1
00:00:00,200 --> 00:00:04,120
President-elect Donald Trump has
called himself a tariff man, 

2
00:00:04,360 --> 00:00:07,800
saying that tariffs are the 
greatest thing ever invented and

3
00:00:07,800 --> 00:00:10,920
that the word tariff is the most
beautiful word in the 

4
00:00:10,920 --> 00:00:13,920
dictionary. 
He announced last week that he 

5
00:00:13,920 --> 00:00:17,800
would impose new tariffs on 
goods entering the US from 

6
00:00:17,800 --> 00:00:21,920
Canada, Mexico and China on his 
first day in office. 

7
00:00:22,400 --> 00:00:26,080
To be clear up front, this is 
not a political video. 

8
00:00:26,320 --> 00:00:29,160
It shouldn't matter if you love 
or hate Donald Trump. 

9
00:00:29,440 --> 00:00:32,720
The purpose is just to discuss 
the issues that exist in 

10
00:00:32,720 --> 00:00:36,600
international trade and the 
impact the tariffs or other 

11
00:00:36,600 --> 00:00:41,040
government actions might have on
trade, employment and inflation.

12
00:00:41,400 --> 00:00:44,920
We'll look at how they've worked
and failed in the past and how 

13
00:00:44,920 --> 00:00:49,120
American tariffs today might be 
different to the disastrous 

14
00:00:49,120 --> 00:00:54,680
Smoot Hawley tariffs of 1930 
Trump announced last week on his

15
00:00:54,680 --> 00:00:57,680
version of Twitter. 
Everyone has their own version 

16
00:00:57,680 --> 00:01:00,920
of Twitter now. 
That he would sign an executive 

17
00:01:00,920 --> 00:01:05,720
order for a 25% tariff on all 
goods coming from Canada and 

18
00:01:05,720 --> 00:01:09,280
Mexico, and that these tariffs 
would stay in place until the 

19
00:01:09,280 --> 00:01:13,000
flow of drugs and immigrants 
from these countries into the 

20
00:01:13,000 --> 00:01:15,640
United States has come to a 
halt. 

21
00:01:16,160 --> 00:01:20,880
After the announcement, the 
Mexican peso fell 2% and the 

22
00:01:20,880 --> 00:01:25,000
Canadian dollar traded at its 
lowest rate to the US dollar in 

23
00:01:25,000 --> 00:01:28,480
15 years. 
Trump has already vowed to 

24
00:01:28,480 --> 00:01:34,280
target China with a 60% tariff 
and has discussed a 200% tariff 

25
00:01:34,480 --> 00:01:38,440
on some car imports. 
He says that goods coming from 

26
00:01:38,440 --> 00:01:42,800
China will be hit with an 
additional 10% tariff if China 

27
00:01:42,800 --> 00:01:45,960
doesn't do something to halt 
fentanyl smuggling. 

28
00:01:46,520 --> 00:01:50,880
Tariffs, which are controversial
with economists, are core to 

29
00:01:50,880 --> 00:01:54,400
Trump's economic vision. 
He sees them as a way of 

30
00:01:54,400 --> 00:01:58,280
protecting American jobs, 
growing the US economy and 

31
00:01:58,280 --> 00:02:02,600
raising tax revenue. 
On the campaign trail, he told 

32
00:02:02,600 --> 00:02:06,600
voters that his tariffs would 
not cost Americans anything, 

33
00:02:06,800 --> 00:02:10,560
that they're instead a tax on 
another country, which many 

34
00:02:10,560 --> 00:02:13,480
economists described as being 
misleading. 

35
00:02:14,240 --> 00:02:18,920
U.S. trade with China has grown 
enormously over the last 25 

36
00:02:18,920 --> 00:02:23,280
years, and while it brought 
lower prices to US consumers and

37
00:02:23,280 --> 00:02:26,800
higher profits to American 
multinationals, it came with 

38
00:02:26,800 --> 00:02:30,680
some downsides, too. 
And both sides of the political 

39
00:02:30,680 --> 00:02:35,040
aisle have been focused on how 
to better balance trade and how 

40
00:02:35,040 --> 00:02:39,280
to avoid losing access to 
strategically important goods 

41
00:02:39,280 --> 00:02:43,320
and industries. 
While Donald Trump is a divisive

42
00:02:43,320 --> 00:02:46,400
politician where some people 
love him and others hate him, 

43
00:02:46,720 --> 00:02:50,600
his threats to impose tariffs on
foreign imports are drawing 

44
00:02:50,600 --> 00:02:53,440
support from lawmakers of both 
parties. 

45
00:02:53,800 --> 00:02:58,000
Janan Ganesh wrote in the FTA 
few weeks ago that Trump's 

46
00:02:58,000 --> 00:03:02,320
biggest success during his first
term in office was that he bound

47
00:03:02,320 --> 00:03:06,480
the actions of his successors, 
saying that Trump moved the 

48
00:03:06,480 --> 00:03:10,320
consensus on a big issue, 
foreign trade, such that the 

49
00:03:10,320 --> 00:03:14,240
next president either couldn't 
go back or didn't want to. 

50
00:03:14,880 --> 00:03:19,480
During Trump's first term in 
office, the average US tariff on

51
00:03:19,480 --> 00:03:25,720
Chinese imports rose from around
3% to nearly 20% when Joe Biden 

52
00:03:25,720 --> 00:03:28,320
took office. 
Four years later, instead of 

53
00:03:28,320 --> 00:03:32,480
reversing Trump's trade 
policies, he added more tariffs,

54
00:03:32,640 --> 00:03:36,680
in particular on electric 
vehicles, and a protectionist 

55
00:03:36,680 --> 00:03:41,480
industrial policy that included 
subsidies and a Buy American 

56
00:03:41,480 --> 00:03:44,120
mandate. 
The Cato Institute, a 

57
00:03:44,440 --> 00:03:48,960
libertarian think tank, 
described Bidenomics as Trumpism

58
00:03:49,120 --> 00:03:52,520
with a human face, or Olite 
Trumpism. 

59
00:03:52,880 --> 00:03:57,040
So let's try to understand the 
issues with international trade 

60
00:03:57,240 --> 00:03:59,840
that have been pushing the 
United States and other 

61
00:03:59,840 --> 00:04:04,440
countries in this protectionist 
direction, and if tariffs can be

62
00:04:04,440 --> 00:04:08,600
expected to improve the 
situation or make things worse. 

63
00:04:08,840 --> 00:04:11,680
We'll discuss whether Trump 
could impose his tariffs 

64
00:04:11,680 --> 00:04:15,520
unilaterally on his first day in
office, and whether the mere 

65
00:04:15,520 --> 00:04:19,920
threat of tariffs could be used 
to improve America's bargaining 

66
00:04:19,920 --> 00:04:23,200
power. 
So tariffs are quite simply a 

67
00:04:23,200 --> 00:04:27,360
tax on imported goods, which 
gets applied at the border when 

68
00:04:27,360 --> 00:04:31,480
a good is bought from abroad. 
This is a protectionist trade 

69
00:04:31,480 --> 00:04:35,440
strategy where the tariffs push 
up the price of foreign sourced 

70
00:04:35,440 --> 00:04:39,680
goods, incentivizing consumers 
to switch to domestically 

71
00:04:39,680 --> 00:04:44,560
manufactured goods, giving 
domestic manufacturers room to 

72
00:04:44,560 --> 00:04:48,360
increase their own prices. 
The benefits that domestic 

73
00:04:48,360 --> 00:04:53,000
manufacturers receive come at 
the expense of consumers, who, 

74
00:04:53,000 --> 00:04:56,360
all else equal, pay more for the
goods that they buy. 

75
00:04:56,680 --> 00:05:00,840
For this reason, tariffs are 
redistributive, taking income 

76
00:05:00,840 --> 00:05:04,480
from the household sector and 
transferring it to protected 

77
00:05:04,480 --> 00:05:07,120
businesses. 
Now, there's nothing too 

78
00:05:07,120 --> 00:05:11,760
surprising about that idea, as 
all taxes are redistributive. 

79
00:05:12,040 --> 00:05:15,320
But critics of Trump's plan say 
that they're not just 

80
00:05:15,320 --> 00:05:19,800
redistributive, but that they'll
be inflationary and harm the US 

81
00:05:19,800 --> 00:05:22,480
economy. 
His defenders, on the other 

82
00:05:22,480 --> 00:05:26,440
hand, point out that this didn't
happen during Trump's first term

83
00:05:26,680 --> 00:05:29,080
and that the Biden 
administration looked into 

84
00:05:29,080 --> 00:05:32,200
removing Trump's tariffs when 
inflation was high. 

85
00:05:32,520 --> 00:05:36,200
But their analysis showed that 
the change was unlike likely to 

86
00:05:36,200 --> 00:05:40,080
make a big difference. 
Because a tariff is charged at 

87
00:05:40,080 --> 00:05:44,000
the border, it does push up the 
price of imports, which is 

88
00:05:44,000 --> 00:05:47,720
inflationary. 
Some of that impact is offset by

89
00:05:47,720 --> 00:05:51,360
changes in exchange rates, where
the currency of the tariff 

90
00:05:51,360 --> 00:05:55,680
charging country rises against 
the currency of the country 

91
00:05:55,680 --> 00:05:59,720
being subjected to tariffs. 
Additionally, foreign companies 

92
00:05:59,720 --> 00:06:03,600
sometimes reduce their prices in
order to remain competitive. 

93
00:06:04,200 --> 00:06:09,040
An analysis by LPL Financial 
found the tariffs imposed in 

94
00:06:09,040 --> 00:06:13,760
2018 hit producer prices more 
than consumer prices in the 

95
00:06:13,760 --> 00:06:18,000
United States as wholesalers 
absorbed some of the price 

96
00:06:18,000 --> 00:06:20,560
increase. 
Now long term viewers are 

97
00:06:20,560 --> 00:06:24,400
probably aware that I believe in
free markets and limited 

98
00:06:24,400 --> 00:06:26,480
government intervention in 
trade. 

99
00:06:26,840 --> 00:06:30,560
From a free market perspective, 
the correct response to foreign 

100
00:06:30,560 --> 00:06:34,240
government subsidizing exports 
is to do nothing. 

101
00:06:34,480 --> 00:06:38,440
In fact, an argument can be made
that a country should welcome 

102
00:06:38,440 --> 00:06:42,480
other nations export subsidies, 
which Milton Friedman has 

103
00:06:42,480 --> 00:06:46,320
described as a form of foreign 
philanthropy, saying that if 

104
00:06:46,320 --> 00:06:49,720
another government wants 
American citizens to enjoy it's 

105
00:06:49,720 --> 00:06:53,280
goods and services at 
artificially low prices, 

106
00:06:53,440 --> 00:06:56,120
Washington should tell them to 
bring it on. 

107
00:06:56,720 --> 00:07:00,800
The problem is that persistent 
subsidized imports can 

108
00:07:00,800 --> 00:07:04,320
eventually displace domestic 
production of often 

109
00:07:04,320 --> 00:07:08,600
strategically important goods. 
The worry is that unfair foreign

110
00:07:08,600 --> 00:07:12,640
competition can bankrupt 
domestic producers, after which 

111
00:07:12,640 --> 00:07:15,880
prices can be hiked up by a 
foreign owned monopoly. 

112
00:07:16,360 --> 00:07:19,520
The example often given of 
strategically important 

113
00:07:19,520 --> 00:07:23,400
production is steel, which I 
discussed in a recent video 

114
00:07:23,600 --> 00:07:27,200
about how Britain was planning 
on paying huge subsidies to 

115
00:07:27,200 --> 00:07:30,560
foreign owned steel mills to 
keep them open in the UK. 

116
00:07:30,920 --> 00:07:34,360
Some of the top comments said 
that if China's willing to ship 

117
00:07:34,360 --> 00:07:38,520
steel to Britain for less than 
it costs to produce the billion 

118
00:07:38,520 --> 00:07:42,600
# subsidies should instead be 
spent on buying Finnish steel 

119
00:07:42,760 --> 00:07:45,600
and setting it aside as a 
strategic reserve. 

120
00:07:46,400 --> 00:07:50,840
Trump is arguing that tariffs on
America's trading partners are 

121
00:07:50,840 --> 00:07:54,760
necessary to protect US 
businesses and the American 

122
00:07:54,760 --> 00:07:58,880
worker at a time when US 
manufacturing jobs have dropped 

123
00:07:58,880 --> 00:08:01,720
from their peak in the late 
1970s. 

124
00:08:02,200 --> 00:08:06,000
Trump supporters point out that 
some of his tariffs did appear 

125
00:08:06,000 --> 00:08:09,520
to work when he was last in 
office, giving the example that 

126
00:08:09,520 --> 00:08:13,400
tariffs on imported washing 
machines may have created new 

127
00:08:13,400 --> 00:08:17,480
jobs as they were imposed at the
same time as Whirlpool was 

128
00:08:17,480 --> 00:08:21,240
building a new factory in the 
United States and the tariffs 

129
00:08:21,240 --> 00:08:23,320
helped the new factory to 
succeed. 

130
00:08:24,000 --> 00:08:28,360
The results of trade policies 
like this are unfortunately not 

131
00:08:28,360 --> 00:08:32,360
always clear, as there are a lot
of moving parts, and it can be a

132
00:08:32,360 --> 00:08:36,960
bit like dietary science, where 
a person excludes sugary drinks 

133
00:08:36,960 --> 00:08:41,000
but then eats a bit more food, 
offsetting most of the benefit. 

134
00:08:41,640 --> 00:08:45,880
The Federal Reserve analysis of 
Trump's first term tariffs found

135
00:08:45,880 --> 00:08:49,640
that a lot of the benefits were 
offset by the higher costs of 

136
00:08:49,640 --> 00:08:53,320
imported raw materials that 
American manufacturers had to 

137
00:08:53,320 --> 00:08:57,680
buy, as well as from retaliatory
tariffs from other nations. 

138
00:08:58,160 --> 00:09:01,520
Overall, they found that there 
was a small decline in the 

139
00:09:01,520 --> 00:09:06,120
number of US manufacturing jobs 
during Trump's first term, but a

140
00:09:06,120 --> 00:09:09,000
number of factors, like the 
start of the pandemic, could 

141
00:09:09,000 --> 00:09:12,320
explain that outcome. 
Now, it's become a bit of a 

142
00:09:12,320 --> 00:09:15,920
cliche when talking about Donald
Trump to say that you should 

143
00:09:15,920 --> 00:09:18,520
take him seriously, but not 
literally. 

144
00:09:18,800 --> 00:09:22,200
And while that might be a 
cliche, it's still probably 

145
00:09:22,200 --> 00:09:24,760
true. 
So while the specifics of what 

146
00:09:24,760 --> 00:09:28,560
he will do about trade once in 
office are not clear, the thing 

147
00:09:28,560 --> 00:09:32,400
that is really clear is that 
foreign trade is the topic he 

148
00:09:32,400 --> 00:09:36,160
cares the most about. 
You can find videos online 

149
00:09:36,160 --> 00:09:39,920
dating back 40 years of Trump on
daytime talk shows. 

150
00:09:40,160 --> 00:09:43,200
Being mostly pleasant doesn't 
until the topic of foreign trade

151
00:09:43,200 --> 00:09:46,000
comes up. 
Back then Japan was his main 

152
00:09:46,000 --> 00:09:48,160
target. 
Well, today it's China. 

153
00:09:48,600 --> 00:09:51,280
Janan Ganesh wrote a few weeks 
ago. 

154
00:09:51,560 --> 00:09:55,000
The trade is almost all that 
Trump cares about, with 

155
00:09:55,000 --> 00:09:57,920
immigration coming in as a 
distant second. 

156
00:09:58,240 --> 00:10:02,680
He says that over the last 40 
years, Trump has had an intense 

157
00:10:02,680 --> 00:10:06,160
belief that to run a current 
account deficit with another 

158
00:10:06,160 --> 00:10:10,960
nation is to lose to it. 
I think that the exact mechanics

159
00:10:10,960 --> 00:10:15,080
of how Trump plans to deal with 
trade are not clear, but I think

160
00:10:15,080 --> 00:10:18,720
it makes sense to take him at 
his word that this is the issue 

161
00:10:18,720 --> 00:10:22,520
he cares the most about. 
Exactly how he'll put tariffs in

162
00:10:22,520 --> 00:10:26,720
place is maybe the most unclear 
part of his plan, but I think 

163
00:10:26,720 --> 00:10:30,080
it's unlikely that he'll do it 
on Inauguration Day, as he has 

164
00:10:30,080 --> 00:10:33,600
said, as that would likely 
require him to declare a 

165
00:10:33,600 --> 00:10:37,560
national state of emergency. 
Which is what Richard Nixon had 

166
00:10:37,560 --> 00:10:42,120
to do to proposed 10% tariffs on
all imported goods when he 

167
00:10:42,120 --> 00:10:46,800
suspended the convertibility of 
the dollar into gold in 1971. 

168
00:10:47,160 --> 00:10:51,640
Nixon put those tariffs in place
to prevent American producers 

169
00:10:51,640 --> 00:10:55,200
from being disadvantaged in the 
expected exchange rate 

170
00:10:55,200 --> 00:10:57,440
volatility around that 
announcement. 

171
00:10:58,200 --> 00:11:02,480
Now, if tariffs were applied to 
Canada and Mexico and applied to

172
00:11:02,480 --> 00:11:06,280
things like oil and gas, it 
would be quite inflationary, 

173
00:11:06,440 --> 00:11:09,840
which is the opposite of what 
Trump promised on the campaign 

174
00:11:09,840 --> 00:11:11,960
trail. 
So I don't think that this is 

175
00:11:11,960 --> 00:11:16,760
awfully likely. 
The USMCA trade agreement, which

176
00:11:16,760 --> 00:11:22,560
replaced NAFTA in 2020, is up 
for a scheduled review in 2026, 

177
00:11:22,760 --> 00:11:26,960
and it seems extremely likely 
that Trump will use that deal as

178
00:11:26,960 --> 00:11:30,960
a bargaining chip to negotiate 
with Canada and Mexico over 

179
00:11:30,960 --> 00:11:33,520
things he cares about, like 
immigration. 

180
00:11:34,280 --> 00:11:37,160
This is exactly what he did in 
the past. 

181
00:11:37,360 --> 00:11:42,160
In 2019, under the threat of 
tariffs, Mexico agreed to step 

182
00:11:42,160 --> 00:11:46,120
up immigration enforcement to 
prevent migrants from entering 

183
00:11:46,120 --> 00:11:49,680
Mexico from Guatemala in the 
South and to stop them from 

184
00:11:49,680 --> 00:11:54,040
leaving to the US in the north. 
While it's reasonable to expect 

185
00:11:54,040 --> 00:11:57,120
Trump to try and extract 
concessions during these 

186
00:11:57,120 --> 00:12:02,200
negotiations, both Mexico and 
Canada do run persistent trade 

187
00:12:02,200 --> 00:12:06,480
deficits, much like the United 
States, and so overall they are 

188
00:12:06,480 --> 00:12:10,000
on the same side as the United 
States on this issue. 

189
00:12:10,680 --> 00:12:13,800
It's worth remembering that 
during his first term in office,

190
00:12:14,040 --> 00:12:18,280
Trump's cabinet mostly moderated
his protectionist instincts 

191
00:12:18,480 --> 00:12:21,880
along with the stock market 
reaction, which he saw as a 

192
00:12:21,880 --> 00:12:25,160
measure of voter approval. 
It looks like he might have a 

193
00:12:25,160 --> 00:12:29,200
less conservative cabinet this 
time around, but likely still 

194
00:12:29,200 --> 00:12:33,600
cares about the stock market. 
So what are the problems in 

195
00:12:33,600 --> 00:12:37,040
international trade that Trump 
is aiming to fix? 

196
00:12:37,560 --> 00:12:41,920
Well, the hyper globalization 
that began in the late 1990s 

197
00:12:42,160 --> 00:12:44,840
made the world better for most 
people. 

198
00:12:45,040 --> 00:12:48,920
It almost eliminated extreme 
poverty and reduced global 

199
00:12:48,920 --> 00:12:52,160
inequality. 
Consumers in wealthy countries 

200
00:12:52,360 --> 00:12:56,440
benefited from cheap imported 
goods, which kept inflation low 

201
00:12:56,440 --> 00:13:00,200
and standards of living as 
measured by per capita income 

202
00:13:00,520 --> 00:13:04,480
increased around the world, 
while the average person was 

203
00:13:04,480 --> 00:13:08,360
doing much better than before. 
Blue collar workers in developed

204
00:13:08,360 --> 00:13:12,600
countries were struggling as 
manufacturing work moved abroad 

205
00:13:12,600 --> 00:13:16,160
where labour was cheap. 
While global inequality had 

206
00:13:16,160 --> 00:13:20,040
fallen, inequality within the 
United States had grown. 

207
00:13:20,720 --> 00:13:24,120
On top of all of this, Western 
governments were getting 

208
00:13:24,120 --> 00:13:28,320
concerned that China and some 
other surplus economies were 

209
00:13:28,320 --> 00:13:32,520
engaging in unfair competition 
by subsidizing manufacturing 

210
00:13:32,680 --> 00:13:36,400
while imposing restrictions on 
foreign companies in exchange 

211
00:13:36,400 --> 00:13:40,760
for access to their markets. 
This became more of an issue as 

212
00:13:40,760 --> 00:13:44,080
China developed and could no 
longer claim to be a poor 

213
00:13:44,080 --> 00:13:48,680
developing country. 
Western economies began to see 

214
00:13:48,680 --> 00:13:52,520
it as a problem that China had 
the highest manufacturing share 

215
00:13:52,520 --> 00:13:56,240
of GDP and the lowest 
consumption share of GDP in the 

216
00:13:56,240 --> 00:13:59,600
world. 
By agreeing to absorb China's 

217
00:13:59,600 --> 00:14:03,680
excess production deficit, 
economies like the United States

218
00:14:03,840 --> 00:14:07,160
were allowing their most 
aggressive trade partner to set 

219
00:14:07,160 --> 00:14:11,360
their trade policies for them. 
The economist Michael Pettis 

220
00:14:11,360 --> 00:14:15,480
argues that surplus countries 
subsidise their manufacturing 

221
00:14:15,480 --> 00:14:20,160
industries and pass on the costs
of these subsidies to deficit 

222
00:14:20,160 --> 00:14:22,920
countries like the United 
States. 

223
00:14:23,200 --> 00:14:27,080
He argues that a free trade 
country with open capital 

224
00:14:27,080 --> 00:14:31,360
markets when trading with a 
planned economy is not really 

225
00:14:31,360 --> 00:14:35,040
engaging in free trade. 
They're instead accepting the 

226
00:14:35,040 --> 00:14:39,360
inverse of their trade partners 
trade and industrial policies. 

227
00:14:39,960 --> 00:14:42,760
So how does China subsidise 
exports? 

228
00:14:43,120 --> 00:14:47,640
Well, Chinese exports receive 
considerable direct subsidies, 

229
00:14:47,880 --> 00:14:51,760
but the indirect transfers they 
receive are even larger. 

230
00:14:52,200 --> 00:14:56,080
Chinese power plants and banks 
are mostly government owned, 

231
00:14:56,320 --> 00:15:00,320
meaning that policy makers can 
decide to give cheap energy and 

232
00:15:00,320 --> 00:15:03,320
low interest rate loans to 
favoured businesses. 

233
00:15:03,840 --> 00:15:07,000
There are a variety of other 
ways a government can support 

234
00:15:07,000 --> 00:15:11,440
it's manufacturing sector too, 
most of which involve transfers 

235
00:15:11,640 --> 00:15:14,400
from the household sector to the
business sector. 

236
00:15:14,880 --> 00:15:19,080
Trade surplus countries often 
have undervalued currencies. 

237
00:15:19,320 --> 00:15:23,000
This helps exporters at the 
expense of importers. 

238
00:15:23,280 --> 00:15:27,600
Manufacturing businesses are 
usually exporters and households

239
00:15:27,600 --> 00:15:30,920
are net importers. 
Keeping interest rates 

240
00:15:30,920 --> 00:15:35,080
artificially low helps borrowers
at the expense of savers. 

241
00:15:35,320 --> 00:15:39,360
And once again, businesses are 
net borrowers and households are

242
00:15:39,360 --> 00:15:42,760
net savers. 
Overspending on transportation 

243
00:15:42,760 --> 00:15:46,960
infrastructure like railways, 
roads and ports supports 

244
00:15:46,960 --> 00:15:49,880
businesses at the expense of 
households too. 

245
00:15:50,400 --> 00:15:54,080
Repressive labour laws, 
restrictions on worker mobility 

246
00:15:54,320 --> 00:15:57,760
and low penalties for pollution 
additionally help the 

247
00:15:57,760 --> 00:16:01,960
manufacturing sector at the 
expense of the household sector.

248
00:16:02,360 --> 00:16:07,160
In China, industrial zoned land 
is an order of magnitude cheaper

249
00:16:07,320 --> 00:16:11,160
than residential land. 
Another transfer from households

250
00:16:11,160 --> 00:16:14,080
to businesses. 
When all of these policies are 

251
00:16:14,080 --> 00:16:17,720
combined, there are huge 
transfers from households to 

252
00:16:17,720 --> 00:16:21,200
businesses in China, meaning 
that while businesses can 

253
00:16:21,200 --> 00:16:25,120
prosper, households can't afford
to consume the goods that are 

254
00:16:25,120 --> 00:16:29,040
being manufactured now. 
In a closed economy, this would 

255
00:16:29,040 --> 00:16:32,840
mean that businesses would be 
forced to either raise wages to 

256
00:16:32,840 --> 00:16:36,960
increase consumption or reduce 
production due to a lack of 

257
00:16:36,960 --> 00:16:40,160
demand. 
In a globalized trading system, 

258
00:16:40,400 --> 00:16:43,160
the surplus production can be 
exported. 

259
00:16:43,640 --> 00:16:47,280
This trade surplus doesn't 
necessarily give China an 

260
00:16:47,280 --> 00:16:50,640
advantage. 
It's a result of flawed policies

261
00:16:50,840 --> 00:16:55,000
and the means of dealing with a 
huge disadvantage, which is 

262
00:16:55,000 --> 00:16:59,680
extremely low domestic demand. 
This doesn't just affect China, 

263
00:16:59,680 --> 00:17:03,600
however, as a surge in a 
country's exports that are not 

264
00:17:03,600 --> 00:17:07,800
balanced by a surge in imports 
means that manufacturers in 

265
00:17:07,800 --> 00:17:11,240
deficit countries find 
themselves partially funding the

266
00:17:11,240 --> 00:17:14,079
Chinese subsidies with their 
lost income. 

267
00:17:14,480 --> 00:17:19,319
The imbalances in China move the
production of goods away from 

268
00:17:19,319 --> 00:17:22,760
where they might be most 
efficiently manufactured under 

269
00:17:22,760 --> 00:17:26,839
the law of comparative advantage
and cause all sorts of trade 

270
00:17:26,839 --> 00:17:30,120
distortions. 
When exports are high and 

271
00:17:30,120 --> 00:17:34,120
imports are low, a country 
starts accumulating the currency

272
00:17:34,120 --> 00:17:37,080
of its biggest trade partners as
savings. 

273
00:17:37,440 --> 00:17:41,960
Chinese savings are not high due
to any culture of frugality in 

274
00:17:41,960 --> 00:17:44,240
China. 
It's simply a function of 

275
00:17:44,240 --> 00:17:47,960
keeping wages low and exporting 
without importing. 

276
00:17:48,480 --> 00:17:52,200
You don't just keep the proceeds
of trade in dollar bills in a 

277
00:17:52,200 --> 00:17:55,560
vault either. 
You usually invest them in 

278
00:17:55,560 --> 00:17:59,080
things like bonds. 
So China's excess savings are 

279
00:17:59,080 --> 00:18:02,880
mostly sent back to the United 
States, where there are deep 

280
00:18:02,880 --> 00:18:06,320
capital markets. 
This means that there's more 

281
00:18:06,320 --> 00:18:09,800
capital in the United States 
than is needed for investment 

282
00:18:09,800 --> 00:18:14,120
purposes, which can be seen in 
the huge cash balances that U.S.

283
00:18:14,120 --> 00:18:18,800
companies are sitting on. 
So can Trump's tariffs offset 

284
00:18:18,800 --> 00:18:22,800
Chinese subsidies and help to 
rebalance global trade? 

285
00:18:23,240 --> 00:18:28,040
Well, possibly, but not if Trump
just puts tariffs on Chinese 

286
00:18:28,040 --> 00:18:31,160
imports. 
The reason this wouldn't work is

287
00:18:31,160 --> 00:18:35,120
that if the United States 
refused to buy Chinese goods but

288
00:18:35,120 --> 00:18:38,680
continue to buy from other 
countries, this would just push 

289
00:18:38,680 --> 00:18:41,240
the problem to another trade 
partner. 

290
00:18:41,600 --> 00:18:46,120
Unable to sell EVs in the United
States, China would ship them to

291
00:18:46,120 --> 00:18:49,280
Europe, undercutting European 
EVs. 

292
00:18:49,520 --> 00:18:53,400
European manufacturers, unable 
to compete in their own markets,

293
00:18:53,600 --> 00:18:58,200
would ship European EVs to the 
United States, and the overall 

294
00:18:58,200 --> 00:19:00,600
problem would be exactly the 
same. 

295
00:19:01,120 --> 00:19:05,080
If China continued to keep 
consumption low while exporting,

296
00:19:05,320 --> 00:19:09,120
Chinese savings would continue 
to be exported to the United 

297
00:19:09,120 --> 00:19:12,560
States too. 
The Chinese trade surplus would 

298
00:19:12,560 --> 00:19:16,920
remain as big as before even if 
it fell against the United 

299
00:19:16,920 --> 00:19:21,640
States, and the US trade deficit
would continue to grow too. 

300
00:19:22,040 --> 00:19:26,720
So tariffs applied on a country 
by country basis are unlikely to

301
00:19:26,720 --> 00:19:30,040
have any notable effect. 
They would really need to be 

302
00:19:30,040 --> 00:19:34,320
applied equally to all trade 
partners in order to work, but 

303
00:19:34,320 --> 00:19:38,560
this would be very politically 
contentious as it would involve 

304
00:19:38,560 --> 00:19:42,600
upsetting America's allies who 
are not really to blame for the 

305
00:19:42,600 --> 00:19:46,920
imbalances in global trade. 
If China is already an 

306
00:19:46,920 --> 00:19:50,840
aggressive trade partner and the
US joined them, every other 

307
00:19:50,840 --> 00:19:54,200
country would be forced to 
follow suit as otherwise they 

308
00:19:54,200 --> 00:19:57,680
would be paying the cost. 
This is the biggest problem with

309
00:19:57,680 --> 00:20:01,440
government trade intervention. 
A number of journalists have 

310
00:20:01,440 --> 00:20:05,600
expressed concern that Trump's 
trade plans are worryingly 

311
00:20:05,600 --> 00:20:09,640
similar to the Smoot Hawley Act 
passed under Herbert Hoover, 

312
00:20:09,800 --> 00:20:12,320
which contributed to the 
problems of the Great 

313
00:20:12,320 --> 00:20:15,200
Depression. 
I made a video a few weeks ago 

314
00:20:15,200 --> 00:20:18,800
about the Great Depression, and 
a notable difference between the

315
00:20:18,800 --> 00:20:23,560
late 1920s and today is that in 
the 20s America was the world's 

316
00:20:23,560 --> 00:20:28,120
biggest exporter and had much 
more to lose than it does today 

317
00:20:28,520 --> 00:20:32,400
in a trade war country. 
Who need to export are in a much

318
00:20:32,400 --> 00:20:36,120
weaker position than countries 
that are absorbing excess 

319
00:20:36,120 --> 00:20:39,080
supply. 
While the Smoot Hawley Act was a

320
00:20:39,080 --> 00:20:43,080
terrible idea, I don't believe 
that it was to blame for the 

321
00:20:43,080 --> 00:20:46,440
Great Depression, and I don't 
believe that new tariffs would 

322
00:20:46,440 --> 00:20:49,400
lead to that scale of economic 
catastrophe. 

323
00:20:49,920 --> 00:20:53,680
Trump has said in interviews 
that he would love to entirely 

324
00:20:53,680 --> 00:20:57,440
replace income taxes with import
tariffs. 

325
00:20:57,720 --> 00:21:00,920
I think this is mostly bluster 
and shouldn't be taken too 

326
00:21:00,920 --> 00:21:04,400
seriously. 
The Peterson Institute, a mostly

327
00:21:04,400 --> 00:21:08,400
centrist think tank, wrote a 
report on this recently, 

328
00:21:08,600 --> 00:21:13,240
pointing out that last year the 
United States imported $3.1 

329
00:21:13,240 --> 00:21:18,200
trillion worth of goods, but 
raised around $2 trillion in 

330
00:21:18,200 --> 00:21:21,360
income taxes. 
Tariff rates would thus have to 

331
00:21:21,360 --> 00:21:26,680
be over 65% to replace the 
income tax, and that's assuming 

332
00:21:26,680 --> 00:21:32,000
no fall in imports, which would 
be extremely unlikely with 65% 

333
00:21:32,000 --> 00:21:34,720
tariff. 
Replacing income taxes with 

334
00:21:34,720 --> 00:21:39,400
tariffs just couldn't work. 
A number of big U.S. companies 

335
00:21:39,600 --> 00:21:43,480
have been stockpiling goods in 
preparation for Trump's tariffs.

336
00:21:43,720 --> 00:21:47,060
The Economist reports that 
Microsoft, Dell, and Hewlett 

337
00:21:47,060 --> 00:21:51,120
Packard are among the American 
tech companies that are rushing 

338
00:21:51,120 --> 00:21:55,320
to import as many electronic 
components as possible before 

339
00:21:55,320 --> 00:21:58,120
the new administration takes 
office in January. 

340
00:21:58,400 --> 00:22:01,440
While this might help them in 
the short term, I doubt that 

341
00:22:01,440 --> 00:22:04,360
they could import enough 
components to get them through 

342
00:22:04,360 --> 00:22:08,920
years of potential tariff. 
It's difficult to predict how 

343
00:22:08,920 --> 00:22:12,680
Trump's trade policies will 
work. the US could act 

344
00:22:12,680 --> 00:22:16,640
unilaterally as they do, run the
largest trade deficit in the 

345
00:22:16,640 --> 00:22:19,680
world, and there's plenty of 
supply in the world and the 

346
00:22:19,680 --> 00:22:23,560
thing that is scarce is demand, 
which is what the US brings to 

347
00:22:23,560 --> 00:22:26,760
the table. 
A better option might be for the

348
00:22:26,760 --> 00:22:30,520
United States to work with other
large deficit economies like 

349
00:22:30,520 --> 00:22:34,680
Canada, Australia and the UK, 
where combined they make up 

350
00:22:34,680 --> 00:22:40,160
about 70% of global deficits. 
If they struck a deal where they

351
00:22:40,160 --> 00:22:43,520
as a group placed tariffs on 
countries that run large 

352
00:22:43,520 --> 00:22:48,160
persistent surpluses, that could
help to rebalance global trade. 

353
00:22:48,480 --> 00:22:51,840
If countries wanted to sell to 
that block, they would either 

354
00:22:51,840 --> 00:22:55,520
have to take steps to boost 
domestic demand or cut 

355
00:22:55,520 --> 00:22:58,520
production. 
Other countries wouldn't have to

356
00:22:58,520 --> 00:23:02,080
really agree, as most of the 
rest of the world are trying to 

357
00:23:02,080 --> 00:23:04,640
export rather than agreeing to 
import. 

358
00:23:04,880 --> 00:23:08,120
If they wanted to sell to these 
countries countries, they just 

359
00:23:08,120 --> 00:23:12,480
have to agree to the terms. 
A rebalancing of trade like this

360
00:23:12,600 --> 00:23:16,520
would be extremely painful for 
surplus countries like China, 

361
00:23:16,520 --> 00:23:21,720
Germany, Japan, Russia and Saudi
Arabia, but it could be expected

362
00:23:21,720 --> 00:23:26,040
to boost American manufacturing 
and allow American businesses to

363
00:23:26,040 --> 00:23:29,720
compete internationally without 
slashing wages. 

364
00:23:30,160 --> 00:23:34,880
This rebalancing would also mean
repatriating the capital, which 

365
00:23:34,880 --> 00:23:38,080
has been flowing into the United
States for decades. 

366
00:23:38,360 --> 00:23:41,640
Foreigners own around 20% of all
U.S. 

367
00:23:41,640 --> 00:23:46,480
Securities outstanding, and as 
trade rebalance, these savings 

368
00:23:46,480 --> 00:23:50,120
would have to be repatriated 
back home, which would have to 

369
00:23:50,120 --> 00:23:54,560
occur in an orderly manner. 
It's very difficult to predict 

370
00:23:54,560 --> 00:23:57,880
what Trump might do in his 
second term in office, other 

371
00:23:57,880 --> 00:24:02,120
than to say that he'll amp up 
trade negotiations while likely 

372
00:24:02,120 --> 00:24:05,040
keeping an eye on the stock 
market as a measure of his 

373
00:24:05,040 --> 00:24:08,160
success. 
As always, I'll be interested to

374
00:24:08,160 --> 00:24:10,600
hear what you have to say in the
comments section. 

375
00:24:10,960 --> 00:24:13,360
Thanks for tuning into this 
week's podcast. 

376
00:24:13,480 --> 00:24:17,240
If you found it interesting, do 
send a link to a friend to help 

377
00:24:17,240 --> 00:24:19,680
it grow. 
Have a great week and talk to 

378
00:24:19,680 --> 00:24:21,240
you again soon. 
Bye.