The Middle with Jeremy HobsonIn this episode of One Thing Trump Did, we dive into the complicated economic impact that Trump's slew of tariffs (and ensuing trade war) could have on the United States and its allies. Jeremy is joined by Moody Analytics' Chief Economist Mark Zandi. #OTTD #onethingtrumpdid #Trump #tariffs #economy #Canada #Mexico #China #USMCA
Welcome to One Thing Trump Did, available exclusively on The Middle Podcast feed. I'm Jeremy Hobson. Each week on this podcast, we're looking at one thing President Trump did, since there is so much happening, and we're going to try and break things down in the same rational, nonpartisan, factual way we do on the Middle. Well, in this episode, our one thing is the new trade war that Trump has started with Canada, Mexico, and China. Trump ordered tariffs on goods coming in from all three countries, even though Canada and Mexico are in a free trade agreement with the US called the USMCA, which Trump himself negotiated in his first term. The President claims these countries are not doing enough to stop the flow of fentanyl into the United States. All three countries he's responded with tariff threats of their own. Here's Canadian Prime Minister Justin Trudeau.
No, it's not in my habit to agree with the Wall Street Journal. But Donald, they point out that even though you're a very smart guy, this is a very dumb thing to do. We two friends fighting is exactly what our opponents around the world want to see.
Well, joining me now is Moody's Analytics chief economist Mark Zandi. Mark, it's great to have you on the show. We haven't talked in a long time. We used to talk all the time. It's great to have you.
Yeah, Jeremy, it's a pleasure. I love hearing your voice and seeing the face to the voice.
Yes, exactly. Our listeners can't see it right now, but you can and I can see your face. So let me ask you. I guess let's just start with the sort of the pros and cons of tariffs. They go all the way back in this country to George Washington, Thomas Jefferson, Abraham Lincoln liked them. What are they good for?
Well, I'd say what I would call targeted strategic tariffs might be useful. So, for example, we have a beef with China over certain trade arrangements, and in that case, targeted tariffs to make a point about the unfair trade practices would be a use of possible use. In fact, then President Biden did that towards the end of his term. He imposed tariffs on about eighteen billion dollars worth of product from China. Very targeted. You know, batteries, evs, certain types of products that are very strategic. So yeah, especially in the world that we live in, where the World Trade Organization is no longer, you know, a very viable institution, and we've given up on free trade deals. You know, if you go back before President Trump, President Obama came pretty close to signing a trade deal with Pacific rim nations, the so called Trades Specific Partnership, that was a free trade deal that excluded China because they did not play fair, and that was the strategy. But you know, in this world that we live in, when with that all blown up and wtowter, I think strategic tariffs are a tool that has some use, but much be Honestly, I don't see it.
You're saying, like, if you would use the tariff specifically for the thing that you want to have made in America, like this item, I want to specifically target this thing because that's going to have a direct effect. You wouldn't use the tariffs just to get countries to do other things that you want.
Yeah, exactly. So solar panels, We'll say the Chinese are way ahead of us on solar panels. They dominate the market. Those panels are subsidized by the Chinese. Very difficult for that industry to make any headway here in the United States. So you say to the Chinese, hey, guys, you're not playing fair with regard to solar panels. Chinese says, I think we are well. In that case, you say, Oka, I'm going to post TIFFs on your solar panels to make it viable for my solar panel industry to develop and to grow. So in that case, it is case by case, it's product by product, it's country by country. I see a use case for terrorists, but beyond that, I don't.
And when you look at the negatives, for the last many decades, the US has embraced free trade around the world. We have not been very tariff heavy. Why what are the arguments against using tariffs.
It's a tax. It's a tax on American consumers and business people. And it's a very regressive tax in that it's born to a larger degree by lower and middle income Americans because of the share of the budget that they devote to imported goods compared to hire income households. It invites retaliation. Other countries don't sit on their hands. They say, hey, that doesn't make sense to me, that's not fair. You can see it. The Chinese are worry retaliated with regard to the terriffs President Trump just put into place. Canadians, they put in some tariffs, and you know, is this tariff war goes on, and trade war goes on, more and more countries will put on their own tariffs and trade restrictions, which hurts American jobs and then, you know, longer run, it impedes competition. You know, competition, I think most of us would agree is a good thing. You know, it makes businesses really focus on being the best at what they do efficient, offer the lowest price to consumers and to businesses, and they innovate, you know, they're looking for ways to come up with new products and services and do different things to serve their marketplace. And that competition is a very very healthy thing. So you do you undermine that with tariffs. You make it much more difficult for that to occur. And then in the current context, the way the President is implementing the tariffs is creating this chaos, you know, havoc because no one knows what they are are on again off again, this country, that country, that product, this product, that company. You know, there's something that businesses label stroke of the pen risk, meaning if the president can do something by the with the stroke of a pen in tariffs because of its executive order, he can, They're just not going to touch it because they have no idea you know what the President's going to do. And if you have no idea, how can you make any kind of investment decision or hiring decision. You just can't, So you sit on your hands. And that's what's you know, the problem in the here and.
Now right And just just to remind our listeners, the president basically when it came into office that I'm going to put these tariffs on Mexico and Canada right away. Then he had conversations with the leaders of both countries on the phone, then said we're going to do a one month delay, and then he came back in and said, okay, now we're going to do it for real at the beginning of March, and then like a day later pulled back on that too. But it's very uneven. It's not quite clear you know which things will have tariffs in the meantime, but it is this on again, off again something that businesses also just don't like that kind of uncertainty.
How do you deal with that. Okay, I'm a manufacturer. I'm trying to decide whether I should invest in a new I don't know, food processing plant. Right that processing plant is going to be in operation for at least a decade, maybe two decades. So I'm deciding where I'm going to locate that food processing plant based on the rules that are in place. But if there's no rules and the rules are changing, how can I make that investment decision. You know, I'm a business person. I'm an economist, but I'm a business person. I have a couple hundred commists around the globe that worked for me, and we have to make business decisions. And you know, if I'm going to think about an investment, I open up a spreadsheet, you know, very simple. Simply put put in my expected revenue, put in my expected cost. Calculator return, compare that to my cost to capital. If my return is greater than cost the capital, and make the investment. If I can't fill in every cell in that spreadsheet, I can't calculate the return, I can't do the calculation. It's not like I go fire people, but I say I'm not doing that until I can actually put it in the spreadsheet. You can't put anything in a spreadsheet in the current in the current environment, because it's it's all over the place. Who knows, you know, how this is going to play out. And the other thing that you know is more even more kind of debilitating, is we don't know what the motivations are. You can tell me what's motivating all this, then I can maybe make some judgment as to how it's all going to play out. But I can't tell you what the motivations are. They're just all over the place. So given that I can't, I can't fill in this, I can't build in the cells in the spreadsheet. I can't calculate. I'm not investigating. That's what's happening.
Well, And you know, on the motivation side, we mentioned that he says he wants to stop the flow of fentanyl, but you know, if you actually look at the numbers, the fentanyl overdose deaths in this country are way down over last year. And then on the issue of kind of what Trump wants, it seems like right now he is punishing countries even when they do exactly what he asks. So it's like, am I supposed to do what he wants in order to get these tariffs removed or does it matter because he might just punish me anyway, even if I do what he asks for.
Yeah, I mean like a take. He said, Look, I want you guys to Canada Mexico to work on the fentanyl problem and the immigration problem. Well, there's a great piece of the New York Times this weekend. The problem on the North, on the Canadian border is that Americans are illegally going into Canada, not the Canadians coming into the United States. So what's what's what's the problem? What are we trying to fix? And the Canadians are asking themselves that question too, and by the way, they're getting pretty upset about it, you know, because they go, what the heck is this all about? And they can't figure it out, and so you know, they're naturally upset. And it's you can see it already if you go look at foot traffic at stores across the border from the Canada and to the United States way down. If you look at an hotel occupancy in those same cities way down. I mean, they're boycotting American product, and you go, well, okay, but they can't figure out what the problem is. What are you trying to do here, and so they think, you know, it's all made up. And so if it's all made up, then you know, how do you respond to that? What do you do with that?
Yeah, they've taken Jack Daniels off the shelves apparently in Ontario, and the CEO of Jack Daniels is very upset, say this is worse than the tariffs because we're not even for sale right now in Canada. But who well, who is the Who are the winners and losers in right now? If with a trade word, let's just talk about Canada. Who are the winners and losers if we're in the middle of this and are the Are the US consumers going to pay more because of our tariffs on Canada or because of Canada's retaliatory tariffs on us?
All of the above, I mean takes steel and aluminum, right, That's what the President has been focused on in terms of tariffs on products, because that's what he did in his first term in that trade war, and that's what he's doing here this go round. Who benefits is the steel and aluminum producers because they're protected, you know, they benefit from the terra jeremy. How many people work in the steel and aluminum industry. I'll tell you one hundred and twenty five thousand people. I think Walmart. I have no idea, but you can google it or g chat, GPT. It's got to be at least twice that you know. So we're prettecting that. And then okay, now think of where stealing aluminum goes. Remember that food processing plant, Well, it goes there if you want a can of tuna, goes into the vehicle industry. He goes into the machine tool industry. It goes into the aircraft industry. Those guys get nailed the building. Think about this for a second. Look, we've got an affordable housing shortage. We can't put up enough plumbs because the cost of building is too high. Now we impost tariffs on Canada, Mexico and China. Well, the cost of lumbers going up. The cost of all electrical equipment and materials that go into the comes are going up. The washing machines and dryers and the fixtures, they're going the price. So that's going up. Now that builders are looking at that, they go, now, I'm gonna have to raise the price even more. I can't build an affordable home So who wins in all this, the steel and aluminum guys with one hundred and twenty five thousand employees or the rest of the economy, the rest of us. You know, we're paying a higher price. And that's even before the retaliation. That's even before Canada, Mexico, and China retaliate and put their own restrictions in tariffs on so and then you ask yourself, look if we actually go down this path of a full blown trade war, and that's I wouldn't have said that. I thought we were going in that direction for six weeks ago, but I don't know, but it feels it feels like we're going down that path. Then that's going to push this in very likely into an economic downturn recession. And then the steel on the loom of them guys are even going to be hurt by that because they're going to sell less. So who wins? Nobody wins? Nobody wins.
Well, and I want to ask you about the economic consequences of this after the break, but just before we take a quick break, do you see a strategy here on the part of the Trump administration? Is there a game plan? Is there a long term plan on how this is all going to play out, and why this is going to get something for the United States that it hasn't gotten so far.
I'm guessing, you know, I don't know. I mean four motivations. I'll just list them.
One.
It's just politics. I'm just you know, I said I was going to do this, now I'm doing it. Number Two of the trade balance, trying to get that the US trade deficit down. That's not going to work with tariffs. Three, try to incent or force businesses foreign and domestic to produce more in the United States. That's definitely not going to happen with the trade war. Fourth, and this is the one that may feels like more likely increasingly. I want revenue. It's a tax. I'm going to tax American consumers and business. I'm going to generate this revenue. And I want that because I want to pay for other stuff I want to do on the tax side, other tax cuts that we're talking about for corporations, and you know, raising the cap on the salt tax, all that kind of stuff, kind of reorient you know, where the revenue comes from. If that's the case, Jeremy uh and and our foreign partners figure that out. They're going to realize this is going to be in place. These arks are going to be in place for the foreseeable future. You can count on them responding with their own tariffs and trade restrictions. We're going to be in a full blown outright trade war. It's going to relay us in recession, and he's gonna have to back There's there's no way he's going to have to backtrack on this whole process.
But that that tax, h the the indirect tax on American consumers that are paying more for goods, That one is okay with the Club for Growth and the and the Republicans basically like that's not a tax that they would be against, uh because the government Yeah yeah.
Yeah, good question. Is that rhetorical?
Yeah, it's rhetorical. Well, stand by, We're going to continue with Moody's Analytics Chief economist Mark Zandy in just a moment, One Thing Trump did. We'll be right back. Welcome back to One Thing Trump Did exclusively on the Middle Podcast Feed. I'm Jeremy Hobson. This episode, we're talking about tariffs on our adversary, China and on our friends in Mexico and Canada. I'm joined by Moody's Analytics chief economist Mark Zandi Uh Mark, I guess let's talk about China for a second, because they are a huge economy. We haven't really been focusing as much on China as we have on Canada and Mexico, just because it's a little more surprising to have these these tariffs go on Canada and Mexico. But in terms of China, a lot of the tariffs that from the first Trump administration did continue under the Biden administration, but now they're ramping up further. Do you worry about what what? What are you concerned about when it comes to China and these tariffs, and do you worry that a trade war with China could turn into something more?
I do? I mean, for you know, first, a level of concern is you know, it just means higher prices. China's a massive trading partner, right, I mean, China, Canada, Mexico each account for about the same amount of imports into the United States. They're four hundred and fifty fifty five hundred billion dollars a year. Twelve thirteen percent of total imports are from each of those countries, so they matter all of the matter A lot so it's a big trading partner. And if you if we jack up tariffs on their product and they jack up tariff's on our product, that does a lot of damage in terms of the taxes that the tariffs. Our consumers are going to pay and businesses are going to pay, and it hurts American companies that sell into China. So that's gonna that's going to happen. But you know, more broadly, and by the way, we're not we're talking about big tariff increases now, right because under President trump first term, the tariff increased effective tariff rate on Chinese product was ten percent. Now with everything he's announced, we're now at thirty percent, and you know it's rising thirty percent, So that's a pretty massive increase in teriff. So it's not inconsequential. But the thing that worries me is that our economies are now quickly moving apart. They already have decoupled, and they're disengaging and uh, you know, it's becoming self reinforcing. You know, yes, they didn't play fair, but you know, we hit him over the head. So now they're pulling away and playing less fair, and you know, we're just pulling away like this, and the thing I do worry about longer run, and maybe it's not as long as wrong long run as I think as the geopolitical implications of that. Take Taiwan. You know, we're taiwan Is sitting there in the Chinese say that's part of their country. We say, oh no, it's not. And by the way, our economy is very reliant on Taiwan because we get despite everything, we still get a lot of our chips from Taiwan, critical to the chip industry and everything else that you know, the chips go into. And you know, it's one thing when we're our economies are integrated, you know, and we're tightly wound together as we were back in twenty seventeen eighteen. Just think about you know, when you're hugging somebody, it's very difficult to hit them over the head, you know, because you know you're hugging them. You don't want you know, you're tied together. But if you're apart and you're stirring each other down and you're not as dependent on each other economically, and that's certainly the case, much more likely. You know something's going to happen. You know, you know geopolitically, militarily, we're going to take a swing at each other. There's going to be a mistake. Tensions are already rising. You can see it in this in the South China Sea, the Chinese Navy is creating havoc for the Filipino sailors. You see what they had exercises off the coast of New Zealand and Australia. There's a Chinese airfire that went into the air Japanese air space for the first time in decades. You know, it's happening, and I just worry that something is even by a mistake, is going to occur, and we have a whole level, another level of hurt here. It's not just a trade war, it's an actual war.
What about the strength of the economies in these countries. I was kind of surprised on our trip to Canada to hear from people who are Canadian about how bad their economy is right how bad they feel their economy is right now. And I'm like, oh, right, the US is actually in a much better position in post COVID than a lot of other countries. Even our close neighbor Canada. Their dollar is way down, so it's very expensive for them to buy things from the United States. Anyway, what about China right now? China's economy is not in near the kind of shape that the US economy is right now.
Yeah, that's very much. That's very true, and part because of this decoupling. I mean, the Chinese economy is much more open, does much more t aid than the US. And so when the US and China pulled apart here over the past five, six, seven, eight years, that hurt both our economies, but it hurt the China Chinese economy more so. You know, I do think the Chinese economy is struggling with that and other issues. You know, real estate, the real estate downturn is doing havoc. They have all kind of environmental issues, stayed on enterprises, They kind of backtracked on some of the privatization the efforts that they put in place over the last couple of decades. So they definitely are having difficulty. This US economy that came into this year the strongest in the world by orders of magnitude, so a very different place. But having said that, the Chinese economy is an authoritarian economy. It's not a democracy, and they can digest a lot of pain before it has any political ratifications. Doesn't mean it's going to change their policies or she's use on anything anytime soon. Very very different than in democracies like Canada or even Mexico, you.
Know, although we remember the different pressure that they came under with the COVID lockdowns and then all of a sudden people started protesting President she and then they said, oh, never mind, no more lockdown. If you just do whatever you want now.
The rules are done. I mean, I don't want does conducives do a well functioning economy in the long run, but it gets them through these scraps that they're in right now.
Yeah, what about the US economy? How worried are you about a recession just because of the tariffs. There's a lot going on, and ask you about it, But what about just the tariffs? Could that lead the US into a recession?
It could depending on the scenario. I mean, if let's suppose President Trump follows through on everything he said he's going to do on Canada, on Mexico, on China, on the EU, on on steel, on autos, on the pharmaceutical industry. You know, he just he follows through and he imposes those tariffs and leaves them there for any length of time, a few months, a couple quarters. That's the flodder for an economic downturn. Yeah. Now you know, something else might have to come along and push us in. But it wouldn't take much to push us in at that point. You know, things happen all the time. And clearly you said don't think about all the other economic policies that are playing out here, because they're also creating a lot of uncertainty, as everyone knows. But even abstracting from those other things, I do think the tariffs, if we got into a full blown trade war, knockout, drag out with other countries, recession is a real possibility.
Yes.
Yeah, if you think about the other economic changes happening since Trump came in just a matter of weeks ago, you have the huge cuts to the federal government, layoffs of tens of thousands of federal workers, at least, the tariffs, new focus on bitcoin, giant tax cuts could be on the horizon that would definitely favor the wealthy, not to mention the billionaires with power that they've never had before in this country. What do you focus on as an economist as you look at all of those changes.
Well all of the above, but you know, first front and centers of the trade war. Second is the DOGE consistent contemporaneous with the trade wars. The DOGE cuts to not only the government employment, but to federal funding. You know, it's affecting large parts of the private sector and other parts of the economy because of the funding cutbacks or the freezes on funding. I do worry in the most immediate future about a government shutdown. That's a possibility here in the next couple, you know, three weeks. I worry about the immigration policy and the context of labor supply. You know, certain industries rely very heavily on immigrant labor. Construction, manufacturing, transportation distribution very very reliant on immigration immigrants, both documented and unauthorized. And then the thing that I you know, it's going to come on the radar screen here it hasn't hit, it hasn't come up yet, but it will is the Treasury debt limit. That clock is ticking that you know, Treasury, that deat limit has now been reinstated. Treasury can't issue debt beyond that, so they're running down their cash and they're going to run out of cash sometime in late July early August. At that point, someone's not going to get paid. That's a default. So that's a real drama that's going to play out here at some point in the spring of the summer. So there's a lot of things to worry about. They're all, you know, they all come together in a very noxious kind of uncertainty stew and the economy's gagging on that. And if this continues on for much more longer, economy is going to choke on it, and that's a recession.
I have been through my share of debt limit fights, and they usually pull back at the last second. But you never know right now because who's they control everything at the moment that Trump, the Trump sort of maga Wright controls all the branches they do.
But think about the uncertainty that it always creates, and think about the backdrop that we now have with regard to all the other things we're worried about. So throw into the mix a debt limit drama, the uncertainty on top of all the trade war drama, on top of the dose drama, on top of the immigration drama, on top of the president's efforts to rework government drama. You know, just add that all up and it becomes, you know, pretty tough to digest.
Let me just come around to one of the things that President Trump has said that the tariffs would help, which is like bringing back jobs. And let's say manufacturing. Do you see the best case the tariffs, you know, have some sort of an impact. Could they actually bring back a lot of US manufacturing jobs if done right?
No, not possible, not happening. I mean, first of all, we're not talking about a lot of jobs. The manufacturing base accounts for about ten percent of all employment ten percent, and it's falling. It's falling. So the number of people working and manufacturing that's flat to down. It's not going to rise. It's a very productive industry. Most of these plants that come into the that are being constructed are robotics, they're not people. You know, that goes to the to the to how efficient these things are. And then why would any company decide to locate in the United States based on tear the current tariff regime. President Trump is going to be present through twenty twenty eight. What happens after that? Again, these plants are they're made to last for a decade two decades, three decades. They're not for the next year or two years or three years. They're there for the long run. So you know, am I going to count on that tariff that he put into place that's going to be there nine in twenty twenty nine or twenty thirty. No chance, there's zero probability that's happening. And then and then on top of that, people around the world, every business person around the world, is looking at what's going on here, and they're saying, how reliable is the US UH government and the rules of the road? The one the secrets, we the United States has a number of things that makes us exceptional. In the secrets, one of the elements of the secret sauce is the rule of law. There's rules, there's there's rules about how to change the rules, and everyone knows what they are, and they live by them and they die by them, and they courts adjudicate those rules and decide what's right and what's wrong. If there's a if there's if there's a if there's any disagreement, you monkey with that. And that's what we're doing here. We're monkeying with that basic principle, the rule of law. They're gonna say, you know, what am I going to do with that? I'm not. This is no different than if I located in I don't know, pick a country, you know, somewhere else, not here. So it's just not it's not conducive to supporting long term investment. It's just not. So No, the answer is absolutely not. It's going to be just the opposite.
Do you think econ profts around the country are starting to teach Holly smoot in a bigger way? Now?
You know what?
I think they should show my One of my favorite movies is Ferris Bueller.
Ferris Bueller, Yeah, right, exactly.
Yeah, top ten, top ten.
Yeah, you know, actually I did that is one of my favorite movies too. And there's a sort of behind the scenes there's another professor, not ben Stein, but there's another professor that where Sloan Peterson is in the class and then she gets pulled out. And the professor was like a second City comic, and he wanted to stress all the wrong word, wrong syllables to make it as boring as possible, and so he goes.
In what way does the author's use all the prism anyway?
I remember that very vivid.
I don't remember, Mark, I gotta I gotta go.
You gotta go back and watch that that again. It's very funny, uh, Mark Sandy, chief economists for Moodie's Analytics, Thank you so much for joining us.
Yeah, anytime, Jeremy, and thanks.
For listening to one thing Trump did. It was produced by Brandon Condritz and Harrison Patino. Our next Middle episode will be in your podcast feed later this week. Will be joined by a pair of artificial intelligence experts to take your questions about AI. You can call it an eight four four four Middle and if you like this podcast, rate it, tell your friends and make sure you sign up for automatic downloads. Our theme music was composed by Noah Haidu. I'm Jeremy Hobson and I'll talk to you next time.
