137. Trump’s Trade War: Winners, Losers and The Global Fallout

0:10Hello and welcome to The Rest Is Money with me Steph McGovern and with me Robert Peston. So what do you reckon we should talk about today? We're definitely going to talk about rate cuts and what's going on with the Bank of England, what it all means, what they're saying in terms of growth and inflation, where we're likely to land with rates. And then we've got to talk about Trump. And I mean, crazy, crazy week. So that needs dissecting. And I want to know what the kind of grandmaster of economics, Robert Peston, thinks on all this and where it's all going to end. So seatbelts on everyone because it's going to be a wild one.

0:45But let's kick off with something even wilder than a week in the presence of Donald Trump. I feel I've spent quite a lot of time with you in the last few days because you've been all over social media promoting your latest great adventure. Yes, so I can now tell everyone what it was. Do you remember I disappeared for like a month last year and you, you know, stood in gallantly and carried on while I was. And had to pretend I hadn't a clue where you were. Yeah. And I was in actually in Costa Rica being chased through a jungle by Bear Grylls, along with people like Boris Becker and Mel B and Shirley Ballas, amongst many others.

1:24And so, yeah. And it was the promo of this. And they were all chasing you? So the premise of it is it's 12 people off the telly basically and for various different reasons. And you're taken to Costa Rica. You live together in this fabulous lodge, but which is quite open to nature and the environment. And so we had like jaguars would just wander through and things like that. You're putting my leg. No, no, no. It was really like, yeah, it was amazing. We used to watch the sharks right in front of the house as well and everything like that. And from memory, aren't I right that one of the Jurassic Parks is in Costa Rica, isn't it?

1:58Isn't it? Wasn't one of the movies made there? Our set up there looked quite Jurassic in some respects, actually. So anyway, you do all these challenges as teams. And then if you fail, you get put into what's called the bear pit. And this is a part of the jungle in Costa Rica where you then are put in there. And then Bear Grylls has to try and catch you. And you have to try and either escape or evade. And it gets harder as it goes on. and you have to get tools to escape and you have to like try and follow maps and you know try not to be caught by him so yeah that's what i was doing it's just been launched on netflix this week it's number one currently in the uk and yeah it's going out across the world but i mean netflix man we have been working for the wrong people robert itv and bbc and channel four they have got nothing compared to the money netflix have like for example i've been staying in raffles all week like one of the poshest hotels in london can i ask you a question about that This is the question that all journalists always ask.

2:53So they put you up in raffles, right? So did they pay for the minibar? Yes. We had an amount of money each day to spend there as well. Although I thought, oh, this is going to last me ages, this money. And then I ordered a curry and a water and it was£90 just for a curry and a bottle of water. Sorry, hang on, hang on, hang on. A curry and a bottle of water in room service, I know. Is£90. Yeah, yeah, that's how much I spent. But honestly, it was off the scale. It was like we did this big press junket. It was like a whole, I felt like a Hollywood star. And then we did this premiere in Leicester Square and Bear Grylls abseiled down the wall into the premiere.

3:32And yeah, it was all very flash. And you would have done that if you hadn't broken your arm. Yes, of course. I know. And everyone thinks my arm's broken because of that. Little do they know it was you that broke my arm and not Bear Grylls. Okay. Okay. Okay. Just if you didn't listen to the episode where this was explained, just go back and listen to that episode would you because you might be slightly misled by what bang me never never never never anyway it's been just i've been busy doing all that but it's been very very busy in the world of business and obviously the bank of england rate decision it's been mad hasn't it it's just been exhausting i mean we're going to get on in a minute or two to the most exhausting part of all of this which is just donald trump's daily delivery of something you never thought the most powerful person in the Western world would ever say.

4:20Just how exhausting, you know, living with Donald Trump has been for all of us. But we're going to kick off with the Bank of England cutting a quarter of a percentage point off interest rates. And I guess there's a couple of things that stood out for me in terms of what it said today about the coming path for interest rate cuts and also just the outlook for the economy. One was, I mean, it's just, you know, I sort of hate this aspect of central banking. You know, every word is weighed with with extraordinary deliberation. And so the Monetary Policy Committee spends ages coming up with a phrase that's supposed to somehow capture the way we're going.

5:12So the phrase they used in terms of interest rates, believe it or not, is careful and gradual in terms of the future path of interest rate cuts. It's careful and gradual. That's not going to set the pulse racing, is it? And what they were trying to capture there is that on the one hand, there are still inflationary concerns around the place. Service inflation, wage inflation is still higher than they would like. And they see risks to hitting their target of getting inflation down to 2 % over the next two to three years. and the risks you can mostly characterize by the word Trump. And, you know, one of the things they talked about today was the risks to the global economy and indeed, therefore, the British economy posed by tariffs.

6:06So we'll come back to that. And it is a bit, it is just a bit demoralizing that if you look at what we thought was going to happen to interest rates, you know, a few weeks ago, we thought they would be coming down a bit faster than now looks to be the Bank of England plan. So, you know, maybe another half percent off by the end of the year. You know, it wasn't that long ago. You know, I was hoping we would see a full percentage point off this year. It doesn't look as though that's going to happen now. Can I ask you a question on that? Just obviously, you know, looking at the breakdown of how the MPC voted on it, it was seven to two for this quarter point cut.

6:43The two who didn't vote for the quarter point wanted it to be cut even further, didn't they? I mean did that surprise you that there were a couple of people in there who wanted it to be cut even more than that? Yeah I think they're right personally I think actually the disinflationary pressures in the economy are pretty strong at the moment we've got absolutely no growth and I'm going to come back to this one of the people who voted for a half point cut was Swati Dhingra who's been on this podcast absolutely fascinating interview if anyone wants to go back and listen to that because it's what she had to say was is still absolutely relevant in terms of the outlook for monetary policy.

7:19They actually had slightly different reasons for wanting a bigger cut. In the case of one, it was about symbolism. In the case of the determination, as it were, to show that the Bank of England is responding to these rather depressed conditions we're in. And the other simply takes a slightly more long-term view of the way in which inflation seems to be on track to come down. It is always disappointing for somebody like me if you think that actually they should be cutting bigger, but in the end the Bank of England goes with a more cautious approach. But the other thing that they talked about, which actually goes to the heart of the sort of mess that this government is in in terms of trying to get the growth rate up, is, and it was very interesting listening to the governor, Andrew Bailey, talking about whether essentially the problem for the British economy in terms of why it's growing so slowly at the moment is that there's not enough demand.

8:27In other words, not enough confidence of consumers in terms of what they're spending, not enough confidence among businesses in terms of what they're investing, or whether the problem is on supply, that basically we just haven't got enough capacity in the economy. It's slightly depressing that they can't answer that question. And one of the reasons it's depressing they can't answer that question is because if the problem is weak supply, it means that it doesn't take much of an increase in demand for the inflation rate to go up again. Yeah, because supply won't meet the demand. So if the problem is supply, then the path for interest rates to fall will be more gradual and slower.

9:15And if they were to take the view that this is very much a sort of what we call an animal spirits problem, people just not confident enough, then you would cut faster. And it feels like it is that. Yeah, it feels like it is a confidence thing in terms of everything we've discussed about, you know, the pressure on business at the moment, the lack of investment and, you know, a lot of talk from the government, but not much action yet. It does feel that that is a big part of the problem. It must be the case. And it slightly drives me up the wall that the Bank of England isn't making that judgment, not just because of the sort of semi-anecdotal thing and their surveys which show how much confidence has fallen.

9:55But he also, the government of the Bank of England, made another sort of very depressing point, right, which is about what's been happening to productivity in this country just over the past year. So the economy has basically been flatlining since sort of March, April of last year. Right. But we also know that over this period of the last two or three years, massive controversial politics around this, the population of the UK has been rising very, very significantly. because despite the promises of the previous government to control immigration, you know, immigration has been rising by hundreds and hundreds and hundreds of thousands of people every single year.

10:47And, you know, it's sort of nudging a million additional people coming into the country in the course of a year. And normally, when the population increases, whatever the cause of it, in this case it's immigration you would expect GDP to rise right it is normally a driver of growth yeah because there's more demand totally I mean and but one of the things that therefore is absolutely and businesses produce more because they're taking on more people so you know anyway the point is over the last year we've had flatlining with a much bigger population so by definition, output per person, output per hour work, productivity has slumped, right?

11:31Now, when that happens, right, when you get a productivity slump like that, you would normally, in my view, take the view that that is a short-term phenomenon. And broadly, because people are, you know, because companies have taken on all these extra people, there is now the potential for a significant increase in supply. Because at the moment that demand increases, let's just say you cut interest rates, people feel more confident again, they start buying and investing more. The truth is, if you are a supplier to the British economy, and you know, in those circumstances, you can deliver that because you've taken on all these extra people, you should be able to deliver that supply without it being inflationary.

12:12You know, in a sense, the sort of most basic bit of analysis that they've done, I would say that the problem, therefore, is one of demand. And, you know, the couple of members of the Multi-Polity Committee who said, let's cut by half a percentage point, they're bang on. That's what should have happened. So then what happens next then, do you think? It isn't as big a cut as it should have been, you think, and too, if the MPC think as well. So what does that mean? Does that mean, you know, they've forecast inflation to go up this year, haven't they? They've downgraded growth. So what happens next?

12:47Look, I still think absent a very significant shock to the British economy, you know, we will see certainly at least one, probably two more interest rate cuts this year. And if the economy continues to flatline, we might see three. Right. But I just think it's going to be slightly slower than what, you know, than is ideal, particularly at a time where there's zero growth in the economy. And, you know, as the Government Bank of England also pointed out, whatever view you take, and we talked at length about this, of just a few days ago, Rachel Reeve's new growth plan, you know, third runway at Heathrow.

13:24I don't personally believe it's ever going to be built, but let's give her the benefit of the doubt and assume it will be built. The creation of the Oxford Cambridge super cluster, connecting them up with accelerated transport development and housing and all the rest. more planning reform as we speak for example there's been a big announcement about making it easier to build these new modular nuclear reactors to power data centers and all all the rest of it you know all of this stuff is potentially good for the growth rate but it'll take years and as the governor of bank of england said he said in terms none of that stuff is going to have an impact on growth over the two to three year forecast horizon that they operate on right So, you know, he says these are all very good measures for the long term.

14:10But, you know, it doesn't have any impact on what the Bank of England decides to do about interest rates now, which is just another reason why, you know, any sensible person would surely say they got to cut faster. And as you kind of implied, they probably might end up having to do that later down the line then, if it doesn't. Well, we'll see. I mean, the problem with all this, and let's get back to this in a minute. But the problem with all of this is, you know, there is the potential for the kind of economic shock that can, you know, frankly, I'm afraid, disrail the best laid plans of that sort.

14:45And as I said earlier, we call that potential shock Donald Trump. So maybe we should talk a bit about him. So before we do that, let's have a quick break.

14:57Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Paston. Well, what a mad week it has been with Trump. I mean, I'll be honest, I have not looked at my portfolio, my investments and everything all week just for fear. Because you're scared. Yeah. But in a way, I mean, it will very much represent a roller coaster, I'm sure, given all the kind of decisions we've had and then the backtracking and the last minute deals. It's been a really crazy week. We knew these trade tariffs were coming in. We had Mexico and Canada, the fact that they were going to be slapped with this 25 % tariff on trade.

15:36And then all of a sudden, the Canadian prime minister and the Mexican president have this call with Trump to try and stop that happening, agreeing to boost security on the borders to prevent trafficking of drugs and migrants into the US. And then, you know, they had this last minute decision. So that's been delayed for a bit. The tariffs there. Obviously, China have been slapped with a tariff. Then they've come back with a retaliation. It's just been wild, hasn't it? What's it felt like from your perspective, Robert? Exhausting. You said it all in the air then. I mean, you know, Monday morning, you know, you wake up and markets all over the world are melting down because the expectation that they'd had that the tariff stuff would be introduced over a longer time period was suddenly smashed to pieces when he said, as you pointed out, 25 % on Mexico, Canada, 10 % on China.

16:31And so that day, we start with equity markets tanking. You get this extraordinary phenomenon of bond prices, you know, gilts issued by the British government, European bond prices actually rising in value. And the reason they rose in value is because although most of us would associate tariffs with higher prices, and we'll come back to the economic impact of all of this, the view among investors was that this one-off hike in prices would just lead to lower growth, more depressed economic conditions. And therefore, the Bank of England and the European Central Bank would actually, in those circumstances, have to cut interest rates faster.

17:24And of course, the prices of bonds move in the opposite direction to what happens to interest rates, right? When investors think interest rates are falling, bond prices rise, And that's what happened. Right. And just very quickly, just this is the sort of, you know, very rapid explanation. On most bonds, the coupon you receive, the income you receive is fixed in monetary terms. So when the bond price rises, the fixed price coupon as a percentage of the bond price falls. And that's the interest rate falling. Right. Anyway, just in case anybody isn't aware of that. The opposite thing happens in the States, right?

18:06Because in the States, right, investors take the view that the first round effect of, you know, the increase in tariffs means a significant increase in the price that businesses pay for the parts they import, that consumers pay for the stuff they buy in the shops. and in America, investors take the view inflation is rising in the short term and therefore interest rates are going to have to either go up or at least fall more slowly. So in America, you get the opposite impact when it comes to bond prices where there the bond prices fell as a result of his tariffs. But then, and this is the bit which slightly does my head in, okay, is normally when the price of American treasuries, US bonds fall, you would expect the value of the dollar to fall as well.

19:01Right. And here's the really weird thing. US treasuries, US bond prices fell, the dollar strengthened. Right. And the reason the dollar strengthened is because of this other mad phenomenon. And this could only really happen under Trump, that he's creating all this global uncertainty. And what do investors do? They tend to buy the dollar. And in this case, they're piling into gold priced in dollars. It's one of the assets they were buying. And the dollar therefore rises in value. But, and this is the other bit of it that was just mind-numbing because I can't remember, do you still own any crypto?

19:38Have you dumped it all? I can't remember. Yeah, no, I've got, I've got, I've actually bought some more recently, just for the speculative. All right. Well, anyway, your timing wasn't brilliant because, as you know in the immediate aftermath of the trump shock the price of crypto absolutely tanked particularly ethereum but you know bitcoin also fell my solano's doing all right uh i'm so pleased and actually do you remember when we had the great entity the mooch scurrimucci on so he he starts to lecture me because i because as you know i'm a great crypto skeptic and he said no no no you don't understand it's a great store of value well i have to say trump just rather disproved that It's not a great store of value.

20:17The roller coaster it goes on. Yeah, I mean, and Trump really just disproved that. So he does this ridiculous tariff based market shock. And, you know, the traditional store of value, gold, rises in value quite significantly. Crypto tanks. Can you see a day, though, where it isn't pegged to the dollar? Like, I know we talked about this a while ago about, you know, like, obviously, when Russia was talking about creating this BRICS payment and doing their own. A BRICS reserve currency, yeah. Yeah. Do you think we could see a day where it isn't the dollar that backs everything? Or is it always, is that impossible to change?

20:53Look, I mean, some people would say, I mean, that Donald Trump is doing an amazingly good job of trying to undermine America's possibly greatest economic advantage, which is that it is the world's reserve currency. And, you know, as we've discussed before, the more that he increases US government indebtedness, the more pressure he puts on confidence in America to repay its debts. And at that point, you know, you begin as an investor to wonder whether you do have to hold dollars, whether you should hold dollars. And once that were to become, if that were to become, you know, a widespread anxiety, then, of course, it's no longer the reserve currency.

21:41And I'm slightly assuming, however bonkers you think he is, he will never go that far that he would totally undermine confidence in the dollar because one of the reasons why it's such a powerful economy is because through thick and thin all over the world, people feel they have to hold dollars. But anyway, just to get back to the roller coaster, of course, within the course of one day, we go from 25 % tariffs immediately on Canada and Mexico. And then he has conversations with Justin Trudeau of Canada and Claudia Scheinbaum of Mexico. They then say, we'll move. I mean, just for those people who have not been following it closely enough, one of the things that Trump said he wanted as a result of this economic warfare was to reduce the flow both of undocumented migrants across the Mexican border into the US.

22:45He seems to think there are a lot of undocumented Canadians coming across the Canadian border into America. And I mean, I'm not sure quite how much evidence there is of that. But he also thinks that it's appalling. And there is evidence of this certainly coming from, again, Mexico. He's deeply concerned about the flow of the absolutely toxic addictive drug fentanyl into the US. There is some evidence. I mean, some does flow into America from Canada. There is all the evidence shows it's way less coming from Canada than is coming from Mexico. Anyway, Scheinbaum and Trudeau both say we'll put more troops on the border.

23:24We'll do more to stop the flow of drugs and people into America. And at that point, they delay implementing the tariffs for at least a month and then markets recover. But then he sets up this idea that he's going to have this conversation with President Xi of China. and then that conversation never happens. And so we are now in the first phases of a genuine trade war because there are these tariffs being imposed on China. There are these tit-for-tat retaliation on, actually a fairly limited, in terms of China's retaliation, actually the tariffs it's imposed are really not that significant, much more significant, and China is normally quite astute about this, is China controls, as a result of its minerals, a very, very significant share of the world's rare earth minerals, which are absolutely vital to America's tech industry.

24:22These are things that, for example, are vital to creation of all sorts of digital tech, especially smartphones and the rest. And China has said they're going to limit the flow of these rare earth minerals into America. and that is a different kind of economic warfare but very damaging to really important American businesses like Apple. There was also as well the kind of temporary suspension of parcels coming from China and Hong Kong weren't there where there was some research done and they say like 30 % of small packages coming into the US were from like Shein and Team U these massive Chinese e-commerce companies so there was a point where that was suspended as well.

25:01I mean that was do you remember we talked about this when we were talking about Cheyenne, one of the reasons these small parcels are important to the likes of Cheyenne is, of course, it is a way of getting round normal tariffs and import duties. So inevitably, Trump, if he wants to raise as much money as he can from these tariffs, he's got to limit these small parcels, hasn't he? The question that I have on all of this, so like, for example, with Canada and Mexico, This, as you say, this commitment from them to strengthen their borders so that it stops migrants crossing the border or drugs or whatever else.

25:42But it's a delay of 30 days. There's no way. And I know that could be increased, that delay, but there's no way anything's going to get done that quickly. I know, for example, we've heard the Mexican president say there's going to be 10 ,000 more people on the border or whatever, security forces and stuff. But you're not going to suddenly stop the drugs, you know, all the drug dealers and everything being able to get drugs in and they'll just find another way. So it just feels like, aren't we just going to have all this drama again in a month's time when we, you know, the drugs are still coming in or whatever.

26:13And then, you know, how would you even measure it to see whether they're still getting in? I just, it just doesn't feel like practical. It just feels like ridiculous kind of grand statements that make him look like he's doing something about it, but that can't be achieved. and then will just lead to more market turmoil in a month's time. So, look, obviously one of the big questions is how much of what he does in this space is about genuinely solving important practical problems. I mean, I think it's very hard to argue against the idea that, you know, fentanyl is an absolutely terrible addictive substance doing awful harm to huge numbers of American people and reducing its flow is a very good idea.

26:55It seems to me that what's going on may reduce the flow a bit. But, you know, there is nonetheless a question about whether or not what Trump really is motivated by is just showing, as he did on Monday, quite how sort of almost godlike he can be. He opens his mouth and markets go mad. You know, politicians go into all over the world, leaders go into an absolute frenzy. And if you think, and this would be a fair amount of evidence for this, that he's something of a narcissist. That's not even a question, is it? Then, you know, for him, just proving to the world, the flick of a finger, you know, markets crash.

27:42His own story about himself somehow gets reinforced. The thing that, however, we also know about him is that he doesn't like to lose. He is an extraordinary survivor throughout his entire career. Goes bust, comes back, loses the election after his first presidency. Some would say tries to subvert democracy and stay in power. Fails, humiliated, endless court cases. He's back. Doesn't end up in prison. I mean, some would say that's extraordinary. You know, at the end of the day, he won't want his presidency to be characterized by abject failure. And one of the things that is really extraordinary about this tariff policy is it puts up prices for U.S.

28:33consumers very significantly if implemented on the scale that he has been talking about. And given that perhaps the biggest factor that led him to win the election was that millions of Americans blamed Biden and then, you know, his anointed successor, Kamala Harris. They blamed that duo for the squeeze in living standards that was caused during their presidency by a rise in inflation, even though, frankly, you know, most of that rise in inflation definitely wasn't their fault. They were blamed for it. Why on earth would he want to punish the people who voted for him by squeezing their living standards again?