299. Trump’s new tariffs - can anyone win a trade war?

0:00Steph McGovern:Trade tariffs are back with a vengeance. Trump's told 60 countries they'll face new tariffs of at least 10%, including the UK. So how's he getting away with it, given the Supreme Court ruled that the last lot were unlawful? Well, we have self-titled trade nerd Samaya Keynes with us. She's an economist who's co-authored the book How to Win a Trade War. We're going to be asking that. Plus, are trade wars always bad? Are we ever going to get back to free trade? And how worried should we be here? we're proud to say that the rest is money is powered by octopus energy this year and greg jackson the founder and ceo is with us greg i wanted to ask you about heat pumps octopus energy now make them why not just import them from china you know what we want to make heat pumps that work

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2:19Steph McGovern:Hello and welcome to The Rest is Money with me, Steph McGovern.

2:22Robert Peston:And with me, Robert Perstom. And we're delighted to be joined by Samair Keynes, who writes about economics and trade for the Financial Times. And I'm just going to get the one thing that had been bothering me when I first came across Samair off my chest, which is I wasn't sure whether her name Keynes was a question of sort of what they call nominative determinism. But actually, it turns out she is related to the world's greatest ever economist, Maynard Keynes.

2:51Steph McGovern:You're right. The great, great niece. There we have it. So a woman who knows what she's talking about. Here's our interview with Samaya Keynes. Samaya, lovely to have you on the show. A very timely chat. I know you've got a book which is all about trade and we're going to come to that. But I mean, this is the perfect time to talk to you because Trump has announced a new set of trade tariffs, trying to circumvent the Supreme Court's ruling about his previous trade tariffs being illegal. Do you want to just bring us up to speed to me and tell us what's happened, what's going on, how's he doing it?

3:27Yeah, so the Trump administration really wants to apply broad tariffs on pretty much all imports. And back in February, the Supreme Court said, no, we don't agree with the way that you've justified that legally. And so this is the Trump administration having another go. And so the justification was that there were countries out there that weren't trying hard enough to stop imports made with forced labor. Right. So suddenly the United States trade representative have become softies, diehard lefties trying to protect workers rights around the world. And that, after an investigation, has justified these new tariffs, which which look pretty similar to the ones that they replaced, at least in terms of the baseline.

4:18So what we've got is we've got a broad tariff of between 10 % and 12.5 % on around 60 trading partners. There are hundreds of pages of details of how these are actually going to be implemented because there are a bunch of exemptions. There's a slight difference in the way that the UK's tariffs are going to be applied from the way that the EU's tariffs are going to be applied. But the headline is the baseline tariff of around 10 % to 12.5 % is there. And now people are going to be looking at that and thinking, oh, well, can we challenge that?

4:53Robert Peston:So I'm going to ask you, it's obviously early days, but do we think these will turn out to be more legally robust? Yeah, so this is a disputed topic. There are lawyers that are very confident either way. I suspect they're going to be more legally robust than the old kind. But if you look at the details of the investigation, there are some questions, right? Because the idea is that this is an investigation into unfair trading practices, that it is hurting US economic interests. And it's quite the leap to say that the UK failing to enforce false labour rules on say imported clothes or something like that really affects US interests so much that it is a proportional move than to whack a 10 % tariff on everything.

5:50So there are going to be questions, there are going to be complaints. If I had to bet, oh, I don't want to bet. I think these ones will last longer than the old lot.

6:02Steph McGovern:And can I just ask then, when we're talking about forced labor, This is unethical working conditions. Surely these countries like us, for example, can just say, no, we don't. Here's the evidence. This is a really hard area of trade law, right? Because to be clear, it's not that the Trump administration is accusing us of using forced labour in the UK. The Trump administration is accusing us of not working hard enough to protect imports coming in from other countries using forced labour, right? That's the complaint. And the problem is that, of course, when something comes across the border, there isn't a label saying used forced labour.

6:41It's really, really hard to detect. There are certain methods that you can use if it comes from certain regions, certain areas where forced labour is particularly likely. That can be used as evidence. But the way that international supply chains work, it's just often very hard to know. Yeah.

7:01Steph McGovern:And I get that. I get we can prove that we don't, but I mean, as in surely our, because we have our own rules about, you know, what we bring into the country. So surely we would be able to prove it on the basis of the fact that we don't, you know, want to bring in unethically made products. So wouldn't we have proof in that way to then put against them? So the US's complaint is that we're not enforcing our rules carefully enough, right? And so they'll point to cases, particular products that they've, you know, banned the importation of that we haven't acted as, you know, aggressively towards.

7:38Robert Peston:But putting to one side that this is obviously just a device, a ruse for Trump to essentially get his way on tariffs for a period at least, in all the pages of documentation, is there anything that's actually quite useful to humane countries like ours in the sense of genuinely fundamental research into those nations where forced labor is being used to a horrific extent? Have they actually done the research? So I think, honestly, the United States Trade Representative is quite a small office. I don't know that they were doing, you know, fresh reporting, going out to places where forced labour is a concern.

8:25This is an area where the US has been active in the past. They were very active when it came to concerns about forced labour in Xinjiang, stopping imports from there. So, there is a body of work that they are relying on. One really interesting thing in the tariff schedule, though, in the details of these tariffs is that there are two different levels of tariffs. There's the 12.5 % level and then there's the 10 % level. So, the EU, the UK have this lower 10 % level. And that seems to be a kind of carrot, right? If you want to introduce laws restricting imports of forced labour or enforce them a bit harder, then you get this lower tariff rate.

9:16So, there is a bit of an inducement there. But I think, as you say, we all know this is a ruse, right? We all know they just want to put up tariffs and this is their excuse.

9:27Robert Peston:And can I ask in respect of the impact on differential parts of the world? I see some people in the UK, I think the British Chamber of Commerce have said this, that any advantage that the UK had in respect of tariffs with the US vis-a-vis the EU has gone. Is that right? So there is a difference in the way that the tariffs are applied to the UK and the EU, which is a bit unfavorable to the UK. So when it comes to the UK, there were some previous tariffs, right? Those are called MFN tariffs, most of the nation tariffs. Those are the tariffs that applied before Trump came on the scene, right? So I don't know, take a widget, 3 % tariff.

10:13and that would have applied both to the UK and the EU. The way that the UK tariffs are being applied is the new 10 % tariff stacks on top, right? So if the tariff before was 3%, now our tariff is 13%. The way that the EU's tariff applies is it's a 10 % floor, right? So on that 3 % tariff, their tariff will be 10%, right? It won't be 13%. It doesn't stack in the same way. Now, if the original tariff was already over 10%, then that's just the tariff they get. But that means that on average, when it comes to these newer tariffs, the UK tariff rate is a little bit higher than the EU's one. Now, we have negotiated various exceptions.

10:57There are many, many exceptions to these new tariffs. Scotch whiskey, not included in the new ones. So there are areas where we've done okay. But yeah, the news that we got on late Thursday night did show a slight advantage to the EU in many areas. Cars are special because cars are included in a different legal investigation. So cars are not covered by these newer tariffs. They still get the older other ones. There are many, many bits of tariffs. It is a nightmare to keep track of them all.

11:30Steph McGovern:So is it not a case though that because the previous tariffs were ruled to be unlawful that it's like day one again so everything that went before is forgotten about. It isn't that case. It's still, which makes it even more complicated for businesses to get their head around doesn't it? It's an absolute nightmare. There are many, many different investigations, tariffs coming out of those, exemptions. There's huge amounts of confusion about what applies, what doesn't apply anymore. And that's why this new ruling had so many pages of exemptions attached to it.

12:08Robert Peston:So if I could ask you about the broader economic impact of all of this, one of the striking things about Liberation Day, the initial tariffs, is pretty much every conventional economist said this is the end of the world. The global economy is going to crash. Inflation is going to go through the roof. And although there was a short term, very big impact on stock markets or financial markets, they pretty quickly recovered. And actually, in the end, the impact on inflation, yeah, a little bit higher, interest rates a bit higher as a result, growth possibly a bit slower. But partly because of the sort of massive AI related infrastructure build out, which was keeping American growth at a pretty hefty pace.

12:55Robert Peston:In fact, the impact on America and the rest of the world was significantly less than people feared it would be. But right now, with these tariffs, we've got Trump's war in Iran with the oil price back at$100 or so. There are widespread concerns that we may see some kind of AI-related financial crash. The volatility in markets at the moment over whether or not there's a significant element of bubble in stock and other financial markets, there's a lot of anxiety around all of that. Do you think, weirdly, these tariffs that have been completely anticipated could end up having a sort of bigger negative impact on our prosperity and a bigger impact on inflation than the ones everybody was terrified of?

13:50It's a good question. I mean, I think it might be worth just being specific about why those first tariffs weren't quite as bad as everyone feared, right? And the answer is retaliation to a large extent. So, the big concern was that other countries would hit back and that would drag the economy into a tit for tat spiral, crashing confidence, massively raising uncertainty. and those are the mechanisms behind the the most dire warnings and the retaliations didn't happen um china did retaliate china is the exception um but that but but it retaliated so effectively um that actually it stopped the escalation right um the us essentially realized that the chinese weapon of restricting rare earth exports was so powerful that it really couldn't raise tariffs higher and higher and higher, right?

14:45And so, the tariffs on China peaked and then they fell. The other reason why the tariffs weren't as bad as many people feared is because actually there were so many exemptions applied that if you look at the data, the applied tariff rates, the rates that were actually collected, if you just compare revenue and total imports, were much lower than those statutory tariff rates, which are the legal rates. So, that's some of why that didn't lead to the end of the world that time. But I think more generally, my takeaway from reading all the research and going through this is that tariffs, in the same way that trade liberalisation doesn't set your economy on fire, it doesn't provide that immediate growth boost, closing off to trade isn't going to crash the economy.

15:39The effects when they come are much slower, right? We think that actually the biggest effects of trade come with this sense that actually you're trading ideas. When you're closing off the trade, you're threatening innovation, productivity, right? And over the long run, that's really the most potentially damaging thing associated with trade.

16:02Steph McGovern:So Trump sold Liberation Day, this day in April 2025, when he introduced these trade tariffs as being about other countries making loads of money out of the Americans and him wanting to bring jobs back and prosperity. By bringing in these tariffs, it's going to get rid of the trade deficit. But is that true? Is exports equaling imports going to do that for a country? So I think there are two questions in there. So one is, what's the right level of the trade deficit? And was Trump right to be so concerned about the trade deficit? And then there's a second question about do tariffs help? So on that first question, I have a bit of a regret because I feel like the first Trump administration was spent yelling at President Trump for being so silly, for caring about bilateral trade deficit.

16:58So he was obsessed with the bilateral trade deficit with China. And economists, pundits were just screaming, don't you realise that if you squash one bilateral trade deficit, it'll just pop up somewhere else? If you import less from China relative to exports, you're just going to end up, all that's going to end up shifting to say Vietnam or Mexico, which is largely what happened. We spent so much energy criticising President Trump for obsessing over those bilateral trade deficits, justifiably. But we didn't spend enough time asking bigger questions and trying to move the public debate on about overall economic imbalances.

17:37Because if you look at the US and their accounts with the rest of the world, there is a problem there. They have a big current account deficit. This can get really technical really fast, But their net international investment position, which is kind of an indicator of their sort of external wealth, that has deteriorated dramatically over the past couple of decades. It's the biggest negative position of any country in the world. It's extraordinary. And so it is reasonable to think that that is a problem and to want to do something about it just for the basic reason that it could sow the seeds of a financial crisis.

18:21But the next question is, okay, if you do think that's a challenge and many, many, you know, the IMF thinks it's a concern, many, many people think it's a concern, are tariffs the way to fix it? And there, the experience of Liberation Day suggests not really. So if you just now look at the narrow trade deficit in goods, say, that was basically the same in 2025 as it was the previous year. It hasn't fallen, despite a really dramatic increase in tariffs. And when you look at the academic research on this, I wouldn't claim that there is no relationship between trade barriers and the trade deficit.

19:03In an extreme case, you could increase tariffs to a million percent. You could crash imports to zero. And then, sure, that might reduce your deficit. But short of doing that, it's just an incredibly unreliable relationship. There are all sorts of other factors that could overwhelm the effects of your trade policy. And, you know, actually really what's going on in the US is that, you know, the federal government has a big borrowing problem. And that's the thing that's driving lots of these external imbalances.

19:33Robert Peston:So I completely agree that this massive negative balance that the US has built up is potentially an enormous accident, not just for America waiting to happen, but for the world. and that one should be concerned about it. So what is a route towards putting the US and indeed the global economy into a more sustainable position? If Trump's unilateral tariffs have made no positive impact, and as you say, the evidence suggests there's been no positive impact. In fact, I would argue the reverse is true. There was a period when international investors did not want to hold dollar assets last year. And that was really scary because at that point, you were staring at that possible financial Armageddon.

20:28Robert Peston:Now, that's to an extent being rectified. But what is the way to do something about these rather scary imbalances? All the leaders of all the global economies would get together, have a nice meeting and agree some kind of rebalancing. So, you know, the challenge in the global economy right now is you've got this big imbalance, right? Americans on average are spending too much. We've got the Chinese, they're the big surplus country, they are spending too little. And this is showing up in global economic imbalances. Now, there are things you could do, right? There is a powerful argument that actually part of the problem is that the Chinese currency is undervalued.

21:13So they could allow that to appreciate. You could fundamentally change the Chinese social security system. You could fix their domestic housing problems. In the US, if you're the government, you could borrow a bit less, right? You could make the decision that, if we want nice things, we've got to pay for them, rather than relying on international investors to fund that gap. None of it's easy. And there is a sense in which this is a domestic US problem, right? This is an imbalanced situation. But this isn't just the US's problem, right? If the US suddenly rode back their consumption, right? Suppose the US, you know, President Donald Trump gets out of bed tomorrow morning, has a change of heart and says, oh, I've got it, right?

22:04The problem is that the government is spending too much. We need to fix the problem by changing that. Then the rest of the world would have a massive problem in terms of where all that demand is then going to come from.

22:14Robert Peston:No president is going to opt for recession, which is broadly what we're talking about here. Yeah. In which case, we're going to kind of wait it out, right? I mean, at some point, maybe investors will decide that the US doesn't look that attractive anymore. I mean, so far, the US has benefited from being the least bad option, right? They're offering returns. And so investors, they're putting their money there because it's giving them returns. We could just wait and I suppose rely on the private sector to discipline the US at some point. But as you say, it's quite risky because if they all do decide to discipline the US at the same time and something in the plumbing breaks, I don't want to be there for that.

23:02That sounds scary. I suppose as a financial journalist, I should say I do want to be there for that because it would be a great economic story, but for my own well-being, not that keen.

23:12Robert Peston:It's not at all surprising we've concentrated on Trump since to an extent he is bossing this argument at the moment, but there are lots of other really important issues around all this for our way of life and our standard of living. We'll cover those after the break.

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