Trump’s Trade War Is Like Nothing America’s Ever Seen

Hosts

Derek ThompsonDerek Thompson

About the episode

Summary

• In the following excerpt, Derek Thompson talks to Matthew Klein about what makes Trump’s tariffs unique.

  Derek Thompson: We’re about the same age. I’m 38. You’re 38?

  Matthew Klein: Thirty-eight, too. Yeah, I’m also 38.

  Thompson: We’re the exact same age. We’ve been writing about economics for the same amount of time. You remember 2007, 2008, the housing crash. You certainly remember 2020, the pandemic crash. Why is this time different? What do you think makes this moment unique in the last generation of financial crises?

  Klein: I think not just in this generation of financial crises, at least within the U.S., but ever, is the fact that this was induced deliberately by policy, without any obvious direct sort of preceding cause or concern.

  The financial crisis obviously had a lot of causes, but it was something that was building up in the system. There were lots of things happening that made it happen. COVID was obviously a financial crisis that was associated fundamentally with a real phenomenon, which was a pandemic that was killing a lot of people and making a lot of other people sick. This is not that.

  This was a set of choices that were made very recently that could have not been made, and we would have been in a very different world. And so that makes it a very different phenomenon.

  I will say, though, that I said among rich countries. There are other places, generally not the kinds of places we think of as being comps of the United States, that occasionally have done things like this, various kinds of policy experiments. You have sort of a radical regime come into office and say they’re going to change things a lot. And there is a precedent there in poor countries. And so we’ve seen that, we just don’t think of that usually as being associated with the United States.

  Thompson: Do you have an example top of mind of a poor country having a regime change, a policy experiment leading to, say, a financial crisis?

  Klein: In terms of financial crisis, maybe not necessarily. But I mean, recently, for example, we’ve seen it in Turkey. And they’ve actually had a bit of a change more recently since then, but a couple of years ago, there was a view among [Recep Tayyip] Erdogan and some of the top people he put into economic and financial positions that the way to deal with inflation was to lower interest rates, and that if you lowered interest rates, you could have less inflation than you otherwise would and also more growth. Which, obviously, if that’s true, that’s great, and you should try that.

  And they did try that, in particular during a period of time when the rest of the world, including Turkey, was having a lot of inflation associated with the pandemic and reopening everything. And it did not work the way they would’ve expected. I mean, the Turkish currency, the lira, crashed against other currencies. They had a very rapid-acceleration inflation. And more recently, they did a pretty big turn of high interest rates, and now things are different, right? But that was a period of time when things were pretty dramatic.

  You could look at Argentina, I think, as an interesting example, Argentina kind of engaging in various sorts of policy experiments. Actually, I think there’s a connection between now and Peronism. I don’t think we need to get into that level of old history, the way that the government tried to basically say, “We’re going to bring industry to a country that didn’t have it.” But we’ve seen this kind of thing before, and it has not generally worked out well. Usually in rich countries, you don’t see that.

  Thompson: So Peronism in Argentina, Erdoganism in Turkey. The fact that those are the best comps for what’s happening in the U.S. right now is very interesting.

  The White House announced their tariff rates last week, and the methodology has received quite a bit of scrutiny. The White House seems to have arrived at their country-by-country tariff rates by dividing the U.S. trade deficit with a given country by how much the U.S. imports from that country, and then doing a rough adjustment.

  So, for example, you take a country like Lesotho, a small, landlocked nation in Africa, very poor. It got slapped with one of the highest tariff rates in the world, 50 percent. Not because of its trade barriers, but because Lesotho sells us a lot of diamonds, and they’re too poor to buy most American goods.

  So if you look to the trade deficit to determine if we’re being ripped off by Lesotho, it’s going to look like Lesotho, where the average citizen earns $5 a day, is ripping off the U.S. That’s the methodology that we settled on, the math formula at the heart of this moment’s crisis.

  As an economic analyst who researches and writes about trade, who wrote a book about trade, is this a good way to determine the degree to which each country is cheating the U.S.?

  Klein: No. Very clearly no. There are a couple things here to break down. The first one I think it’s worth pointing out is this only looks at the trade balance in goods and not services.

  And sometimes people can overstate the significance of this, but it is nevertheless important that, for example, the United States does have a lot of services exports with countries, so you’re already only looking at one side of the ledger.

  The other thing, which I think is actually more important than that, is that we shouldn’t expect every single bilateral trade relationship, so between any two countries, to be balanced or even reflect anything fundamental about what their trading partnership is like, the kind of trade restrictions they have.

  So what’s interesting, there’s been reporting on this that came out the end of last week about how this decision was made in the White House. And the reporting says that actually, starting before the inauguration, there were teams of experts and civil servants in the government—several groups of them within the U.S. Trade Representative’s office and the Council of Economic Advisers and so forth, the Commerce Department—actually trying to come up with a rigorous methodology for how you could look at tariff barriers and nontariff barriers, so everything else that some might have to prevent U.S. exports. They did things like interview American businesses that were operating in foreign countries and ask them what their challenges were.

  But then they didn’t take any of that research, right? For example, and it may have been related to this, the U.S. Trade Representative every year publishes this very long, detailed report on every single country and what their tariff and nontariff barriers are. It happens the most recent one was published last Monday, so two days before they announced these tariffs.

  And you can read through for the countries, and sometimes you get some interesting discrepancies. So for Brazil, for example, they actually have a note saying Brazil’s tariffs are relatively high, on top of which the uncertainty around Brazil’s tariffs means that it’s actually more of a burden for trade than it otherwise would be. And then you look at the formula, and the formula says Brazil gets the lowest tariff rate. OK, well, that’s kind of weird, right?

  Lesotho is not going to be a big importer of American goods, and that’s OK. The question is how does everything add up together collectively? So if you look at where actually the U.S. has the biggest trade surpluses in goods, according to U.S. data, those countries are the Netherlands, UAE, Hong Kong, Singapore—which there are two things interesting here about this.

  One, these countries are all very small. Sorry, three things. They’re all very small. They have really big ports. So the Port of Rotterdam is one of the biggest ports in the world. And they actually all have very large trade surpluses with the rest of the world as a whole.

  So you can look at the U.S.-Netherlands relationship and say, “Oh, well, we’re doing really well in our trade with the Netherlands.” If you look at the Netherlands relationship, just what is our overall trade perspective, you would not think that, in fact, that they are kind of, sort of a normal measure of a country that’s not importing enough relative to what they export. Netherlands would be very high. As is true for the UAE and Singapore and all these others. So clearly, this is not telling you anything useful.

  In Mexico, it’s basically sort of an inverse situation, right? We have a huge trade deficit in Mexico, but that’s because Mexico is effectively, it’s not a port, right? But a lot of companies, including American ones, put factories in Mexico to sell us things. Those companies might be Japanese companies, might be European companies, but we’re importing them from Mexico, even though, in a sense, they’re importing other things from other places. And in fact, Mexico, like the United States, has a trade deficit with the rest of the world.

  And so in other words, they are importing more from the rest of the world than they are selling to the rest of the world. So they are actually much more similar in our situation than we are, than the Netherlands. And yet this formula, by looking only at the country-to-country relationship, kind of misses that.

  This excerpt has been edited and condensed.
  

  Host: Derek Thompson
  Guest: Matthew Klein
  Producer: Devon Baroldi