there in terms of the grievance. It's just that this is not the right solution. Is that right?

Absolutely. So America's middle class is in terrible shape. I mean, we have opioid deaths like the world's never seen. We have an obesity epidemic. We have frequent school shootings. We have a fall in marriage, fall of birth rates. White young men are killing themselves in numbers that aren't seen anywhere else. There's social pathologies going on in the middle class, which are just absolutely off the chart. Something must be done.

But what Trump has decided to do about it, tariffs, is most definitely not that something. In the book, I argue that we need a social policy, maybe like Canadian social policy that would actually help the middle class. But it is a problem. And this is, as I say in the book, it's a placebo for policy in lieu of real medicine that would help them.

So why is this not the right solution? What can he achieve with these policies that would actually support his objectives, if anything? Well, I think basically nothing. So let me go through. For example, if you look at the U.S. trade agenda document, they're essentially listing three things they want to do with these tariffs. First thing is to redress the trade balance.

The second is to re-industrialize America, bring the factories back. And the third is to help the middle class. And his tariffs will do none of those things. Let me take them one at a time. So first of all, it cannot help the middle class. Tariffs are only put on goods. And tariffs can protect workers who are in goods-producing sectors. They don't always, but at least there's a possibility that they can protect their jobs and maybe keep their wages from falling.

but only less than 10% of the middle class works in goods-producing sectors.

And for the other 90% who work in service sectors, Trump's tariffs are simply raising their cost of living. So in fact, rather than helping the middle class, it will probably hurt it subtly. It'll show up in terms of slower growth, inflation, and undermining the cost of purchasing. Now let me take the second one, which is closing the trade deficit. This is a long, widely held, mistaken belief that tariffs can fix the trade deficit.

But I think I've found why people believe it and why it's hard to explain. Now, you and I go to the shop and we see the price of, say, domestic beer and imported beer. And if the price of imported beer goes up, we tend to buy a little more of the domestic beer. So in our everyday lives, buying fruits and vegetables, meat, fish, beer, we look at the prices and we're shaped by things like tariffs. We can imagine how that would make us buy less.

And then without thinking about how the whole thing adds up, you go, well, therefore, if you want people to buy fewer foreign goods, you put up the price of foreign goods. The trouble is when you think at the economy-wide level, when you think about everybody buying everything at the same time, there's a different way to think about the deficit. And that is the U.S. has a trade deficit because they spend more than they produce.

And if Americans spend more than they produce, they have to run a trade deficit. There's no way. The spending can't go anywhere else. So unless they either reduce their spending or increase their production, they cannot close the deficit. Now, tariffs cannot really affect anything.

the spending unless it induces a recession. And even then, that's temporary. And because the U.S. is at full employment, the tariffs won't increase the production. If anything, it would mess it up. But in any case, primarily, it will have no effect on production and very little effect on spending. So tariffs will not close the deficit. Now, the reason it works out is because the tariffs change the relative price of imports and exports, but the dollar can offset that.

So unless they fix the economy-wide problem, they are not going to fix the deficit. Now let me take the third one about reindustrialization. Reindustrialization using tariffs is something people have been trying for literally a half century. It doesn't have a name. It's called import substitution industrialization. And the idea is you protect your local market to encourage local production.

First of all, that did actually work up until 1995 with the offshoring and outsourcing thing where global value chains changed the whole proposition. So, for example, the U.S. in the 1800s did industrialize behind high trade barriers, this time protecting against British goods. So it's not like it's never worked. It just doesn't work anymore. Now, the problem is that to bring back these factories, the United States needs world-class infrastructure.

It needs a world-class workforce who are willing to work in factories and able to run the sophisticated machines that are now part of manufacturing. And it needs engineers

investment that's coordinated and long-lasting. These are 10-year plans. You don't just set up a bakery shop and call it an industry. This requires a whole ecosystem, an industrial base, to develop. That can be done, but it takes a decade at least, and it would involve a bipartisan consensus, lots of subsidies, changes in laws to convince private firms that this is for real and they should move back.

And the tariffs, especially the one Trump is talking about, are most definitely not doing any of those things. Imagine the scenario that we're kind of seeing now, which is we had April 2nd, Liberation Day.

crazily high to most people's eyes. Tariff rates also kind of randomly generated and a lot of noise about trade deals. And we're talking today on a day that Donald Trump seems to have talked about potentially a 50% across the board tariff against the Europeans. He's talked about even higher numbers for China in the past. And yet, once we see the economic consequences or even begin to see the economic consequences, he's tended to step back and

and we've had these pauses. And I think the assumption that many people would now make is, yes, we will end up with maybe 10% tariffs on all goods and a higher effective tariff rate between the US and the rest of the world. That will definitely reduce trade, maybe quite significantly in the case of China. But we're not headed down that full path. We're just on a path where there's going to be more kind of grit in the wheels of global trade. Is that

necessarily the end of the world, Richard, if you're sort of thinking about it from a sort of historical perspective? It could just be a bump in the road. I mean, let's put it this way. If it was a 10% across-the-board tariff on everything...

The first point is that the US dollar would offset part of it. What we know from long experience is that very big changes in trade policy lead to changes in the exchange rate. But what we had talked about was a dollar appreciation, exactly. And I have this in mind partly because J.D. Vance, the vice president, has done an interview for a commentator in the New York Times. And he makes this point that actually it shows that economists get things wrong because absolutely everyone predicts

that if you have a higher tariff, you get an appreciating currency. And in fact, one of the most striking things that happened that has not really changed in direction in the last few months as these tariffs have been introduced is that the dollar has fallen. So we don't know that that universal economist...

view is actually going to be borne out. Not yet, anyway. Let me add on a parenthetical statement about whether it's true or not. The closest example was when during the 90s, many developing countries systematically lowered their tariffs from like 60% down to 9% or 10%. And so that was essentially the opposite of what Trump did. And instead of their currencies appreciating, they've depreciated.

So there's wide experience of massive changes in trade policy leading to offsetting long-term exchange rates on the import side as well from all the emerging markets who essentially unilaterally lowered their tariffs in the 90s.

The dollar's not going up. The one thing it has not done in the last six months is the dollar has not gone up. Absolutely. So I'm not defensive. I want to explain that. So the exchange rate, like the dollar, is two things. It is a financial instrument on which there's enormous amounts, trillions of dollars of arbitrage every single day.

Now that arbitrage is primarily driven by interest rate differentials and expectations of interest rate differentials. One of the times where the dollar depreciates quite reliably is if people think the U.S. is going to go into recession, which means the Fed is going to lower interest rates or not raise them as much, and therefore the dollar becomes less attractive. So right now people move out of the dollar. So I think what we're seeing now is certainly a lot of

anticipation of a lower path of interest rates for the dollar than people would have thought because of the recession that the tariffs are going to introduce.

The second point is, and this is unusual, is that Trump and his administration are systematically undermining the value of the dollar as the world's reserve currency, threatening all sorts of crazy things. People were wondering, is the U.S. actually as reliable as they used to be? This level of rule-breaking and carelessness for the system undermine people's trust.

Now, the other thing that's going on is we've recently seen, just with the House passage, is the U.S. has no plan to close their deficit ever. And they're running 6%, 7% deficits every year with no plan to change it. And there's no political landing path you can see in the United States where they're going to either raise taxes or cut spending sufficiently for this. Moreover, as the interest rates go up on yields,

That means more and more of the current budget will be to pay off the debt. And just recently, with the 10-year bonds going up, the U.S. is now spending more on financing its own debt than it is on its military. So this is something that people are starting, you know, a long ways down the road. What's going to happen is not that people will leave the dollar, but they'll require higher premium. None of these things have to be dramatic. If most people

big money funds in the world decided to put two percentage points less in the US market than they had before, that will lead to an outflow, which will lead to a depreciation of the dollar. So I think what we're seeing is short and medium term things overwhelming the long term things. And in any case, I wouldn't expect the long term things to submit themselves immediately, because as you pointed out, we don't know where this thing's going to land. I guess one could still come away with the idea that

Whatever dollar rise you have associated with the tariffs could be drowned out by some of these other effects, given that there'd been such a move into the US assets in the past. And as you pointed out, it doesn't take much if people start to just adjust at the margin. One of my favorite quotes on this is that the long run takes longer to come than you would have ever thought it would. But when it comes, it comes faster than you could ever have expected. Yeah. Yeah.

Yeah. Slowly and then people go bust just slowly and then suddenly. Yeah. So we don't know, as you say, we don't know where this is going to turn out. And we certainly don't know that the US will continue with the sort of most dramatic version of this war on trade, this trade hack that you've suggested. But you also have highlighted the kind of underlying political reasons for

the trade hack, the grievance doctrine. And it doesn't seem like that's going to go anywhere. President Trump seems pretty committed to that. So I guess one of the questions that anyone would have and that you start to answer in your book is, what happens to globalization? What happens to the global economy in the meantime, while the US is engaged in this big experiment? Let me take the first point, which I think is really important. I hope people will take away from my book.

is that U.S. protectionism is now permanent. It's here to stay. It's not new, and it's not going away. So this narrative that the system is rigged against us started with the Great Recession, and starting from Obama onward, the U.S. political elite blamed globalization. They found that very convenient. So Obama immediately suspended all the trade agreements that Bush Jr. had started, and there were lots of them,

And he became trade hesitant. He was there for eight years and that hesitancy kept up.

Then, of course, Trump came and trade hesitancy turned to trade hostility. And then when Biden came, it just turned back to trade hesitancy. So really going back to 2008, the U.S. has not been the leader of the system. So it's not new. And the reason was, is because the suffering of the middle class, if you will, was something that was going through. They did not want to raise taxes or increase the size of the government in order to actually address it.

And as a consequence, they use trade as a scapegoat. So this anti-trade element is in there. And the U.S. is now on a kind of looping GIF of protection. They've got the malaise of the middle class suffering, leading to the need for a solution that

where anti-globalization becomes that solution at bigger or lower levels, those solutions don't fix the middle class problems. And so they have to keep, again, being protectionist.

So Biden, for example, had a worker-centric trade policy, which meant no trade liberalization. If Harris had won, she would have kept that up. And whoever comes after Trump may be a lot more polite and diplomatic, but they certainly aren't going to start signing free trade agreements. So I think we have to get used to a world where the U.S. has left the stage as the leader of the world trading system at the very least, and maybe more broadly.

While the US is engaged in this grand experiment, or not so grand experiment, what happens to the rest of the world? How do you see...

the global economy, the pattern of global trade panning out. So let me start with the worst case scenario, the sort of ones that we should be panicked for, even though I don't think it's very likely. The last time the U.S. was this irresponsible on trade was in the 1929 Smoot-Hawley Act, which led to retaliation cycles outside the United States. U.S. was actually much less important in the world economy back then.

But those cycles of retaliation led to a collapse in trade, which made the Great Depression bad. That's what we have to look for. What could trigger retaliation of non-U.S. countries against other non-U.S. countries? It's given that the U.S. is going to be more protectionist and it's given that other countries will be more protection against the U.S.,

But the U.S. only accounts for about 15% of world trade. And what really matters is what the other 85% do. In the book, I talk about a few scenarios. The one that's most likely is sort of messy multilateralism going forward. And that's what we're actually seeing.

So there's two elements of it. We will see more protectionism. I call it cascading protectionism. So this was a recent example. The U.S. put up 100% tariffs on Chinese electric vehicles.

And then those diverted somewhere else. Canada then put up 100% tariffs and then Europe put up 100% tariffs. So that's called trade deflection. Now, so far, those tariffs have been done on WTO compliant basis. WTO allows people to put up tariffs against imports or just like that, but it's disciplined and it's explained. And as a consequence, it rarely triggers cycles of retaliation. The second is the liberalizing part of it. And in

And in fact, even since April 2nd, we have seen, especially, I mean, with the UK, three major trade deals done in part because the exporters who used to sell to the US are pushing their governments to get better access to other markets. So we're seeing things like the UK-India deal, which was a long, long running thing, finally get closed because everybody wants to replace the US markets.

But again, those are WTO compliant. So what we're seeing is more WTO compliant retaliation, more WTO compliant liberalization. And we muddle through where the whole rest of the world at least pretends that they're following the rules. And that I think is most likely. The other one, which is a little scarier, is that we get these fighting trade blocs.

And the trigger for that is, it's already out there, is China, the UK-US deal promised indirectly and obliquely to cut China out of the supply chains of the goods which are going to the US. And China said, that's not okay. And they threatened retaliation to any country who agreed to things that were anti-China.

So that's the beginning of trade blocs fighting, where China says, you have to be with me or you have to be against me. The U.S. says you have to be with me or against me. We start, the European Union might end up with that. So that's the worst, that lots of people start violating WTO rules. It's not just the U.S. And it turns into this fragmented world of free trade blocs, U.S., EU, China. And that would be a very bad world.

The last one, which I think is most hopeful, is re-globalization without America. So this is the analogy. So just take countries like India and China, many decades after World War II, lived in splendid isolation. They bought almost nothing from the world. They exported almost nothing to the world. And the whole rest of the world did just fine without them.

Now, when these over 2 billion people opened up, the world was a better place for them and for us. But the world does not actually need the U.S. market to thrive.

So if these ideas that we start going back to signing big regional trade agreements and liberalizing among the rest of the 85%, I can see a future where the world moves on from the U.S. protectionism. The U.S. closes itself off for political reasons. Isolationism, as you well know, is a very long tradition in American politics.

especially on trade. And the rest of the world essentially continues on with liberalizations based on mega regional agreements.

There's so many things there and we're going to run out of time. So I just very briefly, if you were giving advice to other leaders, some of the countries that are trying to negotiate with Donald Trump, but also navigate a world with Donald Trump in it, doing all the things he's doing, you know, what are your kind of top tips for people sitting in chancellories and finance ministries thinking, how the hell do we deal with this?

Yeah. So there's two questions there is one is how do you deal bilaterally with the U.S.? And the second is what to do to prevent this from becoming another 1930s. So let's go with the first advice. That is negotiate. Don't retaliate. There's really only the European Union and China who have the might to stand up to the arm twister that the United States has become.

and China in particular, since the U.S. is so dependent on Chinese intermediate inputs in their entire manufacturing base. Europe less so. But in any case, they're big enough to take care of themselves. They're large closed economies, and they can deal with loss of sales. The rest of the countries can't and shouldn't. And in any case, all they would do is make them mad.

The second bit of that is that what Trump is looking for because of the grievance doctrines is things that make him look like he's winning, like he's redressing the problems with the unfairness of the trade system. So what he wants is happy headlines. He wants to be saying Trump is winning again on trade.

moving this rigged system to something that's fairer and more reciprocal. And as long as those headlines can be generated, the details do not really matter. And if you look at any of the agreements, they're not signed because they're really just press releases, sometimes joint, sometimes not. And those are really just generating happy headlines. And that's really what he needs. So don't make him mad, give him happy headlines and definitely don't retaliate. That's the vice. Now, to keep things

on an even keel. We can defend the rules-based system simply by following the rules. So if the rest of the 85% do their tariff, their more protection, their more liberalization, which they will do because this is like through a great big rock in a pond and the waves are coming out, they will, as long as they do it with a WTO-compliant mechanisms, and there are lots of them to do that with, then the system would be okay.

Things could evolve inside the U.S. where they change, but if they don't, then the U.S. is more or less shutting us off from the world and the rest of the world moves on. So that's the main thing is to defend the rules by following the rules. How much of this can be undone by another administration? Or is this a case? Or are there some things you would identify that, you know, once broken, they're just never going to be put together again?

Well, never is a long time, but I think the key phrase that my father always used to tell me when I was a young man is trust comes on foot, but leaves on horseback.

And that's what we've seen. Trust in America has been eroded in the last six weeks in a way that is incredible. And people used to view the U.S. universally regarded as a steward of the system. Now the U.S. is universally regarded with suspicion. It's not just one man. The guy got reelected

saying he would do all these things and people still elected him. Moreover, I think we're in a situation now where if somebody stood up and ran for president saying, I'm going to undo all this stuff, I'm going to take the blame on America, we're not going to blame the foreigners anymore, that would be political suicide. So they aren't coming back.

So I really think our grandchildren will study this episode, April 2nd really being very different than what was before, as the beginning of the post-American leadership era. I think that the trust of America, especially in economics, has been fundamentally undermined. We've seen it on trade enormously. It's slipping on the dollar and relying on the U.S.'s reserve currency. Moreover, and in terms of military and security, it's

Things that this Trump administration has done, for instance, in Ukraine, threatening to withdraw support for reasons that don't really seem like long-term steady allies. I think the fact of the U.S. leadership being dominant is over. Just for example, the whole discussion on Middle East, it didn't work out, but that was held in Saudi Arabia, not Camp David.

And we're in a world now where the US is no longer leader. So I think that is not going back. I just wonder whether we're being a bit schizophrenic about this, because on the one hand, we tend to say, or many of Donald Trump's critics, and certainly some of what you've said today, is this is a fundamental breaking of the system. It's very damaging. It undermines America's position. There's no going back. This is going to be a fundamental shift of regime. But on the other hand, we tend to say, or a

or a lot of people, some of the same critics will say, he will balk under pressure. We've seen pauses. Once there will be real economic harm to these policies, and then as a result, he will back down. And we've seen signs of him backing down. And April 2nd, yes, if implemented, would be enormously catastrophic. But in fact, I mean, April 2nd was almost immediately put on pause, all of those crazy tariffs. And even...

In the end, this will be a much smaller change than people are arguing. You can't argue it both ways, that it's going to be sort of he's going to give up and it's going to be feeble, but it's also going to be studied by our grandchildren and our great-grandchildren. Let me put that in perspective. First of all, you've probably heard of this taco trade they're talking about in financial markets, which is Trump always chickens out taco.

And that's the idea. The key is, is Trump is not dogmatic. He's pragmatic. And he really believes America has been ripped off by the system. He even talked about that in 1980s when he was a private businessman. So he fundamentally believes that and he fundamentally he's fixing it. But he's very flexible. He believes he's strong by threatening and he's wise by showing flexibility.

But the whole point is that they have completely ripped up respect for the rules-based multilateralism and turned it into U.S. thinking they can do whatever they want on pretty much anything, whether it's the dollar or it's the debts and deficits, whether it's on the tariffs. America is no longer acting in this enlightened self-interest way, and that enlightened self-interest leadership is what's ended. So it's not so much that we're going to tip into the next revolution

1930s. It's more like the interregnum between when the UK ran the world and when the US ran the world. Pax Britannica to Pax Americana. There was a time in between where it wasn't clear who was running what. And I think that's the kind of era we've shifted into now. But also, I don't think there's anybody who can take the US leadership. They're not like UK steps down, US was right on the horizon. China can't do it. EU can't do it because they're not a thing.

So I think we're kind of moving into a very, very different era, what Ian Bremmer calls the G-Zero world, where there's no clear leader on the whole, no clear hegemon, and we just have to muddle through. But in any case, it's the beginning of a completely different era. And I think that is absolutely true, even if the tariffs he actually does don't cause a Great Depression. Richard Baldwin, that's a great place to end. Thank you so much. Thank you.

Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Professor Richard Baldwin. Trumponomics is produced by Samar Saadi and Moses Andam, with help from Chris Martlew and Amy Keene. Sound design is by Blake Maples, and Brendan Francis Newnham is our executive producer. Please help other people find the show. Just rate it very highly and review it wherever you listen to your podcasts.

Thank you.

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