The Unintended Consequences of Trump’s Tariff Strategy

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2:29I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. And this week, we're zoning in again on trade. I mean, we've all been through another round of tariff deadlines in the last few days. There's a bunch of countries around the world feeling could have been worse. Others facing a severe case of tariff sticker shock. Swiss, for example, who have the misfortune of running a$38 billion trade surplus with the US.

3:04The Swiss president's actually in the air to Washington as we record this on Tuesday, the 5th of August, and she's hoping to negotiate down the shocking 39 % tariff rate that is otherwise going to kick in on August 7th. So all these months of so-called trade talks between the US and its trading partners have been messy and not always about trade. For the negotiators charged with striking a deal with the US, you have to think pride and points of principle were often the first to go. But what do all these deals and understandings actually add up to? And how is the global economy going to be affected?

3:43What difference has it made to the impact on ordinary US consumers that more than a trillion dollars worth of US imports have been exempted from tariffs, sometimes very openly, often for reasons that are not entirely transparent? Those are a lot of weighty questions, and I have one of my favourite double acts to answer them. Sitting in Washington, D.C. today, Sean Donnan, senior correspondent on the US and global economy for Bloomberg. Sean, fantastic to have you back. Always great to be here. And again, Anna Wong, chief US economist at Bloomberg Economics, who's worked at the Fed and served in the Trump White House between 2019 and 2020 on secondment at the Council of Economic Advisers.

4:26Hi, Anna. Happy to be here, Stephanie.

4:36Sean, of course, China is a bit of an exception to this, and we'll get on to it. We have not seen a formal deal there and the deadline may well be pushed ahead again. But stepping back from that big exception, if this was said to be a bit of a shakedown by the US, I mean, it seems to have been quite successful, right? I mean, by and large, the US hasn't really chickened out as the claim was often made, but the rest of the world has sort of caved in. That's the impression. Is that right? I think so far, I think that's right. Although I think what we have to any final text to any of these agreements.

5:12There's still a lot of big issues to be worked out. All of these things could fall apart at a moment's notice or in a single social media post from President Trump. But essentially what we've seen is President Trump take another step in cementing in these new higher tariffs. I think one of the things that's fascinating is how he's changed the way we talk about these things. Coming into this week, people have talked about, oh, the EU has managed to negotiate a 15 % tariff, and that's down from a 30 % tariff. Well, actually, the tariff is going up from 10 % to 15 % on imports from the European Union.

5:49And of course, it was much, much lower than that as recently as January of this year. So look, President Trump is putting a tariff wall around the United States. It's a tariff wall that added some layers. It's also got a few doors through it and the exemptions that you mentioned, but the project is successful, at least if you're judging it on the political side. And I think this is where we move into a different phase and that's the economics of this project. And that's where we're just now starting to get the first data that raises some questions over whether or not Trump is going to be able to to bring in this golden age that he has promised to the American people and deliver the re-industrialization of America, a new era of American, I guess, exceptionalism, although of a different kind.

6:41I would say we're definitely going to get into the impact on the U.S. in a minute. I guess we'd have to say, I mean, if Donald Trump has won, free trade, definitely lost. So just remind us when you're thinking about when you say we've put the wall around the US, just update us on where tariffs are now relative to before Donald Trump took office. Because as you point out, there's been a sort of expectations management along the way. We had those announcements in the Rose Garden on April 2nd, which kind of put some very high numbers. And now the numbers look a bit smaller, but they're still a lot higher than they were a year ago.

7:15Absolutely. Or a lot higher than they were six, seven months ago. We came into this year with the average applied tariff rate in the United States sitting around somewhere between two and three percent. It is now sitting somewhere around 15 percent and it's threatening to go higher. Still, we still are waiting for sectoral tariffs to be announced on pharmaceuticals, semiconductors, lumber, and all the things that are made of lumber that include semiconductors and so on. So there's a lot more tariffs to come potentially. To put that in historical context, these are the highest tariffs in almost 100 years.

7:53Nothing like this has happened since 1930 and the Smoot-Hawley tariffs at the time. Our economists have, they're working in the sort of trade modelling, which abstracts from everything and just says other things being equal, that there's a global impact of this kind of tariff shock of maybe$2 trillion by the end of 2027, output that would have happened, trade that would have happened that's not going to happen. But Anna, I know in the short run, you see some powerful offsetting factors, or maybe one in particular, that's helping to offset that shock, at least for the short term, and has really made a difference to the way we perceive the impact.

8:35Yeah. So, Stephanie, I would call that the dog that did not bark in this whole forecast that US tariff trade war would plunge the world into slower growth is the dollar. So, in all these economic models internally, what the model forecasts also is that the dollar would appreciate in response to tariffs. And that's because when there's higher tariffs, import volume is supposed to decrease. As import volume decreased, then the demand of U.S. firms for foreign currency falls, and therefore the relative demand supply of dollar would be shifting in favor of appreciation the dollar since there's relatively less outflows.

9:17Instead, the dollar has depreciated by about 10 % year to date. And for one of the biggest target of this trade war is China, right? And China's renminbi actually stayed pretty constant vis-a-vis US, which means that China's currency has actually depreciated against the rest of the world by double digit in the past six months. For example, It has depreciated against the euro by 10%. And so what we're seeing, therefore, China's growth is better than expected because whether it be a transshipment or trade diversion, it is able to export to other countries more. The dollar depreciation also loosened global financial conditions.

10:03So what we are seeing is in many EMs, you're seeing a lot more capital inflows. This whole sell America thing led to a lot of capital outflows in search of new homes and many lended in emerging markets. And on my trip to Hong Kong earlier, what I saw and what I heard is that the first half of this year had been really good for Hong Kong as an international financial center because of all these deals that are coming from China to the Hong Kong stock market. It's just like the dollar depreciation has really elucid global financial conditions. So all of that has basically currently delayed the adjustment that all these models would be expecting to happen as a result of trade war.

10:50That is interesting. So there was a feeling that the dollar was going to go up. That's what the model said. And when the dollar is high, it's sucking in investment to the US from the rest of the world. And that's kind of tightening for the rest of the world. because the dollar has actually fallen, because people are moving money out of the US, or at least not putting it in as much, it's sending liquidity out into the world. And that's making financial conditions easier for everyone else. They don't have to have interest rates as high to track money if you're an emerging market economy. And that's definitely making things a bit easier for the central banks in that economy.

11:25But you also, you had something crucial about China in that discussion, because you were pointing out that because of the way the Chinese currency is fixed to the dollar. You know, bizarrely, you've had America become more competitive and China's just become more competitive along with it. Anna, I know you spent that time in the Council of Economic Advisors and the Trump's first administration. Did Donald Trump have an understanding that as the dollar goes down, it's actually also helping the Chinese? Well, first of all, President Trump loves a weak dollar. We were examining his tweets back then.

11:56And aside from constantly tweeting about Powell, the next thing that he really loves talking about is weak dollar. And I think from the perspective of the Trump administration, a weak dollar is part of the statecraft, which is to onshore manufacturing, to ensure there's a manufacturing base in the US, you have to have a weak dollar. I do think that the administration actually favors a weak dollar. But they presumably don't favor a more competitive China. So what's going to be the policy there? Yes, that is an unintended consequence. So somebody like Brad Setzer from Council for Foreign Relations have really looked into the intervention practice of China.

12:38And he has noted that China has been intervening through state banks. And so China is actually responding to this trade war in a lot of very smart ways. And it found a way to keep exporting. And that is something that I don't think the calculus of the administration was able to cover. They were able to make other countries not retaliate, as you mentioned earlier, all the other countries' case. But they were not able to stop China from keeping the currency from appreciating. Yes, if you want chapter and verse on that, my old friend Brad's analysis is always, he understands the ins and outs of China's balance of payments better than I think anybody on the planet, certainly better than anyone on this call.

13:21But I mean, Sean, you had a couple of big pieces in the last week or so that were talking through different elements of this. And that's the sort of macro. I mean, there's a micro to this, which is individual companies scrambling to deal with the tariff rates that very much do affect them or stand to affect them. And you had picked on the tomato exporters in Mexico as one example and how they're just trying to grapple with what's happening. There's the world of the models and then there's the real world, which is a lot messier, and that is full of unintended consequences. We're talking about the impact of the dollar and the traditional view is that, yes, a weaker dollar is good for American manufacturers.

14:01Well, 50 % of all imports into the United States are inputs that go into products that are manufactured in the United States. When you have a weaker dollar, they become more expensive and U.S. manufacturing actually becomes less competitive on that front. And that's the messiness and reality of global supply chains. And you see that around Mexican tomatoes, which also can be Arizona tomatoes as well. So there's a company called Nature Sweet. It is essentially the biggest greenhouse tomato grower in North America. A lot of it's growing in Mexico. It also has a big facility. It's about 30 football fields of greenhouses in Arizona in which it's growing.

14:45I think it's growing lots of tomatoes. These are what they call snacking tomatoes, the kind of cherry tomatoes and grape tomatoes, the multicolored things that you put in your salad at home. What they are caught between is the tariffs and their future plans to grow their production in the United States, all of which are being affected by tariffs and the policy. So first of all, President Trump has restored a 17 % tariff on tomatoes from Mexico. So that is literally a million dollars a week in additional costs to NatureSuite on its imports from Mexico. But at the same time, you have all of these other tariffs that are affecting all of these other inputs that they use at their facility in Arizona.

15:34They had a plan to start expanding that facility from 30 football fields to 72 football fields of greenhouses, big multi-million dollar investment there but now they're looking at that investment and they're putting it on hold why because most greenhouse technology comes from the Netherlands or Israel so you're importing things to build those new greenhouses also all the inputs and I did not know this all the things that you need to grow tomatoes in greenhouses are in fact imported so They don't grow these tomatoes in soil. They grow them in coconut husks. Where do those coconut husks come from?

16:13They come from Sri Lanka. Guess what? They've got a tariff on them. Where do they get their fertilizer from? Well, it comes from Chile nowadays. Guess what? It's got a tariff on it. Where do the seeds come from? The seeds come from Europe and Israel. Guess what? They've got tariffs on them. And so all of a sudden, the economics, both importing the finished product in these tomatoes, has changed, but also the economics of investing in the United States and increasing production in the United States have changed materially. And as the CEO of NatureStreet told me, that's just the world that we live in.

16:51And by the way, his main competitors at this time of year are in Canada. You know what? They don't have any tariffs on their inputs and they're going to be more competitive, even if you have a tariff on Canadian tomatoes coming into the United States, at least until the Canadian winter sets in and they have more trouble growing tomatoes. And I think we're seeing that replicated in all sorts of different ways. It's Japanese auto parts makers, it's Chinese manufacturers, it's French wine producers. There are all of these effects around the world, a lot of them just unintended consequences. And that's what we're really starting to see happen in the real economy.

17:29And that's going to start filtering through into the data. That's fascinating. I mean, I guess we should thank Donald Trump at the very least for having kind of lifted the hood or forced us to kind of look under the hood of the global economy. I know you've spent your life under the hood of the global economy, Sean, but just to get a sense of how complicated and intertwined all of these supply chains are. And in case anyone's wondering, I am half American, so I can say tomato and tomato. But Anna, we know that there's been this sort of micro complexities for individual companies, But at the same level, there's been this sort of broader sort of tailwind that people have had from a weaker dollar, which has made people feel slightly better than they might otherwise have done.

18:10But let's just quickly turn the lens on the US. I mean, we discussed recently, I think, with Oren Cass about why tariffs might not have the sort of significant effect on inflation that some people had talked about. But there clearly is an effect on the U.S. economy, and it seems like we may have seen some of that in the controversial revisions to the job data last week. So just talk us through where you think we are in terms of the impact on the U.S. Last Friday, we had July's payroll data, and it came with a shockingly massive downward revisions to June and May's jobs data. So now the three-month moving average of job growth from May to July is only 35K, as opposed to just before last Friday, everybody thought the three-month job growth was really at 150 ,000.

19:03So that's like an order of magnitude of five lower. So last Friday's jobs report really flipped the narrative of, is the U.S. labor market holding up? Donald Trump to flip as well. So, yes. And when you look at the details of these downward revisions, they came from sectors which one would have thought would indeed be affected by this policy shock. So two months ago, we had written a piece about how Liberation Day and all these other policies is going to generate a bloodbath in the non-farm payroll for May and June. We thought that three sectors affected would be leisure and hospitality, which is affected by the reduced tourists coming to the U.S., part of the sell America narrative.

19:50Construction sector from the high 10-year yields since the Liberation Day. And of course, logistics sector as trade flows comes down. And so for the last couple of months, it seemed like those three sectors were holding up. But last Friday's revisions show that, in fact, they did not. These three sectors were not holding up. And then additionally, I think the way to think about these revisions is that they bring questions. But whether it is those revisions could be revised up again in the next month, possible also. But right now, these are the earliest signs that, in fact, the trade war is causing a crack in the labor market.

20:31And I would characterize them as early and tentative because there are other issues related to how BLS is, whether they're accurately measuring the payrolls. And it's entirely possible that next month we'll see an upward revision to this data. Regardless of who has come in to run the Bureau of Labour Statistics, Molly Smith, who's been on this show, and others have written quite a lot about the funding issues at the BLS and also the issue that many other statistical agencies have had with surveys and getting people to respond promptly or at all in a world, certainly post-COVID. We're covering a lot of ground here, but I did want to get to potentially one of the reasons, another reason why it's hard to read the impact on the US economy of tariffs.

21:21And that's the large chunk of imports that's been exempted one way or another. Sean, you've done a fascinating analysis that we brought out last week that adds up the numbers and finds over a trillion dollars worth of imports one way or another has been exempted by Donald Trump from any kind of tariffs so far, though we may have even news on one of the sectors in the next few days. But just talk us through just the sort of headlines of your investigation. Yeah, look, I mean, one of the real differences in at least the language around the tariffs this time versus during Trump's first term is that there has not been a way for companies in the United States to kind of plead their case for tariff relief.

22:04What's called an exclusions process, right? In the first term, when it came to the tariffs that were applied on steel and aluminum and goods from China, companies could go to the government and say, look, I can't get this anywhere else. This isn't made in the United States. All you're doing is charting my business. I can't find these things outside of China and win an exclusion, at least temporarily, from the tariffs. And it was a very transparent process. We could see the applications and the decisions on the website. You can still, if you're interested to this day, go to the USTR website and dig up these exclusions.

22:38There were more than 50 ,000 applications, by the way, for tariff relief just from the China tariffs in the first term. This time around, President Trump has said, no, we're not going to have any exclusions. Well, in fact, on Liberation Day, April 2nd, when he put out an executive order ordering up these new tariffs on goods from all over the world, there was a 37-page annex to the executive order that had more than 1 ,000 tariff codes that were, in fact, exempted from those tariffs. The administration will tell you, well, those will eventually be subject to other tariffs, to sectoral tariffs.

23:16But at least temporarily, you have this exclusion that's quite a lucrative exclusion for a lot of companies. They then followed up on April 11th. They added in a lot of consumer technology products. That's when smartphones, for example, became exempted from the tariffs. So Apple's iPhone production in China faces a lower tariff than lots of other products that are coming from China. That may change in the future, depending on how you apply semiconductor tariffs that President Trump is promising. But it's a major exclusion on a major consumer product. And it's the type of thing that actually the president stayed away from tariffing in the first administration because they wanted to reduce the impact on consumers.

24:00When you add all of this up, this whole universe of excluded products, you get to like something close to$1.2 trillion, about$750 billion of that is these Liberation Day tariff exclusions. And then there's also all these products in North America that are subject to the U.S.-Mexico-Canada agreement, which used to be known as NAFTA. And President Trump, after initially imposing tariffs on Canada and Mexico, said, well, actually, what we're going to do is we're not going to apply that to products that fit the bill on this U.S.-Mexico-Canada agreement. And that's like$400 billion in trade there that's excluded.

24:37Add it all up, and it's a third of all imports into the United States that are now excluded from Paris. And that obviously has a meaningful impact on consumer prices and the effect on consumer prices, on the overall economic effect. And we're going to get more of this to come. But, Sean, I think a lot of people would say, OK, there's a whole segment of the market which have been exempted. And that may be unfair, you know, if you're making in China and you're facing a big tariff, if you're making a certain kind of good, but not if you're making an iPhone. But at least it applies to all companies in a given sector.

25:12Do you have a sense when you're looking at some of the sort of smaller exemptions, are there cases where it seems to be company by company or where they're sort of implicitly company by company because of the way the exemption's been designed? Do most of these still take the form of a whole market segment rather than just a single business person getting a break? Yes and no, right? I mean, it depends what you make. As a consumer technology product, for example, it depends what you make. And this is where tariff codes get incredibly specific. And by choosing one tariff code over another, you can really have an impact on different companies.

25:52The great example in technology is game consoles. Game consoles have not been excluded from tariffs. So if you're Microsoft or Nintendo, your product becomes significantly more expensive to import. And that's kind of a key product. And most people, when you hear consumer electronics, you would probably think that those were included in that. Exactly. Exactly. And then you get into kind of smaller accessories and it gets more complicated. Yes, there are smartphones are excluded. Laptops are excluded. And so on. But then it gets incredibly finicky into inputs like nylon, certain polymers, things like rubber.