The other side of trade

0:06Pushkin. Look, we try not to talk about Donald Trump on this show all the time, but you know, two things. One, he's the leader of the free world. Two, he has a whole bunch of economic policies up his sleeve that matter enormously to markets, and that is very much our jam. And the latest curveball has landed on the market for metals. The president wants a massive 25 % tax on all US imports of steel and aluminium, or aluminum if you prefer, wherever it comes from, China, Europe, UK, whatever. This has sent metals markets a little bit bananas. Today on the show, we're breaking down for you what is going on here, why we should all care and how this fits into the broader trade strategy.

0:55This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, and I'm joined by our dynamic duo today. In the blue corner, down the line from New York City, the bruiser from the unhedged newser, Rob Armstrong. Greetings. But also, in the red corner, a newbie on this podcast, the undisputed heavyweight trade nerd of the FT, Alan Beatty, here in the London studio with me. Alan, welcome to the show. Thank you. Why am I in the red corner? I don't know. Okay. So look, all these years you've been nerding out on trade, and now suddenly, are these the best of days or the worst of days for you?

1:37Someone in the trade world said, it's kind of like we've all been working in this quiet corner of the library. Nobody's bothered us. No one else wanted to take those books out. And suddenly the doors open, all these people crash in, pulling books off the shelves and all the rest of it. You've got to suppress the temptation just to go, shh. And also, these are my books. Get out of here. Get out of here. Instead of which, you've got to try to open up, turn around and go, let me tell you about tariffs. Now, children, sit down while I explain to you what's going on. And so let's start with the metal stuff.

2:08What is the latest proposal and is it serious? There's a thing I always say about trade under Donald Trump, which is what the screenwriter William Goldman, who wrote The Princess Bride, among other things, said, which is, in Hollywood, nobody knows anything. Nobody knows anything. Because with Trump, he thinks about five contradictory things. He has about eight people around him who also think things that contradict each other and indeed themselves. So who knows? What is true is that, you know, he did put on steel and aluminum tariffs in his first term, 25 % for steel and 10 % for aluminum. Now, he suspended a bunch of those.

2:44Biden negotiated some sort of suspensions and loopholes and so forth. But he does have form in putting them on. Yeah, so there's all sorts of like little kind of loopholes and exemptions and whatnot that came in the last administration. And now he's saying, right, all that is gone, 25 % on everything. Alan, why steel and aluminum? Why not pears and stuffed animals? if you know what I mean. Why this? It's always, always steel. Steel screws up the entire global trading system for everyone else. I annoy people massively when I say this. I actually have people from the Biden administration saying, Alan, if you understood the lives of steel workers, you know, you might not be so dismissive about it.

3:18Pointed out to them, I grew up 10 miles away from a steel mill. I know what steel mills are. They've grown up about 600 miles away from a steel mill. This is why I had no friends in the Biden administration. But it is a symbol of industrial strength. It's a symbol of manufacturing. It's men doing things in hot places with big hammers and stuff. We all think steel is cool. It's also really concentrated. If a steel mill closes down, as it did near me, and you get 3, 4, 5, 6 ,000 jobs gone, bang, in a day, that's really dramatic in a way that losing jobs across the service sector is not. It's not only dramatic, it attaches to a very specific political power center.

3:54That representative, that senator, whatever, has a serious bone to pick. Certainly true in the US. Not everywhere, not everywhere, but certainly in the US. You know, that's the other thing. Wisconsin, Pennsylvania, these are the swing states. I mean, it's absolutely true that the Biden administration, Catherine Tai, according to people who have spoken to her, they told me that she or certainly USTR explicitly said to them, you've got to help us win Pennsylvania. You've got to give us what we want on steel because you've got to help us win Pennsylvania. Right, right. So it's almost like an emotional issue and it's a very political issue.

4:23It's very emotional. It's very political. It's very symbolic. And I say it's been screwing up the trading system for decades. I think listeners are probably familiar with the standard argument against steel tariffs, that whatever you gain in terms of steel jobs, you lose in terms of other manufacturing jobs by making input costs in industries that make things out of steel higher. That's absolutely true. The estimates are something like 80 jobs in downstream steel using industries for every job in steel. Yeah. So it's terrible. I'm interested to hear the kind of worldwide or geopolitical implications of this and indeed the whole Trump tariff set.

5:01What is the rest of the world? How much does it matter to them? What are they going to do in response? What is the state of play in terms of responses from the rest of the world? You are stealing all of my questions. Okay, I'm sorry. I'm just curious. I'm a curious man. We have an expert here. I'm just pushing ahead with the discussion, Katie. Go for it. So if this was only metals, I don't think everyone would be quite as alarmed as they are. Because, you know, as I say, there's always a lot of stuff about steel and metals and so on. For example, there's almost no Chinese steel actually circulating in the US because there's so much effort has been made to keep it out with various tariffs or so forth.

5:45It's not just that. It's the fact that Trump is trying to use tariffs for a whole bunch of other reasons, right? He suddenly comes up with these coercive tariffs on Canada and Mexico, 25 % are going to be implemented in, what was it, 72 hours to stop an almost non-existent flow of fentanyl across the Canadian border and to encourage them to do stuff on immigration they're already doing. For Mexico and Canada, that's enormous. And that's just delayed, right? In theory, that's still happening. In theory, that's delayed until March the 4th. So who knows whether they'll come up with something else to buy him off.

6:17I think they've already appointed a fentanyl czar. Cool. So I don't know if they just, I don't know how you escalate that. I would love to. Maybe a fentanyl emperor. Yeah. Or a vizier. I know something. I wouldn't like to be, I'd like to be a grand vizier of fentanyl. I wouldn't actually like to do the work, just do the advice. You'd look great on your LinkedIn. First fentanyl lord. But all things be equal, right? So say this happens, right, the steel tariffs, then what is the impact on industry? Because as you say, it's great if you happen to be a steel worker. It's not that great if you happen to be someone who makes cars or puts food in cans for a living, right?

6:56That's right. It will hit the car industry. It will hit all of those industries. But the thing is, it doesn't hit any of them dramatically enough that they really complain that much. You know, I've always wondered, why does the car industry in America not complain more, given that it's one of its basic inputs? And people always say, yeah, but the thing is, the car industry benefits a lot from what they call trade remedies, right, from blocks on cheap imports as well. So they don't necessarily want to bring the whole system down because they kind of benefit from it as well. Right. But it's just like a pain in the arse.

7:26So what we're already seeing is that like consumers of metals in the US, because US is a net importer of these metals, they're already paying a higher price for copper, for example, which isn't in the current set of new tariff proposals, but probably will be. So already they're paying a higher price for copper, aluminium and steel. I insist on keeping calling it aluminium. Is that a different metal than aluminium? Is that like really good aluminium? Yes, it's posh aluminium. So they're already paying what's known as the Midwest premium to get hold of this metal because they want to get ahead of these tariffs and buy these metals quicker.

8:02So yeah, I guess I kind of don't get either why people are not up in arms and saying, what the hell, you've just raised our production costs. I think Alan has given us part of the answer, which is that the benefits of tariffs are concentrated and the costs are diffuse. This is true. And it's also they don't actually know whether he's going to go ahead with them or not. Yeah. You know, if you if you actually start throwing stuff out of the pump. And also, do you want to cross Donald Trump? Really? We've seen what happens to people who cross Donald Trump. It's not very pleasant sometimes. So if you're going to actually really come out publicly and take a pop at the administration, you might want to wait until you're sure these things are actually hit, rather than looking like a bit of an idiot by coming out, burning a whole load of bridges, and it's not going to happen anyway.

8:45How does the rest of the world respond, Alan? Strategically, what moves are they making, and are they intelligent? So if we look more broadly, because it's not just steel, and I will say aluminum, you know, in deference, in deference to Rob. Rob used to be my boss. He told me to say aluminum. Never show deference to Rob. He told me I would be fired if I didn't say aluminum. That's what I mean. He was a vicious boss. He really was. So they're having to deal with a whole bunch of stuff. If you're Canada and Mexico, you're dealing with these 25%. You're dealing with the metals tariffs. You're dealing with this wacky plan they've got for reciprocal tariffs.

9:19I don't understand what they are. Tell me what they are. Yes, let's have a pause to talk about reciprocal tariffs. This is an important point. Funnily enough, this is actually written down on his policy platform. because campaign platform, unlike most of this, quite simply, you set the U.S. tariffs equivalent to the product of any given trading partner. So if you are trading with the EU on cars, the U.S. has a 2 or 2.5 % tariff on most cars, we'll run to that, and the EU has 10. So you say to the EU, right, either you cut your 10 % tariff to two, or we raise our 2 % tariff to 10. So it's just a tit for tat.

9:53I have a question in the back. What about countries where things don't match like we match kind of europe in cars but like with columbia we take their coffee and presumably their cocaine but i don't think there's a cocaine tariff and they take our whatever it is we send to them i don't know if it's chicken or whatever we send and so like what they tariff us on coffee and what we tariff them on whatever it is we send to them presumably doesn't matter to the other party shut up rob rob shut up shut up shut up don't tell them that OK, they haven't worked it out. And it's going to be really funny when suddenly everyone's drinking really expensive coffee or snorting a really expensive Coke.

10:37And it will have. And amazingly enough, the great coffee growers of the upper Wisconsin mountains do not, in fact, benefit from this. Exactly. It's not thought through for a bunch of reasons. The other reason it's not thought through, even more so, is it's kind of predicated on this idea that American towers are always lower. Right. And Americans believe this. They believe they're a free trade country they're taking advantage of by the rest of the world. By and large, they are lower. There are a bunch of places, particularly in agriculture, they are very much not. So classic one being sugar, right?

11:09The cane growers down in Florida, politically very powerful. I think it's now pretty well established that Bill Clinton, when he was enjoying private time in the Oval Office with Monica Lewinsky, took a call from the Florida sugar growers. That's how important they are. Now, the tariffs on that sugar in the U.S. are actually quite high. I got someone to run the numbers and they came up with numbers above 40%. What? Because, you know, if you're a rich country, that's what you can afford to do. You basically say we can afford to protect these particular bunch of farmers who, until quite recently, were in a swing state.

11:43So that's why they get their protection. You wrote something about pickup trucks, too. Is this another example of this? We tariff the foreign pickup truck? This is the so-called chicken tax, which LBJ put on light trucks, including pickup trucks from Europe in a rage. In fact, from everywhere in a rage because Europeans put taxes, put tariffs on American chicken. That dispute, by the way, in a slightly different guise is still going on. So that's a 25 % tariff on pickup trucks. And I'm told that's the only bit of Detroit that actually makes money. So let's say the US does do this and it cuts its own tariffs, right, if it's going to be fair.

12:17So it's going to cut its sugar tariffs down to Brazilian levels, which are like, I think, 16%. And if Brazil has any wit, they'll cut their tariffs to nil, and then they'll have a nil percent tariff. The U.S. will be absolutely flooded with Brazilian sugar. Nobody grows sugar cheaper than the Brazilians. If they cut their light truck tariff from 25 % down to European levels, which are 10%, or if Europeans, which they've offered to do actually, cut their car tariffs down to 2%, which is the American level, then suddenly Detroit loses all of its protection. So what you've got to assume is there's going to be a load of hypocrisy going on here.

12:50No. I know. I know. We've never seen it before in trade. Say it ain't so. We've never seen it before. But here it is. It's very sad. I think it's all these new people coming in. It's almost as if none of this stuff makes any sense, Alan. So let me ask you, what does this mean for the rest of the world in the sense that the German steelmaker ThyssenKrupp was saying, if the US tariffs do come into effect, then what we're going to end up with is loads more Chinese steel flooding, if steel can flood, into the European market. And so it kind of screws Europe, right? Like what are the sort of knock-on effects in other places in the world?

13:25I mean, it does. I don't think they're using a very good example there. As I say, there's hardly any Chinese steel in the US anyway. But yeah, there were a bunch of low-cost steel producers, India and Turkey and so on. And if steel is kept out, then you get it washing around. So everyone then starts putting on tariffs to protect their workers. Now, Europe is nothing like as in hock to its steel industry as the US is. And in fact, I'm told the Americans kept saying to the Europeans, why don't you put these high steel tariffs on? And the Europeans were like, it's a bad idea. And like, but your steel industry has told you they want it.

13:53And they appear to be utterly baffled by the idea that you wouldn't instantly do what your steel industry told you to do. Is there any chance, Alan, that the rest of the world, as it were, rejects the approach that the U.S. has taken and starts to trade more freely with one another, isolating the United States before its tariff walls? So that would be ideal. And, you know, it's not impossible and it is kind of happening. One funny thing is that the U.S. is quite a closed economy, by which I don't mean they have very high tariffs, but they... make a lot of their own stuff. Make a lot of his own stuff.

14:30It's got food. It's got all sorts of stuff. They can produce a lot of things. So although it's, you know, what is it, a quarter or so of the world economy? It's only 15, 16 % of global imports. So it's not that important. And that could be squeezed out. So yeah, they could trade a lot with each other. One of the problems that the rest of the world has is that what you really need is someone to do the final consumption, right? So China can sell stuff to Malaysia. They can sell stuff on to Indonesia. You have a whole factory production zone. You need someone to do the final consuming. and until now that's often been the u.s so the u.s has a bigger proportion of actual final demand question is who's going to do that consuming because this comes at a really bad time when china has actually shifted back to its export-led growth model because its domestic demand is in such a mess because of the property bubble and all the rest of it so somebody said to me the other day there's a battle of competing mercantilisms right you have u.s and china both trying to export.

15:24So, I mean, yeah, they absolutely can do this. But this would be an excellent time for the EU to do some more consumption. It would be an excellent time, in fact, for China to try and build a consumption model. But it hasn't come at a great time from that point of view. To your mind, Alan, you have been covering this stuff for a really long time. Is it worth almost chasing every headline on this? Because so far we've had tariffs put on Colombia, tariffs taken off Colombia a few hours later. We've had the threat of tariffs against Canada and Mexico. that was taken off before they even started. We have got the additional tariffs against China, but it just feels like you're just chasing your tail at this point.

16:02How much of this policy that we've heard so far do you think is actually going to materialise in real life? Or do you think this is all just a massive exercise at keeping you busy? I mean, obviously nobody knows anything. I keep saying this to people, and I don't think it gets less irritating any time I said it. If anything more irritating, it's like I said it. I think this is an excellent time to be a columnist and a really bad time to be a news reporter. Because, yeah, if you're a news reporter, you have to chase this. I mean, you have to. One interesting thing, I think, you've not seen massive market reactions.

16:33No. I mean, if they're serious about this reciprocal stuff, right, that tears up the entire post-war trading order, which is all based on, you know, you offer the same tariff to everyone, most favored nation, not individually. And it could lead to really massive tariffs and dislocation. And not just that, it's just sort of, you know, dramatic of an administration that kind of doesn't know what it's doing and is out of control. But markets don't seem to be pricing that in. And I think part of it, you put your finger on it before, where markets are in wait in C mode. They're not discounting the event.

17:05They're just waiting to see what will happen. Right. That's point number one. Point number two, and I'd very much like to hear your view on this, Alan, is that people are making the assumption that companies, especially big companies, can be quite clever about adjusting to tariffs and protecting their profit margins and their earnings in the face of tariffs. is that our experience of tariffs in the past the kind of corporate economies reform in a new way and business goes on or is is that a night even hopeful it is no it is given what we've seen so far so i mean in the trump one administration he did put a bunch of tariffs on big tariffs on china in particular and also they're still an aluminum tariffs but big tariffs on china and all that happened is supply chains reorganize themselves so instead of China exporting to the US, they exported through Vietnam, either just, you know, shuffling it through Vietnam warehouses, or they did actually move some of the value added there.

18:03And so you had countries, the IMF calls them connector countries like Vietnam and Mexico and so on, who did very well. So yeah, supply chains have been amazingly flat. And as I always say to people, I've been doing this on and off for a long time. And I continually hearing people writing off globalization, right? And I've actually sort of kept a list in my head of the things which were definitely going to end globalization. Bursting of the first tech bubble at the end of the 2000s 9 11 that was definitely getting a globalization right sandana the um sars navy inflow outbreaks in to in the 2000s the global food crisis definitely the global financial crisis obviously the icelandic ash cloud that was a good one that's one for the hipsters now that is one of the globalization hipsters that was totally going to do it trump was going to do it and then covid was going to do it the massive surge of inflation was going to do it and nonetheless it slowed but i don't think it's actually much to do with those shocks.

18:52But goods trade has actually carried on. It's extraordinarily resilient. I just got this vision of my mind of all of these shocks being like Wiley Cote and the global economy, the goods trade being the roadrunner. And just tries to drop anvils on them and blows themselves up with explosives. And at the end of all of these episodes, it's just beep beep. And the roadrunner's still going. Well, I pity the poor Wall Street strategists, right, are out there. And they are - hard to feel sympathy for the Wall Street strategy. Yeah. No, they are forced to make some kind of back in the envelope calculation.

19:28You know, if there are 25 % universal tariffs, how much will S &P 500 earnings per share change? And they say, okay, percent of global trade and then input costs and then multiply by the thing. And the whole model is about eight lines long. And they come out and they say, 6 % eureka. I just don't believe a word of it. 6 % plus or minus 10 percentage points. Yeah, exactly. I just don't. It's like one of those things. It's like you have to wait and see how the great plastic organism that is the corporate economy reforms in the face of this stuff. So a little thought experiment for you. Say someone was successful in reducing a trade deficit to zero.

20:11That might sound like a nice number, but what would it actually mean in real life? Well, the way you would do this without having sort of massive dislocation is to recognize this is a macro issue. It's not a trade issue. You run current account deficits because you don't save enough. So if you've got saving investment balance back into balance, then you could do it gradually. The mad thing is if you try and do it with trade, because all that happens for a start, all that happens is your currency would tend to go up. It wouldn't really work. The only way it would work is by crunching back domestic demand.

20:42That's how you would stop. you would say we're not going to import anything anymore. And the effect of that would be that the economy would really slow. I mean, the aim of it, of course, is to say all the stuff that's being produced overseas, we produce here. The problem is you can't just instantly move stuff overseas to here. Apart from the fact that you might not be very good at it, it might be very expensive. So what is likely to happen instead is just that you'll bring the whole capacity of the economy right down enough to reduce the trade deficit, which means a massive, massive crunching recession.

21:13Yeah, sounds not ideal. To wrap up, Alan, I want to ask you one last question. Imagine you are Johnny on the spot, right? You are in charge of the UK and European response to what Trump is currently fleshing out as his trade policy. In like a sentence, what is your advice to the governments? You need to do something. What Mexico and Canada did was smart because they moved quickly. And it's hard for the EU in particular to do that. I think you need to have something which can respond as quickly as possible. Canada and Mexico got to the point where at the moment Trump was going to put those 25 % tariffs on at a minute past midnight on Tuesday.

21:52They could have retaliated immediately, right? Now, they had presidential authority in Mexico and the constitutional authority in Canada, which the EU doesn't do. The EU moves much more slowly. But I think just preparing something, something which looks quite scary. So think smart, think quickly, but be ready to respond. Essentially, be ready to respond. Because at the moment when he puts his house on, you want in his mind to be, okay, this has a cost. Right. That is more than one sentence, but I'm going to let you off because we have borrowed your brain. We're going to be back in a sec with Longshore.

22:38Already it's time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. I will go first. I am long eggs. Go yolk, go broke, folks. That's what I say. So apparently the cost of a dozen eggs in America on the wholesale price is$8. Like egg prices have gone completely bananas. They are quite literally expensive. intensive bird flu, the whole thing. This is very much a pocketbook issue, as they say in the States. And I see riots on the street about these here egg prices. I'll follow up on that. Because of eggs, among many other macro-eggonomic factors, I am long the neutral rate of interest.

23:29We were having this debate in the unhedged newsletter in lots of places, it was particularly intense a year or two ago, like is the kind of neutral rate, the kind of ambient level of interest rates in the economy going up? And just judging by the recent inflation reports and the kinds of, you know, a whole lot of other factors, it does seem like we hit an inflection point and the neutral interest rate is going higher. We're not going back to the days of zero to one and a half percent rates. I blame eggs. So Alan, you can't have eggs and you can't have interest rates. What are you long or short of?

24:05I'm disappointed I can't have eggs because I had a whole thing about shell companies ready to go. I mean, I'm just going to go for the classic. For about 20 years now, I have been publicly, very publicly short, the giant panda. Yes. Pandas. It's one of your defining opinions. It really is. Somebody actually said that will be my epitaph. Here lies Alan Beatty. He hated pandas. Simple as that. And, you know, they can't, they don't eat the right thing. What's wrong with pandas? They can't. They can't eat. They pretend to be cute, Rob, but only people like you for it. You see, he's not my boss anymore, I can say.

24:36They're no good at reproducing. They eat the wrong stuff. They have way too much money and attention lavished on them. They're useless. Short the panda. Yeah, short pandas. That's what we get Alan Beatty on the podcast for, boys and girls. Alan, it's been an absolute pleasure. Next time trade policy goes bananas, we'll get you on again. Rob, pleasure doing business with you as usual. Listeners, we will be back in your ears on Tuesday. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio.

25:12Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

25:35We'll be right back.