158. Trump Turmoil: Starmer Takes Action

0:00Now, I'm delighted to tell you that Monzo Business are now a proud partner of The Rest is Money. We're teaming up for the next six months. You'll be hearing why they're a great option for your business banking and how they're supporting small businesses up and down the UK. Now, since I am a Monzo business customer already, I can tell you all about it. They've got three different plans to choose from depending on the size of your business. So, for example, with two of us in mind, me and a business partner in our latest venture, we've opted for the pro version, which comes with a load of tools to help us simplify all of that financial admin.

0:37There's also light for sole traders and team for those slightly larger businesses that are scaling up. So why not join me and over 500 ,000 businesses already banking with Monzo Business and sign up for an account today. Only sole traders or limited company directors in the UK can apply. Invoicing is available with Monzo Business Pro for£9 a month and Team for£25 a month. T's and C's apply.

1:21Externe Kosten fallen an.

1:52My take about these momentous events, I am going to talk probably in the back end of this podcast about where we are with Trump's tariffs. We've had another U-turn, another reverse ferret in respect of Trump's plans in the sense that he has temporarily, he says, exempted smartphones, consumer electronics from the massive Chinese 125 % tariffs and even the 10 % tariffs. But later, he then clarified that tariffs are coming for those sectors. But I wanted to start by focusing particularly on the UK. Steph and I have been looking much more at the sort of US global picture over the last few days. But Trump has had a really significant impact on British industrial policy, the industrial policy being laid out by Keir Starmer and his business secretary, Jonathan Reynolds.

2:57And I think it's just very important to state at the outset the government's remarkable decision to have emergency legislation, which went through the House of Commons on a Saturday, just creating this aura that this was incredibly significant since, you know, recalling Parliament for emergency legislation happens incredibly rarely. and I tend to associate it with a time of war rather than a time of trade war, rushes through this legislation, which is about putting Jonathan Reynolds, the business secretary, in control of British steel in Scunthorpe. Xingyi, the Chinese owner, remains the owner, but powerless to make the really important business decisions.

3:46So this in itself is something we haven't seen in British industrial policy. Well, it feels very 1970s. It feels like the kind of crisis nationalizations that we saw in the 1970s. It's clear that we are heading for nationalization. This is not it yet. but for those of you who are interested in the sort of accounting niceties of all of this once the government is in control and johnny reynolds you know you know he's the guy who's trying to get now the coke and iron ore into the country to keep the blast furnaces running he's in control and typically when the government is in control of a business even you know even when it doesn't have formal ownership.

4:40Normally, you would assume that this business, with all its massive losses, will be on the government's balance sheet. And I would fully expect the Office for National Statistics, which makes these judgments, to determine that even pre-nationalization, where it is now, this is a government liability. One would love it to be a government asset, but it is losing. I had a look at the last accounts of British Steel. They are for the financial year 2023 lost, I think it's about 250 million that year. The previous year it lost almost double that, but there was an exceptional write down of assets. So let's just say this is a business that in underlying terms is losing 200 million a year.

5:26That's a lot of money to lose. The point I wanted to make is this. Six months ago, the government was developing an industrial strategy which was all about raising the living standards of the British people. Keir Starmer has said, and he clarified this in the autumn, that his number one goal for this parliament is to improve British living standards in every part of the UK. and that obviously that every part of the uk obviously mattered at the time just because historically it has been the london and the south that's pulled away from the rest of the uk creating east travel regional inequalities that has changed all right and and the uh taking control of british steel saving the two blast furnaces has changed that industrial strategy because it's now clearly important to this government in a Trump world where Trump is trying to get what he regards as strategically important businesses back onshore, certain kinds of manufacturing back onshore in America.

6:31We are seeing widening tensions between the great industrial blocks in the world, So incredibly tense relationship between China and America getting only worse at the moment. Against that backdrop, this government now says our economic national security matters way more than it did even a few months ago. Because the primary argument for nationalizing British steel and saving three and a half thousand jobs can't be, isn't that it is going to make the UK incomparably richer. because we have endless other businesses with way better growth prospects than the making of steel from iron ore using technology that's decades old.

7:31One of these blast furnaces was built in the 1950s, one of them in the 1930s. These are not highly productive blast furnaces. This is old technology, expensive technology. The reason these furnaces are being saved is because the government has determined that Britain would be at risk of running out of steel in a sort of world of escalating tensions if we don't have any steel manufacturing capacity. That is its argument. Now, I don't know how many of you would agree that there is a significant risk that we wouldn't be able to import that raw steel if necessary, if we had no manufacturing capacity.

8:27capacity. But is there a risk that, you know, at some point, there'd be some kind of naval blockade around the UK that would stop the steel coming in? Is it possible that we would be unable to find any friendly countries prepared to supply us with this stuff? That is the risk that in a sense, the government is saying it is not prepared to take in deciding to invest, you know, it will be hundreds of millions of pounds, potentially billions over time, in saving this manufacturing capacity. What it does, though, in justifying saving British steel's two blast furnaces is it just looks around the world, and particularly looks to our European nations and notices that even now, I mean, these two furnaces supply about 30%, slightly less than a third of our steel needs.

9:17If you look around Europe, most of the big economies have steel production capacity double that. So the UK government has simply taken the view that if it's right for them to have double that, it must be right for us to have at least some steel manufacturing capacity. it will be expensive steel so when you hear them make the case that you know this is vital for all the you know the random you know because a lot of this steel will end up uh you know in the new railways you know it also talks about maybe the steel will be used in this new universal theme park that was announced that is still going to be pretty expensive steel right of course it does mean because you know if you're if you're using expensive british steel that the end cost of these projects is going up.

10:09But, you know, the Prime Minister insists that is a price that he wants to pay. But the politics of it are more straightforward. It's clear that the argument that Nigel Farage has been making, that this business ought to be nationalized, you know, resonates with the kind of voters Labour wants. I'm just raising a question about whether at a time of scarce resources, this is the best use of scarce government resources. We've talked in the past about the amazing potential of our higher tech businesses, small and medium-sized businesses, whether it's in AI or digital, in biotech. We've got amazing media businesses, all of which have growth prospects, potential to grow two, three, four times as fast as some of these heavier industries.

11:08Of course, these manufacturing jobs are good jobs. They tend to pay more. They're also, I mean, decades ago, broadcasting and then a series of books writing about, you know, there's no question that there's a sort of satisfaction for the workers from many of these manufacturing jobs. I would, however, point out that if you look at China, where so many of the world's manufacturing jobs have gone over the last 25 years, and which is the cause of so much of these trade tensions, it's the cause of why Donald Trump, to a large extent, is slapping these tariffs, particularly these punitive tariffs on China, because he wants these jobs back in America.

11:57It is very striking that China now, in its factories, has a greater population, a greater density of robots than any other manufacturing nation on the planet. It is moving in an AI robotic direction faster than anywhere else. And so, you know, obviously humans are still employed in Chinese factories, but it's not necessarily the case that if you want productive manufacturing is going to involve, well, it's not going to involve nearly as many people as used to be the case. But then there are a whole range of other really difficult decisions that have now been opened up as a result of this decision to save British steel, right?

12:43Now, the trade unions, say, let's take the GMB, for example, very influential on the Labour Party, It has been campaigning because it is really worried that this government's climate change policy means that£5 billion worth of investment in the North Sea, developing significant oil and gas reserves, will be cancelled over the next year. And you've got a climate change secretary of state in Ed Miliband, who's going hell for leather in terms of investing in greener power production, you know, everything obviously from wind farm solar to nuclear. But, you know, it also takes the view that we should be scaling back in the North Sea.

13:28the problem for somebody like johnny riddles who wears a different hat at the department for business is what he sees is an incredibly valuable asset sitting in the north sea that when it's brought on shore and is refined there's more value added the at the end of the day the refined product whether it's petroleum or any other oil-based products is very high value and its high productivity. What's more, most of the people working on these, I was talking to a union here the other day, who said what was really striking to him was it goes to the North Sea platform and the kind of people who were working there, he said astonishing numbers are from the North East, from Middlesbrough in particular.

14:12You know, and parts of the UK which were de-industrialized, you take these jobs away from those people and they again feel, you know, these are high-paid jobs, Again, they will feel desperately let down by a British government and they'll question why they're being let down by a British Labour government. So, you know, there are these extraordinary tensions here. And then just a final point on all of this, you know, so six months ago, again, talking to ministers, it was perfectly clear that they were happy when it comes to solar panels for every solar panel that was going to be used in the UK for this green transition to come from China.

14:55That is no longer such an obvious calculation to make. You know, we had just a couple of days ago, a Liberal Democrat MP refused entry to China because in some senses she was regarded by China as threatening to the state. an astonishing decision to bar a British MP. China does not look like a friendly ally at the moment. So should the government be chucking a ton of money to get us into solar panel manufacturing? But that kind of industrial policy, again, unbelievably expensive. And we're going to go to a break in a minute, but it is also just worth pointing out. There is literally no point, you know, whatever the arguments about national security, keeping the two steel furnaces in Scunthorpe open if you do not have a plan to modernize, right?

15:51There are technologies, whether it's plasma or electrolysis or hydrogen, to produce steel efficiently and cleanly. But it costs billions to create those furnaces. And, you know, we will not be able to judge whether this is an effective, whether it was sensible to save these blast furnaces, unless and until we actually have a detailed plan for how we make steel productively, efficiently five years from now. And that will cost a fortune. Government says it wants a partner in all of that. It will cost a fortune of our money. So, you know, what the government has basically done expensively at cost of hundreds of millions is give itself the option on that future.

16:39but by you know we still can't be certain that future is coming or indeed whether that is for a modern economy in this increasingly polarized world the right use of our money now i'm going to go for a quick break after the break i'm just going to make one other point that's relevant both to the uk and indeed the global economy which is to do with the cost of energy and then we'll go on to where we think we are now with the individual who is driving all of these economic shifts, including the ones I've just been talking about, Donald Trump. So I'll see you in a minute. This episode is brought to you by Vanguard.

17:22Now, we all know managing your money is important, but let's be honest, not everyone has the time or confidence to do it themselves. And that's where Vanguard's managed ISA comes in. It's a stocks and shares ISA, but managed by experts. So Vanguard helps you figure out your risk appetite, matches you to an investment plan and takes care of the rest. So no second guessing, no stress, just smart professional management. With over 50 years of experience, Vanguard makes investing simple and cost effective. So while Vanguard sorts your ISA, what will you do? Focus on your career, maybe build your savings, maybe even take that long overdue break.

18:03I think if it was me with that spare time, I'd think about setting up another business. Why not? You've got to be in it to win it. So yeah, Vanguard's sorting your ISA. What will you do? Discovered managed ISA today. When investing, your capital is at risk. Tax rules apply.

18:23Welcome back to another Trump turmoil Rest is Money special. This is even more experimental than normal because it's just me. Now, let's just look at the latest U-turn by Trump, which we talked last week about how these tariffs on China, 145 % in total, were massively damaging companies like Apple. given that most of Apple's iPhones are made in China, the way that that was going to more than double the cost of an iPhone in America was massively damaging to it. And a Nintendo Japanese company was about to launch its latest, I think it's the Switch gaming device, which, as I understand it in the gaming world, was the most eagerly anticipated product of the year by a wide margin.

19:21Those super tariffs that were imposed that have now been also postponed, massively damaging to a company like Nintendo. Again, there's been a postponement in the imposition of those tariffs. But the fact that on all of these consumer electric devices, he has temporarily shelved both the top rate from China, plus the 10 % that's levied on all other products from all other countries, gives a bit of a breathing space for these companies. But it is not a permanent rescue. And the reason I say it's not a permanent rescue is because Trump immediately clarified that he wants tariffs on these products, on semiconductors, on smartphones, on laptops, on gaming devices.

20:09And he's spending a little bit of time working out what that rate should be. And you cannot be at all confident if you're a manufacturer in that world, that these are going to be tariffs that aren't going to damage your business significantly. And equally, if you're an American consumer, you've got to be concerned that the price of this stuff that you love is going to go up very, very significantly. And I guess this is the sort of fundamental point that I really wanted to get to today. There was a very good analysis by the economist Adam Posen, who was on the Bank of England's Monetary Policy Committee a while back.

20:52And he made a very simple but powerful point that even if you believe, as Trump does, that you've got to solve two kinds of imbalances, It has this massive trade deficit in manufacturing with China, with Vietnam, with Germany, and it wants to close that deficit. It wants American manufacturers to make more and sell more to the rest of the world to offset the significant amounts of the rest of the world's stuff that Americans want to buy. I've never taken the view that these deficits are in and of themselves terrible but there's another imbalance of course that's directly related to that that he wants to close but you know I would historically say that this is an example of American good fortune which is that the rest of the world wants to lend to America and it's so you know it's very dependent on credit from the rest of the world to fund its its spending habits and you know it is one of the reasons why the American government runs a significant deficit.

22:08But the rest of the world has been prepared to fund that. Now, you could argue that the trade deficit is too big, and the government's borrowing deficit is too big, and you want to reduce them. But broadly, though, Americans should look at those deficits and think, gosh, aren't we lucky the rest of the world wants to finance our lifestyles. Now, obviously, that can't go on forever. And therefore, managing them down over time is the right thing to do. The point is that shock therapy of this sort is self-harming. And the way to see this, and I thought Pozen expressed this very clearly, was that if you are the vendor, if you are China selling all this stuff to America, and then suddenly the wall goes up, which is what happened with 145 % tariffs, and you can sell very little of that stuff to America.

23:02Now, of course, that's painful, right? Something like$400 billion of sales to America can no longer go there, and a fraction ends up there. But you have the choice, if you are China, of selling that stuff somewhere else. Okay, yes, there will be a blow to your economy, and you're probably going to have to stimulate consumer expenditure to keep the economy going, which is something many would say is long overdue in China. But you can just redirect those products to other countries like the UK. It's one of the reasons that the UK and EU are slightly worried about stuff arriving here at too lower price at dumping.

23:44But broadly, you've got the rest of the world as a market. If you are the buyer, however, and you are wholly dependent on China for your iPhones, for example, what's going to happen? You're going to run out of iPhones, right? You can't go anywhere else for iPhones because they're not made in scale anywhere else. Yes, Apple's making some iPhones in India and trying to expand it. But in the short term, Americans just run out of iPhones, right? Right. For pharmaceutical companies and also for high tech companies, there's a risk you're going to run out of quite important ingredients. And that even though there is no tariff at the moment on pharmaceuticals itself, there could still be disruption to pharmaceutical manufacturers.

24:30And there would certainly still be disruption to whatever high tech manufacturers they have in America, simply because China is saying quite a lot of the ingredients of the stuff that goes into high tech manufacturing, and they're not prepared to supply to America. It's part of the tip-for-tap retaliation. And so the bizarre aspect of Trump's decision to go into this trade war with China is that, you know, basic economics tells you that America goes into the trade war in a weaker position because if you're China, you can get your money by selling elsewhere. If you're America, you cannot get the things that China makes from anywhere else for years, because it just takes that long to set up a factory.

25:16And so one of the things I have been obsessed with since this trade war started is the way that Trump is undermining the most valuable aspect of its status in the world, which is that the US dollar is the reserve currency, and that normally in terms of crisis, when investors are feeling anxious. They buy the dollar and they buy US government debt. Now, they haven't been doing that. The dollar has been weaker and US government debt prices have been falling, which means interest rates in America have been rising. The reserve currency status of the US has been in jeopardy. Why is that? It's a combination of the uncertainty, the cancerous uncertainty.

25:59It's not just the level of the tariffs that cause damage to the global economy into America, it is that he keeps changing his mind about what the tariffs are. It's all very well to say, thank God he's taken the tariffs off consumer electronics and iPhones and the rest. But if he's also saying some unspecified tariff is going to come in, if you're in that industry, you still can't invest. It's impossible. It's uninvestable, that industry at the moment, because you don't know what the tariff, what the tax rate is going to be. And then you just look at the competence of going to war with the world's second biggest economy, China, despite the fact that pretty much every economist would tell you that China is in a stronger position than you are as you go in.

26:49So that in itself just undermines confidence in America. Now, I'm going to wrap up now. I'm just going to wrap up by making one final point, which is there's a very interesting piece by a friend of mine called Hugh Van Steens, who used to work for Mark Carney. It looks as though he may end up as Prime Minister of Canada, which is very interesting. And we might come back to what Carney would be doing right and doing wrong in terms of his relationship with Trump at some point. But anyway, Hugh Van Cies wrote a very interesting piece in the FT, referring back to something that is a sort of episode in recent economic history or post-war economic history that's not that dissimilar, which was Nixon's decision in 1971 to come off the gold standard and simultaneously impose 10 % tariffs on the world.

27:37And, you know, he talks about how this led to a combination of low growth and inflation, what we call stagflation, and how that then fed in to terrible economic conditions of the 70s when we had the oil price shock. And the interesting thing that Van Steen talks about is how that also led to enormous financial innovation, innovation, what's called the disintermediation of banks, the fact that banks provided less credit relative to the whole, and we got the explosive growth of the bond market where companies raise money directly from investors. And his argument, and I think this is probably right, is that what Trump is doing is not just going to have an impact on the real economy, where manufacturers locate themselves, but actually on the whole nature of finance.

28:21And one of the things that I want to come back to in a subsequent episode is I do think that the globalization of finance is under threat. And the one thing to go back to where I started in this conversation that I think the government needs to think about way more urgently than it is, is making sure that domestic sources of finance back British industry. You know, in this fragmenting world, it is really important that investors are more patriotic. There's no issue about it. We cannot for our, you know, you only have to look at the fact that, you know, Xingyi decided to pull the plug on the blast furnaces.

29:09That's just one example of when your provision of finance does not have a patriotic interest in the UK you can be much less confident that they are going to back the UK. Now, historically, we've taken the view of the global financial market, British pension funds should invest anywhere just for the best returns for the sake of British pensioners. But if our whole prosperity depends on being able to scale up, for example, our high-tech industries, as I've been arguing, then it then becomes a matter of national security that we get secure sources of domestic finance to scale up. And therefore, actually, I do think that this government has to be much bolder in making us less reliant on global sources of finance for actually how it funds itself, but also for how it funds great British prospects when it comes to our businesses and our economy.

30:09So the Trump fragmentation of the real economy is being accompanied by a fragmentation of the financial economy. And we've got to get ahead of the curve so that we are not too dependent on foreign sources of capital that inevitably will always favour their home markets over us. We've got to have patriotic capital in the UK. And that, I think, is an appropriate place to end. And Steph and I will see you again soon. Goodbye for now. We'll be right back.