Is This the End of Globalization and Free Trade?
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 519. It's titled, Is This the End of Globalization and Free Trade?

Last week, the Trump administration announced a massive expansion of tariffs on imports to the U.S. The scope of these tariffs was much greater than financial markets anticipated. U.S. stock market dropped over 10% in two days. The VIX volatility index, the implied volatility priced into the S&P 500, soared to over 45%.

Back in late January, it was at 15. When markets fall, crash, and some extent 10% drop, volatility spikes, that causes hedge funds and other investors, algorithms to start selling because there are margin calls. So they're reducing risk, reducing leverage, and even safe assets can get hurt. Last Friday, the 10-year treasury yield jumped 15%.

0.19 percentage points, the biggest daily increase. The yield goes up, the value bonds fall, the biggest since September 2022. 30-year treasury yields jumped 0.21 percentage points. That's the biggest move since March 2020.

In episode 515 and 516 of the podcast, we described what the Trump administration wants with these tariffs. Why are they doing it? We quoted U.S. Treasury Secretary Scott Besson and Stephen Moran, the chairman of the Council of Economic Advisors. They want a narrower trade deficit, more exports, fewer imports. They want

A lower capital account surplus, a drop in the amount of investment flows coming into the U.S. They would prefer a weakened dollar so that U.S. exports are more competitively priced. They want more manufacturing in the U.S. President Trump's senior counselor for trade and manufacturing, Peter Nielsen,

Navarro reinforced those points in a Financial Times editorial this week. He pointed out that the U.S. cumulative trade deficit in goods from 1976 to 2024, that transferred $20 trillion of American wealth into foreign hands. In other words, $20 trillion aggregate trade deficit is the mere image of $20 trillion of capital

capital that foreigners had to purchase U.S. assets. He writes, foreign interests have taken over vast swaths of U.S. farmland, housing, tech companies, and even parts of our food supply. If we look at the trade deficit of goods and services as a percent of GDP, it's generally been around 3% of GDP. Currently, it's 3.1%. It's actually wider now than it was when Trump

initiated tariffs in 2018. One of the things the Trump administration finds frustrating, and Navarro mentions in his editorial, is the World Trade Organization's, WTO's, most favored nation rule. It requires member countries to apply the lowest tariff they offer to any one nation that's part of the WTO. And so if a country on average has higher tariffs than

And the U.S. is applying a lower tariff because it has to honor this most favored nation status. Now, U.S., the MFN tariff is 3.3%. China's at 7.5%. Thailand and Vietnam are near 10%. Navarro points out with India at 17%. I pulled up, and I'll link to it, some World Bank data. The highest most favored nation average tariff

is the Bahamas at 31.5%. Bermuda's at 23.4%. Sudan is at 21.8%. I mention that because estimates, and this is from Capital Economics, that if these new U.S. tariffs are applied, they're not lowered, the average tariff rate in the U.S. as of April 9th will be 24%. Clearly,

close to the highest in the world. Now, there are places where the tariffs are even lower than U.S. at 3.5%, Canada's at 3%, Australia's at 2.4%, and Hong Kong's at zero. Now, the administration isn't just frustrated at the level of tariffs, but they believe there are non-tariff weapons that other countries use to

As they say it, or Navarro says it, strangle American exports. And he lists out currency manipulation, value-added tax distortion, dumping export subsidies, state-owned enterprises, IP theft, discriminatory product standards, quotas, bans, opaque licensing regimes, burdensome customs procedures, etc.

It's somewhat unbelievable the size of these tariffs, 24%. That's higher than the tariffs back in the 1930s. Now, our question is, is globalization done? Globalization remains near an all-time high. And when we talk about globalization, global connectedness, certainly trade,

goods and services is there. And the flip side of trade, capital, investment flows, but also information. We're connected globally through information and then people, people traveling to places, living in other nations, sometimes legally, sometimes illegally. But all this is flowing together, the trade, capital, information, and people. And the indexes that I looked at, such as the DHL, Global Connectedness Index, it shows the

an increase over time, going back to 2000. Now, it peaked in 2022, and it's kind of plateaued since then, but the world remains very connected. And these trading relationships are complex. In many regards, they are bottom-up. It's given example back in episode 212, when we talked about trade and trade wars. And I

referred to a quote by Karl Popper in his book, Objective Knowledge. And he talked about how an animal path arises in a jungle. Some animal may break through the undergrowth to find a place to drink, and then other animals find it easier to use the same track. I used to do that when I cross-country skied. Much easier to cross-country ski where somebody's already broken through the snow. And Popper mentions how then the path gets widened and improved.

by use. And that's how the global supply chain arose. It was little by little, layer by layer. And the system that we have has been in place for decades now. And these complex trading relationships have been in place for decades. The movement of goods, exchanging services, the information, the capital. Now, with the tariffs from 2018 and

This is from DHL. The amount of trade and capital and information flows from the U.S. with China has fallen 25% since 2016. But the share of world merchandise trade between the U.S. and China is 2.6%. It was 3.5% in 2016.

So over 97% of trade in the world doesn't involve the U.S. versus China. U.S. total consumption in the world is only around 17%. So there was a lot of these trading paths and connections that don't involve the U.S., which now will have one of the highest tariffs in the world.

Trade has been good for the global economy. It has built wealth due to increased productivity. Many countries

They're more productive at building things. Often they move faster, their use of technology, but oftentimes the costs are cheaper. And if we can look at the amount of wealth per capita, so this is GDP, the value of output per person comparing 1991 to 2023, the largest increase was China.

as it has been the biggest beneficiary of global trade. And it increased 8.2% per year wealth per capita. India also increased, not as much, 4.6%. Surprisingly, Mexico, even though their trade with U.S. has expanded greatly, GDP per capita only rose 0.7% per year over the past 32 years. The U.S. was at 1.7% per year

Per capita GDP went from 38,637 to 65,875. U.S.'s per capita wealth is significantly more than China. The world overall saw its per capita GDP rise 1.7% per year over the past 32 years. Trade has contributed to that. Now, there's argument as to who has benefited the most –

Economist Joseph Stiglitz has pointed out for decades that there are winners and losers with globalization. And the idea of globalization is that there will be more winners, that the winner's gains will be enough to compensate those that lost. But there's some disagreement in that because wealth inequality has increased income inequality, some argue that most haven't benefited from that.

from the rise in global trade. And some statistics in the U.S., as I mentioned, per capita GDP increased 1.7% over the past three decades, but real median income only increased 0.8%, and the real median weekly earnings increased 0.5% per year. Navarro, in his editorial, suggested that this real median weekly earnings basically have stagnated.

There's a lot of disputes about the accuracy of that data. There's a report by economist Bruce Sacerdote. This came out in 2015. And he pointed out there's a difference between income inequality and consumption inequality. And he suggested, and his data suggests, that poor households in the U.S., those in the 25th percentile and below in terms of household income, they're able to consume more.

because prices are cheaper. His view and others is that inflation is overstated. Now, we've done episodes about how some believe inflation, the official numbers, the Consumer Price Index, aren't high enough. And calculating CPI is not easy because you have to do estimates for quality improvements, for substitutions over time, the reference basket changes,

over time. It's trying to measure a cost of living index versus just changing prices. But some believe that inflation is actually lower than the official number, which means that the median real income is actually higher. And reasons they give for that is CPI fails to quickly incorporate new goods that people are buying to adjust the reference basket quickly enough that it doesn't capture all

all of the quality improvements in products. If it's missing some of the quality improvements, then inflation would be overstated, that it fails to take into account where people are buying stuff, more of it online. And if they're sampling prices at retail stores, then that could overstate inflation. And then they fail to capture completely the substitution bias, the ability to

substitute one good for another. And so they're suggesting that real wages are actually higher.

people benefited more from global trade and globalization than shows up in the official figures. And he gives some examples and just focuses on that 25th percentile. And he went from 1960 to 2015, families below the 25th percentile, the number of vehicles they have per household went from three quarters on average to 1.4. So they have more cars and they're holding onto the cars because

Because the cars are better. They keep them on average 11 years instead of five years back in 1969.

households in the 25th percentile and below that did not have indoor plumbing in 1960 was 35%. It was 12% in 2015. I was surprised it's still that high. The number of bedrooms has grown. Again, this is 25th percentile and below. Their houses are bigger. And so the argument is there is less consumption inequality. And then finally, they point out if things are that bad,

They look at how much food is on average relative to median household income. So what are people spending on food? And that has gone down over time, which means there's more discretionary income for non-food items. Now, one of the biggest changes in the last five years, which causes a significant amount of frustration, is rents have gone up and housing prices. And that's squeezing everybody, but particularly the poorest.

within the U.S. And part of that could be this big capital surplus due to the financialization of housing, more capital coming in, more big institutional investors buying up apartment buildings, raising rent, the sheer amount of money creation that was done to offset the negative impacts of the pandemic. Before we continue, let me pause and share some words from this week's sponsors.

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It is true that the number of manufacturing employees has fallen in the U.S. It peaked in 1979 at 19.5 million. Now it's 12.7 million, but much greater population. So as a percentage of the population, it has shrunk, partly because factories are more productive now, more robotics, but mostly because much of that manufacturing moved overseas and

to areas that had a lower cost of production. And that is what the Trump administration finds frustrating. They believe that it's gone too far and that the playing field is not even. What will the impact of these tariffs be? Whether they actually come in at 24% or it's lower, higher prices and lower economic growth. Studies, if you look at studies, and I've looked at them, we've done it in other episodes, the

The impact of the tariffs in 2018, it led to higher prices and it led to lower economic growth because as prices go up and they're going up because money is flowing to the government, tax revenue in the form of tariffs, people react to those higher prices and buy less. And so,

And since part of that price is taxes, it's not the actual value of the output that leads to lower GDP growth. The uncertainty of what will the tariffs be? And as businesses try to reroute their trade to get a lower tariff, we could see, and what often happens, and the administration has made this argument, that a stronger dollar could offset the tariffs. Now, given the level of tariffs, that seems unthinkable.

unrealistic. A 25% increase in the dollar, the dollar has weakened 6% this year, which makes the tariffs even more expensive because goods you import from overseas, the dollar doesn't go as far, and then there's a tariff on top of that, which is why, in some ways, these tariffs are like a carbon tax, an incentive to buy fewer imports that are shipped

from overseas and to buy more domestic things. But even the domestic goods will go up in price because many of the manufacturers are importing supplies that they use, such as screws, nuts, bolts from overseas in the tariff supply. So the extent of the economic carnage, we don't know. It depends on the size of the tariffs. What's the actual amount that ends up being negotiated?

negotiated lower? How much of the revenue from tariffs gets recycled into the economy through tax cuts or other transfer payments that could reduce the impact some? And then what will the retaliation be? China's already applied a 34% tariff on U.S. imports and retaliation. And so when you look at the impact

On some of the studies I've seen economic growth, some countries could see GDP drop by 0.1%, others 0.8% in the U.S. And given the U.S. stock market fell more than other countries, financial markets are anticipating a higher probability of a U.S. recession than other places because we're paying most of the tariffs.

Capital economics puts the odds of a U.S. recession this year at 30%, J.P. Morgan at 60%. Financial market participants are expecting the Federal Reserve to have to reduce its policy rate. Right now, the policy rate is between 4.25% and 4.5%. A week ago, based on Fed futures, there was a 50% probability of just one rate cut, which

or none between now and July. Now there's a 90% probability of two rate cuts or more, which means investors are anticipating slower economic growth in the U.S. and the Federal Reserve will cut rates to compensate for that. Now I've read a lot of articles about billionaires, hedge fund managers, others who supported Trump are surprised at the tariffs that he went through with them. I wasn't surprised.

I like the analogy of a fox versus a hedgehog. It was originally a fragment from the Greek poet Archilochus that said, the fox knows many things, but the hedgehog knows one big thing. And Trump has consistently over decades been upset at trade deficits and wanted tariffs. Here he is in 1988. I believe very strongly in tariffs. He

He was telling journalist Diane Sawyer, America is being ripped off. We're a debtor nation and we have to tariff. We have to protect this country. I don't see the tariffs going away. They might be reduced, but this is just not going to go away, in my opinion, because the administration seems very convicted in this. And they have a point of view as to what the problem is, too high a trade deficit, they

They have markers to measure whether it's improved. And in the meantime, we're all going to pay more. And it could take years for manufacturing to come back. And this complex adaptive system of trade and capital flows now has some major blockages in the form of tariffs that have to navigate. And what the consequences and unintended consequences are, we know one is the prices will increase. We don't know by how much.

Economy will slow. We don't know by how much. How quickly will manufacturing come back to the U.S.? Takes years. Is this the end of globalization? No. It's going to be change, though, and trade has never been free. There have always been tariffs. There's always been barriers. It's always been an ongoing negotiation. It has led to greater wealth overall due to increased productivity. Trade, capital, people, manufacturing.

and technology will continue to flow, but there are some more barriers now. And how steep will they be? We don't know. We'll watch in the weeks and months ahead. But this is a meaningful change if these tariffs stay in place, the highest tariffs in the U.S. since the 1930s. And that will be painful. This is Episode 519. Thanks for listening.

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