Trump’s Tariff U-turn

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0:43BBC Sounds, music, radio, podcasts. It was all part of the plan, says the White House. The master dealmaker, the negotiator-in-chief, has got China where he wants them, say his allies. Yeah, right. Let's just imagine for a second that this really was a plan. What it means is that Donald Trump had a plan to crash the world's stock markets, wiping billions of dollars off the value of American companies and off the savings of ordinary Americans. He had a plan to punish friends and foes alike, accusing them of raping and pillaging and looting the US economy, his words, not mine, only to drop the plan days later and call on those same countries to back him in a trade war with China.

1:35And yes, he had a plan to lose the greatest prize the United States has. Its status as the place where the globe's money is safe. The beating heart of the world economy, which never falters. some plan, ladies and gentlemen. It is clear that Donald Trump caved into the markets, caved into pressure from prominent supporters like Elon Musk, caved into growing worries in the Republican Party about what he was doing to the country and to the global economy. But let's remember, he has just announced a temporary reprieve, a pause on higher tariffs. For most of the world, but an escalating trade war with China.

2:24And that's something we're going to try to understand on the Today podcast this week, talking to a former economic advisor to President Trump and to our economics editor, Faisal Islam. So let's do it.

2:51Hello, it's Nick. Amol is away on his Easter break with the family, so it's just me for the next couple of weeks. But I am joined by the BBC's economics editor, Faisal Islam, a busy man, a man in much demand. Hello, Faisal. Hi, Nick. So Donald Trump gave the game away, Faisal, didn't he, when he said he'd been a bit queasy looking at the markets. He talked about people getting yippy. well what was going on that might have made him queasy or yippy well he fundamentally didn't want to be the president who lost in real time as a direct result of his decisions the precious safe haven status of america in the world whenever there's a crisis i mean yippy doesn't even begin to uh to meet the moment in terms of what that would have communicated to the rest of the world that as a direct result of that board that he held up last week, you got to a point where in Asia, overnight, somebody somewhere, and there's a bit of a whodunit about this, decided to bet heavily billions against America.

4:03And that, I think, undoubtedly, was the fundamental change because he'd already suffered the share price falling, decided to sort of, he didn't care about that anymore. But this was the big shift. And so, yeah, I think yippee is something of an understatement, Nick. He panicked. He U-turned. He blinked. Pick your word. So talk us through the whodunit. So this happened in the early hours of Wednesday morning in trading time in Asia. And quite naturally, everyone thought, well, this must be China. And China holds is the second biggest holder of this US government day. It's what it does with the dollars generated by all those factory exports.

4:44It kind of sends them back in large quantity to the US buying government debt. So putting two and three together, it must be China. This is a massive escalation of the conflict. But it may not have been China. We don't know. The short answer is we don't know. But the most common assumption now is that it might have been a Japanese traders with massively leveraged or borrowed bets that decided to bet against US Treasury bonds. And the significance of this is in times like that, that is normally a safe haven. And it was not looking like a safe haven. It shot up hugely in that Asian trade yesterday.

5:27And that was enough, I think, for people within the White House, within the administration, who were a little sceptical about where this was going to press their claim, play their hand, and say, shall we just park some of this? And so that is the sort of sequence. Having said all this, if you were a man from Mars or you'd been on holiday or asleep for a week, it is still the case after this U-turn that we're in a dramatically different place for world trade and we are in a trade war. So if you look at the measure, when you put everything into a big blender and you say, well, how big is the protective wall, the tariff wall on average around the US?

6:13It went from two and a half percent of the size of the US economy and it was going to go to 25, 26 percent. And as a result of this, it's about 22. So this is still a massively protectionist move. You still have a 10 % universal tariff on the whole world, and you have 125 % theoretically on the second biggest economy in the world. So if you like the bulk of the macroeconomic change, the overall change to the US economy, that still stands. The people who have feeling unbelievable relief today are the likes of Vietnam and India, the European Union and others who were facing this so-called reciprocal tariff.

7:01So that's where I think things shift. But it now really does focus on a very significant standoff and potentially trade stopping between the world's two biggest economies. When you say trade stopping, let's just spell out why. That number, 135%, it basically means if China carried on trying to export to the United States, prices would more than double. And that's not going to work, is it? People are not going to buy products at those sorts of prices. That's why, effectively, there's a blooming great wall between China and America blocking trade. and it's why in a way the increase from 104 to 125 percent is sort of immaterial these are prohibitive levels of tariff now some things will get through that are particularly high margin but yeah these are these are unthinkably high and it's 84 percent going the other way too although in theory china might retaliate against this again and the tit for tat for tit for tat That will go on forever.

8:09And I see both sides have reasons to stick this out now. The Americans obviously, after the event, are saying, well, this is always going to be about China. Now, there is no way, Nick, that you would have started. If you wanted to end at this point, you never would have alienated your key allies in the first place whilst trying to confront China, which is a different type of challenge. You'd have wanted to get them on side. and so there's you know the entire pathway of this from holding up that board to where we are today doesn't really make a great deal of sense but it is where we are now and this confrontation has so many different angles China also will probably see a certain lack of competence from the US in the holding up of that chart in using a very very shaky and inexplicable equation and think do you know what maybe we can just hold out maybe they aren't so solid and we have found out their pain points we have found out the bond market makes them blink look at this we have 750 billion dollars worth of u.s treasury bonds so so i see the i see the sort of this is what economists call game theory i i see now the game theory of this leaving this in position for some time and causing a great deal of economic pain to both countries factories closing businesses is closing um queues of chinese workers out oh in undoubtedly at this level there we are the world has not escaped this by any stretch of the imagination you can this is the main artery of the world economy and has been for 25 years and it as i said it doesn't just affect the flow of goods this it affects the capital markets the bond markets and the share markets but it also affects um the currency markets when you get a war like this a trade war like this history shows is that it goes into the currency markets.

10:00So it's important to get some sense of perspective re-China. This is going to be devastating for the Chinese economy, but is it existential? 440 billion is a huge amount of exports, but their economy is 18 trillion. So it's about 2 % of the size of the Chinese economy. So they'll be planning a stimulus package now. They won't want unemployment to get out of control. They'll be trying to manage it in some way. It's like a bad, you know, that's the size of a very bad earthquake, 2 % to 4 % of GDP. What you don't expect is something like that to last for years and years and years and years and years.

10:36So that's on their side. On the American side, you have the pain points are starting to materialize in very real terms. You're starting to see small, successful small businesses, people who won the American version of The Apprentice, coming on to their local newspapers, ending up on Fox News explaining that they can't sell their imports anymore. Fox News, interestingly, is starting to report things like this person's business plan, this all-American Trump-supporting small business, cannot sell their wares anymore. There was a fascinating moment on Fox News, I don't know if you saw it, in which a presenter parroted the White House line about it all going to plan and their own business correspondent almost laughed in their face just went, oh, come on, and then started to spell out that the bond markets had forced Donald Trump to blink.

11:27Indeed. But then you think that is in the markets, and the bond markets only indirectly affect Main Street. Obviously, they're hugely impactful on Wall Street. But then you imagine things like smartphones and iPhones, and what price are they going to be at in the States with 125 % tariff? There is no way Apple, for example, can shift their factory production elsewhere to India in time. And people will very, you know, in theory, they will see that at the Apple store, for example, I'll just use that as an example, in New York, that the phones will be hundreds of dollars more expensive than going across the border to Canada.

12:06Probably fly to London and make your airfare in terms of how much cheaper they will be around the world because of this tariff. So this will definitively become very visible in terms of jobs and factories in China and in terms of the prices consumers pay and some small businesses folding in the States. Who has the stomach for this? Final quick thought. You said this is where we are now. The lesson of the last few days is who knows where we'll be tomorrow, the next day, next week? well exactly and in terms of the strategy for example for the uk government i think both of these sides now in what is basically a us china i mean trade war doesn't really even capture how the the scale of this but both sides now will be looking to the rest of the world for if not backup but to act in a for neutrality i would i would say the us will be looking for the rest of the world to support it but then you don't go about that by holding up a board claiming that the whole rest of the world is cheating you.

13:12And I mean, it was quite something. And I think there'll be some memories. But also, Nick, the narrative doesn't quite function. You know, they're saying we only retaliated against China because they retaliated against us. Everybody else was fine because they only said they were going to retaliate. And so they lowered the EU's tariff. Canada has retaliated and they haven't done this manoeuvre. So, you know, people can see through things like this and it doesn't look particularly stable or coherent, but the states will be looking for, Donald Trump will be looking now, and it's amazing to be here a week on, back up from the rest of the world.

13:50Will the rest of the world want to get involved? Faisal, fascinating. Thank you so much. Enjoy the ride. No worries, thank you.

14:03Perhaps what we've really learnt in the last few days is that Donald Trump never really had an answer, one answer, rather than the whole series, to a critical question. What are Trump's tariffs meant to do? Listen to some, and the answer appears to be to get things made in America again. Listen to others, it's about making money by putting a tax on the price of imported goods. That's certainly what Trump allies have always said, and yet there are others in his administration, not least the Treasury Secretary Scott Besant, who's a long-time sceptic about tariffs, who talk as if all they're meant really to do is force America's trading partners to the negotiating table with offers to make life easier for American exporters.

14:52But now we hear another answer to the question, they're really about launching a trade war with China to get them to do a deal, to get them to make trade fairer. Now, why does answering this question matter? Because if all this is about a negotiating tactic, albeit a pretty brutal one, if it does actually lead to freer trade in the end, then many more things won't be made in America and more money won't be raised for American tax coffers. And the tariffs which have spooked the world markets won't be around for very long. That question, what are Trump's tariffs meant to do, was the focus of a conversation I had before the great U-turn with Ambassador Carla Sands.

15:39She sat on President Trump's Economic Advisory Council during his first presidential campaign. She was also US Ambassador to Denmark during the first Trump administration. She now works for the conservative think tank, the America First Policy Institute. And as you'll hear, she's no fan of China and she's relishing the trade war with them. Welcome to the Today Podcast, Ambassador. Thanks, Nick. Thanks for having me on your podcast. Let's start with the easiest question, but maybe it's a hard one. What are Trump's tariffs meant to do? I think in a phrase, they're meant to level the playing field.

16:18And they're really meant to give the American working man and woman who has lost out for the last 40 years, to give them back their opportunity to achieve the American dream. So that sounds like you mean that jobs that have been exported to China or Vietnam or Cambodia or elsewhere, those jobs are meant to come back to the United States to, as you put it, the ordinary American working man. Is that right? Many of them. I don't know that all of them will, but what's happened is when I was a young woman, even a kid, the American family, the typical working class or middle-class American family, the father worked, the mother could stay home and raise the children.

17:10They could afford to buy a house, own a car, own a television, send the kids to school, take a family vacation every year, and they had a really good life. And their main streets across those towns in America, what many call on the coast, the flyover country, they were thriving. They were prosperous. The stores were full of merchandise. People could go and buy. And there was an order to society. The civil society thrived, the families thrived, and mostly the families were intact. What happened over the next 40 years was, and government incentivized this on both sides of the aisle, the jobs and companies moved offshore.

17:53They moved to other countries, often Asia, and then ultimately China. And I blame the government, but I also blame those company owners. They didn't remember what made them great, what built their family business or their factory, their company, which was where they were. It was the people. They didn't take care of the people in place that they were from. Well, hold on a second, Ambassador. What they remembered is that it's the job to give the customer the best product at the cheapest price. And therefore, if you want to make sneakers, which Americans love to buy, it's cheaper to make sneakers in Vietnam.

18:34Almost half of Nikes are made in Vietnam than it is in Peoria or Philadelphia. So is it the policy of Donald Trump to say, pay$400 for some sneakers, but at least they'll be made in Peoria or Philadelphia? Well, I'm not making the case for the price of the item. I'm kind of talking about our society and what happened. What happened was that one person could support a family. And now that family, if you look at them today, both the husband and wife are working. They have to to make ends meet. They probably don't own a home. They probably rent an apartment and they're both hustling without the opportunity to advance in their career.

19:16And so they don't think that their kids are going to be able to do better than they did. And that's the first time in the history of the United States that this generation of adults don't think that their kids are going to be able to do better than they did. I think it's a very powerful story. It's one that's familiar across the Western world. And the argument is that is because globalization has made people richer, but particularly in developing countries. Look at India. Look at China. Look at Indonesia. We have ended poverty for millions, hundreds of millions of people right around the world.

19:55Billions. But if you're saying, hold on, we've got to reverse that process because we've made our own people poorer as a result, then I have to come back to the price of sneakers. Are you willing to say to American consumers, okay, you're going to have to pay more for your smartphone and more for your sneakers because we're going to try and make them made in America where, let's be clear, they will be more expensive because you have to pay people a lot more in the United States than you do in other countries around the world. Well, so I appreciate your question. I was just in India and I was shocked to see how much less poverty there was now than when I was there the first time.

20:31But the fact is that it's not just about saving the families and the American dream, which the UK, like you just said, going through the same thing the United States is going through. Your middle class is so squeezed, but President Trump's looking at it in society to save our towns, which have hollowed out. Maybe 30 ,000 people lived in a town that had a factory and made things, and now there's 5 ,000. So you have the collapse of these towns all across the United States. But it's also, so it's not just about paying more for sneakers because we're going to make them at home. That's not really the play here.

21:08The play here is that a country that doesn't make important things cannot be a great superpower. And if the United States is going to keep the world safe, which we have, there have been mistakes. You look at what's being uncovered by USAID and other rogue American agencies that have been, you know, as Doge has uncovered them. And I don't know if the world's watching this, too. It's been a lot of bad stuff that's happened because of the United States leadership. But putting that aside, because we're ending that on Donald Trump's watch, we must make things in the United States to be a great power and be secure.

21:45We can't be a service economy and actually defend ourselves. We have to make cars. We have to make heavy equipment, steel, aluminum, the pharmaceutical precursors. precursors. We can't let China control this. China, our greatest adversary, who has stated that they want to destroy the United States, has stated they want to be the global hegemon. When a country's leadership says things, you should pay attention. But that's very interesting because what you're doing is powerfully describing one reason for trying to change the way international trade works about the lifestyle of ordinary American families, what you call the middle class, we tend to call the working class in the UK.

22:27It's both. And at the same time, you're adding a new thing, which is national security. But I want to go back to how in practical terms this works. Either you say the price of sneakers and smartphones are going up, or you don't. Now, I accept there are some strategic goods, and you've listed some, steel, some people would say heavy machinery, pharmaceuticals, if you want to avoid what happened during COVID, where you're dependent on other countries to get the vaccines you need. But are consumer goods part of this? Well, we didn't mention rare earth minerals, which do go into every cell phone. I'd call that a consumer good.

23:06Cell phones, defence equipment, all those electric car batteries. The rare earths are one of the big ones because the Chinese government, the Communist Party, has just announced, I think they're going to ban the export of seven different rare earths. And those are inputs that we need in some of our defense equipment. And so we must, we have to, I mean, China threatened during the pandemic, maybe we don't send you those pharmaceutical precursors that you need. They literally publicly threatened the United States when they didn't like something that we did during the pandemic that came out of China.

23:43I mean, you can't make this stuff up. If you have an adversary that talks so belligerently and backs it up with actions, you have to pay attention and you have to prepare for war to avoid war. So what President Trump is doing is he is re-industrializing the United States. And I just will speak to the UK, but also greater EU. Please don't de-industrialize. If it's the case that this is about national security. There's no off-ramp, is there? There's no chance of the Chinese saying, oh, I tell you what, we'll cut some tariffs for you. You cut the tariffs. We'll go back to where we were before. By the sounds of it, you don't want to deal with the Chinese Communist Party.

24:25You think it's time to stand up for them. So these tariffs are permanent. President Trump wants to have a good relationship with every world leader. There's no question. He wants to wisely be able to pick up the phone and sort things out. with every world leader, whether they're a friendly or an unfriendly. He has a good relationship with Chairman Xi. But China is the number one stealer of our intellectual property. They don't play by the same rules in the accounting of their companies. They have a Chinese Communist Party member in every company watching over what they're doing. There's a national security law, which you may be aware of, that every Chinese citizen is compelled to steal, to do whatever the Chinese government wants them to do.

25:10If that's the problem, you can't do a deal with Xi, surely. If that's the problem, you have to say, no, they're the enemy. They're the strategic competitor. The tariffs stay. They're for good. Yeah, I think you can deal with anyone. You just have to know who you're dealing with and, you know, put the guardrails up and you can make a deal with anybody, right? I mean, President Trump was the first US president to actually step into North Korea to meet with the North Korean dictator. He's willing to deal with anyone. There's a lot of talk about deals, but we haven't seen a single successful deal.

25:50It's not a deal in the Middle East. There's not a deal in Ukraine. I'm sorry. And there's not a deal there. Yeah. So he tried to get that deal done. He had, unfortunately, people who did not speak wisely in his administration that killed that deal. So I don't need to name names, but it's on the record. So yes, he worked on a deal. For clarity, you mean on Korea, do you, when you say that? North Korea. But I mean, in every case, he got that initial trade deal done with China. And then they unleashed the virus on the world and everything upended. So, you know, what can I say? President Trump is the greatest negotiator in the history of the United States.

26:30That's what we in the rest of the world are trying to work out, you see. The question I posed at the beginning. Are these tariffs meant to be permanent, to bring jobs back to America, to bring money to America in the form of what is effect a tax on imported goods? Or are they simply a way of saying, look, come to the negotiating table, give us a better offer. I'm the dealmaker. You can do a deal. Let's turn to another specific. Let's turn to Australia, because this came up in a Senate hearing this week in which the US Trade Representative Jameson Greer was being questioned by Democrat Senator Mark Warner, who was puzzled the senator because what he pointed out is America actually has a trade surplus with Australia.

27:17There is no deficit. In other words, it sells more machinery, more transportation equipment, more chemicals to Australia than Australia sends back in the form of beef and other things, for example. I'm just going to play you a little extract of that hearing between the senator, Mark Warner, a critic, let's be clear, an enemy of Donald Trump's, and the US trade representative, one of his allies, Jameson Greer. We have a free trade agreement. They are incredibly important national security partner. Why were they whacked with a tariff? Senator, despite the agreement, they ban our beef, they ban our pork, they're getting ready to impose measures on our digital companies.

27:54With your Greek letter formula, the fact that we have a trade surplus. We have a trade surplus, he says. You could tell he was quite angry, wasn't he? Oh, yes, yelling. But it confuses people. Why are Australia being hit? Well, President Trump wants a level playing field, and Australia uses non-tariff barriers to block our beef. $29 billion, they have sold their beef into the United States, and not$1 of American beef, which is arguably better, has been able to be exported to Australia. Well, they say it's because American farmers are allowed to inject hormones into beef. Now, you call that a non-tariff barrier.

28:34Other people call it a protection for public health and an environmental protection. I don't disagree with you. I wouldn't like to have beef injected with hormones. So I think that in the agriculture and in the health and human services, we're working to make food healthier. in the United States, thank God. We have RFK Jr. at HHS. And then we also have Brooke Rollins at the Department of Agriculture as our secretary. And they're both working to make American food healthier. So there's no question there will be healthier food. The cartel that's been in control of American food, it's being changed.

29:15But my point is that Australia is entitled to keep out American beef just as the UK does, just as the EU does, if it thinks it doesn't meet its standards. And are you saying, we don't care what your standards are, do as we demand, otherwise we're going to charge you a massive tax on the goods that you export to us? Yeah, I can't defend that. I mean, I don't want to eat hormone-injected beef either. So I can't defend that. But we do want the non-tariff barriers to go away. The tariffs are bad where the US charges almost everywhere in the world, very low tariffs. Almost all of our trading partners have higher tariffs on our goods.