Hello and welcome to the forecast.
The trade war has begun, sort of.
Now. Donald Trump announced all sorts
of tariffs against Mexico and Canada and then put them on
hold. But the tariffs against China
have gone ahead and China has announced its retaliation.
So already from today, the US coffers are being filled up with
dollars as those tariffs are being paid by American
importers, not by the Chinese. Remember, that's an amazing
slice of hand that he seems to have pulled off with a lot of
the American public. So where is this going?
When is he going to announce his tariffs on Europe?
And where does that leave both Europe and Britain as it tries
to work out how it can keep both America and Europe sweet?
Joining me, the Greek economist and former finance minister
Yanis Varoufakis, and from the United States Tax Foundation
think tank, Erica York. Yanis, first of all, I mean,
what do you think is really going on here?
Is this a sophisticated economic policy to address the trade
deficit and protect American jobs?
Or something else? It's definitely something else
disguising as a policy for reducing the trade deficit and
bringing jobs back to the United States.
As you suggested. It is a hyper weapon.
That is his tariffs, which he's deploying quite smartly, I
should say, from his perspective, in order to
maximize his political clout both domestically and
internationally. Is it real political clout?
I mean, The thing is that when he makes these announcements, he
gets the headlines that say, well, he's forced Mexico to send
10,000 troops to the border and Canada's going to do the same
thing and have a fentanyl czar and all this kind.
And then and then it takes a day or two for everyone to go.
Mexico already had 10,000 people at the border and Canada did as
well. And all they've really done is a
point of fentanyl czar, which is one job.
So, you know, as a political instrument, you know, is it
really as big a deal as it initially seems?
Well, judging by his first, it is a potent tool.
Remember that when he was first elected in 2016, very soon after
that he tore up the NAFTA agreement, the North Atlantic
Free Trade Agreement, and slapped large tariffs on Mexico.
And then very soon after that, he managed, I have to say to my
surprise, rather rapidly compared to how long it had
taken Clinton to create NAFTA, to renegotiate NAFTA.
And I can't say that the NAFTA 2.0, which was called something
else, was worse for the United States than the original NAFTA.
So let's not make the mistake of underestimating him.
He will keep people guessing. This time he introduced the
tires. He took them back.
I very much expect that he will do the same thing with the
European Union. And this time, he's not going to
take them back. Right, so, So what?
What does he want from the European Union?
Oh, I think that we have to take very seriously his long standing
ideological and theoretical opposition to the very concept
of the European Union. He dislikes from an isolationist
sovereign this point of view which is his ideological
foundation. He dislikes the very notion of
the European Union and particularly the very large
trade surpluses the Germany, but also the rest of the Eurozone
have vis a vis the United States.
And this is not just a belief by Donald Trump.
I remember having a conversation with Jack Lew, who was the
treasury of secretary of Barack Obama, and his position was that
Europe is exporting deflation, it is exporting recession to the
United States through it's mercantilist policies.
So we need to take this very seriously, whatever criticism we
may have for Donald Trump. So, So what?
What effect will it have both in Europe and America if they go
ahead? Well, it is my considerable
opinion that the worst victim of Trump's return to the White
House is going to be the European Union.
China can very easily take in it's stride the 10% tariffs that
have been announced. Their industry is so well
technologically advanced and so efficient that they can absorb
that easily. Even a 20 percent, 25% tariff,
they will be diverting a lot of their net exports to Europe and
to the rest of the world. The United States, on the other
hand, have a enormous autarkic economy.
They have a remarkable capacity to accumulate the capital, the
accumulated profits of the rest of the world, as we know.
But it is Europe which has already been in dynamic of
secular stagnation well before Trump was elected because of 15
years of rather silly combination of austerity for the
many and socialists for the bankers, and political
fragmentation which led to 15 years of no investment.
There has been an investment strike in Europe.
So we missed and the German industry missed a whole
industrial revolution. So even if Trump was not
elected, Europe would be stagnating.
But these tariffs are going to create a greater exodus of
capital, particularly from Germany to the United States.
Erica, I mean, do you agree? I mean, is this going to work
economically for America if tariffs with Europe go ahead?
I mean, the question is what, what is the goal?
And you know, I, I think we have some hints from Trump.
I mean, he has written down in a speech in the past and all caps
trade is bad. If you look at his talks going
back to the to the 1980s there, there is just an anti trade view
that that Trump holds. And so it's not entirely clear
whether this is a negotiation strategy or whether this is a
change from Trump 1.0 where tariffs were clearly targeted at
renegotiating NAFTA and getting US MCA.
They were targeted at China's IP theft practices.
Now there seems to be more of an idea of we want tariffs for
revenue, we want tariffs to replace the income tax, we want
tariffs to attempt to reindustrialize the US
manufacturing base. I don't think tariffs are going
to be successful on those grounds.
If we look at what it is that the US imports, most of more
than half of US imports are intermediate inputs or capital
goods. I'm so placing tariffs on those
directly increases the cost of producing in the United States.
When we invite retaliatory actions against US exports, that
hurts our ability to sell on the global market.
So it does mean that the US economy turns inward and turning
inward is not how we get growth. So I don't think it's a a
positive growth strategy. There's also just not enough of
a tax base there for it to be a significant revenue source to do
the income tax reforms that Trump has talked about either.
I'm so I think in many ways the the strategy will not achieve
the goals that that have been outlined.
But I mean, like, like Yanis, I mean, you, you seem to be
suggesting that it may be the, the, you know, the tariffs are
going to stay, that we shouldn't be misled by what's happened
with the first few days of Mexico and Canada, where they've
been put on hold for now. You know, the the when it comes
to Europe and China, they're going ahead.
That's the big question. And you, you can't really have a
tariff for negotiation and a tariff for revenue.
You, you have to choose one path.
We don't really know what path the administration is going to
walk down yet. But if you look at the way that
Trump's talked about these, the Canada, Mexico tariffs are a
good example. You know, the the national
emergency was related to fentanyl, was related to border
crossings, but all of the media interviews that Trump did
afterwards were talking about the trade deficit.
We're talking about these economic reasons which are in
stark contrast and contradiction with the national emergency
related to these border issues. And so at at some point you have
to choose one path. It's it's not clear to me yet
that there has been a path chosen.
Janice, I mean, do do you agree that this is straightforwardly
bad for the US economy? No, I don't.
I I can't say I agree with that because the world we live in is
far removed from the textbook world of general equilibrium
where you already assume markets working efficiently.
The strength of the United States economy is its capacity
to accumulate other people's capital.
This is not going to to go away. If anything, remember
immediately after 2000 and eight, 2008 was a financial
catastrophe that befell the world as a result of things that
were happening in New York. And yet the rest of the world's
capital flooded New York because this is what happens when
capital gets jittery, when uncertainty is in the air, it
rushes into the United States. So even if Trump's tariff policy
is macroeconomically destabilising and anti growth,
if this creates a sufficient crisis, then there will be even
more of a flood of capital in the United States.
So those two blocks, mainly the United States and China may very
well find that, you know, the, the, the, the commotion that
he's creating strengthens the internal dynamic of capital
accumulation of innovation. There's no doubt that in China
you have massive progress as a result of the CHIPS Act that
Biden introduced. This is a form of impediment of
trade and the result was that China got stronger from that.
It is not far fetched to imagine that some jobs will return to
the United States. But where I do agree with Erica
is that long term he is facing a major incongruity.
But I don't agree with the particular incongruity that
Erica mentioned. For me, the the greatest
incongruity, and I think that these will be the shows upon
which the Trumpist ship crashes eventually, not immediately, but
in the next 3-4 years, is that even if he's successful at
diminishing, shrinking the trade deficit of the United States,
which I don't think he will be. But even if he is successful in
this, the American trade deficit is operates like a huge vacuum
cleaner which sucks into American territory, the net
Expos of Germany, of Japan, of China.
And they get paid in dollars and those dollars go back to the to
New York where they are invested in real estate and their Stock
Exchange. So if he succeeds in shrinking
the trade deficit, he will have dealt a major blow at the real
estate sector in Miami, in New York, in California and the
Stock Exchange. So he would have to choose his
poison. Does he betray the working class
which elected him, or does he betray his favorite clans, which
are the finances and the Realtors?
Erica, I mean, if you look back at history, the last time Trump
tried tariffs, he didn't shrink the trade deficit and he didn't
save American jobs. Right.
And and I agree that we do not live in a standard textbook
model. And if you look at what the
standard textbook model says about trade, most of those
models are based on trade in final goods.
Like I mentioned earlier, most of what we import is not final
goods, it's these intermediate inputs.
It's these capital goods that we use to produce in the US, So
supply chains are much more complicated than just this
standard model. Yeah, Alice, Chris Giles in the
FT has done a column in which he's looked back at the the
history of President McKinley, who Donald Trump sometimes likes
to emulate, looking back to the 1890s.
And he he says that one of the things that happened there was
that there was a massive fall after the imposition of these
massive tariffs in the input of in the import of dutiable goods
because people stopped buying them.
And that as that fell, so did support for the Republican
Party. So I mean this could yet blow up
in his face. Well, Chris Giles need to look
into his economic history a bit more carefully because yes, it's
true, but the 1890s were a period of major international
depression. So it's important to not to
confuse correlation for causation.
That he that Trump can inflict a lot of damage on the American
economy. There's no doubt, but I don't
believe we should take it for granted that the manner in which
the American economy is finding it possible to regenerate itself
and to recalibrate itself through major advances in in the
way in which intermediate goods are being used in order to
produce final outputs. You know, this May surprise us
in terms of the ultimate effect of Trump's policies, which, of
course, we don't even know what they're going to be.
The big talking point that we've seen Trump say is that he wants
to raise this revenue to offset the cost of further tax cuts.
Those tax cuts would have to be enacted by Congress.
But there's also some tension there.
If we look at how the tax revenue raised by Trump's first
round of tariffs was spent, more than 90% of it went out to
direct payments to US AG producers who had been targeted
by retaliation. So rather than represent this
new source of revenue we can use for new programs, it was revenue
to compensate those who were harmed by the retaliatory
action. And, you know, somehow that
didn't generate political blowback for Trump the first
time around. He was able to message around
the tariffs and, and come out on top of that.
But I do think if we look back at McKinley and we look back at
the, you know, midterm elections after McKinley as Ways and Means
chair passed the McKinley Tariff Act, Republicans lost, McKinley
lost re election and it was directly tied to the tariff
issue. They had been named the billion
dollar Congress for taxing and spending.
So if tariffs are significant enough this time around, if they
are shocking enough that the American people realize this
isn't a tax on China, this isn't a tax on the EU, This is a tax
on us. We are paying being we are
harmed. Maybe the political story in
2025 is different than it was in 2018 and 2019.
Well, that, but that's been one of the most surprising things.
What watching it from here is that how has Donald Trump got
away with this narrative that tariffs are something that
foreign countries pay when it's American consumers who will pay
it? It's a nice political story.
It, it lets Trump make an enemy of someone else, lets him tell a
story that fits in with the way people want to feel.
And most people have not had a, you know, an economics lesson in
tariffs. So I think that's why we've seen
the political message went out, even though it's not tied to
economic reality. Alice.
Well, there are many misconceptions that appeal to
the broader public, like for instance, the idea that spending
cuts in the middle of the recession is good for the bottom
line of the government. You know, the myth of austerity.
It's very difficult to get this out of the heads of the the
general public. But, you know, I agree.
I agree with Erica. There's a degree of xenophobia
as well, because it's easy for a Trumpist to speak of tariffs as
attacks on the foreigners. Once you actually say that,
that's the end of the conversation.
Somebody who is xenophobic and who thrives on xenophobia stops
listening. From that moment on, just cheers
and moves on. Can we talk about China then and
how China is likely to be affected by this?
There's been some commentaries suggesting that China's in a
much more difficult position potentially this time round.
How is China going to be affected if Trump goes ahead?
I mean, if we're, if we're really just talking, you know,
10% tariffs on what the US imports from China, I, I don't
think it's going to be dramatic. If, if we're in a world where
Trump really follows through and tries to completely cut off ties
and decouple with China, then then that's a different
equation. But I, I don't see us moving
fully in that direction. So, so it's really uncertain,
but I think at least with the actions we've seen so far that
the impact is going to be fairly limited.
Because their react their their retaliation is also fairly
limited, isn't it? Beijing is celebrating.
The 10% tariff is much, much lower than what they were
expecting. It is a gift if anything,
compared to expectations. I not only is it not going to be
a dramatic tariff, but I think that if anything is going to
unleash animal spirits in China because it given the awful
expectations that preceded. If anything there will be more
investment towards exporting to the United States in Shenzhen,
in Shanghai. Beyond that, As for the theory
that China is in a worse position today than it was in
2017, I don't buy it. Technologically, China has made
important strides, so I don't see anything from Beijing's
perspective that if I were them, would have made me worry with
the developments of the of the last few weeks.
I suppose it depends if it escalates though, doesn't it?
I mean, if you get to 60% or whatever it was that he spoke
about during the election, then then you've got trouble.
But I mean, are you saying you just don't believe anything big
in terms of escalation is possible?
There's no way that he is going to impose a 60% tariff on
everything from China because if he does that, Walmart is going
to be up in arms. And the people who shop from
Walmart, who are mostly Magda followers or mostly, but to a
very large extent they will be up in arms if he impose a 60%
tariff on electric vehicles come from China.
Again, it's no skin of the Chinese's nose because they
don't import. They don't export that many EVs
to the United States. Yeah, I think it depends on how
far it escalates and then whether the United States takes
the position of we're isolating against all of the world, we're
putting up tariff barriers against all of the world, or
whether the United States tries to lead a new trade bloc that's
excluding China. To me, it seems like it's been a
conservative approach so far and we have to see if it's if it's
going to escalate and really that that depends what the
administration decides to do next.
And overall, Yanis, I suppose the Chinese economy has become
much more self-sufficient. It's less dependent on exports
now than it was 10 years ago. What China is going to do If the
United States goes on an all out war against trade, war against
China, China is going to start thinking very seriously about
rejigging the bricks, expanding the bricks.
Perhaps turning the payment system, which is now just a
payment system, into something closer to Bretton Woods and play
within bricks the role that the United States played in the 50s
and 60s, supporting and backstopping with the US dollar.
The Bretton Woods system. They could do the same thing
with a bricks equivalent of Bretton Woods, using the one
that would be a major change in world affairs.
But Beijing doesn't want to do that and they will only do this
if they are pushed and if they are pushed fiercely.
Worth just saying that when Yanis talks about BRICS, he's
referring to Brazil, Russia, India, China and various other
countries that have now joined this alternative economic
grouping. And they've already got, as he
says, this payments messaging system up and running.
And people wonder where it's going to go next.
Let's turn, then, to Britain's role in this.
I mean, Yanis, you've warned that, you know, Europe is going
to feel the pain. Britain has this dilemma of how
it treads the line between being close to Europe and wanting to
be a little closer to Europe than under the last government
and staying friends with America.
Is it possible? There's a major incongruity
there. The other day Keir Starmer was
visiting Brussels and I don't think those bags that Donald
Trump on that same moment as Keir Starmer was trying to make
to make friends again with Brussels said that, well, you
know, the Brits, maybe I won't slap any tires on them.
So, you know, this was this was a way of throwing, throwing a
hand grenade in the meeting in Brussels between Keir Starmer
and the European Union. In fact, we were saying to Keir
Starmer, you want to go into bed with them, then you're going to
have to to deal with tariffs. So London is caught up between a
rock and a hard place. There's no doubt about that.
But even if Trump was not elected, had not been elected,
the European Union will have 8 secular stagnation, and so would
the United Kingdom. Erica.
I think the the big question going forward, both with the
United Kingdom, with the EU, with Canada, Mexico versus
China, is what is cooperation going to look like?
How much multilateralism are we going to have?
Is the United States going to step up and lead or is the
United States going to shrink back?
And other countries will have to choose, too.
What what do they do in the face of this question about the
United States versus China? How do you cooperate?
In the 2018-2019 trade war, it was kind of easy to not make
that choice. You, you didn't have to choose
between the US and China. Depending how far the Trump
administration pushes the trade war with China, we may be at a,
at a point where you, you do have to decide.
I mean, that will also depend on the position of the US and
whether we are creating this off ramp for commerce to increase
and grow with our allies or whether we are completely
turning inward and not moving in the direction of, of cooperation
anymore. I.
Mean isn't it straightforwardly impossible for Trump to to
tariff the UK on the basis of emergency powers?
I mean, what what is the threat coming from the UK it?
Doesn't need glasses. Coming from Canada, I.
Exactly. I don't think we're in a world
where like we're in a world where we are pushing the bounds
of emergency power in order to kind of have a fig leaf to get
to tariffs. I think tariffs are the goal.
Whatever powers are there are going to be used to achieve that
goal. Yeah, Alex, you don't think
that's a obstacle? No entirely.
I agree entirely. And it's already been shown that
the real liberal establishment, the courts, nobody is prepared
to challenge the monstrous application of national security
emergency propaganda for justifying tariffs.
He's not being challenged on that.
So yes, he can declare, you know, an emergency for whatever
reason he wants in order to slap any tariff he he feels like.
So what do you think Keir Starmer should be doing?
Well, looking within the limits of the United Kingdom, the the
United Kingdom has a a serious realisation problem. the United
Kingdom has for too long relied on a Ponzi scheme that involves
house prices that are unsustainable remaining
unsustainable for a very long time.
It relies on a flow of capital which does not materialise in
the form of productive investments, and the fact that
they ditched the Green New Deal, those 20 Watt €5 billion pounds
which were not enough even before they got into government,
is indicative of the fact that this is a clueless government.
They have no plan to create something like an an investment
bank, the equivalent of the European Investment Bank that in
association with the Bank of England, could channel the very
large amount of liquidity that exists in the City of London in
productive ways. They talk about growth, growth
and investment and investment, but there's absolutely nothing I
see in there except for recessionary contractionary
measures like the English and National Insurance
contributions, which was a suicidal move by Rachel Reeves.
I think this is the fastest sinking newly elected by its
landslide government in the history of the United Kingdom.
Just say what you really think now, Erica, overall is, is it
right to say that from your point of view, whatever happens
on tariffs, it's going to be bad for growth both in the US and in
Europe and Britain? Yes, very clearly I, I don't
think you can make a case that tariffs will boost macroeconomic
growth for the United States or for the countries that are the
target of the tariff action. I agree with that.
But let's not forget that when
we did have growth, that was not necessarily in the interest of
the majority of people in the majority of countries.
And that is the political strength of Trump, that he
appeals to the discontent that went hand in hand with growth.
Well, maybe a gloomy economic note and possibly a buoyant,
tough political note for Trump fans, but we'll leave it there.
Erica York, Yanis Varoufakis, thank you very much indeed.