1 00:00:00,080 --> 00:00:05,000 The conclusion of Davos 2026 was not marked by a return to quiet 2 00:00:05,000 --> 00:00:09,280 diplomacy, but by a tactical retreat delivered with a 3 00:00:09,280 --> 00:00:11,640 signature flourish of brinksmanship. 4 00:00:12,000 --> 00:00:15,320 While President Trump chose to pull back from his immediate 5 00:00:15,320 --> 00:00:20,160 tariff threats, ruling out military force for now, he used 6 00:00:20,160 --> 00:00:23,720 his 80 minute address to explicitly demand the 7 00:00:23,720 --> 00:00:28,040 acquisition of Greenland, stating I want to get Greenland 8 00:00:28,040 --> 00:00:32,479 including right title and ownership for European capitals. 9 00:00:32,479 --> 00:00:37,160 This was less an Armistice than a tactical retreat by a leader 10 00:00:37,160 --> 00:00:41,080 who views alliances as transactional and territory as 11 00:00:41,080 --> 00:00:45,120 real estate. This territorial scuffle bubbled 12 00:00:45,120 --> 00:00:47,720 up and subsided with startling speed. 13 00:00:48,040 --> 00:00:52,600 A weekend of maximalist threats against eight NATO allies led to 14 00:00:52,600 --> 00:00:57,280 a global $1 trillion market sell off on Tuesday, only to be 15 00:00:57,280 --> 00:01:01,280 followed by a framework deal at DAF of US on Wednesday. 16 00:01:01,560 --> 00:01:05,239 Yet while the immediate pressure has eased, Europe is left 17 00:01:05,239 --> 00:01:09,320 wondering if or when this claim will be brought to the fore 18 00:01:09,320 --> 00:01:12,080 again. The crisis has exposed A 19 00:01:12,080 --> 00:01:15,760 fundamental breach of trust that cannot be unseen. 20 00:01:16,040 --> 00:01:19,760 For decades, the transatlantic alliance was an article of 21 00:01:19,760 --> 00:01:21,880 faith. Today we worry that it's 22 00:01:21,880 --> 00:01:25,840 increasingly being treated as a bilateral transaction, where 23 00:01:25,840 --> 00:01:29,640 security is a product and allies are spongers. 24 00:01:30,120 --> 00:01:34,760 This breakdown in trust feels particularly jarring because, on 25 00:01:34,760 --> 00:01:38,920 paper, a conflict between such deeply integrated partners makes 26 00:01:39,000 --> 00:01:43,240 absolutely no sense whatsoever. It brings to mind the central 27 00:01:43,240 --> 00:01:46,920 argument of Norman angels. Nineteen O 9 book The Great 28 00:01:46,920 --> 00:01:50,880 Illusion, Angel correctly identified that the world had 29 00:01:50,880 --> 00:01:55,080 entered an era of globalization where economic interdependence 30 00:01:55,080 --> 00:01:59,040 made war amongst great powers fundamentally irrational. 31 00:01:59,360 --> 00:02:03,480 He famously illustrated the absurdity of modern conflict by 32 00:02:03,480 --> 00:02:06,880 pointing out that Lloyds of London insured the German 33 00:02:06,880 --> 00:02:09,800 merchant marine. Should war break out, the 34 00:02:09,800 --> 00:02:13,280 British Navy would effectively be sinking ships that British 35 00:02:13,280 --> 00:02:15,560 insurers would then have to pay for. 36 00:02:15,800 --> 00:02:20,720 Angel argued that in a credit based global economy, an invader 37 00:02:20,720 --> 00:02:24,320 could not seize A neighbour's wealth without destroying the 38 00:02:24,320 --> 00:02:27,920 foundational systems of exchange that supported their own 39 00:02:27,920 --> 00:02:30,440 prosperity. While his logic was 40 00:02:30,440 --> 00:02:33,960 indisputable, and while every state leader agreed with his 41 00:02:33,960 --> 00:02:37,360 conclusions, history demonstrated just five years 42 00:02:37,360 --> 00:02:41,080 later that just because a conflict is economically self 43 00:02:41,080 --> 00:02:43,800 defeating does not mean that it won't happen. 44 00:02:44,080 --> 00:02:46,720 We're facing a similar paradox today. 45 00:02:46,920 --> 00:02:50,320 While our current era feels significantly more nervous than 46 00:02:50,320 --> 00:02:55,760 the world of 19/09, the lesson remains economic logic is no 47 00:02:55,760 --> 00:03:00,200 longer a reliable guardrail when trust is replaced by coercion. 48 00:03:00,680 --> 00:03:05,160 In just 12 months, the nervous energy in Europe has transformed 49 00:03:05,160 --> 00:03:08,200 into a profound strategic recalculation. 50 00:03:08,480 --> 00:03:12,480 As The Economist has observed, the continent has moved rapidly 51 00:03:12,640 --> 00:03:16,440 through a terrifying progression from wondering if it can defend 52 00:03:16,440 --> 00:03:21,320 alongside America to questioning if it can defend without America 53 00:03:21,560 --> 00:03:25,200 to finally ask, asking what it must do to defend itself from 54 00:03:25,200 --> 00:03:28,440 America. The Greenland crisis was the 55 00:03:28,440 --> 00:03:32,480 catalyst for this realization. To risk the stability of the 56 00:03:32,480 --> 00:03:36,400 entire Western alliance over ownership of an island to which 57 00:03:36,400 --> 00:03:40,320 the US already enjoys unparalleled military access, 58 00:03:40,520 --> 00:03:43,720 and where U.S. companies are already exploring mineral 59 00:03:43,720 --> 00:03:47,360 potential, suggests that we've moved beyond policy 60 00:03:47,360 --> 00:03:50,320 disagreements and into the realm of coercion. 61 00:03:50,920 --> 00:03:54,360 Beyond the Greenland dispute, the broader geopolitical 62 00:03:54,360 --> 00:03:57,800 landscape seems to have shifted towards a state of profound 63 00:03:57,800 --> 00:04:00,360 anxiety. It was once unthinkable to 64 00:04:00,400 --> 00:04:03,160 imagine Canada. Traditionally the US is most 65 00:04:03,160 --> 00:04:07,520 steadfast partner, wargaming A defensive strategy against its 66 00:04:07,520 --> 00:04:10,480 southern neighbor. Yet the current climate has 67 00:04:10,480 --> 00:04:13,160 forced such contingencies into the war room. 68 00:04:13,640 --> 00:04:17,800 For Europe, accepting this new reality means acknowledging that 69 00:04:17,800 --> 00:04:22,520 strategic autonomy is no longer a distant ideal, but an urgent 70 00:04:22,520 --> 00:04:27,160 necessity for survival. However, building this autonomy 71 00:04:27,160 --> 00:04:31,600 will be a massive task, taking years if not decades, as both 72 00:04:31,600 --> 00:04:35,200 Europe and the United States plug critical gaps in their 73 00:04:35,200 --> 00:04:38,440 military capabilities. The transition from the 74 00:04:38,440 --> 00:04:41,680 efficiencies of global integration towards a world of 75 00:04:41,680 --> 00:04:46,160 autarky, a self-sufficient driven by mutual fear, will 76 00:04:46,160 --> 00:04:49,800 impose heavy costs. While the fiscal strain on 77 00:04:49,800 --> 00:04:52,800 national budgets will be immense, the burden will 78 00:04:52,800 --> 00:04:56,600 ultimately be felt by every consumer through higher prices 79 00:04:56,600 --> 00:05:00,520 and by every business through a fragmented, more expensive 80 00:05:00,520 --> 00:05:04,760 landscape for trade. While the Davos climbed down has 81 00:05:04,760 --> 00:05:08,160 lowered the immediate temperature, it hasn't erased 82 00:05:08,160 --> 00:05:12,040 the need to refine the war room plans drafted in European 83 00:05:12,040 --> 00:05:16,200 capitals when the thread of economic warfare and annexation 84 00:05:16,200 --> 00:05:20,120 first hit the wires. Europe's defensive arsenal 85 00:05:20,120 --> 00:05:23,520 against American economic coercion is built on the 86 00:05:23,520 --> 00:05:27,200 realization that if trust is no longer the currency of the 87 00:05:27,200 --> 00:05:30,880 alliance, hard financial leverage must take its place. 88 00:05:31,160 --> 00:05:34,600 This is not an act of aggression, but a reluctant 89 00:05:34,600 --> 00:05:38,720 strategic recalculation, a way for the European Union to assert 90 00:05:38,720 --> 00:05:42,720 it's status as a peer level economy rather than a collection 91 00:05:42,720 --> 00:05:46,880 of expendable vassals, the realization has said in that 92 00:05:46,880 --> 00:05:51,160 relying on shared history is no longer a viable risk management 93 00:05:51,160 --> 00:05:53,960 strategy. If the US is going to treat the 94 00:05:53,960 --> 00:05:57,760 alliance as a series of transactional shakedowns, Europe 95 00:05:57,760 --> 00:06:00,840 has found that it's in everyone's interest to ensure 96 00:06:00,840 --> 00:06:04,320 the costs of those transactions are prohibitively high. 97 00:06:04,920 --> 00:06:09,120 The financial nuclear option is a phrase that has dominated the 98 00:06:09,120 --> 00:06:13,200 headlines, though it's important to note that it wasn't a policy 99 00:06:13,200 --> 00:06:16,280 proposal put forth by any European head of state. 100 00:06:16,480 --> 00:06:21,000 Instead, the idea of weaponizing Europe's 2.84 trillion in 101 00:06:21,000 --> 00:06:25,040 Treasury holdings originated in the research departments of one 102 00:06:25,040 --> 00:06:27,400 of the very institutions that manage them. 103 00:06:28,040 --> 00:06:32,120 George Saravellos, the global head of FX research at Deutsche 104 00:06:32,120 --> 00:06:36,800 Bank, sparked the debate with a blunt memo titled Europe Owns 105 00:06:36,800 --> 00:06:38,840 Greenland. It also owns a lot of 106 00:06:38,840 --> 00:06:42,200 Treasuries. Arguing that the US is reliance 107 00:06:42,200 --> 00:06:45,920 on foreign creditors to pay its bills is its ultimate 108 00:06:45,920 --> 00:06:49,840 geopolitical weakness. This sentiment was echoed by 109 00:06:49,840 --> 00:06:53,320 Rebecca Patterson of the Council on Foreign Relations, who 110 00:06:53,320 --> 00:06:58,240 suggested that even if a total sell off is unrealistic, Europe 111 00:06:58,240 --> 00:07:02,880 could send a devastating signal by simply scaling back exposure 112 00:07:02,880 --> 00:07:06,520 through government affiliated investors like public pension 113 00:07:06,520 --> 00:07:09,280 funds. This argument gained enough 114 00:07:09,280 --> 00:07:13,560 traction that Treasury Secretary Scott Percent felt compelled to 115 00:07:13,600 --> 00:07:18,440 address it at Davos, dismissing the talk as media hysteria and a 116 00:07:18,440 --> 00:07:21,280 false narrative that defied logic. 117 00:07:22,080 --> 00:07:25,840 For all the talk of hysteria, some investors weren't just 118 00:07:25,840 --> 00:07:29,400 listening, they were acting. In the frantic week of the 119 00:07:29,400 --> 00:07:33,040 Greenland crisis, a Danish pension fund announced that it 120 00:07:33,040 --> 00:07:37,040 was divesting its entire $100 million portfolio of U.S. 121 00:07:37,040 --> 00:07:41,160 government bonds, citing the poor health of US public 122 00:07:41,160 --> 00:07:44,080 finances and the unpredictability of the 123 00:07:44,080 --> 00:07:47,640 administration. More significantly, the Swedish 124 00:07:47,640 --> 00:07:51,920 pension giant Elector confirmed that it had trimmed its holdings 125 00:07:51,920 --> 00:07:57,360 by by roughly $7 billion to 9 billion, explicitly citing the 126 00:07:57,360 --> 00:08:01,160 reduced predictability in American policy making as a 127 00:08:01,160 --> 00:08:05,320 growing risk factor. The question, then, is no longer 128 00:08:05,320 --> 00:08:09,120 just whether the idea is on the table, but whether it's actually 129 00:08:09,120 --> 00:08:12,280 a viable weapon. So let's look at whether Europe 130 00:08:12,280 --> 00:08:15,680 could actually follow through with a coordinated strike like 131 00:08:15,680 --> 00:08:19,440 this, or if the financial realities of the 21st century 132 00:08:19,440 --> 00:08:23,800 make this a suicide pact. Beyond the bond market, Europe 133 00:08:23,800 --> 00:08:27,520 has been readying its anti coercion instrument, a trade 134 00:08:27,520 --> 00:08:31,640 bazooka specifically designed to counter economic blackmail. 135 00:08:31,880 --> 00:08:35,159 It's a stark reflection of the current state of affairs that 136 00:08:35,159 --> 00:08:38,600 this tool was originally conceived to defend the bloc 137 00:08:38,600 --> 00:08:41,919 against authoritarian pressure from China and Russia. 138 00:08:42,120 --> 00:08:45,880 It was first proposed after Beijing attempted to blackmail 139 00:08:45,880 --> 00:08:49,960 Lithuania by cutting off trade over its ties with Taiwan. 140 00:08:50,360 --> 00:08:53,800 Seeing it now discussed as a primary defense against the 141 00:08:53,800 --> 00:08:58,240 United States, traditionally a European ally, represents A 142 00:08:58,240 --> 00:09:02,400 surprising and historic shift in the transatlantic relationship. 143 00:09:02,920 --> 00:09:08,200 What makes the ACI so potent is its ability to bypass the usual 144 00:09:08,200 --> 00:09:12,520 veto power that often paralyzes European foreign policy. 145 00:09:12,840 --> 00:09:17,120 Unlike most security decisions that require unanimous consent, 146 00:09:17,360 --> 00:09:21,560 the ACI operates through qualified majority voting, which 147 00:09:21,560 --> 00:09:26,880 means that while 55% of member states representing 65% of the 148 00:09:26,880 --> 00:09:32,400 total population must agree, a single dissenting capital can no 149 00:09:32,400 --> 00:09:36,960 longer block a unified response. It turns European trade policy 150 00:09:36,960 --> 00:09:41,440 into a centralized one for all, all for one defense system. 151 00:09:41,880 --> 00:09:46,360 This tool allows Brussels to move past simple tit for tat 152 00:09:46,360 --> 00:09:50,520 tariffs and unleash a far broader menu of countermeasures. 153 00:09:50,720 --> 00:09:55,120 For instance, the EU could legally bar US tech firms from 154 00:09:55,120 --> 00:09:58,120 bidding on massive public procurement contracts for 155 00:09:58,120 --> 00:10:02,160 hospitals, schools and digital infrastructure, markets where 156 00:10:02,160 --> 00:10:05,720 American vendors currently enjoy a substantial share. 157 00:10:06,240 --> 00:10:09,720 They could also choose to restrict or outright close 158 00:10:09,720 --> 00:10:14,640 access to the EU's 450 million consumer market for U.S. 159 00:10:14,640 --> 00:10:18,760 financial services, hitting Wall Street banks and venture capital 160 00:10:18,760 --> 00:10:22,800 funds where it hurts. In perhaps the most radical move 161 00:10:22,800 --> 00:10:27,040 available, the ACI even allows Europe to revoke the 162 00:10:27,040 --> 00:10:30,760 intellectual property rights of companies from the coercing 163 00:10:30,760 --> 00:10:33,640 country. This would effectively jailbreak 164 00:10:33,640 --> 00:10:37,760 American software and hardware, allowing European firms to 165 00:10:37,760 --> 00:10:42,440 legally ignore US patents and commercial protections within 166 00:10:42,440 --> 00:10:46,240 the single market. While the trade bazooka targets 167 00:10:46,240 --> 00:10:49,480 the digital and financial software of the modern economy, 168 00:10:49,720 --> 00:10:53,040 Europe has also been identifying the industrial hardware 169 00:10:53,040 --> 00:10:57,200 bottlenecks where the US remains critically dependent on Europe. 170 00:10:57,560 --> 00:11:02,360 The centrepiece of this strategy is the Dutch firm ASML, which 171 00:11:02,360 --> 00:11:06,800 holds a global monopoly on the EUV lithography machines needed 172 00:11:06,800 --> 00:11:10,400 to manufacture the world's most advanced computer chips. 173 00:11:11,040 --> 00:11:15,200 Analysts are increasingly describing ASML as Europe's 174 00:11:15,200 --> 00:11:19,880 version of rare earths, a unique technological gatekeeper that 175 00:11:19,880 --> 00:11:23,720 gives Brussels a massive say in the global AI race. 176 00:11:24,160 --> 00:11:28,360 If Europe were to restrict the export, or even more subtly the 177 00:11:28,360 --> 00:11:32,360 servicing of these machines, it would strike a direct blow to 178 00:11:32,360 --> 00:11:35,640 the Silicon Valley innovation engine that the White House 179 00:11:35,640 --> 00:11:38,360 views as its primary strategic asset. 180 00:11:38,960 --> 00:11:42,920 As you'll start to see with many of these solutions, the ASML 181 00:11:42,920 --> 00:11:45,520 chokehold is more of a mutual leash. 182 00:11:45,800 --> 00:11:48,880 While the machines are designed and built in the Netherlands, 183 00:11:49,080 --> 00:11:52,480 they are filled with American made components like the 184 00:11:52,480 --> 00:11:55,720 high-powered Cymer lasers from San Diego. 185 00:11:56,080 --> 00:12:00,160 Under the Foreign Direct Product rule, Washington could veto the 186 00:12:00,160 --> 00:12:04,200 export of any product that contains a significant amount of 187 00:12:04,400 --> 00:12:08,880 US technology. So if Brussels tries to use ASML 188 00:12:08,960 --> 00:12:12,360 as a weapon, the US can essentially brick the production 189 00:12:12,360 --> 00:12:16,680 line by cutting off the American parts and software updates that 190 00:12:16,680 --> 00:12:21,080 keep those machines alive. Leverage isn't just found in 191 00:12:21,080 --> 00:12:25,520 high end silicon, it's also in more basic industrial feedstocks 192 00:12:25,520 --> 00:12:27,920 that keep American manufacturing humming. 193 00:12:28,200 --> 00:12:32,960 The EU has already been treating aluminium and steel scrap as a 194 00:12:32,960 --> 00:12:37,800 critical secondary raw material, moving to restrict its export. 195 00:12:38,080 --> 00:12:41,520 This would hit the US steel makers who rely on using 196 00:12:41,520 --> 00:12:45,400 recycled materials to keep their energy costs down. 197 00:12:45,960 --> 00:12:48,960 By cutting off the flow of specialized chemicals and 198 00:12:48,960 --> 00:12:52,880 industrial products, Europe is signaling that it can clog the 199 00:12:52,880 --> 00:12:56,720 arteries of American industry just as effectively as any 200 00:12:56,720 --> 00:12:59,920 digital lockout. Finally, there's the most 201 00:12:59,920 --> 00:13:05,080 conventional part of the arsenal, the €93 billion or $108 202 00:13:05,080 --> 00:13:09,920 billion retaliatory list of tariffs originally drafted after 203 00:13:09,920 --> 00:13:12,720 the Liberation Day shock of last year. 204 00:13:13,000 --> 00:13:17,000 Liberation Day is on April 1st for those who celebrate it. 205 00:13:17,320 --> 00:13:21,040 These aren't just randomly applied to drive up costs on 206 00:13:21,040 --> 00:13:24,320 European consumers. They're carefully calibrated to 207 00:13:24,320 --> 00:13:28,200 maximize political pain in America while minimizing the 208 00:13:28,200 --> 00:13:32,520 price tag for European voters. By targeting soybeans, for 209 00:13:32,520 --> 00:13:35,920 example, the EU is sending a direct message to the 210 00:13:35,920 --> 00:13:39,360 agricultural heartland that supports Republican leaders like 211 00:13:39,360 --> 00:13:43,440 House Speaker Mike Johnson. The list also features the 212 00:13:43,520 --> 00:13:47,560 classic targets, iconic American products like Harley-Davidson 213 00:13:47,560 --> 00:13:51,920 motorcycles, Levi's jeans, and American whiskey. 214 00:13:52,640 --> 00:13:56,440 These were chosen precisely because they're easily replaced 215 00:13:56,440 --> 00:14:00,120 by European, Japanese, or South American alternatives. 216 00:14:00,480 --> 00:14:03,760 The goal is to make the trade war feel expensive to the 217 00:14:03,760 --> 00:14:07,440 average American voter while ensuring that the European side 218 00:14:07,440 --> 00:14:12,000 of the Ledger remains balanced. As effective as this arsenal of 219 00:14:12,000 --> 00:14:16,080 trade weapons might appear at first glance, it's mostly built 220 00:14:16,080 --> 00:14:18,760 on a series of macroeconomic myths. 221 00:14:19,280 --> 00:14:23,120 In the high stakes theatre of Davos, the threat of a Treasury 222 00:14:23,120 --> 00:14:26,640 dump or a tariff wall makes for great headlines. 223 00:14:26,800 --> 00:14:30,480 But as the dust settles, the economic reality is far more 224 00:14:30,480 --> 00:14:33,480 sobering. The argument that a massive sell 225 00:14:33,480 --> 00:14:37,680 off of U.S. debt by European bondholders would spike interest 226 00:14:37,680 --> 00:14:41,440 rates and bankrupt the US who are highly indebted and trying 227 00:14:41,440 --> 00:14:45,000 to reduce the interest rate on the massive deficit spending 228 00:14:45,280 --> 00:14:49,920 doesn't hold up to scrutiny. For starters, the act of dumping 229 00:14:49,920 --> 00:14:53,640 bonds on such a scale is inherently self defeating. 230 00:14:53,880 --> 00:14:57,040 By flooding the market, you drive down the price of the very 231 00:14:57,040 --> 00:15:00,880 assets you're trying to exit, essentially setting fire to your 232 00:15:00,880 --> 00:15:03,320 own portfolio to spite your neighbor. 233 00:15:03,840 --> 00:15:07,680 Furthermore, once you've dumped the bonds, you're left with U.S. 234 00:15:07,680 --> 00:15:10,080 dollars. You now need to find another 235 00:15:10,080 --> 00:15:13,080 currency to store trillions of dollars of wealth in. 236 00:15:13,320 --> 00:15:16,640 There simply aren't many economies with open capital 237 00:15:16,640 --> 00:15:20,360 accounts liquid enough to absorb trillions in savings. 238 00:15:20,640 --> 00:15:24,640 Large alternatives like China or India have strict capital 239 00:15:24,640 --> 00:15:28,560 controls in place. Even if you pivoted to trillions 240 00:15:28,560 --> 00:15:33,080 in Japanese bonds, Tokyo would likely just recycle those funds 241 00:15:33,080 --> 00:15:35,880 back into U.S. Treasuries, leaving you 242 00:15:35,920 --> 00:15:39,560 indirectly exposed. It just wouldn't work. 243 00:15:40,120 --> 00:15:43,800 The economist Michael Pettis makes a more sophisticated 244 00:15:43,800 --> 00:15:46,240 argument about why this wouldn't work. 245 00:15:46,440 --> 00:15:50,600 He argues that the threat to weaponize Treasuries is a dud 246 00:15:50,800 --> 00:15:55,280 because foreign capital inflows are not a gift to the US, but 247 00:15:55,280 --> 00:15:59,280 instead a burden. The inflows force the US to run 248 00:15:59,280 --> 00:16:03,480 massive trade deficits and pile up debt just to balance the 249 00:16:03,480 --> 00:16:06,720 global Ledger. He explains that you can't 250 00:16:06,720 --> 00:16:09,600 change your capital account without changing the trade 251 00:16:09,600 --> 00:16:13,600 account and you can't change external imbalances without also 252 00:16:13,600 --> 00:16:18,520 changing internal imbalances. According to Pettis, suppression 253 00:16:18,520 --> 00:16:22,520 of consumption in China and other export driven countries 254 00:16:22,720 --> 00:16:27,080 leads to huge trade surpluses in their countries and thus to 255 00:16:27,080 --> 00:16:31,120 large deficits abroad. His argument is that when 256 00:16:31,120 --> 00:16:34,720 capital is not being drawn into a country by the need for 257 00:16:34,720 --> 00:16:38,680 investment, but instead is being pushed in to compensate for 258 00:16:38,680 --> 00:16:42,640 imbalances abroad, like China exporting way more than they 259 00:16:42,640 --> 00:16:47,120 import, the foreign capital doesn't fund investment, it 260 00:16:47,120 --> 00:16:50,960 indirectly funds the consumer or fiscal borrowing. 261 00:16:51,280 --> 00:16:55,400 He argues that if export driven economy stopped storing their 262 00:16:55,400 --> 00:16:58,960 excess savings in American bonds, it would likely help the 263 00:16:59,200 --> 00:17:03,400 US by forcing its trade deficit to shrink and its domestic 264 00:17:03,400 --> 00:17:07,440 savings to rise. This leads into what Martin Wolf 265 00:17:07,440 --> 00:17:11,400 of the Financial Times describes as the lunacy of the current 266 00:17:11,400 --> 00:17:15,440 tariff obsession. Wolf argues that Trump's tariffs 267 00:17:15,440 --> 00:17:18,440 can't actually save American industry. 268 00:17:18,680 --> 00:17:21,960 They'll simply shift domestic production away from the 269 00:17:21,960 --> 00:17:25,280 efficient production of exportable goods towards the 270 00:17:25,280 --> 00:17:28,640 less efficient production of import substitutes. 271 00:17:29,320 --> 00:17:33,600 You might protect a few specific factories this way, but you do 272 00:17:33,600 --> 00:17:36,640 it by making the rest of the country poorer and less 273 00:17:36,640 --> 00:17:40,160 competitive. Richard Salmons of the Brookings 274 00:17:40,160 --> 00:17:43,560 Institute takes this idea further, arguing that the 275 00:17:43,560 --> 00:17:47,680 problem is that world leaders are trying to use microeconomic 276 00:17:47,680 --> 00:17:51,720 tools like tariffs under Trump and subsidies under Biden to 277 00:17:51,720 --> 00:17:56,360 fight a macroeconomic war. These trade tools are blunt 278 00:17:56,360 --> 00:18:00,240 instruments being used to address a system that's actually 279 00:18:00,240 --> 00:18:03,360 suffering from a massive imbalance between what different 280 00:18:03,360 --> 00:18:07,280 nations save and what they invest, which is mostly driven 281 00:18:07,480 --> 00:18:09,760 by consumption suppression abroad. 282 00:18:09,960 --> 00:18:14,160 He argues that these tools treat the superficial symptoms of the 283 00:18:14,160 --> 00:18:17,960 underlying problem with an over prescription of an outmoded 284 00:18:17,960 --> 00:18:21,840 medicine that runs the risk of precipitating A cascading 285 00:18:21,840 --> 00:18:24,400 failure of the patient's vital functions. 286 00:18:24,720 --> 00:18:28,880 Salmons argues that the time is ripe for a new deal, not unlike 287 00:18:28,880 --> 00:18:33,320 the Plaza and Louvre Accords of the 1980s, to be struck among 288 00:18:33,320 --> 00:18:37,160 the major economic powers which would strengthen the growth and 289 00:18:37,160 --> 00:18:40,840 stability of the world economy, an outcome that would be greatly 290 00:18:40,840 --> 00:18:44,120 in the national interests of Europe, China, and the United 291 00:18:44,120 --> 00:18:47,480 States. The US does want to see trade 292 00:18:47,480 --> 00:18:51,800 rebalanced, Europe is prepared to do its part, and China does 293 00:18:51,800 --> 00:18:55,720 seem to have recognized after wave upon wave of supply side 294 00:18:55,720 --> 00:19:00,000 investment stimulus that it is no choice but to boost domestic 295 00:19:00,000 --> 00:19:04,000 consumption in order to maintain sufficient growth in output and 296 00:19:04,000 --> 00:19:07,560 employment. My worry is that people in 297 00:19:07,560 --> 00:19:11,280 positions to make these changes don't understand the nature of 298 00:19:11,280 --> 00:19:15,200 the problem and believe the tariffs or subsidies will fix 299 00:19:15,200 --> 00:19:18,320 everything. As Martin Wolf points out, the 300 00:19:18,320 --> 00:19:23,040 interaction of U.S. trade policy with its fiscal policy offset 301 00:19:23,040 --> 00:19:25,200 each other. The tariffs are supposed to 302 00:19:25,200 --> 00:19:29,040 reduce, if not eliminate, trade deficits, while the large 303 00:19:29,040 --> 00:19:32,680 external deficits mean by definition that the country's 304 00:19:32,680 --> 00:19:36,480 spending more than its income, meaning that it has to buy from 305 00:19:36,480 --> 00:19:39,440 abroad. With the US economy running 306 00:19:39,440 --> 00:19:44,040 close to its potential with very low unemployment, no further 307 00:19:44,040 --> 00:19:48,520 quick way to raise incomes exists, so reducing the external 308 00:19:48,520 --> 00:19:52,280 deficit would require reductions in national spending. 309 00:19:53,080 --> 00:19:57,320 Ultimately, the attacks and counterattacks, meaning the US 310 00:19:57,320 --> 00:20:01,160 tariffs and the European retaliations, simply make 311 00:20:01,160 --> 00:20:03,960 everyone poorer. The true danger, as The 312 00:20:03,960 --> 00:20:07,600 Economist notes, isn't just the shrinking GDP. 313 00:20:07,800 --> 00:20:11,400 It's the permanent evaporation of trust between historically 314 00:20:11,400 --> 00:20:15,520 friendly nations. If we enter an era of autarky 315 00:20:15,520 --> 00:20:18,880 where every nation feels compelled to build its own 316 00:20:18,880 --> 00:20:24,120 redundant, expensive and fragile fortress economy, it's no longer 317 00:20:24,120 --> 00:20:27,080 about more expensive soy or motorcycles. 318 00:20:27,240 --> 00:20:30,920 It's about the end of the efficiency first era, where we 319 00:20:30,920 --> 00:20:35,000 trade the gains of global trade for the expense of redundant 320 00:20:35,000 --> 00:20:39,800 safety of the bunker as capital is diverted in the US and Europe 321 00:20:39,800 --> 00:20:43,240 to military spending. We find ourselves moving from a 322 00:20:43,240 --> 00:20:47,240 world of the great illusion where we believed that economic 323 00:20:47,240 --> 00:20:51,800 ties made war impossible, to a world where the new illusion is 324 00:20:51,800 --> 00:20:55,160 that anyone can actually win in this scenario of growing 325 00:20:55,160 --> 00:20:58,440 hostility between formerly friendly nations. 326 00:20:59,000 --> 00:21:02,880 The Economist warns that while Trump backed down at Davos, 327 00:21:03,040 --> 00:21:07,040 Europeans should still heed the language in his speech, which 328 00:21:07,040 --> 00:21:11,400 betrayed an ominous contempt for Europe and for the value to 329 00:21:11,400 --> 00:21:15,360 America of the transatlantic alliance as it works today. 330 00:21:15,800 --> 00:21:19,160 They warn that if the rest of the world decides that they can 331 00:21:19,160 --> 00:21:23,480 no longer trust America, Germany, Japan, Poland and South 332 00:21:23,480 --> 00:21:27,920 Korea would rush to rearm and possibly seek nuclear weapons. 333 00:21:28,440 --> 00:21:32,640 Proliferation, they argue, would curb the value of America's own 334 00:21:32,640 --> 00:21:35,400 arsenal and inhibited statecraft. 335 00:21:35,760 --> 00:21:40,280 They argue that China and Russia won't necessarily agree with Mr. 336 00:21:40,280 --> 00:21:43,800 Trump on where America's influence ends and theirs 337 00:21:43,800 --> 00:21:48,080 begins, and this might lead to a war so devastating that America 338 00:21:48,080 --> 00:21:51,360 could not stay out of that. Thanks for tuning into the 339 00:21:51,360 --> 00:21:55,120 podcast, with special thanks to my supporters on Patreon whose 340 00:21:55,120 --> 00:21:57,600 financial support keeps this whole thing going. 341 00:21:57,840 --> 00:22:01,040 If you enjoy the podcast, I'd really appreciate you giving it 342 00:22:01,040 --> 00:22:04,520 a five star rating or writing a short review on whatever 343 00:22:04,520 --> 00:22:08,240 platform you listen on, as that should help the podcast grow. 344 00:22:08,440 --> 00:22:10,800 Have a great week and talk to you again soon. 345 00:22:10,960 --> 00:22:11,280 Bye.