Good morning, everyone. Hi, everyone. So we also have a little bit of a treat. First of all, we're speaking to Gita, which is always a treat. We'll look at the world economy. I'll ask you about trade, tariffs and aid. And then right after, we'll also be joined by the former Polish president, Andrzej Duda, for a good conversation on security on Ukraine and of course, on everything that's going on with Greenland. So don't miss. That's right after my conversation with the Governor. Thank you so much for joining us. Look, the world had moved on from trade and tariffs. If you spoke to economists or surveys, we were like, oh, that was a 2025 thing. And now they're like, back with a vengeance. How much do you worry that the latest geoeconomics concerns on Greenland and the tariff threats derails the US economy and the world economy?
Francine, I agree with you that I think we all came into this year hoping that we were past peak tariffs and past peak uncertainty, but all of that has blown up very quickly. Now, what we should always keep in mind is that there is a difference between the numbers that get thrown out and what actually gets implemented. And that happened all of 2025. So if you look at the headline numbers for tariffs and the announcements, the tariff rate in the US was around over 20%, so about 20, 25%. But if you looked at the actual tariffs being paid at the border on the US side, on the US border, the tariff rate is around 14%. So it's much lower than what the sticker headline number was, which is why the consequences of the tariffs were also smaller than was feared initially. Now, I was hoping that we would have more clarity at this point, but that's clearly not the case. I thought by now we would have the Supreme Court's decision on tariffs, which was supposed to have come last week. It was supposed to come yesterday, but it hasn't happened yet. But that will tell us something more about how tariffs can be used. And that's what the midterm elections, which now has become an issue of affordability, would be some sort of a guardrail against having further rounds of tariffs. But clearly, we're in a different place altogether. This is no longer about global imbalances. It's no longer about US trade deficits. It's about basically using tariffs as a tool against any international agreements. I mean, this is a weaponizing basically of the tariffs.
Who paid for the tariffs last year? So there's a number of studies out saying that actually it's probably American consumers that paid 70 to 80% of that extra burden. Is that fair?
So actually, I did some research with a co-author at Harvard. We put a paper out last year, which basically shows that about 90% of the tariff was borne by firstly the American importer, and a small fraction of that was passed through. A small fraction of that was passed through to consumers. So 90% borne by American importers, firms. Small fraction passed through, which is pretty much exactly how it played out in 2018-19. It was the same story. So while indeed there is a substantial amount of tax revenue being collected from the tariffs, it's basically being paid by US firms and importers.
I mean, even before these extra threats over Greenland of tariffs, there was a concern that actually inflation would pick up this year. Is this an overhang of what happened last year for the tariffs or is this the come up from any other parts of the economy?
The baseline expectation is that tariffs will not get out of control. Sorry, inflation will not get out of control. Now, I do believe there is about a half of the impulse to inflation coming from tariffs that's supposed to play out this particular year. So we get about a half a percentage point coming from the tariffs of 2025. But otherwise, because of the increase in productivity that we've seen in the US, unit labor costs are actually not growing at a very high rate, like one and a half, two and a half percent, to keep bringing inflation down. The risk, of course, is that with further rounds of tariffs, with the fact that the One Big Beautiful Bill's tax incentive could increase investment and because of that, there would be an increase in demand. The shrinkage in the labor force in terms of labor force because of the drop in immigrants, all of that is an inflationary pressure that could play out now. And in that event, the Fed may actually need to raise interest rates, which is something that is really not being priced in by markets.
Are we importing deflation from China? Because if you look at deflation in China, it took many people by surprise. So China is exporting deflation to many parts of the world.
We've not seen much of an effect of that on the US because the tariff is coming on top of those deflated prices.
When you look at some of the things that we worry about, Fed independence is largely not priced by the markets. But does it change the dynamics of what we could see from the Fed?
Like truly at this point, a lot is not priced by the markets. If you think of the big shifts that are happening, I don't think the markets really truly believe we're going to have a breakdown of Fed independence. And markets don't believe that we're going to have the end of central bank independence. So all of these are possibilities, but not priced into markets because the hope is that this will not really play out as things go forward. That is a risk. Now, there's going to be the name that's going to be announced relatively soon. He's going to be the next Fed chair in May. We have to keep in mind, it takes about 12 people to make the Fed rate decision. It's not one person. It's not the chair that makes a decision, but it's a 12-person committee that makes a decision. But that said, it is the chair that goes out there and does a press conference alone and communicates to the world about what is US monetary policy, what is the path of it. And we know that in the past, with the best of central banks, we've had tantrums. So I do think that if we find ourselves with a Fed that is more divided on every rate decision, there's a lot less clarity coming from the number one central bank in the world, which is consequential for all of the world.
And when you're constantly attacked by the president and even if you stay the course, it's just not easy, right? So biases can kind of creep in, I guess, because you're getting so much pressure.
What worried me about this recent, you know, criminal investigation of Chair Powell, was this about Chair Powell? Because I don't think that's going to stick at all. And anyway, his term ends in May for being chair. What I was concerned was that this would have a chilling effect on everybody else on the committee because it was a signal saying that if you don't do what I would hope you do, we throw the state machinery at you. And I think that's the bigger concern, which is why we need strong pushback from everybody, including from Congress. And we did see that come from some Republicans. And it has to be in the strongest possible terms because otherwise you are going to have this hangover, which is that people will think, well, I'm going to have the state come and investigate me if I don't cut rates.
We talked a little bit about China, but India is seen as the biggest nation that can have the most growth and the most, I guess, industrial prowess. Is this the decade for India?
So India is doing well in terms of growth. I think we just had an upgrade for 2026 for India, but the IMF upgraded it to around 7.3%, I believe. So it is one of the fastest growing nations of the world. It could be a very promising decade for India. Potential growth in India is at around six and a half percent, which is still great. It's going to get to the number three economy status by 2028, given how things are going. It is indeed one of those economies that you want to look at, but it's another country that's in a bit of a difficult spot with the US because it has a tariff war. In fact, right now it has one of the highest rates it's facing compared to many other US trading partners. About, you know, the sticker number is 50%, the effective rate is about 36%. So that's unresolved. That was not something people expected that that would be the case.
Where do you stand on that? You speak to a lot of the tech companies and say, look, this is the biggest revolution we've seen in 200 years. And then you speak to psychologists and they say this is the biggest worry we've seen in 200 years. We haven't really seen the impact concretely on macroeconomics. How do you view it?
I increasingly believe it is one of the most, if it is the most transformative technology of our lifetimes. I've been playing with it myself and it is remarkable what it can do. So I do think it's going to transform growth and productivity and jobs. Without a doubt. That's quite separate from what it tells us about market valuations. Market valuations still strike me as quite high. I find it difficult to believe that all of these companies can generate the kinds of profits that would be required to justify all of their high valuations. This is a pretty competitive industry at the current moment. You know, it's not just OpenAI competing with Anthropic, but you also have DeepSeek and you have what's coming out of China. So that's where I think the risk is. So the question is how do you make the profits from it? How do you make the rents from it? Well, without a doubt, I do think it's going to be transformative, both in terms of raising productivity and growth.
What's your biggest worry when it comes to the jobs market? So we're hearing, you know, chief executives having to spend so much money on some of these AI models that maybe they decide to hire less staff at the junior level because it's costly to train them. Is this something that will level out or is this a real concern?
This is a real concern. Again, I don't think we should say that the data that we're seeing right now tells us that we're going to end up with a whole lot of joblessness. That's not the case. It's still early days for it, but it is something that is very reasonable to expect. I mean, a likely scenario is where you have a shrinking of the middle class, which is you have those at the very high end of the income spectrum, the ones who benefit from this technology. Usually when that happens, there's a huge amount of demand for low skill services. So that group does well and it's the middle class that shrinks. And I think that is a risk because it's not just about manufacturing this time around. It's also about services. And, you know, a lot depends upon the speed with which this transition happens. Firms are adopting it, but not at an extremely high speed or anything like that. But this could be in the next couple of years. We'll see how the uptake is. It's something I like to remind people all the time is that, you know, automation really is a job... losses happen in a recession. So the last time we had a big wave of layoffs tied to automation that never came back was the great financial crisis. 85% of job losses tied to automation happened during that first year of the GFC, and we had the so-called jobless recovery where we had growth coming back very quickly, but jobs didn't come back. And we know that created a lot of stress in society, something that has lasted a very long time and including into the recent elections in the US.
Do you expect every job, every sector to be touched in some way or another?
I do believe yes. I think this is a general purpose technology. It's affecting everybody. I just returned to Harvard last September. You know, I was there seven years ago. For seven years, I was at the IMF. But before that, I was at Harvard. I just returned back. And for the first time, I'm going back to giving oral exams because that's the only way I know the student I'm dealing with actually knows what they're talking about.
