April 2, 2025 • 24 mins
US President Donald Trump’s administration said it’s still finalizing plans to unveil what could be a barrage of new tariffs on America’s trading partners around the world. Trump contends he is waging his global trade war to fix a system he considers unfair to the US. On this week's Trumponomics podcast, we’re going to look at this strategy. But rather than analyze the potential economic impact, we instead look at how the world arrived at this moment.
Host Stephanie Flanders is joined by Martin Wolf, chief economics commentator at the Financial Times. They discuss whether the countries now in the firing line of America’s tariffs (and primed to retaliate in kind) should have seen Trump’s trade war coming. They also explore how the trade imbalances the US administration is targeting aren’t an accident and can potentially lead to an unstable global economy.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
A market economy, particularly global one, needs actors who believe
that they can have confidence about how policy is going
to work over the next five to ten years. We
had that in monetary affairs, we had it in trade policy,
and I think after the last twenty years, I think
we risk losing it.
Speaker 1 (00:34):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Welcome to 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. So
it's the Eve of Liberation Day as we record this
Tuesday afternoon, the day before Donald Trump announces what looks
(00:54):
set to be a barrage of tariffs on America's trading
partners around the world, all in the net aim of
fixing a global trading system that he considers broken and
unfair to the US. All this being Trumpernomics, we could
spend the next twenty twenty five minutes talking about the
potential economic impact of those tariffs in the US and overseas.
(01:15):
We've done a bit of that in the last few weeks.
Spoiler alert's probably going to be negative. We could also
talk about whether these particular tariffs are the most efficient
way to raise trillions of dollars in tax revenues for
the US, as the President has suggested, or bring manufacturing
production back home. Spoiler again probably not, certainly not both.
(01:37):
But I'm sure you've heard a lot of that in
the past few weeks, and you certainly will in the
next few days. So instead, I thought, for today only,
we could engage in a bit of the economic version
of blaming the victim, because there are two sides to
every story, and there are definitely two sides to every
trade balance. And if you look at the countries now
in the firing line with the biggest trade setpluses with
(01:58):
the US, Germany, for example, well that deficit isn't there
by accident. It's a conscious choice by successive German politicians
to have an economy driven very largely around exports. That's
a choice that many economists have been telling them for
years was indeed an accident waiting to happen. Martin Wolfe
(02:19):
is the chief economics commentator of the FT and he
has been particularly consistent on this point over the years.
He's also been described as the most important economics commentator
in Britain and arguably the world, and for his services
to financial journalism, Martin was awarded the cbe in Yer
two thousand. He's the author of several very impressive books
(02:40):
and I'm delighted he's here with me for this episode. Martin,
thank you very much for talking to us, and I'm
particularly grateful because we're talking on Tuesday afternoon, which is
a crucial moment for you, where you've finished your column
for the Financial Times, and you'd probably be expecting to
have a cup of tea, so I appreciate it.
Speaker 2 (02:54):
It will be a pleasure. I'm sure.
Speaker 1 (03:01):
I was looking back and you have been warning about
global imbalances and what it could lead to for a
long time, and I'm talking now about the sort of
systemic trade imbalances across the global economy, not just the
ones with the US, although those are pretty the obvious.
I found a particular quote from you. I think it's
a two thousand and eight column. You say, in the
(03:22):
long run, the global economy will have to rebalance. If
the surplus countries do not expand domestic demand relative to
potential output, the open world economy may even break down
as in the nineteen thirties. This is now a real
danger now. That was in two thousand and eight, and
that was when we were going through a particular moment
that you've argued that global financial crisis was partly related
(03:45):
to those imbalances. But just talk us through a little
bit how big surpluses imbalances can potentially lead to an
unstable global economy and even potentially the kind of protectionism
that we're now seeing from Donald Trump.
Speaker 2 (04:02):
The story goes back really to a very well known
British Knesan economist, Joan Robinson back in the thirties, and
this is about what she and the Kainsians generally called
beggar my neighbor policies, and the beggar my name of
policies consisted of essentially fixing your exchange rate at an
(04:26):
undervalued level. That meant exports tended to grow very strongly,
imports were rather weak, and as a result, you generate
you to trade surplus and other things equal to current
account surplus that of course sustains your demand. A significant
part of your demand is then being imported from your
(04:48):
trading partners. That's sort of clear. You're selling more exports
than you're spending on imports. That's a net stimulus to demand.
That means, of course, you do have to curb domestic demand,
so economic policy is required. And most countries that do
this sort of thing have one or two characteristics. Either
they run very tight fiscal policies, and the most famous
(05:12):
example of that of a significant economy in the last
twenty years is Germany, but there are other much smaller
ones like Singapore which would also fall into that category.
They just don't have the global significance. Germany has run
a very tight fiscal policy really for twenty five years
since the end of unification. Other countries do it, and
(05:33):
China is the of its example here by having arrangements,
you would say, their income distribution arrangements which generate huge
surplus savings in the private sector or in the household
and non central government sector China. Distinguishing the private from
the public sector in China is a bit complicated, and
(05:54):
so China is a country where the national savings rate
has been over forty percent of GDP for indefinitely indefinite
bout thirty or forty years and investing productively forty percent
of GDP in a country growing at ten percent is
just about possible, but as it slows it becomes really impossible.
(06:15):
So they've got surplus savings and they've had to find
a way of absorbing them, and one of the ways
they found of absorbing them is to have an undervalued
exchange rate. In this case, they actually intervened in the
currency market substantially, particularly in the first decade of this century,
and that gave them a colossal expert surplus. At its peak,
(06:37):
they ran a current account surplus of ten percent of GDP,
which was far and away the biggest in the world.
So again it was a policy choice, and in both
cases crucially. I'm just going to focus on China and
Germany because they're the most obvious ones. But one of
the consequences is China and Germany both have a comparative
advantage in manufacturing, so that generated a huge surplus in
(06:59):
the output of manufacturers over the consumption of manufacturers, even
more than they would have had normally, because in addition
to paying for their imports, that also paid for the
foreign assets they were inevitably accumulating as a result of
their trade and current account surviluces. So that's their side
of the story. Now, look at what's going on in
(07:20):
the rest of the world. Well, the rest of the
world is importing recession. Essentially, if they're importing demand from
the rest of the world, the rest of the world
has to be importing a recession or at least weak
demand to meet more precise so they have to upset
this and that's exactly what the countries you would say,
are expecting. And they have set this by spending more
(07:43):
than their income. So they run counterpart deficits that shows
itself up as a trade and current account deficit. I
won't go into the relationship between them now, and so
to do that, they have to borrow. Either the government
has to borrow so it has to run a deficit,
or the private sector has to borrow, or both most
usually both. So what happens then in the country on
(08:07):
the other side of this is they run expansiory fhyscal
policy with huge physical deficits, and they run relatively loose
monetary policy, which generates lots and lots of private sector
dead and then low and behold debt starts accumulating. You
could have inflationary pressure that's contained by the deficits, but
ultimately you run the risk of going bankrupt, and that
(08:29):
case you have a horrible recession. And that's what happened
to the US in the aftermath of the financial crisis,
and crucially with Germany. And I argued this throughout that
period the Eurozone crisis. The Eurozone crisis was, in my view,
an internalization within the Eurozone of the consequences of the
German exports surpluses. So this, I know, won't sound like
(08:53):
it is a very simple explanation of the underlying argument.
Speaker 1 (08:57):
There's obviously a lot there. I mean, we should say
that the peak of all these imbalances was indeed in
the lead up to the global financial crisis, and as
you said, many people did think there was going to
be a sort of dollar crisis as a result of this,
and in the end it worked the way broadly that
you've described. But then they started picking up again in
the last few years, as the US was running its
(09:18):
big budget deficits with all that stimulus of the economy,
we saw imbalances kind of come into view again. And
of course now we've have Donald Trump really focusing on
those particular manifestations, which is those trade deficits with the US. Again,
if we just go back to what the implications are
for the countries themselves. I mean, if you look at
Germany this long period where they had these big current
(09:41):
account surpluses, and for the last twenty years there's been
almost no year where it's been less than six seven
eight percent of GDP. The implication of that is not
just that you have a tight government budget, as you said,
and we now see them with much lower debt than
most other European countries. It also means you're really crimping
domestic consumption. I think German consumption didn't grow at all
(10:04):
for several years in the two thousands. Consumers seem to
have lost out from this export led model. But at
the same time you've got Donald Trump saying these very
aggressive exporting countries have helped hollow out US manufacturing. I mean,
do those two go together.
Speaker 2 (10:21):
I think here we need to introduce quite an important
distinction between Germany and China. I think it's an important
distinction that the Chinese, I think will disagree. The big
parcel in Germany is that investment in the private sector
has been so weak. I mean, nobody was stopping the
German corporate sector from borrowing what was effective the very
(10:44):
high savings of their private sector. The households and corporation
for that matter, are high savers, not by Chinese standards,
but by normal standards. My memory is that overall gross
national savings in Germany are about twenty seven to twenty
eight percent of that's very high for a developed country.
The only one close to it is Japan, and the
(11:05):
corporate sector above all didn't invest very much, so that
left them with this huge surplus. Now China is somewhat different.
They have capital controls. A lot of the intervention in
capital markets was government. They clearly had a policy of
keeping the exchange rates down, and they clearly had a
policy of trying to keep savings up. My friend Michael Pettis,
(11:29):
who's been arguing this for years, is I think in
this case largely correct. And for them, the obvious counterpart
was going to be the US, the only market big
enough to run really large deficits where the financial sector
was sufficiently dynamic to do so. And indeed, as you say,
the counterpart has to be some weakening of the manufacturing sector,
(11:53):
which is probably mustn't exaggerate this, it's probably about three
percentage points of GDP three P Send of GDP or
so smaller than would other wise be, which is roughly
a quarter of the manufacturing sector, which is shrinking in
its employment anyway anyway, so we wouldn't exaggerate. But those
(12:13):
are I think slightly different stories.
Speaker 1 (12:15):
Donald Trump has a claim in sort of macro terms
that the global trading system that the US helped to
underpin all those years after World War II has ended
up giving the US a raw deal. I think probably
both of us would say the US has done extremely
well out of this system, and he exaggerates the harm
that was done. But he is right to say that
(12:38):
some of these countries identified by their big surpluses generally
have done, as you suggest, destabilizing things for that system,
not least running large surpluses, but things that were also potentially,
in the case of Germany, not so great for its
own citizens.
Speaker 2 (12:56):
I think the same is true active China. I mean
my own view, who has been for twenty years, that
the Chinese could perfectly well run the economy with a
significantly lower national saving trade, maybe five to ten percent
points of GDP. They'd still be able to invest like
crazy and grow like crazy. The current account surplus would
(13:18):
more or less disappear and consumption would be very significantly higher,
which would be very good for lots of poor Chinese people,
lots of poor people who could enjoy the same rate
of growth of GDP in my view, because a lot
of the investment is wasted and they would be permanently
better off. So I think both sides could benefit from
a somewhat different range. And similarly, I think the Eurozone
(13:40):
would be more dynamic and more stable if Germany, the
most credit worthy country, was able to generate higher domestic demand.
I've been making these arguments forever, and I'm very pleased
that mister Metz at least has got a little bit
of that, with a desire to improve our infrastructure investment
and of course the defense spending. But I do want
(14:01):
to underline the crucial point you made. It is impossible
to argue that though this has created problems for macroeconomic management,
that this is immensely immiserized or impoverished in the US.
It does seem rather ridiculous. And what is even more
ridiculous is to complain about this. Will be absolutely insistent,
(14:23):
as Donald Trump is that the dollar should retain every
aspect of its superior status in the world, which is
one of the reasons this has happened.
Speaker 1 (14:33):
We've had a previous episode where we were trying to
get our heads around some of that and what a
potential new role for the dollar might be that would
satisfy Donald Trump. I'm not sure we came up with
a consistent answer, But to your point, we've seen in
China a move in the last few months, an apparent
embrace of more stimulus for consumption and more consumption driven approach,
(14:55):
at least relative to the past. We have seen new
leadership in Germany suggest that both in the defense spending
and through infrastructure investment, that there will be more domestic demand,
which at least in theory, could mean a smaller surplus
in future. So, you know, is there a parallel here
with the argument we tend to make about Donald Trump
(15:15):
when it comes to NATO, that although he's not gone
about it the right way, he has ended up prompting
countries to do, the case of Germany, quite explicitly, things
that they probably wouldn't have done otherwise but were a
long time coming.
Speaker 2 (15:29):
Well, I think there's no doubt that if you engage
in what seems from the point of view of the
other side of this debate to be an act of war,
things will happen, and he's quite right. One of the
problems here is it's quite difficult to relate the various
dimensions of Donald Trump's policy objectives, the security objective, the
(15:53):
trade objective, how they these are supposed to fit in.
But I think it is true. In fact, just finished
the writing a column myself on this theme. The Chinese
and the Germans will have to decide that a greater
part of the demand for their output will have to
come from home. The rest of the world will not
(16:17):
absorb it. I think that's particularly obvious with China, which
is a superpower and a continuing to grow as far
as we know, at a reasonable rate, though nothing like
the rate it used to. Foreign demand is just not
enough to keep the economy going. With households having only
sixty percent of GDP after household disposable income, getting away
(16:41):
from the investment dependence is really impossible. But that's also
an opportunity. They could raise that run a proper welfare
state or something much closer to it, improve public consumption
and private consumption simultaneously, make the Chinese better off, and
the manufacturing sector will still be the biggest in the world.
They've got a huge comparative advantage in manufacturers. Even if
(17:02):
they had balanced trade, that will be the case. So
I think it is sensible for the Chinese and the
Germans to consider a different path because the rest of
the world is not going to absorb these surpluses.
Speaker 1 (17:14):
But Martin, I've known you long enough to know, and
I've certainly read your columns long enough to know that
what countries ought to do and what they actually do
are often very different things, which is why you often
had to write the same column more than once and
telling them to do it. So what chance is from here,
from this very bombastic new chapter in global trade, what
(17:36):
chance that we will be moving smoothly to that more
stable outcome for everybody that you just described.
Speaker 2 (17:42):
But I think it is possible that Trump's pressure will
change these policies in relevant countries because the alternative is
just unworkable for them. It could be very messy, obviously,
and lots of the tariots are irrelevant. He should be
just targeting the big surplus countries, but he's not at all.
Speaker 1 (18:05):
Well, to be fair, we don't, as we say, as
we speak, we have no idea what he's going to do,
because we're still getting very.
Speaker 2 (18:09):
Completely We sort of know that Canada and Mexico have
been attacked, which aren't huge countries. To put it mildly,
we don't even know whether the UK is going to
be a target, which is assistant deficit country like the US.
But I think it is arguable that at least in
the case of China, they are going to be forced
to recognize that running gigantic trade surpluses forcing others to
(18:34):
run huge trade deficits will not work unless it's with
developing countries and they're prepared to finance it. In other words,
they're prepared to lose a lot of money on the
export credit they're providing, and their experience with the Belton
Road initiative has shown that's where it will tend to
end up. Neither the US nor the EU, which are
the only really big markets that are relevant to them,
(18:56):
are going to run huge trade deficits in manufactures consistently
has certainly not growing ones, and the Chinese really do
now have to recognize it. Chinese are very good at
responding to crisis, and so we've seen with unification, and
now are the Germans and so maybe a result of
(19:17):
global pressure, US pressure, changing world, we are going to
see this problem disappear.
Speaker 1 (19:23):
But it's interesting you think the US, the actions that
Donald Trump is about to take, the uncertainty associated with
his policies, the inconsistencies associated with his policies, as he
appears to want to really blow up the system that
America underpinned all those years. You don't think that long
term will necessarily damage America's role in the global economy.
Speaker 2 (19:44):
One set of questions is how we resolve the current
and capital account distortions, which I think there are in
the system, certainly visibly China. How do you absorb this
beer moth into the world economy. There's a big challenge.
But the danger to the US position in the world,
in my view, lies somewhere else. Although this is a
(20:07):
reflection of it, which is that I think it is
perfectly plausible that the US is going to under Trump
damage very considerably the perception that the rule of law
functions in the US. That this is the country with
the most reliable, deep seated set of legal institutions containing
(20:30):
and constraining the government in the world. It's the biggest
economy by far that has those characteristics, so it's the
safest place in the world to put money, And of
course that means holding dollars or assets which are denominating
in dollars or convertible into dollars, both real and nominal,
bonds and all the rest of it. Now, if you
(20:51):
make people feel that these institutions of the law are
not going to work because the Trump government thinks that
it is above the law, that it's not bound by
what the judiciary the courts say, and they have done
and said things that suggest they do believe that. Then
if suddenly it becomes seriously dangerous to do this, and
(21:11):
that would certainly weaken the currency, and you won't have
a problem with capital inflows, and you would probably solve
the trade balance problem, but you would create a much
bigger problem, it seems to me, for the US, because
it subverts the basic source of its prosperity.
Speaker 1 (21:27):
Well, as you say, that is a much bigger question.
Very briefly, as a last question, we don't know what's
going to happen in the next few days, and we
certainly don't know how any of these tariff negotiations that
we must expect now will happen, will be resolved. But
what does your gut say, in a few months from now,
we will feel like we have dodged a bullet as
people are now talking in such sort of apocalyptical terms
(21:49):
about the impact of these tariff wars, or do you
think it really could be quite serious?
Speaker 2 (21:52):
I think the question is what the next stage and
the stage after that. If at the end of it
we end up with let's say, twenty or thirty percent
tariffs by the US towards basically everybody and retaliation of
the same scale, then trade is going to shrink a lot,
(22:13):
and that will have undoubtedly sizeable consequences. How big depends
on the consequent macroeconomic policy choices, which are difficult to predict,
but it will be very disruptive in the world economy.
We would end up somewhat smaller than it is. I mean,
it's not on itself enough to create a depression, far
from it, but it would be noticeable, and it would
(22:35):
also have created an enormous amount of ill will. And
there will be no credibility to those current tarriffs because
you think that might all change tomorrow. So business will
reorder itself to an autarchic world, a more autarchic world.
That would be a very very large cost, particularly for
smaller economies and poor economies. It would worry me a
(22:55):
great deal. And it is possible that even if we
go away from these tarots that people will be worried
they're going to come back again. The WTO's system has
gone and it could all start again. So I think
there will be a permanent impact on trade, confidence in
trade as it were at the microeconomic roots of the
world economy. But possibly some of these macro forces, which
(23:20):
I've never thought that huge since the financial crisis, will
be slightly better. But it comes back really to in
the end to what worries me about this is the
lawlessness of it, the unpredictability of it. A market economy,
particularly global one, needs actors who believe they can have
(23:40):
confidence about how policy is going to work over the
next five to ten years. We had that in monetary affairs,
we had it in trade policy, and I think after
the last twenty years, I think we risk losing it.
Speaker 1 (23:53):
Martin Wolf, chief economic commentator for the Financial Times, Thank
you very much thanks for listening to Trump andomics from Bloomberg.
It was hosted by me Stephanie Flanders, I was joined
by Martin Wolf of The Financial Times. Trumpnomics is produced
by Samasadi and Moses and Am with help from Chris
(24:16):
mart Lou and Amy Keene. The sound design is by
Blake Maples. Brendan Francis Newnham is our executive producer. Please
do help other people find this brilliant show, rate and
review it highly wherever you listen to podcasts
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
A market economy, particularly global one, needs actors who believe
that they can have confidence about how policy is going
to work over the next five to ten years. We
had that in monetary affairs, we had it in trade policy,
and I think after the last twenty years, I think
we risk losing it.
Speaker 1 (00:34):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Welcome to 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. So
it's the Eve of Liberation Day as we record this
Tuesday afternoon, the day before Donald Trump announces what looks
(00:54):
set to be a barrage of tariffs on America's trading
partners around the world, all in the net aim of
fixing a global trading system that he considers broken and
unfair to the US. All this being Trumpernomics, we could
spend the next twenty twenty five minutes talking about the
potential economic impact of those tariffs in the US and overseas.
(01:15):
We've done a bit of that in the last few weeks.
Spoiler alert's probably going to be negative. We could also
talk about whether these particular tariffs are the most efficient
way to raise trillions of dollars in tax revenues for
the US, as the President has suggested, or bring manufacturing
production back home. Spoiler again probably not, certainly not both.
(01:37):
But I'm sure you've heard a lot of that in
the past few weeks, and you certainly will in the
next few days. So instead, I thought, for today only,
we could engage in a bit of the economic version
of blaming the victim, because there are two sides to
every story, and there are definitely two sides to every
trade balance. And if you look at the countries now
in the firing line with the biggest trade setpluses with
(01:58):
the US, Germany, for example, well that deficit isn't there
by accident. It's a conscious choice by successive German politicians
to have an economy driven very largely around exports. That's
a choice that many economists have been telling them for
years was indeed an accident waiting to happen. Martin Wolfe
(02:19):
is the chief economics commentator of the FT and he
has been particularly consistent on this point over the years.
He's also been described as the most important economics commentator
in Britain and arguably the world, and for his services
to financial journalism, Martin was awarded the cbe in Yer
two thousand. He's the author of several very impressive books
(02:40):
and I'm delighted he's here with me for this episode. Martin,
thank you very much for talking to us, and I'm
particularly grateful because we're talking on Tuesday afternoon, which is
a crucial moment for you, where you've finished your column
for the Financial Times, and you'd probably be expecting to
have a cup of tea, so I appreciate it.
Speaker 2 (02:54):
It will be a pleasure. I'm sure.
Speaker 1 (03:01):
I was looking back and you have been warning about
global imbalances and what it could lead to for a
long time, and I'm talking now about the sort of
systemic trade imbalances across the global economy, not just the
ones with the US, although those are pretty the obvious.
I found a particular quote from you. I think it's
a two thousand and eight column. You say, in the
(03:22):
long run, the global economy will have to rebalance. If
the surplus countries do not expand domestic demand relative to
potential output, the open world economy may even break down
as in the nineteen thirties. This is now a real
danger now. That was in two thousand and eight, and
that was when we were going through a particular moment
that you've argued that global financial crisis was partly related
(03:45):
to those imbalances. But just talk us through a little
bit how big surpluses imbalances can potentially lead to an
unstable global economy and even potentially the kind of protectionism
that we're now seeing from Donald Trump.
Speaker 2 (04:02):
The story goes back really to a very well known
British Knesan economist, Joan Robinson back in the thirties, and
this is about what she and the Kainsians generally called
beggar my neighbor policies, and the beggar my name of
policies consisted of essentially fixing your exchange rate at an
(04:26):
undervalued level. That meant exports tended to grow very strongly,
imports were rather weak, and as a result, you generate
you to trade surplus and other things equal to current
account surplus that of course sustains your demand. A significant
part of your demand is then being imported from your
(04:48):
trading partners. That's sort of clear. You're selling more exports
than you're spending on imports. That's a net stimulus to demand.
That means, of course, you do have to curb domestic demand,
so economic policy is required. And most countries that do
this sort of thing have one or two characteristics. Either
they run very tight fiscal policies, and the most famous
(05:12):
example of that of a significant economy in the last
twenty years is Germany, but there are other much smaller
ones like Singapore which would also fall into that category.
They just don't have the global significance. Germany has run
a very tight fiscal policy really for twenty five years
since the end of unification. Other countries do it, and
(05:33):
China is the of its example here by having arrangements,
you would say, their income distribution arrangements which generate huge
surplus savings in the private sector or in the household
and non central government sector China. Distinguishing the private from
the public sector in China is a bit complicated, and
(05:54):
so China is a country where the national savings rate
has been over forty percent of GDP for indefinitely indefinite
bout thirty or forty years and investing productively forty percent
of GDP in a country growing at ten percent is
just about possible, but as it slows it becomes really impossible.
(06:15):
So they've got surplus savings and they've had to find
a way of absorbing them, and one of the ways
they found of absorbing them is to have an undervalued
exchange rate. In this case, they actually intervened in the
currency market substantially, particularly in the first decade of this century,
and that gave them a colossal expert surplus. At its peak,
(06:37):
they ran a current account surplus of ten percent of GDP,
which was far and away the biggest in the world.
So again it was a policy choice, and in both
cases crucially. I'm just going to focus on China and
Germany because they're the most obvious ones. But one of
the consequences is China and Germany both have a comparative
advantage in manufacturing, so that generated a huge surplus in
(06:59):
the output of manufacturers over the consumption of manufacturers, even
more than they would have had normally, because in addition
to paying for their imports, that also paid for the
foreign assets they were inevitably accumulating as a result of
their trade and current account surviluces. So that's their side
of the story. Now, look at what's going on in
(07:20):
the rest of the world. Well, the rest of the
world is importing recession. Essentially, if they're importing demand from
the rest of the world, the rest of the world
has to be importing a recession or at least weak
demand to meet more precise so they have to upset
this and that's exactly what the countries you would say,
are expecting. And they have set this by spending more
(07:43):
than their income. So they run counterpart deficits that shows
itself up as a trade and current account deficit. I
won't go into the relationship between them now, and so
to do that, they have to borrow. Either the government
has to borrow so it has to run a deficit,
or the private sector has to borrow, or both most
usually both. So what happens then in the country on
(08:07):
the other side of this is they run expansiory fhyscal
policy with huge physical deficits, and they run relatively loose
monetary policy, which generates lots and lots of private sector
dead and then low and behold debt starts accumulating. You
could have inflationary pressure that's contained by the deficits, but
ultimately you run the risk of going bankrupt, and that
(08:29):
case you have a horrible recession. And that's what happened
to the US in the aftermath of the financial crisis,
and crucially with Germany. And I argued this throughout that
period the Eurozone crisis. The Eurozone crisis was, in my view,
an internalization within the Eurozone of the consequences of the
German exports surpluses. So this, I know, won't sound like
(08:53):
it is a very simple explanation of the underlying argument.
Speaker 1 (08:57):
There's obviously a lot there. I mean, we should say
that the peak of all these imbalances was indeed in
the lead up to the global financial crisis, and as
you said, many people did think there was going to
be a sort of dollar crisis as a result of this,
and in the end it worked the way broadly that
you've described. But then they started picking up again in
the last few years, as the US was running its
(09:18):
big budget deficits with all that stimulus of the economy,
we saw imbalances kind of come into view again. And
of course now we've have Donald Trump really focusing on
those particular manifestations, which is those trade deficits with the US. Again,
if we just go back to what the implications are
for the countries themselves. I mean, if you look at
Germany this long period where they had these big current
(09:41):
account surpluses, and for the last twenty years there's been
almost no year where it's been less than six seven
eight percent of GDP. The implication of that is not
just that you have a tight government budget, as you said,
and we now see them with much lower debt than
most other European countries. It also means you're really crimping
domestic consumption. I think German consumption didn't grow at all
(10:04):
for several years in the two thousands. Consumers seem to
have lost out from this export led model. But at
the same time you've got Donald Trump saying these very
aggressive exporting countries have helped hollow out US manufacturing. I mean,
do those two go together.
Speaker 2 (10:21):
I think here we need to introduce quite an important
distinction between Germany and China. I think it's an important
distinction that the Chinese, I think will disagree. The big
parcel in Germany is that investment in the private sector
has been so weak. I mean, nobody was stopping the
German corporate sector from borrowing what was effective the very
(10:44):
high savings of their private sector. The households and corporation
for that matter, are high savers, not by Chinese standards,
but by normal standards. My memory is that overall gross
national savings in Germany are about twenty seven to twenty
eight percent of that's very high for a developed country.
The only one close to it is Japan, and the
(11:05):
corporate sector above all didn't invest very much, so that
left them with this huge surplus. Now China is somewhat different.
They have capital controls. A lot of the intervention in
capital markets was government. They clearly had a policy of
keeping the exchange rates down, and they clearly had a
policy of trying to keep savings up. My friend Michael Pettis,
(11:29):
who's been arguing this for years, is I think in
this case largely correct. And for them, the obvious counterpart
was going to be the US, the only market big
enough to run really large deficits where the financial sector
was sufficiently dynamic to do so. And indeed, as you say,
the counterpart has to be some weakening of the manufacturing sector,
(11:53):
which is probably mustn't exaggerate this, it's probably about three
percentage points of GDP three P Send of GDP or
so smaller than would other wise be, which is roughly
a quarter of the manufacturing sector, which is shrinking in
its employment anyway anyway, so we wouldn't exaggerate. But those
(12:13):
are I think slightly different stories.
Speaker 1 (12:15):
Donald Trump has a claim in sort of macro terms
that the global trading system that the US helped to
underpin all those years after World War II has ended
up giving the US a raw deal. I think probably
both of us would say the US has done extremely
well out of this system, and he exaggerates the harm
that was done. But he is right to say that
(12:38):
some of these countries identified by their big surpluses generally
have done, as you suggest, destabilizing things for that system,
not least running large surpluses, but things that were also potentially,
in the case of Germany, not so great for its
own citizens.
Speaker 2 (12:56):
I think the same is true active China. I mean
my own view, who has been for twenty years, that
the Chinese could perfectly well run the economy with a
significantly lower national saving trade, maybe five to ten percent
points of GDP. They'd still be able to invest like
crazy and grow like crazy. The current account surplus would
(13:18):
more or less disappear and consumption would be very significantly higher,
which would be very good for lots of poor Chinese people,
lots of poor people who could enjoy the same rate
of growth of GDP in my view, because a lot
of the investment is wasted and they would be permanently
better off. So I think both sides could benefit from
a somewhat different range. And similarly, I think the Eurozone
(13:40):
would be more dynamic and more stable if Germany, the
most credit worthy country, was able to generate higher domestic demand.
I've been making these arguments forever, and I'm very pleased
that mister Metz at least has got a little bit
of that, with a desire to improve our infrastructure investment
and of course the defense spending. But I do want
(14:01):
to underline the crucial point you made. It is impossible
to argue that though this has created problems for macroeconomic management,
that this is immensely immiserized or impoverished in the US.
It does seem rather ridiculous. And what is even more
ridiculous is to complain about this. Will be absolutely insistent,
(14:23):
as Donald Trump is that the dollar should retain every
aspect of its superior status in the world, which is
one of the reasons this has happened.
Speaker 1 (14:33):
We've had a previous episode where we were trying to
get our heads around some of that and what a
potential new role for the dollar might be that would
satisfy Donald Trump. I'm not sure we came up with
a consistent answer, But to your point, we've seen in
China a move in the last few months, an apparent
embrace of more stimulus for consumption and more consumption driven approach,
(14:55):
at least relative to the past. We have seen new
leadership in Germany suggest that both in the defense spending
and through infrastructure investment, that there will be more domestic demand,
which at least in theory, could mean a smaller surplus
in future. So, you know, is there a parallel here
with the argument we tend to make about Donald Trump
(15:15):
when it comes to NATO, that although he's not gone
about it the right way, he has ended up prompting
countries to do, the case of Germany, quite explicitly, things
that they probably wouldn't have done otherwise but were a
long time coming.
Speaker 2 (15:29):
Well, I think there's no doubt that if you engage
in what seems from the point of view of the
other side of this debate to be an act of war,
things will happen, and he's quite right. One of the
problems here is it's quite difficult to relate the various
dimensions of Donald Trump's policy objectives, the security objective, the
(15:53):
trade objective, how they these are supposed to fit in.
But I think it is true. In fact, just finished
the writing a column myself on this theme. The Chinese
and the Germans will have to decide that a greater
part of the demand for their output will have to
come from home. The rest of the world will not
(16:17):
absorb it. I think that's particularly obvious with China, which
is a superpower and a continuing to grow as far
as we know, at a reasonable rate, though nothing like
the rate it used to. Foreign demand is just not
enough to keep the economy going. With households having only
sixty percent of GDP after household disposable income, getting away
(16:41):
from the investment dependence is really impossible. But that's also
an opportunity. They could raise that run a proper welfare
state or something much closer to it, improve public consumption
and private consumption simultaneously, make the Chinese better off, and
the manufacturing sector will still be the biggest in the world.
They've got a huge comparative advantage in manufacturers. Even if
(17:02):
they had balanced trade, that will be the case. So
I think it is sensible for the Chinese and the
Germans to consider a different path because the rest of
the world is not going to absorb these surpluses.
Speaker 1 (17:14):
But Martin, I've known you long enough to know, and
I've certainly read your columns long enough to know that
what countries ought to do and what they actually do
are often very different things, which is why you often
had to write the same column more than once and
telling them to do it. So what chance is from here,
from this very bombastic new chapter in global trade, what
(17:36):
chance that we will be moving smoothly to that more
stable outcome for everybody that you just described.
Speaker 2 (17:42):
But I think it is possible that Trump's pressure will
change these policies in relevant countries because the alternative is
just unworkable for them. It could be very messy, obviously,
and lots of the tariots are irrelevant. He should be
just targeting the big surplus countries, but he's not at all.
Speaker 1 (18:05):
Well, to be fair, we don't, as we say, as
we speak, we have no idea what he's going to do,
because we're still getting very.
Speaker 2 (18:09):
Completely We sort of know that Canada and Mexico have
been attacked, which aren't huge countries. To put it mildly,
we don't even know whether the UK is going to
be a target, which is assistant deficit country like the US.
But I think it is arguable that at least in
the case of China, they are going to be forced
to recognize that running gigantic trade surpluses forcing others to
(18:34):
run huge trade deficits will not work unless it's with
developing countries and they're prepared to finance it. In other words,
they're prepared to lose a lot of money on the
export credit they're providing, and their experience with the Belton
Road initiative has shown that's where it will tend to
end up. Neither the US nor the EU, which are
the only really big markets that are relevant to them,
(18:56):
are going to run huge trade deficits in manufactures consistently
has certainly not growing ones, and the Chinese really do
now have to recognize it. Chinese are very good at
responding to crisis, and so we've seen with unification, and
now are the Germans and so maybe a result of
(19:17):
global pressure, US pressure, changing world, we are going to
see this problem disappear.
Speaker 1 (19:23):
But it's interesting you think the US, the actions that
Donald Trump is about to take, the uncertainty associated with
his policies, the inconsistencies associated with his policies, as he
appears to want to really blow up the system that
America underpinned all those years. You don't think that long
term will necessarily damage America's role in the global economy.
Speaker 2 (19:44):
One set of questions is how we resolve the current
and capital account distortions, which I think there are in
the system, certainly visibly China. How do you absorb this
beer moth into the world economy. There's a big challenge.
But the danger to the US position in the world,
in my view, lies somewhere else. Although this is a
(20:07):
reflection of it, which is that I think it is
perfectly plausible that the US is going to under Trump
damage very considerably the perception that the rule of law
functions in the US. That this is the country with
the most reliable, deep seated set of legal institutions containing
(20:30):
and constraining the government in the world. It's the biggest
economy by far that has those characteristics, so it's the
safest place in the world to put money, And of
course that means holding dollars or assets which are denominating
in dollars or convertible into dollars, both real and nominal,
bonds and all the rest of it. Now, if you
(20:51):
make people feel that these institutions of the law are
not going to work because the Trump government thinks that
it is above the law, that it's not bound by
what the judiciary the courts say, and they have done
and said things that suggest they do believe that. Then
if suddenly it becomes seriously dangerous to do this, and
(21:11):
that would certainly weaken the currency, and you won't have
a problem with capital inflows, and you would probably solve
the trade balance problem, but you would create a much
bigger problem, it seems to me, for the US, because
it subverts the basic source of its prosperity.
Speaker 1 (21:27):
Well, as you say, that is a much bigger question.
Very briefly, as a last question, we don't know what's
going to happen in the next few days, and we
certainly don't know how any of these tariff negotiations that
we must expect now will happen, will be resolved. But
what does your gut say, in a few months from now,
we will feel like we have dodged a bullet as
people are now talking in such sort of apocalyptical terms
(21:49):
about the impact of these tariff wars, or do you
think it really could be quite serious?
Speaker 2 (21:52):
I think the question is what the next stage and
the stage after that. If at the end of it
we end up with let's say, twenty or thirty percent
tariffs by the US towards basically everybody and retaliation of
the same scale, then trade is going to shrink a lot,
(22:13):
and that will have undoubtedly sizeable consequences. How big depends
on the consequent macroeconomic policy choices, which are difficult to predict,
but it will be very disruptive in the world economy.
We would end up somewhat smaller than it is. I mean,
it's not on itself enough to create a depression, far
from it, but it would be noticeable, and it would
(22:35):
also have created an enormous amount of ill will. And
there will be no credibility to those current tarriffs because
you think that might all change tomorrow. So business will
reorder itself to an autarchic world, a more autarchic world.
That would be a very very large cost, particularly for
smaller economies and poor economies. It would worry me a
(22:55):
great deal. And it is possible that even if we
go away from these tarots that people will be worried
they're going to come back again. The WTO's system has
gone and it could all start again. So I think
there will be a permanent impact on trade, confidence in
trade as it were at the microeconomic roots of the
world economy. But possibly some of these macro forces, which
(23:20):
I've never thought that huge since the financial crisis, will
be slightly better. But it comes back really to in
the end to what worries me about this is the
lawlessness of it, the unpredictability of it. A market economy,
particularly global one, needs actors who believe they can have
(23:40):
confidence about how policy is going to work over the
next five to ten years. We had that in monetary affairs,
we had it in trade policy, and I think after
the last twenty years, I think we risk losing it.
Speaker 1 (23:53):
Martin Wolf, chief economic commentator for the Financial Times, Thank
you very much thanks for listening to Trump andomics from Bloomberg.
It was hosted by me Stephanie Flanders, I was joined
by Martin Wolf of The Financial Times. Trumpnomics is produced
by Samasadi and Moses and Am with help from Chris
(24:16):
mart Lou and Amy Keene. The sound design is by
Blake Maples. Brendan Francis Newnham is our executive producer. Please
do help other people find this brilliant show, rate and
review it highly wherever you listen to podcasts
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