Cornell University's, Eswar Prasad discusses the impact that Trump's tariffs might have on trade with the US for our partners around the world. He is joined by Bloomberg's Romaine Bostick and Alix Steel.
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Questions asked in this interview
4
0:02What's your base case for trade wars this year?
2:30What do you think the downside potential is here for that?
4:21Meaning, are they going to have to choose between a relationship with the US versus a relationship with China, or is there a way that they can sort of thread that needle and appease both nations?
Bloomberg Audio Studios, podcasts, radio, news. Also, I think the question becomes all the sequencing we're going to get from a President Trump administration, and sort of when that winds up affecting equity markets, right? You have tax cuts versus tariffs, right? You have immigration versus deregulation — like, what comes first could also dictate that as well. And I think the market might be waiting a little bit. Obviously, the inauguration here in the United States is until January 20th, and we have to kind of see whether he makes good on all those promises or whether it was just all... Yeah, so let's get a little bit into that because Bloomberg Economics crunched the numbers on what would happen to GDP in different countries based on whether or not all partners retaliated in the event of a trade war, or only if China retaliates. And you can see Mexico getting hit the hardest, right after Canada, with GDP wiped out by about 2%. The US comes next with about 1.5% negative to GDP. And the question that becomes — we talk all about China and what it means for Europe, but the impact on the rest of North America could be huge, particularly for any sort of goods coming in from China through Mexico and Canada. So joining us now to discuss is Eswar Prasad, Tolani Senior Professor of Trade Policy at Cornell University and Senior Fellow at the New Century Chair in International Economics at the Brookings Institution. It's great to get your perspective. Thank you for joining us. Happy New Year. What's your base case for trade wars this year?
So Trump has gotten increasingly specific about the amount of tariffs he's going to levy, the countries that he's going to levy on right off the bat. So I suspect this is not all bluster. Now, for the rest of the world, I think this could be seen as a bit of a bargaining stance. And the reality that is quite different from the first Trump administration is that the US is on a very strong footing because the economy here has been doing remarkably well over the last few years in the post-COVID period. But in addition, the rest of the world is really floundering in terms of economic performance. If you look at China, Europe, including powerhouses like Germany, Japan, and even India, which was roaring along until recently, none of these countries can really withstand the effects of a significant increase in trade sanctions around the world. So they're going to be on the back foot. So it's going to be a very interesting bargaining game, but my bet is that we're going to see at least a small increase in tariffs, perhaps some symbolic amounts, but especially targeted towards China. And what the world does to retaliate, I think, is the key.
Exactly. And if we just focus in on North America for a moment, I can make an argument that, you know what, it's legit because if you have stuff coming from China through Mexico and Canada, you're not going to want to get that into the US. Versus the other side, which is you're really going to hurt your partners in trading within North America. What do you think the downside potential is here for that?
Now, for the US, there are some significant downsides. The imposition of tariffs generally ends up with the customers paying a significant portion of those tariffs, so that could, along with the reduction in immigration flows, lead to an increase in inflation in the US. On the other hand, you could have a stronger dollar resulting from the imposition of tariffs, which would at least partially offset the increase in prices. But the bigger concern really is going to be about the disruption in global trade. And here too, there are some very important differences. You know, in the previous Trump administration, there was this notion of the US imposing tariffs not just on rivals like China, but even on traditional allies, including Canada, Mexico, and Europe. And we are seeing some rumblings of that as well. In the past, China and these other countries could perhaps take on the US together, but right now China's economy is not doing very well, and whatever growth they're getting is really coming from the production side rather than the consumption side. So the rest of the world is very concerned about becoming the dumping ground for exports from China, which it really needs in order to sustain growth. So there is a fracturing of the potential alliances among other countries, which again puts the US in a strong position. But certainly, disruption in supply chains and in production is going to be a cost that US manufacturers and manufacturers around the world are going to have to bear.
With some of those governments, though, the ones that have to deal with China for that matter, the ones that have to deal with the US, is there any sense here that they will be able to find some sort of common ground between the two? Meaning, are they going to have to choose between a relationship with the US versus a relationship with China, or is there a way that they can sort of thread that needle and appease both nations?
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