1 00:00:00,160 --> 00:00:03,560 On what was described as Liberation Day this Wednesday, 2 00:00:03,840 --> 00:00:07,240 Donald Trump held up a large cardboard sign in the White 3 00:00:07,240 --> 00:00:10,800 House Rose Garden with a list of countries along with his 4 00:00:10,800 --> 00:00:14,120 estimate of their tariffs against America, which he said 5 00:00:14,120 --> 00:00:18,080 included currency manipulation, trade restrictions and other 6 00:00:18,080 --> 00:00:20,360 distortions like value added tax. 7 00:00:21,120 --> 00:00:25,040 As he revealed his placard, the stock market began its decline 8 00:00:25,240 --> 00:00:29,040 to what would soon be the 15th biggest gap down open for the 9 00:00:29,040 --> 00:00:32,240 S&P in its history. Joe Weisenthal at Bloomberg 10 00:00:32,439 --> 00:00:36,080 described watching the speech as one of the most surreal events 11 00:00:36,080 --> 00:00:39,520 in his life, saying that he has seen speeches and press 12 00:00:39,520 --> 00:00:43,240 conferences that the market hated before like this, but they 13 00:00:43,240 --> 00:00:46,560 had all been given in the middle of a market crisis and the 14 00:00:46,560 --> 00:00:50,240 market plunged because the speaker was seen to not be doing 15 00:00:50,240 --> 00:00:52,400 enough. He says that this was the first 16 00:00:52,400 --> 00:00:55,720 self manufactured event like this that he had seen. 17 00:00:55,920 --> 00:00:59,480 And what made it worse, he said, was that the administration knew 18 00:00:59,480 --> 00:01:03,280 how much damage they would do, but went ahead with even more 19 00:01:03,280 --> 00:01:06,160 aggressive actions than anyone had expected. 20 00:01:06,600 --> 00:01:09,800 To be clear from the start, this is not a political video. 21 00:01:10,000 --> 00:01:13,360 I've no interest in covering political topics, but this is 22 00:01:13,360 --> 00:01:16,160 likely to be the biggest market event of the year. 23 00:01:16,480 --> 00:01:20,560 My goal is just to discuss the ideas behind these tariffs and 24 00:01:20,560 --> 00:01:23,840 their economic impact. Both sides of the political 25 00:01:23,840 --> 00:01:27,320 aisle in the United States had been moving in a protectionist 26 00:01:27,320 --> 00:01:30,720 direction in recent years, and Trump's moves are just more 27 00:01:30,720 --> 00:01:34,120 extreme than Biden's were. But neither were taking a free 28 00:01:34,120 --> 00:01:37,640 markets approach. During the Liberation Day event, 29 00:01:37,840 --> 00:01:41,920 Trump announced new reciprocal tariffs on almost all of 30 00:01:41,920 --> 00:01:45,080 America's trading partners. He announced that there would be 31 00:01:45,080 --> 00:01:51,640 additional tariffs of 34% on China, 27% on I24, percent on 32 00:01:51,640 --> 00:01:56,640 Japan and 20% on the EU. All other countries face a 33 00:01:56,640 --> 00:02:00,200 tariff of 10%. And these tariffs are on top of 34 00:02:00,200 --> 00:02:04,200 other tariffs already announced by the Trump administration on 35 00:02:04,200 --> 00:02:07,440 China, Mexico, Canada and the other industry. 36 00:02:07,960 --> 00:02:12,360 The total tariff rate on China will now be 65%. 37 00:02:12,520 --> 00:02:16,720 If the US applies to 25% Venezuelan oil buyers tariff to 38 00:02:16,720 --> 00:02:20,960 China, it goes even higher. If there was one bright spot, 39 00:02:21,160 --> 00:02:25,040 Canada and Mexico were spared additional tariffs and the new 40 00:02:25,040 --> 00:02:29,680 ones won't be added to industry specific tariffs like the 25% 41 00:02:29,680 --> 00:02:33,720 tariff on cars or the promise tariff on semiconductors. 42 00:02:34,400 --> 00:02:38,680 America's overall tariff rate will now soar far above its 43 00:02:38,680 --> 00:02:42,520 Depression era level to the highest rate seen in over 100 44 00:02:42,520 --> 00:02:45,760 years. Tariffs are quite simply taxes 45 00:02:45,760 --> 00:02:49,480 on goods imported from other countries which are charged at 46 00:02:49,480 --> 00:02:52,120 the port of entry. Despite what some people are 47 00:02:52,120 --> 00:02:55,600 saying, foreign countries do not pay these taxes. 48 00:02:55,840 --> 00:02:59,000 The companies or individuals bringing the goods into the 49 00:02:59,000 --> 00:03:01,920 country pay the tax to the US government. 50 00:03:02,400 --> 00:03:06,120 Tariffs have often been used to push a country citizens to buy 51 00:03:06,120 --> 00:03:09,400 domestically manufactured goods rather than imported goods. 52 00:03:09,640 --> 00:03:12,560 They're sometimes used in developing nations to protect 53 00:03:12,560 --> 00:03:16,720 fledgling industries until they grow and can compete with more 54 00:03:16,720 --> 00:03:19,760 advanced competitors from more advanced nations. 55 00:03:20,280 --> 00:03:23,400 During the event, Trump confirmed his previously 56 00:03:23,400 --> 00:03:28,040 announced tariffs on specific goods, including 25% on steel, 57 00:03:28,240 --> 00:03:32,880 aluminium and foreign made cars. The Wall Street consensus in the 58 00:03:32,880 --> 00:03:36,360 lead up to the event had been that the average tariff rate 59 00:03:36,360 --> 00:03:40,880 would rise to between 10 and 20%, with most analysts in the 60 00:03:40,880 --> 00:03:44,600 bottom half of that range. The effective rate announced is 61 00:03:44,600 --> 00:03:49,920 somewhere between 25% and 30%, so much higher than was expected 62 00:03:50,080 --> 00:03:54,280 and and up from an average of around 2% before Trump took 63 00:03:54,280 --> 00:03:58,960 office. the US is now one of the highest tariff nations in the 64 00:03:58,960 --> 00:04:01,360 world, or at least in the developed world. 65 00:04:01,560 --> 00:04:04,680 It's still not clear if Trump plans on maintaining these 66 00:04:04,680 --> 00:04:06,960 tariffs or if they're a bargaining tool. 67 00:04:07,120 --> 00:04:10,400 If the US stuck with these rates, it would do immense 68 00:04:10,400 --> 00:04:15,120 damage to the economy. On Thursday, the S&P 500 fell by 69 00:04:15,120 --> 00:04:19,240 almost 5%, with the tech heavy NASDAQ down 6%. 70 00:04:19,560 --> 00:04:23,280 Dell fell 19%. Apple fell 9%. 71 00:04:23,520 --> 00:04:26,440 Retail stocks were down 11% or more. 72 00:04:26,600 --> 00:04:30,800 Apparel makers like Ralph Lauren, Nike and Lululemon were 73 00:04:30,800 --> 00:04:35,840 down between 10 and 16%. The banks were down around 10%, 74 00:04:35,840 --> 00:04:38,440 too. It wasn't just stocks, either. 75 00:04:38,640 --> 00:04:42,240 The dollar fell 2%. Treasury yields had a big drop 76 00:04:42,480 --> 00:04:46,160 and oil prices fell too. I'm recording this on Friday 77 00:04:46,160 --> 00:04:50,480 morning and the S&P 500 is already down more than 4%. 78 00:04:50,640 --> 00:04:53,480 And this is after yesterday's 5% decline. 79 00:04:53,680 --> 00:04:57,400 So we can possibly expect more chaos in markets today. 80 00:04:57,960 --> 00:05:01,520 The drop in stocks, interest rates, oil, and the dollar 81 00:05:01,720 --> 00:05:04,960 reflected lower growth expectations for the United 82 00:05:04,960 --> 00:05:08,280 States economy, not the prosperity that Trump was 83 00:05:08,280 --> 00:05:11,280 pitching. Let's look at how Trump's tariff 84 00:05:11,280 --> 00:05:14,760 formula worked, who was hit hardest by these announcements, 85 00:05:15,000 --> 00:05:19,000 what retaliation might look like, the economic effects, and 86 00:05:19,000 --> 00:05:22,720 why Trump's hero William McKinley, who oversaw one of the 87 00:05:22,720 --> 00:05:26,560 biggest tariff bills in U.S. history, eventually abandoned 88 00:05:26,560 --> 00:05:29,920 his own tariff strategy straight after the White House 89 00:05:29,920 --> 00:05:32,960 presentation. The journalist James Sarawwicki 90 00:05:33,160 --> 00:05:36,520 quickly pointed out that there was something very strange about 91 00:05:36,520 --> 00:05:39,960 the supposed tariff rates that foreign countries were charging 92 00:05:39,960 --> 00:05:43,800 the United States. the US has a trade agreement with South 93 00:05:43,800 --> 00:05:48,280 Korea, he pointed out, so South Korea is not charging a 50% 94 00:05:48,280 --> 00:05:53,160 tariff on American goods, nor is Europe charging a 39% tariff. 95 00:05:53,400 --> 00:05:56,240 With some quick analysis, he worked out that the 96 00:05:56,240 --> 00:05:59,320 administration hadn't done the calculation that they claim to 97 00:05:59,320 --> 00:06:02,400 have done. Instead, for every country, they 98 00:06:02,400 --> 00:06:06,240 just took the US trade deficit with that country and divided it 99 00:06:06,240 --> 00:06:09,200 by the countries exports to the United States. 100 00:06:09,800 --> 00:06:13,400 When called out on this, the White House defended itself by 101 00:06:13,400 --> 00:06:16,520 publishing what might at first look like a complicated 102 00:06:16,520 --> 00:06:20,080 mathematical formula for backing out the tariff rates being 103 00:06:20,080 --> 00:06:23,480 charged by other countries. If you dig into the formula, 104 00:06:23,640 --> 00:06:27,080 which one commentator described as being woke because it 105 00:06:27,080 --> 00:06:31,360 included Greek symbols, you can see that they threw in two Greek 106 00:06:31,360 --> 00:06:35,200 symbols but then selected values for them that cancel out. 107 00:06:35,360 --> 00:06:39,360 So Sarah Wiki was right, the formula is simply the trade 108 00:06:39,360 --> 00:06:43,120 deficit it for the US with a particular country divided by 109 00:06:43,120 --> 00:06:45,440 the total imports from that country. 110 00:06:45,960 --> 00:06:48,680 There were some other strange things that people quickly 111 00:06:48,680 --> 00:06:51,760 noticed, like an unusual list of countries. 112 00:06:51,960 --> 00:06:56,040 You'll note that the 4th country on Trump's list is Taiwan, which 113 00:06:56,040 --> 00:06:58,520 the US doesn't recognize as a country. 114 00:06:58,680 --> 00:07:02,560 In order to keep China happy, the country list, which included 115 00:07:02,560 --> 00:07:06,200 tiny islands and overseas territories, LED online 116 00:07:06,200 --> 00:07:10,600 commentators to suggest that the White House had possibly used an 117 00:07:10,680 --> 00:07:14,280 AI to come up with their trade policy rather than doing any 118 00:07:14,280 --> 00:07:18,120 real trade analysis. The whole televised event felt 119 00:07:18,120 --> 00:07:20,840 more like a game show than a serious trade policy 120 00:07:20,840 --> 00:07:23,200 announcement. And in my opinion, they should 121 00:07:23,200 --> 00:07:26,600 have leaned into the game show vibe a bit more by possibly 122 00:07:26,600 --> 00:07:30,200 inviting the leaders or at least representatives from the foreign 123 00:07:30,200 --> 00:07:33,920 nations being tariffed to attend so that the cameras could zoom 124 00:07:33,920 --> 00:07:37,640 in on their faces to catch their expressions as the tariff rates 125 00:07:37,640 --> 00:07:40,280 were announced. Doing this would have made 126 00:07:40,280 --> 00:07:43,760 better TV, but it also could have prevented the embarrassment 127 00:07:43,760 --> 00:07:47,600 of announcing tariffs on places like Herd Island and the 128 00:07:47,600 --> 00:07:51,080 McDonald Islands, which are a two week boat ride from 129 00:07:51,080 --> 00:07:55,200 Australia and are covered in glaciers and only inhabited by 130 00:07:55,200 --> 00:07:58,800 Penguins. The Penguins were hit with a 10% 131 00:07:58,800 --> 00:08:02,120 tariff for looting, pillaging, and plundering the United 132 00:08:02,120 --> 00:08:05,040 States. When the Penguins that live on 133 00:08:05,040 --> 00:08:08,560 these islands turned up for the televised event, it might have 134 00:08:08,560 --> 00:08:11,800 given the White House a chance to take them off the list. 135 00:08:12,200 --> 00:08:15,800 If I was organizing the event, I would have left them on anyhow 136 00:08:16,000 --> 00:08:19,680 based on my long standing belief that Penguins make great TV. 137 00:08:20,080 --> 00:08:23,200 If this YouTube channel gets big enough I'll eventually add a 138 00:08:23,200 --> 00:08:26,360 Penguin as a Co host. I'm planning on buying a walk in 139 00:08:26,360 --> 00:08:28,960 refrigerator to store it in when I'm not recording. 140 00:08:29,360 --> 00:08:32,200 I haven't really looked into it, but I presume that's how you 141 00:08:32,200 --> 00:08:35,200 keep Penguins. The Penguins got off easy. 142 00:08:35,200 --> 00:08:39,559 However, the FT reports that Lesotho, a tiny landlocked 143 00:08:39,559 --> 00:08:44,280 African Kingdom with AGDP per capita of under $1000 per year, 144 00:08:44,480 --> 00:08:48,040 was hit much harder. Denim manufacturing makes up 145 00:08:48,200 --> 00:08:51,800 more than 90% of the manufacturing jobs in Lesotho, 146 00:08:52,080 --> 00:08:56,520 and the country had a $235,000,000 trade surplus with 147 00:08:56,520 --> 00:09:00,920 the United States, mostly from selling cloth to American brands 148 00:09:00,920 --> 00:09:05,480 like Levi's and Wrangler. They were hit with a 50% tariff. 149 00:09:05,800 --> 00:09:10,240 The Falkland Islands exported $27 million worth of goods to 150 00:09:10,240 --> 00:09:13,200 the United States. Their biggest export is 151 00:09:13,200 --> 00:09:17,200 something called the Patagonian toothfish, which is not native 152 00:09:17,200 --> 00:09:20,800 to the United States. The Falkland Islands, where less 153 00:09:20,800 --> 00:09:24,480 than 4000 people live, only imported goods valued at 154 00:09:24,480 --> 00:09:30,360 $329,000, one third of which was a single piece of broadcasting 155 00:09:30,360 --> 00:09:34,320 equipment. They were hit with a 41% tariff 156 00:09:34,360 --> 00:09:37,600 as punishment for the unrelenting economic warfare 157 00:09:37,600 --> 00:09:40,360 that they've been waging against the United States. 158 00:09:40,840 --> 00:09:43,440 Fortunately for them, they bought that piece of 159 00:09:43,440 --> 00:09:46,840 broadcasting equipment last year or the tariffs would have been 160 00:09:46,840 --> 00:09:50,040 even higher. It won't surprise you that the 161 00:09:50,040 --> 00:09:54,360 Falkland Islands don't have any tariffs in place on US goods. 162 00:09:54,680 --> 00:09:57,640 It's a bit pointless doing that when you have a population of 163 00:09:57,640 --> 00:10:02,240 3700 people and you probably feel lucky to be able to get any 164 00:10:02,240 --> 00:10:04,120 goods shipped to you to begin with. 165 00:10:04,720 --> 00:10:08,920 Madagascar, an even poorer nation with AGDP per capita of 166 00:10:08,920 --> 00:10:13,480 $506.00 per year, doesn't buy much from the United States 167 00:10:13,600 --> 00:10:16,480 either. You can only stretch those 506 168 00:10:16,480 --> 00:10:20,320 dollars so far, but they have the nerve to export vanilla 169 00:10:20,320 --> 00:10:23,960 beans which only grow in tropical countries and need to 170 00:10:23,960 --> 00:10:27,680 be hand pollinated and picked to the United States. 171 00:10:28,240 --> 00:10:33,000 They were hit with a 47% tariff. So you can expect to see a lot 172 00:10:33,000 --> 00:10:37,040 of growth in America's domestic vanilla growing industry and 173 00:10:37,040 --> 00:10:41,600 denim weaving industry as those jobs which pay as much as $500 174 00:10:41,600 --> 00:10:43,840 per year are brought back on shore. 175 00:10:44,640 --> 00:10:48,200 The fact that the calculation used to determine the tariffs is 176 00:10:48,200 --> 00:10:51,680 so strange, combined with the odd list of countries where it 177 00:10:51,680 --> 00:10:56,960 appears they used the ISO 3166 country codes without checking 178 00:10:56,960 --> 00:11:00,320 if each code represented an actual country, and then 179 00:11:00,400 --> 00:11:04,560 stripping out Russia, Cuba, and North Korea LED online 180 00:11:04,560 --> 00:11:08,680 commentators to suggest that the analysis had been done using 181 00:11:08,680 --> 00:11:12,920 ChatGPT. Just to be sure, I asked ChatGPT 182 00:11:13,040 --> 00:11:16,600 how to calculate reciprocal tariffs for the US government 183 00:11:16,840 --> 00:11:20,280 and it delivered a much more coherent plan than the official 184 00:11:20,280 --> 00:11:24,080 one that was announced. So I don't think ChatGPT can be 185 00:11:24,080 --> 00:11:26,680 blamed for this. Maybe they used Grok. 186 00:11:27,280 --> 00:11:30,760 One positive take away from the announcement was the relatively 187 00:11:30,760 --> 00:11:34,520 soft treatment of Canada and Mexico, where a lot of goods 188 00:11:34,520 --> 00:11:38,640 that fall under the USMCA agreement were made exempt from 189 00:11:38,640 --> 00:11:41,880 the tariffs. This possibly shows that the US 190 00:11:41,880 --> 00:11:44,840 learned one of the big lessons of Brexit, which was the 191 00:11:44,840 --> 00:11:48,160 importance of trade with a country's nearest neighbors. 192 00:11:48,440 --> 00:11:51,120 Countries typically trade most with their neighboring 193 00:11:51,120 --> 00:11:54,280 countries, and when you break those supply chains, they're 194 00:11:54,280 --> 00:11:58,120 very difficult to replace. Exempting pharmaceuticals, 195 00:11:58,120 --> 00:12:02,360 lumber, copper, semiconductors, and critical minerals was wise 196 00:12:02,360 --> 00:12:05,680 too, but something may be coming on that front soon. 197 00:12:06,360 --> 00:12:09,280 Look, it's easy to make fun of tariffs on Penguins. 198 00:12:09,280 --> 00:12:13,080 In fact, I might start an entire second channel to only do that. 199 00:12:13,320 --> 00:12:17,120 But we should consider the other side of the argument, which is 200 00:12:17,120 --> 00:12:20,400 that while the calculation might seem a bit bizarre and the 201 00:12:20,400 --> 00:12:23,960 analysis might look a little bit rushed, the announced trade 202 00:12:23,960 --> 00:12:27,400 measures do target China and it's neighboring countries, 203 00:12:27,560 --> 00:12:31,280 which are used as transshipping destinations to work around US 204 00:12:31,280 --> 00:12:34,840 tariffs on China. At the White House event, before 205 00:12:34,840 --> 00:12:38,760 announcing his tariffs, Trump listed his grievances and said 206 00:12:38,920 --> 00:12:42,360 that he had believed in tariffs as a remedy for trade imbalances 207 00:12:42,360 --> 00:12:44,720 for decades. I covered some of this in a 208 00:12:44,720 --> 00:12:46,760 prior video. But while the hyper 209 00:12:46,760 --> 00:12:51,000 globalization that began in the 1990s made the world better for 210 00:12:51,000 --> 00:12:55,360 most people, blue collar workers in developed countries lost out 211 00:12:55,360 --> 00:12:59,000 when manufacturing work moved abroad to countries where labor 212 00:12:59,000 --> 00:13:02,080 was cheap. While global inequality fell, 213 00:13:02,280 --> 00:13:05,080 inequality within developed countries grew. 214 00:13:05,360 --> 00:13:09,080 As my friend Manoj argued in his book, there was a huge labor 215 00:13:09,080 --> 00:13:13,400 supply shock, and laborers in developed countries lost out. 216 00:13:13,840 --> 00:13:17,600 On top of all of this, free trade economies began to worry 217 00:13:17,600 --> 00:13:21,160 that surplus economies like China, Germany, and Japan were 218 00:13:21,160 --> 00:13:24,720 engaging in unfair competition by subsidizing their 219 00:13:24,720 --> 00:13:28,440 manufacturing sectors, often at the expense of their household 220 00:13:28,440 --> 00:13:30,960 sectors. The suppressed wages in these 221 00:13:30,960 --> 00:13:34,360 countries meant that workers produced more goods than they 222 00:13:34,360 --> 00:13:37,360 could afford to buy and exported the surplus. 223 00:13:37,600 --> 00:13:41,280 This had the effect, according to Pettis and Klein, of passing 224 00:13:41,280 --> 00:13:44,800 on the costs of these subsidies to deficit at countries like the 225 00:13:44,800 --> 00:13:48,080 United States, the UK, India and France. 226 00:13:48,560 --> 00:13:52,720 Western economies began to see it as a problem that China had 227 00:13:52,720 --> 00:13:56,480 both the highest manufacturing share of GDP and the lowest 228 00:13:56,480 --> 00:13:58,720 consumption share of GDP in the world. 229 00:13:58,960 --> 00:14:02,960 By agreeing to absorb China's excess production deficit, 230 00:14:02,960 --> 00:14:06,520 economies were allowing their most aggressive trade partner to 231 00:14:06,520 --> 00:14:08,520 set their trade policies for them. 232 00:14:09,200 --> 00:14:12,840 Trump is right too that countries can hide economic 233 00:14:12,840 --> 00:14:16,760 interference with non tariff distortions which are hard to 234 00:14:16,760 --> 00:14:19,920 spot. They can subsidized exporters by 235 00:14:19,920 --> 00:14:23,240 providing cheap energy and low interest rate loans to favorite 236 00:14:23,240 --> 00:14:26,800 businesses from state owned energy companies and banks. 237 00:14:27,080 --> 00:14:30,160 They can manipulate their currency lower, benefiting 238 00:14:30,160 --> 00:14:34,080 exporting businesses at the expense of importing businesses 239 00:14:34,080 --> 00:14:37,040 and consumers. They can over invest in 240 00:14:37,040 --> 00:14:41,000 infrastructure like railways, roads and ports which helps the 241 00:14:41,000 --> 00:14:44,600 business sector at the expense of the household sector too. 242 00:14:45,160 --> 00:14:48,680 Repressive labor laws, restrictions on worker mobility, 243 00:14:48,880 --> 00:14:51,960 and low penalties for pollution additionally help the 244 00:14:51,960 --> 00:14:55,720 manufacturing sector at the expense of the household sector. 245 00:14:56,280 --> 00:14:59,840 In China, for example, industrial zoned land is an 246 00:14:59,840 --> 00:15:03,600 order of magnitude cheaper than residential land, and this is 247 00:15:03,600 --> 00:15:06,520 another transfer from the household sector to the business 248 00:15:06,520 --> 00:15:08,840 sector. When all of these policies are 249 00:15:08,840 --> 00:15:12,600 combined, there might be huge transfers from households to 250 00:15:12,600 --> 00:15:16,160 businesses which act as subsidies while also keeping 251 00:15:16,160 --> 00:15:20,160 consumption low so that an entire economy is geared up to 252 00:15:20,160 --> 00:15:23,800 export goods without importing anything from the rest of the 253 00:15:23,800 --> 00:15:26,920 world. In a closed economy, this would 254 00:15:26,920 --> 00:15:30,200 naturally rebalance as businesses would be forced to 255 00:15:30,200 --> 00:15:33,680 either raise wages to increase consumption, or they would have 256 00:15:33,680 --> 00:15:36,640 to reduce production due to a lack of demand. 257 00:15:36,880 --> 00:15:40,640 In a globalized trading system, the surplus production can be 258 00:15:40,640 --> 00:15:43,480 exported. Running an economy this way 259 00:15:43,480 --> 00:15:46,320 isn't necessarily a winning long term strategy. 260 00:15:46,520 --> 00:15:49,960 It can be used to kick start a dead economy, but in the long 261 00:15:49,960 --> 00:15:53,960 run a good economy is one that exports goods in order to get 262 00:15:53,960 --> 00:15:57,160 foreign exchange so that they can buy foreign goods that they 263 00:15:57,160 --> 00:16:01,280 either need or desire. The problem for export driven 264 00:16:01,280 --> 00:16:05,160 economies like this is that they usually struggle to rebalance 265 00:16:05,160 --> 00:16:08,280 from being export driven to consuming the goods that they 266 00:16:08,280 --> 00:16:11,320 produce. From a free market perspective, 267 00:16:11,480 --> 00:16:14,880 countries should be happy to import goods from countries who 268 00:16:14,880 --> 00:16:16,640 are subsidizing their production. 269 00:16:16,960 --> 00:16:21,080 Milton Friedman described export subsidies as a form of foreign 270 00:16:21,080 --> 00:16:24,520 philanthropy. Those who argue for fair trade 271 00:16:24,720 --> 00:16:28,640 rather than free trade say that persistent subsidized imports 272 00:16:28,840 --> 00:16:32,000 can eventually displace domestic production of often 273 00:16:32,000 --> 00:16:36,160 strategically important goods. They worry that these subsidies 274 00:16:36,160 --> 00:16:39,600 could bankrupt domestic producers, and that this becomes 275 00:16:39,600 --> 00:16:42,200 a a big problem for strategically important goods 276 00:16:42,200 --> 00:16:45,600 like steel, semiconductors, airplanes and ships. 277 00:16:45,880 --> 00:16:49,840 Fair traders will point out how car factories can be retooled to 278 00:16:49,840 --> 00:16:53,840 build weapons in time of war, but that you can't do this if 279 00:16:53,840 --> 00:16:57,120 neither the factories nor the expertise to run them exist 280 00:16:57,120 --> 00:17:00,480 anymore. Trump is arguing that tariffs on 281 00:17:00,480 --> 00:17:03,960 America's trading partners are necessary to protect US 282 00:17:03,960 --> 00:17:07,839 manufacturing and the American worker at a time when US 283 00:17:07,839 --> 00:17:11,240 manufacturing jobs have dropped since their peak in the late 284 00:17:11,240 --> 00:17:14,720 1970s. If you agree, based on that 285 00:17:14,720 --> 00:17:18,160 logic, that something needs to be done to rebalance global 286 00:17:18,160 --> 00:17:21,720 trade or even just American trade, And despite all of the 287 00:17:21,720 --> 00:17:24,599 disagreements, it would appear that both the right and left in 288 00:17:24,599 --> 00:17:28,520 American politics do seem to feel this way, with Trump 289 00:17:28,520 --> 00:17:31,520 seeming to believe more in tariffs and Biden more in 290 00:17:31,520 --> 00:17:34,440 subsidies. It brings us to the question of 291 00:17:34,440 --> 00:17:37,400 why the tariffs are being ramped up so aggressively. 292 00:17:37,680 --> 00:17:40,680 And additionally, is it necessary to fight with your 293 00:17:40,680 --> 00:17:43,920 closest trading partners? Many of who whom are in the same 294 00:17:43,920 --> 00:17:47,040 position as you rather than working with them. 295 00:17:47,760 --> 00:17:50,680 If the goal was to bring factories back to the United 296 00:17:50,680 --> 00:17:54,720 States, most economists argue that a more gradual approach to 297 00:17:54,720 --> 00:17:56,720 applying tariffs would work better. 298 00:17:57,040 --> 00:18:00,040 Some of the worst hit stocks since the announcement were 299 00:18:00,040 --> 00:18:03,440 firms like Apple and Nike. These are very successful 300 00:18:03,440 --> 00:18:07,200 American firms who do all of the high value added design and 301 00:18:07,200 --> 00:18:11,160 marketing work in the United States and outsource the less 302 00:18:11,160 --> 00:18:15,040 profitable manufacturing work. Apple has been trying to 303 00:18:15,040 --> 00:18:18,960 diversify their supply chains in recent years to be less reliant 304 00:18:18,960 --> 00:18:21,920 on China, but they can't reasonably move all of their 305 00:18:21,920 --> 00:18:25,440 factories back to the United States in the next few months. 306 00:18:25,760 --> 00:18:28,720 And so the tariffs will just push up the price of their 307 00:18:28,720 --> 00:18:32,040 products while giving a cost advantage to the Korean owned 308 00:18:32,040 --> 00:18:37,760 Samsung who get hit with a 25% tariff instead of the 65% or 309 00:18:37,760 --> 00:18:40,200 higher tariff that Apple will suffer. 310 00:18:40,920 --> 00:18:45,680 And that depends on if the 25% Venezuelan oil buyers tariff is 311 00:18:45,680 --> 00:18:49,040 also being applied. According to Morgan Stanley, 312 00:18:49,320 --> 00:18:52,960 Apple take the biggest hit in terms of tariffs due to their 313 00:18:52,960 --> 00:18:57,560 manufacturing exposure to China. James Scott from King's College 314 00:18:57,560 --> 00:19:01,400 London argues that a huge problem with Trump's focus on 315 00:19:01,400 --> 00:19:05,080 bringing manufacturing back is that manufacturing has changed a 316 00:19:05,080 --> 00:19:08,840 lot in recent decades. He says that the model of 317 00:19:08,840 --> 00:19:12,520 manufacturing that underpins Trump's approach hasn't existed 318 00:19:12,640 --> 00:19:16,600 for the best part of 40 years, and it's not coming back either. 319 00:19:17,200 --> 00:19:20,800 The loss of manufacturing jobs is as much about increased 320 00:19:20,800 --> 00:19:25,440 automation as it is about offshoring. 100 years ago, most 321 00:19:25,440 --> 00:19:28,920 workers were employed as agricultural laborers, but 322 00:19:28,920 --> 00:19:32,480 increased farm productivity, driven by mechanization, put an 323 00:19:32,480 --> 00:19:34,680 end to that. The same, he argues, has 324 00:19:34,680 --> 00:19:38,640 happened in manufacturing, and reversing this trend is no more 325 00:19:38,640 --> 00:19:42,320 likely than great swathes of workers returning to working in 326 00:19:42,320 --> 00:19:45,600 the fields. Some are arguing that these 327 00:19:45,600 --> 00:19:48,920 massive tariffs are simply a negotiation tactic. 328 00:19:49,200 --> 00:19:52,680 The Trump supporting hedge fund manager Bill Aikman tweeted 329 00:19:52,680 --> 00:19:56,600 yesterday that sometimes the best strategy in a negotiation 330 00:19:56,840 --> 00:19:59,560 is convincing the other side that you're crazy. 331 00:20:00,120 --> 00:20:04,320 Treasury Secretary Scott Percent told Republican House lawmakers 332 00:20:04,320 --> 00:20:08,040 the day before the announcement, hopefully not as an April Fools 333 00:20:08,040 --> 00:20:12,000 joke, that the reciprocal tariffs represent a cap of the 334 00:20:12,000 --> 00:20:15,960 highest US tariff level that countries will face and could go 335 00:20:15,960 --> 00:20:18,880 down if they meet the administrations demands. 336 00:20:19,400 --> 00:20:22,320 It's not clear that this is true, as if the plan was to 337 00:20:22,320 --> 00:20:25,960 negotiate them down or come up with something that doesn't harm 338 00:20:25,960 --> 00:20:30,160 America's largest businesses. The fact that each country is 339 00:20:30,160 --> 00:20:33,440 getting a different deal makes it extremely difficult to 340 00:20:33,440 --> 00:20:38,120 negotiate one by one with each country in a meaningful way over 341 00:20:38,120 --> 00:20:41,160 a few days. I don't see how genuine 342 00:20:41,160 --> 00:20:44,800 negotiations could be done at the speed needed to avoid 343 00:20:44,920 --> 00:20:47,200 harming America's best businesses. 344 00:20:47,600 --> 00:20:51,320 On top of this, due to the wacky calculation which is based 345 00:20:51,320 --> 00:20:55,440 entirely on trade surpluses with the United States and nothing 346 00:20:55,440 --> 00:20:58,800 else, there's nothing obvious for many of America's trade 347 00:20:58,800 --> 00:21:02,000 partners to offer. What the Trump administration is 348 00:21:02,000 --> 00:21:06,000 demanding is the country should buy the exact same amount from 349 00:21:06,000 --> 00:21:08,680 America as America buys from them. 350 00:21:09,040 --> 00:21:12,960 This makes no sense whatsoever. If a business has a relationship 351 00:21:12,960 --> 00:21:15,960 with a supplier, that supplier doesn't also need to be a 352 00:21:15,960 --> 00:21:20,080 customer of that business. Madagascar is a good example. 353 00:21:20,240 --> 00:21:24,320 While Americans consume over 1000 tons of vanilla per year, 354 00:21:24,560 --> 00:21:28,480 the impoverished residents of Madagascar have almost no need 355 00:21:28,480 --> 00:21:31,360 for US exports. There's not much that they can 356 00:21:31,360 --> 00:21:35,400 do to close that trade gap, and they're not taking advantage of 357 00:21:35,400 --> 00:21:38,960 Americans by selling them a product that Americans want to 358 00:21:38,960 --> 00:21:42,200 buy. Countries like Canada and Mexico 359 00:21:42,400 --> 00:21:46,200 may sell more to America than they buy from it, but they run 360 00:21:46,200 --> 00:21:49,160 trade deficits with other countries and have mostly 361 00:21:49,160 --> 00:21:52,640 balanced trade. The idea that any trade America 362 00:21:52,640 --> 00:21:56,800 does is cheating America makes absolutely no sense. 363 00:21:57,640 --> 00:22:01,200 The trade negotiations are further muddled by the fact that 364 00:22:01,200 --> 00:22:04,160 Trump claims that they're driven by different factors. 365 00:22:04,480 --> 00:22:08,360 The earlier tariffs on China, Mexico, and Canada were placed 366 00:22:08,360 --> 00:22:12,000 in part he claimed, to stop fentanyl from flowing into the 367 00:22:12,000 --> 00:22:14,840 United States. If those countries were able to 368 00:22:14,840 --> 00:22:18,120 meet Trump's demands on this front, would he then drop the 369 00:22:18,120 --> 00:22:20,440 tariffs? It's possible that he simply 370 00:22:20,440 --> 00:22:24,000 sees tariffs as a good way to raise revenue, and if that's the 371 00:22:24,000 --> 00:22:26,840 case, he wouldn't want to come to an agreement with those 372 00:22:26,840 --> 00:22:30,040 countries as he would need to raise revenue somewhere else. 373 00:22:30,040 --> 00:22:34,320 Then in a campaign speech last summer, JD Vance told the 374 00:22:34,320 --> 00:22:38,560 audience that a million cheap knock off toasters aren't worth 375 00:22:38,560 --> 00:22:41,680 the price of a single American manufacturing job. 376 00:22:42,040 --> 00:22:44,760 Well, there's obvious hyperbole in that statement. 377 00:22:45,040 --> 00:22:48,360 Vance and Trump do seem to believe that America would be 378 00:22:48,360 --> 00:22:52,000 better off if it manufactured more and imported less, and 379 00:22:52,080 --> 00:22:55,640 Americans would be better off working in toaster factories 380 00:22:55,800 --> 00:22:57,560 than doing whatever job they have now. 381 00:22:57,640 --> 00:23:01,960 Now, most Americans don't actually want these factory jobs 382 00:23:01,960 --> 00:23:04,520 that JD Vance is so excited about, either. 383 00:23:04,800 --> 00:23:08,760 There were 8 million unfilled jobs in the United States as of 384 00:23:08,760 --> 00:23:12,360 the last count, according to the Department of Labor, and most 385 00:23:12,360 --> 00:23:16,280 Americans would rather buy an affordable imported toaster than 386 00:23:16,280 --> 00:23:21,040 have the opportunity to make one. the US economy has been on 387 00:23:21,040 --> 00:23:24,280 a run that is the envy of the rest of the world for the last 388 00:23:24,280 --> 00:23:27,360 few decades. Almost every other economy in 389 00:23:27,360 --> 00:23:30,880 the world stagnated in the wake of the credit crunch, while 390 00:23:30,880 --> 00:23:34,920 America led the world in innovation and R&D, not 391 00:23:34,960 --> 00:23:37,960 producing toasters. One of the problems with 392 00:23:37,960 --> 00:23:42,600 protectionism is that it reduces competition and could damage the 393 00:23:42,640 --> 00:23:46,840 US economy if American companies no longer felt the need to 394 00:23:46,840 --> 00:23:49,320 innovate. Protectionism is one of the the 395 00:23:49,320 --> 00:23:52,360 things blamed for destroying the Argentine economy. 396 00:23:53,240 --> 00:23:56,600 While Americans might be jealous of Germany's manufacturing 397 00:23:56,600 --> 00:24:00,040 output, they may not want to find themselves in the position 398 00:24:00,040 --> 00:24:02,920 of the German worker. Today I'll put a link in the 399 00:24:02,920 --> 00:24:05,520 description to a really interesting interview on the 400 00:24:05,520 --> 00:24:10,080 Hidden Forces podcast, where Wolfgang Munchao explained how 401 00:24:10,080 --> 00:24:15,040 Germany fell behind the United States 25 years ago by focusing 402 00:24:15,040 --> 00:24:19,160 on analog rather than digital goods, entirely missing out on 403 00:24:19,240 --> 00:24:22,440 the digital revolution. Other problems with these 404 00:24:22,440 --> 00:24:26,040 tariffs is that they'll be extremely difficult to manage. 405 00:24:26,280 --> 00:24:29,760 According to the Wall Street Journal, 53% of the cars 406 00:24:29,760 --> 00:24:33,240 currently sold in the United States are built in the United 407 00:24:33,240 --> 00:24:37,960 States, and the other 47% will be hit with a 25% tariff. 408 00:24:38,520 --> 00:24:42,360 Unfortunately though, it's not that easy as even the most 409 00:24:42,360 --> 00:24:45,880 American of vehicles, like the Ford F-150, are made from 410 00:24:45,880 --> 00:24:49,040 thousands of parts that come from over 24 different 411 00:24:49,040 --> 00:24:51,880 countries. The individual parts will face 412 00:24:51,880 --> 00:24:54,720 the tariffs that have been placed on their countries of 413 00:24:54,720 --> 00:24:57,320 origin. For companies to move production 414 00:24:57,320 --> 00:25:01,160 to the US would be extremely expensive, and that cost would 415 00:25:01,160 --> 00:25:03,400 have to be passed on to consumers too. 416 00:25:03,880 --> 00:25:07,160 Checking every product that enters a country will be 417 00:25:07,160 --> 00:25:10,960 incredibly resource intensive and could bring trade to a 418 00:25:10,960 --> 00:25:14,320 grinding halt. In his press conference, Trump 419 00:25:14,440 --> 00:25:18,160 threatened to jail people for 10 years if they try to claim the 420 00:25:18,160 --> 00:25:20,920 wrong tariff rate. But it's not always easy to 421 00:25:20,920 --> 00:25:23,440 decide on a product's country of origin. 422 00:25:23,800 --> 00:25:27,560 Often the raw materials come from 1 country and the goods are 423 00:25:27,560 --> 00:25:31,200 assembled in another. William McKinley is Trump's 424 00:25:31,200 --> 00:25:35,000 purported inspiration. McKinley called himself a tariff 425 00:25:35,000 --> 00:25:38,360 man standing on a tariff platform when he ran for 426 00:25:38,360 --> 00:25:41,320 election. But in McKinley second term, he 427 00:25:41,320 --> 00:25:45,160 abandoned that platform and eventually spoke out against 428 00:25:45,160 --> 00:25:48,040 tariffs. The reason McKinley implemented 429 00:25:48,040 --> 00:25:52,160 tariffs was that after the Civil War, America was collecting more 430 00:25:52,160 --> 00:25:54,560 tax than the federal government could spend. 431 00:25:54,920 --> 00:25:58,320 McKinley wanted to reduce that revenue, but worried that if he 432 00:25:58,320 --> 00:26:02,120 cut tariffs he would invite a flood of imports and possibly 433 00:26:02,120 --> 00:26:04,440 increase the amount of taxes collected. 434 00:26:04,760 --> 00:26:09,800 He instead raised the average duty on imports to almost 50% to 435 00:26:09,800 --> 00:26:12,960 reduce the amount of foreign goods being brought in, which he 436 00:26:12,960 --> 00:26:16,560 then figured would reduce government revenues, solving his 437 00:26:16,560 --> 00:26:19,280 problem. He did like the idea that 438 00:26:19,280 --> 00:26:23,440 tariffs would protect American manufacturing, too, which it 439 00:26:23,440 --> 00:26:25,480 did. And while the tariff cut 440 00:26:25,480 --> 00:26:29,080 government revenues as expected, it was not well received by 441 00:26:29,080 --> 00:26:31,600 Americans who suffered high inflation. 442 00:26:31,840 --> 00:26:36,160 Mckinley's Republican Party lost its majority in the House during 443 00:26:36,160 --> 00:26:39,800 the next election. In his second term, McKinley 444 00:26:39,800 --> 00:26:43,320 advocated cutting tariffs as they were no longer needed for 445 00:26:43,320 --> 00:26:46,880 revenue or protection. And cutting them, he said, would 446 00:26:46,880 --> 00:26:50,760 encourage America's trade partners to reciprocate, opening 447 00:26:50,760 --> 00:26:53,200 up global markets for American goods. 448 00:26:53,720 --> 00:26:57,280 He never got to implement that plan though, as the day after he 449 00:26:57,280 --> 00:27:01,120 gave that speech he was assassinated and Teddy Roosevelt 450 00:27:01,120 --> 00:27:04,200 became president. It's very difficult to know how 451 00:27:04,200 --> 00:27:07,520 Trump's tariff plan will work out, as we don't really know 452 00:27:07,520 --> 00:27:11,800 what the plan even is. If it's a negotiating strategy, 453 00:27:12,000 --> 00:27:15,760 it might not be a great one. Since Trump took office and has 454 00:27:15,760 --> 00:27:19,520 been announcing and cancelling tariffs, both consumer and 455 00:27:19,520 --> 00:27:22,000 business confidence have been in decline. 456 00:27:22,280 --> 00:27:26,320 When consumers are worried, they spend less, slowing the economy. 457 00:27:26,480 --> 00:27:29,840 And when businesses don't know what to expect next, they take a 458 00:27:29,840 --> 00:27:33,920 wait and see approach and don't make any big investments, which 459 00:27:33,920 --> 00:27:37,240 can hit growth. A lot depends on how America's 460 00:27:37,240 --> 00:27:40,880 trade partners respond. This morning, China announced 461 00:27:40,880 --> 00:27:46,560 duties of 34% on all US imports, moving the world closer to a 462 00:27:46,560 --> 00:27:50,400 full blown trade war. The FT reports that European 463 00:27:50,400 --> 00:27:54,000 leaders are worried that China will divert exports from America 464 00:27:54,000 --> 00:27:57,960 to Europe, meaning that they'll have to erect trade barriers too 465 00:27:58,120 --> 00:28:01,440 to defend their markets. Thanks for tuning into this 466 00:28:01,440 --> 00:28:04,000 week's podcast. Do share it with a friend if you 467 00:28:04,000 --> 00:28:06,480 think they'd find it interesting, as that's the best 468 00:28:06,480 --> 00:28:09,640 way for podcasts to grow by word of mouth. 469 00:28:09,920 --> 00:28:12,280 Have a great week and talk to you again soon. 470 00:28:12,480 --> 00:28:12,800 Bye.