144. The European Silver Lining to Trump’s Global Gangsterism

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1:13Hello and welcome to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. So much to talk about. I think in this episode, we want to look at the latest goings on in the US, what the trade tariffs will mean for us all. Obviously, the fallout from what's happening with Ukraine and Zelensky. We want to look as well at maybe a bit of cautious optimism around this increase in defence spending and how that might play out across the world and how that might help the UK. We've been talking to manufacturers recently about this and there's a sense that maybe this could be part of the industrial strategy here that helps increase growth and productivity.

1:51So we're going to cover all of that. But you want to start with the states, don't you, Robert, and the chaos that's happening there and what it all means for us? Yeah, so look, I'm going to start by depressing all of you about the sort of terrible things that Trump's doing and then I'm going to talk about an important silver lining. But I think we should start with the really disturbing aspects of all of this. And I'd say there are three really big points that we all have to focus on. First of all, in the way that Trump suspended military aid to Ukraine, that is a break with the American European Security Military Alliance that has kept the world much safer since the Second World War.

2:41So that in itself is really shocking. The second point is for decades we have had a free trade system that I'm not saying it's flawless, I'm not saying that there are millions of people who've lost out in this era of globalised free trade, But in the round, it has made growth for the world higher than it would otherwise have been. And it has made all of us richer than would otherwise have been the case. And Trump's decision to impose very significant tariffs on Canada, Mexico, doubling the rate of tariffs on China, very, very likely to impose punitive tariffs on the European Union. that is going to have negative consequences for all of us, including for millions of American citizens.

3:38And then just finally, you know, we are moving into this era of sort of global gangsterism. The one thing that holds all of this together is Trump's view that the world should be run by a limited number of powerful individuals like himself. He obviously will dominate the Americas. We've seen this extraordinary change in the approach of America to Putin. And we saw this actually in the first term. He plainly admires Putin. He wants to do a deal with Putin. Yeah, it's really, really, really scary. But it's interesting because in America, obviously, Trump's done this big speech, hasn't he, where he's gone on about tariffs are going to make America rich again.

4:27and, you know, we're getting our pride back. And you talk there about Vance saying that, you know, Americans are the most important people, which is a really scary rhetoric. But there's a lot of people who probably agree with him and think, yeah, them and their family are the most important people. And so I think that's the scary thing here is he is playing into the fact that people are selfish on the whole, aren't they? For all the talk of people being charitable and all that, there's actually a lot of people who just want their own lives to be better. So although this sounds scary to lots of us, it sounds amazing to lots of Americans who think, yeah, you're not going to pay for all the other people in other countries now.

5:15We're going to put tariffs on you and therefore enhance industries in our country. Now, you and I and lots of other people know that that is not wrong because the world is not as simple as that. And inevitably, this is going to push up inflation in America. It's going to add costs in the supply chain. It's going to make everything more expensive. But as a message to American people, it's optimistic. It's about getting rich. It's about everything being about them. And it's working though, isn't it? It's like in the sense of people are really excited about it there. Obviously, that was a sweeping generalization.

5:49I know there's lots of Americans raging about this. But there's also a cohort who think, yes, this is good for us. Yeah, look, I think America as a society is deeply divided. But I have to say, Trump is failing his own test of serving the interests of Americans above all else. When a tariff is imposed on imports from a trading partner as important as Canada, there are only two possible outcomes. The importer can choose to absorb that increased cost, the 25 % tariff, by cutting its profit margins. Lower profits mean lower investments. In most cases, the importer will pass on that cost to either the business that it is supplying or if it's supplying consumers, just simply putting up the cost to consumers.

6:45Now, all of that means that there will be lower growth in America and there will be higher inflation in America. And given that Trump was elected on a platform of attacking Biden and Harris for increasing the cost of living for Americans, it is somewhat extraordinary that his central economic policy is increasing the cost of living for Americans. And I wonder how long they will tolerate that. We are already seeing as well the American economy slowing down really rapidly. There was a really shocking nowcast by the Atlanta branch of the US Federal Reserve. Nowcasts are when you take data that emerges in real time and then you look at that and try and make an assessment of what's happening to the economy in the round.

7:47And what is genuinely striking and genuinely shocking is only a couple of weeks ago, the Atlanta Fed was looking at 3 % annualized growth in the first quarter of this year. That now cost is now saying that the US economy is shrinking by an annualized rate of 3%. That is a shocking swing from positive to negative. It is a 6 % swing and it raises the very real risk that the world's biggest economy, America, is heading into recession. If there's a recession in America, that will be bad for the whole world. It's little wonder that we've seen stock markets falling. American stock markets have reacted very negatively.

8:39and something that many people would regard as a good thing has also happened, but it's happened as a result of a very negative assessment of what Trump is doing by investors. And that is the yield on the 10-year US government bond, 10-year treasuries has fallen very significantly. Now, you would argue that in some ways that's a good thing because it means the cost of borrowing for the American government is falling. And it also means that for certain kind of consumer loans, they will become a bit cheaper. But we should be under no illusion about what is driving that fall in the yield. That yield is falling because investors are buying the 10-year bond because of their fear.

9:33It's a flight to safety. It's because of their fear that the US economy is slowing down. So it is because they are negative about the US economy under Trump that they are putting their money into US government bonds. So the underlying cause of the fall in interest rates there is something seriously bad, seriously negative. And, you know, we've talked about this before when times when things go chaotic, people move their money into what they think are safer assets and things like, as you say, bonds. But there's an interesting reaction from businesses to all of this as well. So if you look, let's take car manufacturing, for example.

10:12There are lots of suppliers of car parts who manufacture in countries like Mexico, one of which is a French company called Fervia. And Fervia are a supplier to Tesla. So they've already come out and said this is going to cost them tons more money. They describe it as an enormous impact. And then there's a piece in the FT as well where they've seen conversations between some of the people who work there saying that it could raise annual costs, this tariff on Mexico, by$200 million to$450 million a year. That inevitably is going to impact the cost of Tesla parts, which means Musk's going to have to put up the price of Teslas.

10:53And I just don't understand why he can't see that and be saying it to Trump. Because, OK, he might want to open plants in the US and make all the parts for Teslas in the US. That's going to take time. It's going to take skills, potentially, they don't have. And in the meantime, costs are going to go up. Unless he's going to take the hit personally, but I doubt it. And that's what I just can't get my head around here, is why Musk is not having those conversations with Trump. And if he is, why Trump's not listening. So there's a couple of things there. One is that with Trump, we sort of never know, you know, what the final sort of structure of all of this, in this case, the tariffs is going to be.

11:37And we had Howard Lutnick, who's his Commerce Secretary, who I ran into actually last week at the UK Embassy, a sort of swanky party in Washington when I was over there. I mean, he has said that although these tariffs have been imposed, They're not necessarily forever. There's a negotiation going on with Canada and Mexico right now. And maybe these tariffs will be reduced a bit, possibly even within hours. We just don't know. Trump's official position is there will be a bit of disruption, a bit of pain along the way for the likes of his great ally, Elon Musk and Tesla. He believes that it's worth it because these businesses currently located in other parts of the world, Canada and Mexico, he hopes that they will relocate to America.

12:31America and we have seen, for example, in just the last few days, a very, very big investment by one of the most important companies in the world. Taiwan Semiconductor has announced a hundred billion dollar investment in new capacity in America. If there were over a period of years, that kind of massive so-called on-shoring, massive investment in America of that kind of manufacturing, the short term costs of all of this might be mitigated, might be lessened over the long term. But to be clear, you know, that is the work of years to create those jobs. And on almost all in economic analysis, the pain that will be endured by American businesses and American people during that transition will way outweigh the long term benefits.

13:32And also, just in simple economic terms, if you at the same time as bringing in these tariffs and being stricter on immigration, you're not going to have all the skills you need to suddenly open these factories. There will not be enough people with the right skills they need to be able to deliver on all of this. So that's another hit as well. You're kind of hitting yourself at both ends, aren't you? if you're not going to allow people to come. You want the factories to be built in America, but you're going to need people from the other countries who've been working in those factories to bring their skills over, even if it's just in the short term while you train up everyone in the States.

14:07But again, if you can't do that, then that's a double whammy. It's just not thought through. It's really simple economics. And the thing that blows my mind is that Musk, who is a very successful business person with all these companies in different areas, hasn't explained that to him. but maybe he doesn't care. Maybe Musk is so rich he doesn't care. Well, he is incredibly rich, and he's also got a big job on at the moment, totally dismantling the American government. I wanted to talk a little bit, though, about grounds for... Optimism is possibly putting it too strongly, but, you know, where good could flow from this.

14:48There are sort of two aspects to this. It's been very clear, actually, for years, given the threat posed by Putin and other bad actors across the world, that Europe, including the UK, allowed its arms manufacturing businesses to become relatively insignificant in a global context. And of course, our military, our defence has become inadequate given the threats we face and the way that Trump is distancing himself from Europe. Some would say abandoning Europe. One of the, you know, the positive aspects of all of this is this has delivered an enormous shock to European leaders. And there are sort of three potentially really big benefits that may flow for this for the UK and for wider Europe.

15:39I'd quite like to just talk about all three. Now, I was at Lancaster House on Sunday, which is when the Prime Minister, Keir Starmer, convened European leaders to talk about how to essentially take more responsibility in Europe for our own defence. and we had pretty much every important European leader there with one significant exception, which was sort of mind-blowing, which is, you know, he forgot to invite the Baltic states who are literally on the front line with Putin. How did that happen? Quite out of time, I don't know. But, you know, instead he did a Zoom call with them. But, you know, that was a sort of, you know, let's just say that was a sort of minor embarrassment.

16:26Trudeau was also there. And one very positive thing about that is that, you know, you could see a warmth between Europe's leaders and the prime minister of Britain that we simply haven't seen since Brexit. OK, there was a sense of solidarity in the face of this, you know, the dual, you might say, threats of Trump and Putin that, as I say, we haven't seen for many years. And it gave me grounds for more optimism that not only can Europe act in a much more coherent way to protect ourselves, but also this newfound sense of solidarity should translate. and I don't think I'm being naive here, into a much more constructive approach when it comes to improving our terms of trade.

17:25That's the terms of trade between the UK and the European Union. Up to now, we have been really frustrated in the UK by Europe's red lines about getting access to the European single market and sort of de facto membership of the customs union. And my own view, is that if this solidarity over our mutual protection continues, I think there is a chance that we will see a more constructive attitude from the rest of the European Union that will allow us to integrate our economy more closely with theirs again and reduce the costs of trading in both directions. So that would be one potentially very positive outcome of the shock that's been imposed on us by Trump.

18:14Two other really important benefits from all of this. One is, in the case of the UK, government talks a good talk about wanting an industrial policy, but frankly, it's not been very coherent up to now. Actually putting rearmament at the heart of an industrial policy, which is what they appear to be doing, would make sense both for manufacturing jobs and indeed for tech development, because there are always tech benefits, technological benefits. So, you know, one of the sort of appalling things about rearming is, you know, the benefits to civil society are always there in terms of the spin-offs from the sort of research and development that you do as you confront an enemy of that sort.

19:00And equally, I think for the whole of Europe, this is really, really important. It's important for the UK. It's important for the continent. I think there's a growing recognition that the years of low growth, of stagnating prosperity, will undermine the ability of the European Union to be a countervailing positive force in this new world of global gangsters. We should be the beacon in Europe of democratic values, but we can only really argue that with force if our economies are performing way better than they're performing today. So I am hoping that we will see not only a reform to fiscal rules that stifle public investment, but we will also see a more mature approach to regulation that will allow, for example, the growth at the moment of the too small and stifled technological industries and high tech industries that Europe desperately needs on its own shores.

20:06We've got the brains. We've talked about this repeatedly, but we just don't have the finance and the infrastructure to allow these companies to become world leaders. We saw the Draghi report last autumn, which highlighted what a problem this is. And I'm just feeling a bit more optimistic that we will now see real momentum behind the re-energizing of Europe. So basically, in summary, there's a friendlier field between the leaders of the EU and the UK now. And the fact that more money is going into defence could be actually something that spurs the economy, gives us growth, increases productivity, gives it in the right places in terms of, you know, we're talking high tech, advanced manufacturing.

20:50But also forces Europe itself to tear up its growth destroying regulatory structures, right? You know, which is not just important for them. If Europe grows, we grow. And I want to come back to some of that after the break, because we spent some time this week talking to manufacturers. And I think you're right. There is definitely a feeling of this increase in defence spending could be a great thing for the manufacturing sector and for giving this industrial strategy some purpose. But let's have a quick break. See you in a minute.

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22:29Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. Now, we were both at the Make UK conference, which gathers together some of the UK's leading manufacturers and indeed small businesses in manufacturing. you spent the whole day there give me a sense of what's on the minds of the people in this very important sector of the economy so um i have a really um good relationship with the make uk gang because you know i started my career in manufacturing and it was them who when i was a 19 year old when they were called eef at the time the engineering employers federation gave me an award for the work i'd been doing at black and decker back then so and i've been hosting their conference and part of their conference for 10 years now.

23:16So I've seen the change in that time, how they've dealt with the pandemic, how they've dealt with the political landscape, the constant lack of an industrial strategy, which I know is their biggest beef in all of this. But this year, it was interesting because I felt there was a genuine optimism in the room. I mean, if you look at where we are at as a manufacturer, we are the 12th largest manufacturing economy in the world, But we were eighth a couple of years ago. You know, countries like Mexico and Italy and Taiwan have now surpassed the UK in terms of their manufacturing output. And so this is an industry that has been declining.

23:57And despite, you know, we've heard in the past the march of the makers and all of this rhetoric around we should really strengthen our manufacturing sector. it's really struggled and you know there's been a lot of political lip service paid but no genuine action but now if you look at what's happened with this defence increase in defence spending there's a sense that actually this now is something for the manufacturing sector to get hold of if you look at what makes up the manufacturing sector it's you know something like out of 250 ,000 manufacturing businesses that we have in the country, 99 % of them are small or micro or medium-sized businesses.

24:41So these are possibly a lot of the companies that are really impacted by things like the national insurance rise, the employment regulation changes, all of these things that have really stressed them out. I think there's now a sense that if this UK defence spending comes with an industrial strategy which has genuine tangible objectives that you know these guys were saying to me what they want to see is like tenure goals they want things where there's an alignment between departments government departments so for example if we're talking about skills which is one of their biggest beefs that they really struggle to get the skills they need in the sector and you know you and I asked actually the audience how many of them are are struggling with getting the right people.

25:28And pretty much half the people there are not far off put their hands up to say they're still struggling to get the right skills. So what the guys were saying to me is, if there is a genuine industrial strategy, which, as we're saying, could be centred around defence as one part of it, but mainly advanced manufacturing, advanced technology, and they've got this alignment between if it is skills, the Department for Education is saying the same as the Department for Trade or whatever, and they've got this cohesion between the skills agenda, that for them will be genuinely something that will allow them to grow, to be more confident about investing, to expand.

26:09But they said there's a lot of expectation about this. Particularly the big manufacturers have a lot of holding out for this industrial strategy, which we're going to get out in June. It's going to come out the same time as the spending review. If that, though, just turns out to be a waffly kind of 10-page document, which is basically a brochure of UK manufacturing, of UK industry, then they will be raging. But there is a sense of optimism that for the first time in forever, they would say, there could be an industrial strategy which gives them something to tangibly work on, increase investment, increase growth, productivity, everything else, and employment too.

26:52If you look at the industry, it employs 2.6 million people. And on average, the wages are 10 % higher than the UK average for wages. So we're talking about jobs which are skilled and pay better than lots of other sectors as well. So traditionally, I would have argued that the sort of politicians' obsession with manufacturing was a sort of absurd nostalgia for, you know, an economy that we're never, ever, ever going to get back. And, you know, traditionally, I felt frustrated that rather than reinforcing the success of industries, you know, whether it was in, you know, finance or life sciences or tech, another one would be the creative industries.

27:49Actually, I spent some time with some people in the creative industries this week and was reminded that the creative industries have been growing at twice the rate of pretty much every other sector of the economy. It's really fulfilling employment in this sector. One of the things that's slightly frustrating is that, you know, we have a sort of culture in the UK where we think that somehow manufacturing is a more serious industry than creative, which is mad, right? You know, we have world leading exporters in the creative industries, whether it's on the sort of tech side of it, whether it's things like the entertainment side, music and film.

28:29But actually, if you look at the amount of money that is going to have to go into defence. So, you know, we've just had an announcement from the government that defence spending is going up to 2.3 % of our national income to 2.5 % of our national income. Now, that is not massive. You know, it's sort of six billion extra per year. But there is broad consensus that it needs to rise significantly more than that. NATO members are debating a new minimum threshold for defence spending by individual countries as a share of their GDP, their national income. That minimum threshold is currently 2%. Likelihood is it will be raised to 3%.

29:17In fact, Keir Starmer has already said that in the next parliament he wants to get to 3%. But frankly, there's a very, very good chance that economies like ours are going to have to get back to levels of nearer 5%. Now, when you go from less than 2.5 % to 5%, that is real money, right? And that is real money going into defence companies, manufacturers, and that could genuinely transform. so long as we direct that money to UK-based businesses, that could transform the prospects and the size of our manufacturing industry. And just to reiterate what I was saying earlier, if you just look at the history of defence investment, it always comes up with breakthroughs in communications, in the internet, in digital, that actually benefit our lives as just ordinary citizens, a million miles from defence.

30:19So this does have the potential because of the sheer scale of the rearming that we need to do to be the core of a really compelling industrial strategy. I mean, I have to say, when I talk to people who are involved trying to advise the government on the current framework of its industrial strategy, they are pretty pessimistic. There are these eight work strands. One's the creative industries. One, you know, is another one in manufacturing. people say, oh my God, it's just all over the place. There are too many different initiatives. They don't really get it. You know, they've got a headline, it's PR, but the compelling detail isn't there.