Intro

There are few more respected economic analysts in the world than the Financial Times Chief Economic Commentator Martin Wolf. Yesterday, we ran a conversation with Wolf about the survival of American democracy. Today, we talk Trumpian economics, particularly tariff policy. Wolf characterizes Trump's trade policies as historically unprecedented in their scale, comprehensive nature, and unpredictability. But are they “dumb”, I asked? He acknowledges genuine issues driving tariff policy like global imbalances and deindustrialization but believes the current approach won't solve these problems. Wolf explains that the US-China trade war is causing significant economic disruption, with prohibitive tariffs likely stopping trade between the world’s two dominant economies. He warns that investor confidence is damaged by unpredictability, which will take years to restore, and questions the wisdom of dismantling America's alliance system. Dumb, dumb and dumber.

Five Key Takeaways

* Trump's tariff policies are unprecedented in economic history for their scale, comprehensive nature affecting most of the world, and extraordinary unpredictability.

* There are legitimate economic problems regarding global imbalances and deindustrialization, but Wolf believes the current approach won't solve these issues and may worsen them.

* The economic consequences include potential slowdowns in US retail sales, reduced profits for retailers, job losses, and decreased manufacturing investment due to uncertainty.

* Investor confidence is severely damaged by unpredictability, with concerns about US government stability reflected in Treasury markets, and this uncertainty could take "a decade or two" to fully dissipate.

* Wolf compares the current US withdrawal from global leadership to America's post-WWI rejection of the League of Nations, calling it "strikingly willful" and potentially destabilizing for the global order.

Full Transcript

Andrew Keen: Hello everybody, we are at the London office of the Financial Times with the chief economics commentator of the newspaper, one of the world's leading economists, Martin Wolf. Martin's been on the show many times. Martin, before we went live you suggested to me that this was your moment, that suddenly economics has become interesting again. Is it because of this Tariff thing that a certain Donald Trump has introduced well, there's no doubt

Martin Wolf: what you describe as this tariff thing has created a novelty, to put it mildly. He's done things that as far as I can see have never been done before in the history of economics. So and you don't normally live through an experience with a set of policies, trade policy, which has been pretty unexciting since the Second World War, and you're suddenly in a different world. And that was not quite what we expected. In addition to that, it's not even as though it's sort of predictably in a different world. It was sort of every day or so. It seems to be something different. So in that sense, yes, it is very, very exciting. Now, there are other things going on, obviously in the administration and other areas which might turn out to be even more important. The attack on science and the funding of science, for example, the attack on universities. These are all very, important, the dismantling of important parts of the government, the relationship with allies, but I think this tariff war is remarkable for its scale. We've never seen changes in tariffs on this level before. It's comprehensive nature that base effects most of the world and it's extraordinary unpredictability. So this This is a new world for economists and we will be studying this, I'm absolutely sure, for half a century.

Andrew Keen: My sense, Martin, is that one of the reasons you're enjoying it is because you're a natural polemicist and you haven't pulled your punches in your columns. I think you recently wrote in one of your last FTPs that America is inevitably going to lose in this war against China. Is it as dumb? As it seems. I mean, you're the chief economist at the chief economics commentator at the FT, one of the world's, as I said, most respected economists. You're an expert on this area. Is it just dumb? Are there any coherent economic arguments in favor of tariffs, of what they're doing? Well, I think...

Martin Wolf: There is a genuine problem, and part of that is to do with trade. And more broadly the balance of payments, which is affecting the U.S., is genuine. There's a real set of issues, and economists, including me actually, have been discussing these problems, which you might call actually two problems, the global imbalances problem and the deindustrialization problem. These are two real problems, economic and social. The problem is that it's very hard for me to see how these policies that are now being introduced will solve those problems worldwide, and they are global problems. And the way the war is being pursued, if you like, by the Trump administration is such as, I think, inevitably to lose the many of the allies they ought to have in this contest and therefore they are playing this match, if we like, without the help of lots of people who should be on their side. And I don't think the way they're going about it now will solve that problem. I think making it worse but yes there are a couple of genuine real problems which is perfectly reasonable for them want to for them to want to address address if they can do so in a coherent well-planned

Andrew Keen: relatively inclusive way is it a problem with China essentially in terms of China producing too much and not buying enough of American goods is that the heart of the problem I think the problem China's

Martin Wolf: not the only such country. They are right to observe that Germany has also behaved somewhat in the same way, but Germany's capacity for disruption, though very real in Europe and I wrote about that in my book on the crisis published about a decade ago, is not global. The rise of China was bound to be a massively disruptive event. How could it not be? Suddenly there's a new peer competitor out there in the world. I don't think we had the right or the capacity to prevent its rise I would have strongly opposed any such effort but some people I'm sure would disagree but China is a vast country with a tremendously capable population and an even more capable government than we thought 20 or 30 years ago and its rise was going to be very disruptive its disruption is for the world I mean it's also disrupted Europe a lot it's disrupted any country that is competing with Chinese manufacturers. Actually, that includes Japan. Japan has been displaced as a manufacturing exporter to significant degree by China. So it's not just about America. One of the mistakes is thinking it's just about America. The rise of China is a fundamental transformational moment. And there is a specific problem with China, which is it's been following the general line of East Asian manufacturing-led development but because it's much bigger and because there are features of its economy particularly excess savings which are even larger than in other countries the disruption is even bigger so there's a genuine disruptive force here which we should have started dealing with consistently.

Andrew Keen: About two decades ago. My sense is that Trump is trying in his own peculiar way to walk back some of these policies. But has the damage already been done? Well, that's a very interesting question.

Martin Wolf: There are two dimensions that some damage has been done because it's working through the system now. Right now, there's essentially prohibitive tariffs between the US and China. And that means that trade between these two countries is largely going to stop and inevitably that's going to do a lot of damage because they, on both sides, but notably with China's supplies of manufacturers to the U.S. There are an enormous number of businesses across the United States that depend on these products. So that's going to be a disruption and it's going show itself up in economic activity and retail sales in the U.S. That's going have a significant effect. But I think the more important point is the degree of unpredictability and the degree of zaniness of what's happened, introducing these so-called reciprocal tariffs, which were reciprocal on one day and essentially getting rid of them the next for 90 days without anyone knowing what will follow them, for example, or introducing these obviously not expected, massively prohibitive tariffs on China, 145% tariffs and 125% on the other side, people suddenly realize that sort of anything can happen, things that they couldn't possibly imagine. It was completely outside their worst nightmares that this is what would happen when Donald Trump became president. After the first term, they didn't experience that. So I think the realization... That the range of possible developments of events is so far outside what you thought was possible changes the way you view the future and inevitably I think it's going to make investors who are going to be affected by trade which is basically anyone in manufacturing quite a lot of other businesses very very nervous about making commitments which they can't walk back so I think that everybody's going to become very risk averse. That includes allies, potential allies, because they don't know what's going happen to them. Should they align themselves with the US? Well, maybe that won't work. Look at what has happened to Canada. So, I think the In this respect, they have broadened the range of possible futures in relationship to the US, still the most important country in the world, beyond anything they could imagine, and that cannot disappear quickly. It will take, I would have thought, a decade or two at best before people will say, Now we know exactly what's going on.

Andrew Keen: Exactly how the U.S. Is going to behave again. In terms of the economic consequences, Martin, is the real damage, at least at this point, 100 days into the Trump administration, is there real damage to the U S economy and the U,S. Consumer? I think that...

Martin Wolf: That's certainly going to be important. There's no doubt about it. There's a basic proposition in economics, which is still basically true. The biggest victim of protection, particularly at this sort of level. Is your own country. You are imposing massive adjustment shocks on your country by suddenly putting out of reach, a huge range of goods that they were used to buying. So that's a huge shock and they have to adjust their spending habits, the firms have to adjust how they structure themselves. That's ineluctable and as it all goes away, And if it all goes away, will they assume that it's all back to normal? I don't know. But of course, because the US is the US, it has imposed tariffs now, significant tariffs by historical standards. It used to be an average of 2% or so. Now it's 10%, leaving aside China and leaving aside of course the automobile sector which has got higher tariffs and all the other special cases that are being considered. So these all affect other countries. And, of course, the effect on China is certainly going to be very, very substantial because it's losing the ability, really, to export to its biggest single market, if you don't regard Europe as a single market. So there will be damage to China. And then there's a really big question. What does it mean for all the countries that might replace China? Vietnam for example, other East Asian countries, is there now going to be a huge opportunity or is the US going to jack up its, reintroduce its reciprocal tariffs, 50%, close to 50%, which case they're going to lose the market. So I think at the moment you'd have to say that everybody is going to feel... Actually or very close to actually

Andrew Keen: damaged. And what's that gonna look like? Higher prices, fewer jobs? Well I would be, there will be countries that will, in the US in particular. What should we be so to speak looking forward to in the next couple of years? Well when I assume that

Martin Wolf: There will be a slowdown in retail sales of consumer goods which will be really quite significant. It will affect the profits of major U.S. Retailing and retail firms significantly and jobs in those activities. That's sort of the shock effect. There will be a risk factor in investment above all investment in manufacturing which will also be significant so I would expect manufacturing investment to decline too. Will that lead to an actual formal recession? I don't know. I don t have enough expertise on the day-by-day numbers. I think there s an additional factor which we mustn t underestimate, how that will play out, we don t know, which is the loss of confidence in the U.S. Government, and you can see that in the Treasury s market, which is most important market in the world, and the pricing there suggests some real nervousness about the future of stability of US economic policy. And here, I think the most important thing will be will there be a war on the Fed? Who's going to be the next Fed chair? What will Trump try to do to get the Fed to do what he wants? So there's going to be a shorter term medium short term impact on the economy. Through exports and, above all, also import availability. And there's going to be bigger concern which will affect investment. And, I think, people's confidence in US financial assets, which is ultimately about confidence in the US government and the consistency and probity of its policies. So short, medium, and long-term effects. How bad it will be, that depends very much on what is decided in the next few months. If in the end, the trade war disappears, Trump stops threatening the Fed, everybody thinks well they tried that it was a huge disaster and they've learnt and he's very flexible he could go away still but the next I think the next two three months are going to be very very important do they walk all this back pretty decisively or do they stick with it or even play double or quits we don't know

Andrew Keen: I don't know whether Mr. Trump knows. Finally, and that's one of Donald Runfield's unknown unknowns, especially when we get into the head of Donald Trump. Finally, Martin, you're very good at the big picture. What people are talking about this moment at the end of a US-centric economic world order, the demise of the dollar, perhaps the rise of cryptocurrency, obviously the 90s. Dimension. Was this? Two final questions. Firstly, is that true? Are we seeing a reoriented global financial system in America and the dollar no longer being central? And secondly, for all Trump's stupidity, was this in the long run inevitable? I mean, of course, Kane says in the long run, everything is inevitable, including our own deaths. Uh is this something that we should have expected it's just all come in a rush in a mad rush at the beginning of 2025 well these these are really difficult questions i think that's why i asked you you're the chief economics commentator in the ft if you can't answer them no one let's just say how i think about it

Martin Wolf: There are two reasons why you could think the world wouldn't continue as it was. The first is the rise of China has genuinely changed the world. And the unipolar moment was clearly over and China is clearly a more credible peer competitor of the US across the board than the Soviet Union ever was. So in that sense, the world that the US comfortably dominated had gone, and it was bound to require a, and something I've written about many times, a forceful alliance strategy by the US using its web of alliances which are still so potent as the basis of its power and influence to maintain anything like that order. So that was the situation. What I don't think was inevitable is that the president who sort of declared the end of the US-led order would also be someone who basically stands not just for America first but America alone. I always attacked his allies so forcibly. So he has, as it were, taken apart the Alliance system and the values that were linked to that, on which I think U.S. Leadership was going to depend increasingly in future. So that's a, it doesn't seem to be a necessary shock and a rather strange one if you consciously detonate as such an important part of your power, but I suppose it is possible to argue that after 80 years since the war, second world war, the Americans have just sort of got tired of that world and tired of the responsibility of that well and they've sort of gotten tired with themselves, with the system that they've been living under. That's so obvious. Left and right agree they don't like modern America. Well once we look at that, then it may be that this was inevitable, but it was inevitable then for reasons that I don't fully understand. And that's probably a failure of my imagination. And the core remains that while America couldn't go on being precisely what it was in the 90s or early 2000s, where they made a bigger mess of it, but they didn't have to jump out of the world and the world they created with this stupendous speed. And it's very similar, and even more dramatic in its effects, when after the First World War the Americans repudiated the League of Nations, said Europe's got nothing to do with us, we're just going to leave it, gone. You sort it out and you know what happened as a result. Germans elected the Nazis and the Nazis started conquering the whole of Europe. So it's the American withdrawal. So suddenly, and so completely, well, complete, that's unfair, but so suddenly, with no obvious strategy to replace it, that seems to me striking, strikingly willful and a little bit mad and in any case, for me it's a surprise.

Andrew Keen: And it changes the world. Well, on that chilling note, Martin Wolff, the chief economics commentator of BFT, given us much to think about. Martin, thank you so much. This story is only just beginning. We're gonna get you back on the show in the not too distant future to explain what comes after America.

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