What's Trump's tariff hokey cokey all about?
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You put your tariff in, you put your tariff out. In, out, in, out. You change it all about. You plan to tax pharmaceuticals and then you turn around. What on earth is it all about? The Trump hokey-cokey has caused havoc in the markets, but behind it all, behind the day-by-day dramas, is there a coherent plan to alter the terms of world trade and the position of the dollar as the world's reserve currency?

Step inside the briefing room and together we'll find out. First, a history lesson. The briefing room's Ben Carter spoke to Douglas Irwin, Professor of Economics at Dartmouth College in New Hampshire. Throughout his political career, Donald Trump hasn't had many kind words for his predecessors and rivals. Sleepy Joe Biden. Quote, cheating Obama. Crooked Hillary, she is a crooked one.

These are just a few he's criticised over the years. But if you listened to Trump's second inauguration speech in January, you might have been surprised to hear him waxing lyrical about one former president. We will restore the name of a great president, William McKinley, to Mount McKinley, where it should be and where it belongs. President McKinley made our country very rich through tariffs and through talent. He was a natural businessman.

William McKinley was a Republican politician from the state of Ohio, and he represented Ohio in the House of Representatives for many years, where he's chair of the House Ways and Means Committee, author of the McKinley Tariff. But he later, in the election of 1896, became president of the United States until he was assassinated in 1901. The McKinley Tariff came into law in October 1890.

Great Britain was an industrial powerhouse, and the US was importing our iron and steel. It was also importing raw materials from Canada. Tariffs weren't new, but... This pushed tariffs in general a little bit higher. But we also put some goods on the duty-free list, such as sugar. But mainly, most of these tariff acts in the late 19th century were sort of adjusting the rates, some up, some down, but on net higher in the case of McKinley.

They were used as much to protect domestic industries from foreign competition as to raise revenue, but they were definitely a part of the American political scene. At this time, tariffs raised about half the federal government's revenue. Excise taxes had been introduced in the Civil War, and the idea of introducing income tax was under discussion. As you heard earlier, Donald Trump said McKinley made our country very rich through tariffs. But was it actually McKinley's tariff that created this wealth?

Well, this was a general period of industrial expansion in the U.S. from after the Civil War right up to World War I. There were some ebbs and flows in the economy. A lot of it, the boom, didn't happen right after the McKinley Tariff that took place in the later 1890s and then into the early 1900s. But there were a lot of other things going on during this period as well. We may have been relatively closed to trade because of the high tariffs, but we were very open to international capital inflows, such as British buying and financing the construction of railroads through their purchases of bonds.

We were open to immigration, so it was a period of mass immigration. A lot of workers came from Europe to the United States, adding to the labor force. It was a period of Western expansion. We were able to mine new raw materials, such as iron ore in Minnesota and copper in the Southwest.

And we were also open to British technology. So that kept the steel industry productive by borrowing the best practices from Britain. So we are closed on certain dimensions in terms of trade, but we're also open to this great expansion with an increase in capital, an increase in labor, and an improvement in technology. All these things were going on at the same time.

All that considered, was the McKinley Tariff a success story? It proved to be very politically unpopular, and the Republicans lost in the midterm elections of November of 1890. They lost both the House and the Senate, I believe, in a fairly big rout. And a few years later, there was a financial crisis in Britain

The Barings Crisis that spread to the US and the US slumped into a depression in the 1890s where we had an elevated unemployment rate of over 10% for about three or four years. And that was associated less with the tariff itself, but certainly it wasn't completely independent of it. And so it got tainted a little bit with the idea that it didn't lead to this wonderful economy. And during his time in politics, McKinley's views on tariffs evolved.

When he was president, he had a little bit of a different view than when he was just a representative from the state of Ohio. You sort of look more to a national constituency and what might be in the national economic interest. When you represent a particular district, you're really just concerned about workers and voters in your particular district. But as president, he took more of an expansive vision and thought that maybe tariffs should come down to promote U.S. trade in the rest of the world. So you might be wondering why Donald Trump is such a big fan of McKinley.

Douglas Irwin says it's probably because he's viewed as a Republican icon. Karl Rove, who served as deputy chief of staff for George W Bush, wrote a book lauding McKinley's political achievements.

McKinley did win the 1896 and 1900 elections very convincingly. And in his Liberation Day speech, Donald Trump complained that post-McKinley... In 1913, for reasons unknown to mankind, they established the income tax so that citizens rather than foreign countries would start paying the money necessary to run our government.

The 1913 Revenue Act did see the introduction of income tax, at a basic rate of 1% and a top rate of 6%. Only 2% of the population paid tax at all. This did not replace the income from tariffs, although the average tariff rate did drop from around 40% to 25%.

And there's another problem. One reason why the tariffs were sort of worked in the late 19th century as a revenue raising device is the federal government is only spending about 2% of GDP. We didn't have a welfare state. We didn't have a big defense establishment. And so now government spending is just so large, there's no way you could tax imports and pay for all that spending. You really need a domestic tax source. Today, the federal government is spending around 25% of GDP, around $7 trillion a year.

Some estimates suggest that Trump's new tariffs will raise around $3 trillion over the next decade, which leaves a $67 trillion shortfall. Maybe Donald Trump understands all of this, maybe he doesn't, but it's probably not unfair to say that trying to apply economic lessons from the 1890s and early 1900s to the globally intertwined economies of 2025 might prove problematic.

Ben Carter talking to Douglas Irwin. So, that takes us up to 1913. What happened next? Meredith Crowley is a Professor of Economics at the University of Cambridge.

Meredith Crowley, Douglas Irwin's just told us about what happened in 1913 with the introduction of the Revenue Act and then you get First World War. What happened in world economic terms after that? The first big economic event after that really is the Great Depression. So the stock market crash of 1929 followed by the beginning of the Depression.

And in the United States, this turned out to be an opportunity for some Republican lawmakers, Smoot and Hawley, to decide to re-industrialize America by imposing some higher tariffs on imports from the rest of the world. What they didn't fully anticipate was that the Depression was going to get worse because trading partners would retaliate with their own higher import tariffs and

And the Smoot-Hawley tariffs, unlike modern tariffs where we would say it's something like 10% of value, they were specified as what's known as a specific tariff. So the tax would be something like $1 for X many tons of wheat.

What this meant was as the price of wheat fell during the Depression and for the first half of the Depression prices were falling, each year these Smoot-Hawley tariffs became more and more restrictive because the tax stayed fixed, but the price of what was being imported fell and fell and fell. So as a percentage of value, the taxes got worse. Now, was the objective of Smoot-Hawley...

to cut trade deficits with other countries? Or was it essentially to try and make sure that other countries' products weren't coming in? The main thing was protect U.S. industry with high tariffs, which had been the policy of the Republican Party since the end of the Civil War.

But by the time we get to 1934, Franklin Roosevelt is president and the U.S. takes a totally new tack. They introduce what's known as the U.S. Reciprocal Trade Agreements Act. And this is sort of the bedrock of U.S. policy until 2018 when Trump came into the presidency. So the idea was the

The U.S. would say to another country, we will reduce our import tariffs if you in exchange reduce import tariffs on some of the goods you import from us. So we move on to the Second World War. And then after World War, we get this kind of explosion of international agreements and what you might call the kind of creation of a world order.

Yeah, so starting at the Bretton Woods meetings in New Hampshire where we had on the British side John Maynard Keynes and James Meade going to lobby for a new post-war economic architecture of the IMF, the International Monetary Fund, Reconstruction Bank, which would eventually become the World Bank, as well as some security institutions like the UN. They also discussed but didn't do anything about an international trade organization.

They understood that part of the depression got worse because of things like the Smoot-Hawley tariffs, and they wanted to move into an open, more liberal world. But at the same time, they didn't want to completely eliminate tariffs because they'd just come out of the depression and they were really worried about people having jobs.

They said to the trade ministries, "Will you guys sort out something for trade?" And they began to negotiate an agreement. Eventually that negotiation became a treaty, which is known as the General Agreement on Tariffs and Trade of 1947, or GATT. And this treaty was signed by 23 countries. The agreement basically had two big ideas. The first one is what we call non-discrimination, or most favored nation.

And the idea was the U.S. and U.K. would negotiate bilaterally. And for example, the U.S. would say to Britain, we want you to charge no more than 25% tariff on shoes. And the U.K. would say, okay, well, can you charge no more than 15% on coal? The U.S. would say, okay. But then other people in the room included France, the Netherlands, et cetera. So whatever was the best offer the U.S. made to the U.K., so say it was 15% on coal,

that same offer would automatically get extended to France, the Netherlands. And in this way, it was non-discriminatory or sort of equal treatment principle.

And that's the sense in which we use this word multilateral to describe modern trade agreements. So as a country, your incentive is to go in and make your best and final offer right at the start. And so that led to a general opening and liberalization of the global economy so that by the time you get to 1994, you have average import tariffs roughly of around 5% among all the major high-income countries in the world.

And you also have a new organization looking at it all. The membership by then had expanded from the original 23 to over 100. And so in 1994, this new treaty established what's now called the World Trade Organization. And this is where countries come together to try to negotiate further reductions, but also when they don't like what the other party's doing, they can fight it out in a sort of

productive way, at least for the first 20 years from say 1995 to say 2005 or 2015. So alongside this, you've got the Bretton Woods system and you've also got the position of the dollar in the world economy. Tell me how this relates to what's happening with trade.

In the original Bretton Woods system from say '44 until the collapse of the dollar under Richard Nixon in the early '70s, the entire world is on a gold standard. And so the United States currency is backed by gold. The idea was rather than letting markets freely float the currency, so rather than having a market determine what the value of each currency was,

By fixing it to gold, you create, the hope was, a sense of stability of what the future value of the currency would be. However, if countries are growing at different rates and if they have different monetary and fiscal policies,

naturally the values of currencies will rise and fall. And so by the early 70s, the value of this dollar had become unsustainable. And that's when the U.S. under Nixon released- It was too high. It was too high, had to release-

the dollar from that position. And so since that time, the dollar has freely floated. It's what's known as a fiat currency. It's not fixed to any particular value of gold. It's valuable only because we think it's valuable and because, for example, I think I could buy a can of Coca-Cola for about a dollar and you'd agree with me that that's a reasonable value for $1 is a can of Coke.

Is it right historically to characterize the period we've just been through as a low tariff era? Up until 2018, yes. Yes. It's also correct to say that the U.S.,

tariffs charged on imports are lower than almost any other country in the world. So it is a more open in terms of policy economy than say even the UK or the European Union. So up until 2018 when Trump started raising tariffs kind of wildly.

Meredith Crowley, and before we carry on, just a quick reminder that you can subscribe to the Briefing Room podcast by visiting BBC Sounds and you will get access to the entire back catalogue, which includes the one about what the government is trying to do with the NHS, the one about Europe's defence dilemma and the one about what's happening in Turkey.

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for free. Go to ChumbaCasino.com to collect your free welcome bonus. Sponsored by Chumba Casino. Right. Back to tariffs. We've just done the history. Now we're returning to the present day.

There's so much noise around the president's tariffs. China's going to do this. Trump's going to do that. The penguins of the Herd and McDonald Islands are doing the other. So it becomes essential to discern the strategy behind the policy. Fortunately, I'm joined now by Duncan Weldon, economist and author of 200 Years of Muddling Through, and Mehreen Khan, economics editor of The Times.

Marion Kahn, before we begin to discover the kind of intellectual basis for all this, can you remind us what actually happened to tariffs in Trump's first term? So Trump, a bit like the presidential campaign that we saw last year, promised to come into office hitting US trade partners with tariffs. And he used very much the same kind of reasoning. He thinks that the trade deficit is going to be

is a liability for the US economy. And he had China in his crosshairs. So we got tariffs. So tariffs on steel and aluminium, tariffs on China, tariffs on Canada and Mexico, and tariffs on the European Union. The difference was, was one, the level wasn't as high. They weren't as sweeping and as universal. And ultimately, Trump did sit down with his trading partners and negotiated, in his own words, the best trade deals ever.

I think stepping back, we can say that those trade deals were an example of where he sort of got fleeced. So he was made promises by China. China said they will buy 200 billion extra in U.S. imports. The European Union said they will buy lots of soybeans and energy from the U.S.,

They didn't really do any of that. So if we're going to think about why Trump is so emboldened in his second term about making these tariffs serious, it might have something to do with the fact that his first attempt at imposing tariffs on trading partners, he actually was a bit of a loser on the deal because, as I said, people sort of pulled the wool over his eyes and promised things that they didn't deliver.

What can we say, Mayreen, about how his vision has changed for the second term? I think he's become more ideologically emboldened by the idea of tariffs and the people around him are much more likely to say, yes, Mr. President, that's a great idea. Actually, in the first administration, and this is across policy areas, including foreign policy and other parts of domestic policy, there were still people in the Trump administration that would listen to his flights of fancy and then basically go away and not do them.

This time is different. The personnel is different. There are real hawkish voices in this administration. Some of them we already know about people like Robert Lighthizer and Peter Navarro who were around the first administration. But now they very much seem to have gotten his ear. He sees tariffs as really a silver bullet for fixing the Main Street problem. The Main Street being the American worker has been screwed over for the last 30 or 40 years. Tariffs are a way of giving them jobs back, manufacturing jobs back, of raising their wages financially.

fixing the US fiscal deficit, being a great tool of foreign policy against China, helping national security, bullying your allies into doing things like more defence spending. So now tariffs have become a catch-all to achieve so many of Trump's goals. And that really wasn't the case in the first administration, where it was very much part of his sort of chauvinism, but it wasn't so central to his entire raison d'etre, which is what it's become. I was going to ask you whether the American workers have been screwed over. And then I realised that actually the important point is that he thinks they have.

Duncan, Miriam mentioned the word ideological there. In other words, the kind of idea is that this isn't just a sort of, you know, we want to negotiate a better deal, but that there is a kind of picture of how the American economy should work better. And tariffs are a significant part of that. Can you take us through? We mentioned these two advisors, Lighthizer and Navarro. Can we take us through their thinking a bit?

Yeah. So if you were to talk to the people Trump is listening to on tariffs, they think America has been de-industrialised by globalisation. It doesn't make enough stuff anymore. It buys it from overseas. And that's because the dollar has been too strong and the US has had too much free trade.

Their argument is you put up these tariff walls. It's not just about the revenue you raise from the tariffs. It's the best way companies will avoid these tariffs is by making stuff in America. You know, they talk about all sorts of things. They talk about bringing iPhone manufacturing to America. They talk about more cars on American roads being manufacturing. They think people...

behind these tariff barriers, America is going to really re-industrialise. And the way Trump says it, when Trump makes these speeches surrounded by workers in hard hats and high-vis jackets, he thinks that's going to bring back

good blue-collar jobs to the United States. Now, Maryam, one of the reasons the dollar has been so strong is because it's been a popular currency for people to invest in. Is what we're talking about a way of trying to essentially revalue the dollar downwards for a good period of time? Yes, I guess there is a kind of a catch-all ideology which tries to capture what's been happening in the global economy. And we have the US on one hand,

a country that doesn't make so much stuff. It sells a lot of stuff, things like services, but not goods, the stuff that Trump understands. And then a country like China, which has become a manufacturing powerhouse, actually domestically its consumption is low. So this balance between a big deficit country, which is the US, and a big surplus country like China. And those two kind of totems are really important in the Trumpian worldview. And

For many years, I think it was a former French prime minister who coined the term the exorbitant privilege of having the world's reserve currency. Now, what does it mean? It basically does mean exactly as you said, when times are difficult, people are financially stressed, they buy the dollar. It's the safest thing to buy. Where do you put your money? You put it in the dollar.

Now, you would think that this is a great privilege to have because it's ultimately allowed the US government and not just the dollar, but also its sovereign bonds to borrow at pretty low rates. It's given it a very strong currency. Americans have fantastic purchasing power because of their strong dollar. If you noticed in Europe in the last couple of summers, there's Americans everywhere.

Because it's really cheap for them to come to Europe and they spend lots of money. But the Trump administration has flipped this privilege and said, actually, this is a huge burden on us because we've got this artificially inflated currency that all these Chinese and all these foreigners want. That's making us uncompetitive as an exporter. And the point of the devaluation, if they can manage it,

is to create the dollar at a level which does help US exporters. Now, the question is, how do you devalue a currency? What I think they would like to do was a managed devaluation. And this is something that has been called the Mar-a-Lago Accord, which people might be familiar with something, the Plaza Accord, which happened in 1981 under the Reagan administration, which was getting all of the US's major trade partners, mainly Japan, to agree to revalue their own currencies to help the dollar depreciate. Now, this raises a significant question, Duncan, which is,

Do we actually discern this as being the big long-term objective? Yes. I mean, you know, the dollar is the reserve currency for the world. As Maureen said, that brings benefits. It brings lower borrowing costs, higher purchasing power for Americans. It does have some costs. It's got the cost that a higher dollar does make life harder for US exporters. But I think, you know, the benefits of having the world's global reserve currency far outweigh the cost. It's like...

complaining that the problem with your massive house is that it takes a long time to clean it. There are some small downsides, but the upside is here. People around the Trump administration in markets have been talking about this idea of a Mar-a-Lago Accord. Sort of the supposed blueprint...

was a paper written by Stephen Mirren in November last year, who's now chairman of the Council of Economic Advisers. Now, is this happening or not? I think we've got to be very, very careful because people in financial markets like to assume there is a framework. They like to think, OK, these actions look a bit chaotic, but I can understand them. Here's my roadmap.

Now, I think you've got to be very careful because that paper was essentially written as a job, you know, a job application by Stephen Mirren. He sort of took some things Trump had said, put them in a paper and said, here's a logical theory behind it. And lo and behold, he's in the White House. What was in it? Well, it argues you can have this Mar-a-Lago accord. And again, you know, playing to Trump's ego. Where's this big new Bretton Woods going to be signed? It's going to be signed that a resort he happens to own. It's perfect job application. Well done, Stephen Mirren.

The idea would be the US would call together foreign governments who hold US debt and they would sit down and they would agree to restructure that debt, accept lower interest rates, accept longer terms on it and, you know, revalue their currencies against the dollar. There is very little in it for them doing it. So there's a bit of fret and a bit of stick involved as well. Talk of saying, OK, if you don't do this, there'll be really high tariffs. If you don't do this, maybe we'll withdraw US security guarantees again.

But, you know, the difference with the Plaza Accord is in the Plaza Accord in the 1980s, you could sit down in a room with the Japanese, the West Germans, the French, the Italians, the Canadians and the British. And that was pretty much what you need to do as a fairly small group of countries who were your allies. This time, you've got to get not just those countries on board, but China, the Gulf states, South Korea, some other East Asian and Southeast Asian countries. It would be much harder.

Mary, what do you think about that? I think the key is, why did Plaza work? It's because Japan ultimately agreed at that point the biggest economic rival to the US and an exporting powerhouse to change the value of its currency. Right now, China's in a much more difficult position. They don't want to devalue their currency. And we know that because they haven't actually responded in kind with a major depreciation. Why is that? Because the president of China, he has his own ideas about boosting the consumption power of Chinese households.

about making the renminbi maybe the world's reserve currency to rival the dollar. And doing something like a huge depreciation obviously will shake confidence in the renminbi. So China is the key actor. China is now, as we've mentioned, there's an incredible amount of hawkiness towards China, not just in the Republican Party. This is a kind of cross-partisan belief inside in Washington. And, you know, we mentioned earlier on that this idea that workers had been screwed over.

Joe Biden's administration also took this on as a major political imperative, but their policy solutions were different. They also thought American works would get screwed over, but instead of doing tariffs, they wanted to create domestic manufacturing jobs by throwing huge amounts of federal subsidies and do make America industry again. So it was a very different policy tool, but the goal was the same. And the attitudes towards China have been

pretty much the same in both of these administrations. So as I understand the strategy as you're outlining it, and forgive the crudeness of it, the idea is partially to take the dollar off being this reserve currency for everybody, which overvalues it, so that you can undervalue it as a product of an agreement, the stick of which is high tariffs. But the problem is that you've now...

set the high tariffs without the Mar-a-Lago Accord. Which is why Stephen Mirren a couple of weeks ago basically said the Mar-a-Lago Accord is dead.

and may have just admitted exactly what Duncan said, which was like, you know, I'll put it on LinkedIn. It got me a job. I'm inside the tent. And now I don't really believe that it was ever going to happen because it was a kind of speculative attempt at doing some creative thinking. So we shouldn't I think we shouldn't fixate so much on on the Mar-a-Lago accord being a real blueprint or the strategy that's driving the Trump administration. I think Trump himself and we know he is making decisions differently.

He's much more fixated on the flow of goods and trade than he is the consequences for the capital markets that could emerge. So what actually happens to capital flows in that world? I mean, he's just for him, it's just kind of the deficit, I think, is much more of his ideological fixation. Do you mean he can only see the world in terms of things? Well, he can't see services, for example, which I mean, whisper it, but in the UK, that's quite good news for us.

He just really likes tariffs. He's really liked tariffs publicly for 40, 45 years. And the idea that a paper published in November last year explains this, I think, you know, somebody has called it, it's QAnon for Wall Street. You know, it's a theory you can look into to understand the world, but it's also not true. Are you saying, both of you, that in trying, my trying to discover a kind of deep ideology behind all this and a plan in all this, I'm actually whistling in the wind, Mary? Um...

I think often people call it sane washing, right? We are giving more cogency to these inca hate ideas than they deserve in an attempt to understand them. And we're not the only people doing that. There are people on trading desks across the city of London and Wall Street who are doing exactly the same.

So I think now we're at a point where we're just actually having to deal with the consequences of what has happened, the economic consequences of what's going to happen. So probably high inflation in the US, lower growth in the US, the implications it has for asset prices, and actually the reality of the dollar, which is that it is going down and

And I'm going to throw another span in the works, but this is not what's supposed to be happening. Right. What should be happening every time you get tariffs is the dollar's value is supposed to go up because it causes uncertainty and volatility. And there are other parts of the Trump administration that wanted and need the dollar to go up because that is an offset to the inflation that they're going to get from the tariffs. So, again, I've just in that nutshell have explained why it's so incoherent to talk about them wanting a weak dollar because they also want a strong dollar and they still want a reserve currency, but they don't want the benefits or the burdens that come with that status.

marrying Khan there with Duncan Weldon. And my conclusion is, maybe we should talk about China on the programme next week, when we'll be back at the same time. Goodbye. You've been listening to The Briefing Room with me, David Aronovich. The producers were Beth Ashmead-Latham, Kirsteen Knight and Ben Carter. The sound engineer was James Beard and the editor is Richard Varden. Another edition of this podcast will be along again soon.

I'm Ophelia Byrne and from BBC Radio Ulster and BBC Radio 4, this is Assume Nothing, Killer Dust. The story of how a 1960s headline about a secretive factory opening just outside Belfast led me on a trail into corporate espionage, cover-up and death.

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