161. Trump Turmoil: Starmer Should Choose EU Over US

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1:21external costs fall in an.

1:33Hello and welcome to The Rest is Money, another Trump's turmoil special. God, he keeps us occupied, doesn't he, the American president? Anyway, I'm Robert Paston. And I'm Steph McGovern. And today we are joined by Lord Jim O 'Neill, former chief economist at Goldman Sachs, probably best known for coining the term brick back in 2001 to describe, of course, the then emerging economies of Brazil, Russia, India and China, which he predicted would become major global economic powers. He's done a ton of other jobs as well. And he's a friend of the show, a friend of Robert's as well. I know I am big into Jim because he's a northern powerhouse kind of legend as well.

2:19but lots to talk to him about Robert isn't there? He has and he's devoted his life since being the chief economist at Goldman Sachs where as you say he was very influential on the financial scene to really trying to reduce the income and wealth gaps between Midlands North and the London and the southeast um and then he's he's created this venture capital outfit called northern gritstone which is all about translating really exciting know-how from universities uh in the northwest in particular and translating them into commercial projects it's exactly the kind of venture capital business that we need to see a hell of a lot more of in the uk yeah so here's our interview uh with Jim O 'Neill.

3:11And of course, we started off talking to him about Trump turmoil. Great to see you, Jim. And we've been focused now every day for more than a week on what we're calling Trump's turmoil. Can I just ask you a very general question, which is, do you rate the British government's response to this extraordinary turmoil that we're witnessing that has been created by the American president? What is it? Is a week and a half in? I mean, I think the saying all the right things, the specifics when it comes to trying to answer that question is hard because they haven't actually done anything other than say a lot of what I would say are the right things.

3:58Talk us through what the right things are, and then we can then drill down to see what that would involve in terms of actual actions. Well, I think the really right thing is to stand back and try to assess what is behind it all in the US. Is it because there is actually really a strategy? Or as each day passes, as many commentators are saying, Trump has just found out that he can actually try and bully every bit of every part of the world about whatever he wants using tariffs. And what I mean more below that is, is there really a sincere goal of trying to restructure a better state of world trade?

4:57Or is it just you do what we say, otherwise we're going to punish you until the pain's too much? That's what needs to be thought through. And I think the more I think that through, the more it suggests to me we should not be obsessed about doing a trade deal with the US, because almost definitely they will only do it if we do a lot of what they say we must do. And as each day passes, and I heard an interview with one of Trump's ex-advisors an hour before we had this chat, that they might well constrain other countries' ability to do their own deals with China, which I think would be a preposterous thing for any country to do because at the end of the day, we don't have a vote in who is US president or not.

5:49So why should we have those kind of conditions thrown on us? Yeah. whilst we should be diplomatic to the US and consider a trade deal if we can get whatever it might be that we'd really want what we might end up really getting that would help us is pretty hard to see as being that important relative to trying to stand for freer trade between what you might call the coalition of the willing and in particular this this forced opportunity to get the Europeans to give us more than they might have done two months ago on a better trade relationship since we made the rather weird decision to leave the EU.

6:33You've described, Jim, haven't you, what Trump's doing is like throwing a brick at the world's economy's operating system. Tell us a bit more about what you mean by that. um well if you look at world economic growth since the turn of the millennium of all the growth the world has had 50 percent of that growth has come from the us and china about about the same and 55 percent of global demand has come from those two countries uh and the rest of us have sort of lived off the scraps i think the only other the i think the euro area has contributed just over 10%. We have contributed two. So if these guys are going to be tearing scraps out of each other, then it's pretty bad for the whole world.

7:22And what I fundamentally, it's back in my mind very much, having heard this interview earlier, what I fundamentally don't get is how there is this very popular view in the US that you've got to stop China becoming bigger, because they're evil and it's bad for everybody, when their own contribution to global growth since 2000 has been as big as the United States, and on some measures, as it relates to trade, much bigger. And that includes for the United States. So China has made America richer. Yes. You know, look at, I've thought a lot about this with my own background. and my near 20 years at somewhere like Goldman Sachs.

8:12I think a lot about Apple, where, of course, he seems to have made at least a temporary exception. In the world of international finance, arguably Goldman kind of might still be and certainly was this sort of iconic global investment bank that brings enormous benefits to the United States from its integration finance-wise with the rest of the world. And Apple has been the iconic global entity of the past, of this millennium, arguably, certainly the last 15 years of it, which not only gets so much of its stuff to be so effective from inputs from China, but importantly, sells an enormous amount of what they produce to China.

9:00I think the one area, obviously, because of the Chinese system, where the US might not benefit as much as it benefits from elsewhere, other social media, but on so many other things, the US has obviously benefited dramatically from China's involvement in the world economy. And I think, without getting overly philosophical, I've come to the conclusion more that there's something deeper which allows those around Trump and Trump to sort of behave this way in that effectively the US is struggling to cope with the reality that they don't save as much as they should do, and therefore highly dependent on all this capital from the rest of the world, hence their persistent trade deficit.

9:50And as time passes, it means that it's harder and harder to have an equal distribution of wealth inside the US without the US becoming more Scandinavian, let's call it, by having higher taxes. So they're just lashing out irrationally. And it's easy to do that with China because, of course, they're horrible communists. But, you know, as I've chatted with some others, I have a lot of respect for the past couple of weeks. In some ways, it's a close cousin of how the US behaved towards Japan 30 years ago when everybody thought for a while Japan was going to become bigger than the US. And at the core of it, the US has somehow got to figure out, does it want to be wealthier for all its citizens, or is it just obsessed about being the biggest?

10:45And I think that's the core problem. You know, this is this time of big choices on all fronts for the government. So one very simple question, is China a friend or foe? it's not as big a foe as is being created by this emotion about uh the steel issue nor by trump's advisors there are obviously two or three things where they are let's call it foe-ish they have they have a completely different ideology and a central unelected government that seems to have enormous control over what their people can and can't do. And, you know, that is fact. But I immediately counter that by saying, it is quite naive for us to think that in this very complex world that has evolved ever since I, before, and it's why I dreamt up this thing that will live on my forehead forever, Bricks, that are, you know, the idea that you can only do things with countries that think exactly like you is spectacularly naive.

11:55And so that's the first issue. If you want, you know, at the end of the day as it relates to trade, and this is important point to emphasize in the context of all this focus on trade deals, the biggest drivers of trade are relative rates of domestic demand growth. and so if you don't want to trade with the countries that are generating large domestic amounts of reoccurring sustainable domestic demand then you're never going to be good at exporting irrelevant of whatever trade deal you satisfy so you know china probably does in some sectors try to do things that independently if it was really transparent the wto wouldn't allow for and so we've got to we have got to be sensible about where we will go with them so challenge when they're being anti-competitive you know when you know when they're distorting markets challenge yes i think it's i think it's relatively straightforward and can be easily done with the incredible brains that surround various areas of the civil service and And emotionally and socially, it's got built up to be this thing that, you know, everything that China does is evil.

13:11And we don't seem to understand it, which I think is very, very sort of superficially compelling theme. But it's just kind of mad. But technologically, they've moved up the scale at a rate of knots. It's been incredibly impressive to me. You know, somebody has been steeped in the China story for 25 odd years now. Are we right? Therefore, you know, they are now banned from getting involved in nuclear power development in the UK. Is that rational? I do have some historic, because of my role at Treasury, awareness of the Huawei issue, where I think our security people were very strongly of the view we could deal with Huawei without it being a genuine security issue.

13:55Until, effectively, that version of Washington at the time told us, you with us or you against us. And I suspect there's aspects of the nuclear thing that are going on here, but I don't know. But we've got to be careful. Again, all these things link. If we want to really go towards our net zero targets, we're going to say those countries can't get involved on us. That means we can't develop our nuclear unless our taxpayer effectively comes up with all the financial risk. and otherwise our energy costs are going to remain very expensive and not conducive to our role in global climate change. It wasn't that long ago that Miliband was talking to China though about this kind of clean energy partnership, you know, this cooperation with Beijing and sectors like battery storage and offshore wind power.

14:52If they're involved in that, they could just as much switch off power through other things as well, couldn't they? You would have thought so. We can think too kind of binary about what's strategic, what's non-strategic. And actually, there's loads of ways they could harm us if they wanted to. If it was left to the... I think we have plenty of officials that can figure out the nuances that are needed rather than these blanket... Can't do anything in that space because of X. Because you're right. And, you know, China is the leading, from what I consider the data, the leading successful player in so many aspects of, certainly in the transport sector.

15:37And I suppose this is now probably off the table, but the whole idea of trying to persuade them to set up a battery-operated car production facility here in the UK would seem to me to be very sensible. developing small modular reactors and many other forms of alternative energies that could be exported to China would seem to be an extremely interesting thing to do but if we cut them off in a very blunt way from things that they think might help them and be useful they're going to cut us off from things that we want to do The other thing that you and I have been talking a lot about is this coalition of the economically willing which we think is the right response to Trump's tariffs.

16:22And there are various versions of it. But one of the things I think you and I both agree on is that actually extending free trade between nations and indeed areas like the EU outside of the US. So if the UK could form some kind of a coalition with Canada, Australia, the EU, Japan And to lower trade barriers between us, that would spark growth. That would be a pretty big counterweight to the depressing impact of Trump's tariffs. But would you want to negotiate with China? Would you want to bring China into this coalition of the willing? Potentially. I think it has to include all those countries and maybe some others like South Korea in the core.

17:14but potentially yes because of what they mean for global domestic demand and actually we're having this conversation on the day they published their latest economic statistics which was surprisingly strong and unlike others i don't doubt the quality of the data because they were surprisingly weak for much of the past few months um but anyhow um i think that is the way to go and In fact, the more I think about this, what is really interesting for us is, of course, our edge is in a global export of services context. And I suspect that at the margin, some of the other key major trading powers that now suddenly realize aspects of the game of the past post-World War II environment of trade is changing.

18:05and so they have to be a bit more open-minded about what they will and won't consider. And I think this is a fantastic opportunity for us to really push on this lowering trade tariffs and a more genuine pursuit of cross-border trade, especially inside the EU, by the way. It's obviously, at the end of the day, economically, the biggest fault of the EU's life. that they have never pursued cross-border services, but for the EU itself, now being more serious about this with this Trump threat would bring enormous productivity and welfare gains inside the EU. And for the UK to really push where it can on that, it could be extremely positive for us, as it would be, of course, to places in the so-called emerging world, of which I would include many places, but you can't think of not including China in a desirable way at least, but you'd have to be really careful because you want to make sure that they, despite their sort of one-party system, you'd want to ensure that they would respect the rules of engagement that were set up between all these different parties.

19:20There is an issue at the moment about whether if the British government gets the kind of trade deal that we would like with Brussels, with the EU, whether Washington would regard that, particularly in, let's say, the agricultural and veterinary space, as incompatible with a deal that they would want to do. I mean, just straightforwardly, if it turns out to be a straight choice between an EU trade deal and an American trade deal, my instinct is because EU's on our doorstep it's a very big and important market to us I probably would say we should go with the EU but is that the right analysis? You know I think the right tactic would be to exactly do that and on the same day formally set the date with President Trump to have his royal visit to the UK because he that would keep him happy.

20:18So do a deal with Brussels give him his state visit. Yeah. Pimp out the king again, basically. So, Jim, look, tons more that we need to talk to you about. One of the things that's always impressed me about you is, you know, you listen to Boris Johnson banging on about how levelling up is so important. We all agree that narrowing that income and wealth gap between the north and the south is absolutely vital. He did, technical term, bunger all to achieve that. But you've devoted your life to trying to achieve that. So really key to hear what your current plans are. So let's do that after the break.

20:56Can I sort of take you back actually to where you were, let's say, 20 odd years ago? The presumption that, for example, you know, I've been steeped in this as a journalist forever. And, you know, if you had conversations, let's say, with the Treasury 25 years ago, the view in the Treasury was we're an open economy. Globalization is the most powerful force in the world. You know, what we've got to concentrate on is where we have competitive advantage. the concept of businesses that were sort of important for security reasons was massively downplayed, whether it was economic security or indeed even national security.

21:43OK, and now we're now in a world, you know, where Trump massively believes, apparently, or so he says, that there are some industries that have to be American. We've got a British Prime Minister who's just said that it is a matter of national security that we save furnaces that were built in the 1930s and the 1950s. Two of them, right? For national security reasons. Now, if I had that conversation with the Treasury, let's say, 25 years ago, they would have had a heart attack at the idea that we were putting 300 million minimum a year into saving these furnaces. I suppose the question I'm asking you is, were we wrong then?

22:29And therefore, what's happening now is a belated recognition that we were wrong, that we could outsource everything, pretty much everything to the rest of the world, so long as we concentrated on what we were good at? Or are we just going through a phase of economic self-harm by focusing on what many would say are basically, you know, dying industries? I suspect it's the latter in a modest, hopefully brief, isolated way. And obviously, it is quite incredible how fashionable it is now to think this way. So first of all, I would think most senior Treasury officials and those that have been around there and probably influential still that might not still be at Treasury would think exactly how you described they did 20 odd years ago.

23:24and quite rightly. The second thing is to say, where this plays in is actually where I spend so much of my weekly life these days on things like Northern Pairhouse and Northern Gritstone. And I do think that, let's call it, as some people describe it, unfettered globalisation didn't think enough about the consequences for those that were genuinely left behind by the scale of benefits that did accrue to everywhere from it. And the third thing is, of course, is our friend Mr. Farage frightens the hell out of both main political parties. And we've got this local election coming up. So it's just sort of strangely trendy to say these kind of things and sort of stand for it because it it gives the impression that you're aware to the things that he feeds on people in these places but it it is kind of bonkers i mean the idea that we need to suddenly become really important as a steel producer when we spend 30 odd years if not more happily letting it whittle down is kind of crazy but it is because as you say you know i come from teeside yeah this is a big thing where you're from steph Yeah, it is.

24:47And there is that sense that these industries are where, you know, the jobs are in the regions which are suffering the most from the regional inequality. So although it is old technology, you know, it's not where we're going to get loads of productivity from and things like that. As things stand, where do those people go who are employed in those sectors? There's been nothing to transition them into other industries. So therefore, they are the people who quite often can side with Farage more, who's saying that their work and what they contribute to the economy is just as important as the bankers in London.

25:30I can see why that works as a rhetoric. Yeah, of course. That's why it's so powerful and trendy, because it works so powerfully, superficially in those communities. What I think, and I've thought this ever since Brexit, really, and again, it links to why I'm so passionate about Northern Powerhouse and Northern Kyrgyzstan. the real way to be sincere about lasting help for those kind of communities Steph in my view is to find what edge is in those regions some of it might relate to the wonderful industrial heritage and try to really build on it to have lasting global or certainly international edge and to bring new value-added jobs and satisfactory lives rather than this at times it seems almost an emotional pull to old industries which i mean i'm sufficiently old that you know i was actually at sheffield university and joined the build-up to the huge battles at all grief.

26:45So I remember, you know, pretty, yeah, there's a lot of sort of history looking back with emotion about how great these lives were. But I think at the time, a lot of people didn't actually really like a lot of these jobs, because they were, you know, not great for the health. So I get, of course, you know, when the alternative is no job or in some sort of reprocessing sensor for Amazon, I don't know what it is. And again, linked to the Brexit thing, when we say you're going to lose this in GDP, a lot of them would say to me, we've not had any GDP for the past 30 years, who cares about you losing your GDP, because we don't have any any.

27:21So I get all of that. But here is the, this is where I really think this government should now be eight months into life, a lot bolder. Because it is an opportunity, you know, as is always the case, I think, how a prime minister ends up being remembered is how they deal with events that are thrown at them, not what they said in advance. I think that's broadly the case. And here is a chance for them to really push on some areas that actually, ironically, Robert, we talked about this last time, and we have done privately, about things they've conceptually set up that they can be more ambitious on than we've had for decades.

28:08The whole thing about devolved powers, and here I always focus on it with the Manchester hat on, there is significant evidence from the little data we have that over most of the period since the turn of the millennium, and certainly going way back before the Brexit vote, over that whole period, Greater Manchester has grown by more than London. and his productivity performance has grown by more than London. It's still absolutely 35 % lower, but that gap has gone from close to 50 % to 15%, helped by London not doing as well as it did. But that probably relates to a number of initiatives, including giving more genuine powers for Manchester's great-managed to look after its own affairs.

28:58And why not be a lot more, even more ambitious about that for Greater Manchester, for West Yorkshire, for Liverpool, for the North East, which finally, a decade later, has now got all seven of the boroughs of the combined authority actually finally prepared to do it. Teesside's got its own merit from the early days anyhow, et cetera, et cetera. Give them a lot of powers. And on top of that, take this second part of the fiscal rule where they supposedly are going to borrow to invest for projects that will have a huge positive multiplier effect for the economy and do it, as opposed to what they so far have done, said in November that they're going to do it, and then never even mention it again.

29:44Can I ask you about, Jim, about investment? Because we talk so much on this podcast about the lack of investment in British companies. you know we often lose them to america particularly kind of our high tech sector how do you think we encourage more investment into this country and is that something that happens on a as part of devolution on a local level is it you know these combined authority mayors getting in it like how how do we tackle it how do we get more money i mean i think it's more it's that's the local thing here is a little bit of it, but it's much more than that. So the other part of my northern hat, Northern Gritstone, which is probably the most exciting thing I do, in some ways is a tiny version of what could be done on a much bigger and broader scale.

30:38Northern Gritstone is a venture capital company. It acts like a fund, but we're a company. We have about 350 million pounds that we've raised, most of it from private investors, investing in startups coming out of northern universities. It was quite hard to get it off the ground. We've invested in 32 entities so far, and it links into what we touched on before about we're looking for what are the real, you know, game changing ideas coming out of these universities that could be colossal things for them and their regions in the future. And that could be done on much, much bigger scale and i suspect if done well it could um but you know a much bigger issue than that which is cousin of the core issue in the states we don't save as much as we should as a country we do get net investment from overseas which is the flip side of our current account deficit it's just that it often doesn't really go into what you would traditionally regard as investment.

31:38And that takes me to the third and the most important thing. And it goes back to the fiscal rules, and why I thought the government had really changed them. The never ending focus on the first rule and whether they have to change taxes to keep the current spending in line. They haven't even tested the second rule, which is, as far as I know, is the main reason why it was changed so that they could borrow to invest and and here's the central part of it to me you know a traditional liberal market free market economist type or certainly right of center would think that if it's done in big size it will crowd out private investment but on the contrary if it's done correctly and transparently with this new body nista at the center of it i think it would very likely crowd in more private investment and be central to the whole process of what you're talking about.

32:38You know, in my whole professional lifetime, probably my life, we have not had a body that independently assesses, whether it be Hinkley, HS2, Heathrow, Hammersmith Bridge, you know, goes on and on and on, whether any of these projects have independently verified positive benefits for the economy. And when you sit and think about that, it's bonkers. But NISTA is supposed to be setting that up. And I believe that if that's done with real determination, that is a game changer for certainly public spending on investment. And because it would set in place a clear future for the whole private sector, it would be hugely beneficial for private investing too.

33:29We have many construction build companies on our board in the Northern Powerhouse Partnership. And so I hear this from people that are steeped in complex infrastructure projects. And I don't understand why the Chancellor and the Prime Minister aren't talking more about this kind of thing, which they're supposedly going to be unveiling in the next couple of months. It's absolutely vital, as you say, that when we get this 10-year investment plan from them, that it's ambitious. And I think you and I completely agree about this, and it will be absolutely fascinating to see whether we get rational choices in terms of what gets the money and what doesn't get the money in terms of what's most likely to improve productivity and living standards.