The Great Trade Policy Hack

>> Steven J. Davis: The Great Trade Hack: How Trump's Trade War Fails and the World Moves On. That's the title of a provocative new book by Richard Baldwin, eminent economist and expert on international trade and globalization. Stay tuned as I engage Richard on the key themes in his new book. Welcome to Economics, Applied, a podcast sponsored by the Hoover Institution.

 

I'm Steven Davis, a Senior Fellow at the Hoover Institution and host of the show. Joining me today is Richard Baldwin. He's a professor of international economics at IMD Business School. He's also founder and editor in chief of Vox EU, an innovative online platform that publishes short, accessible articles grounded in recent research in economics and political economy.

 

Check it out. Richard has also held faculty appointments at the Geneva Graduate Institute in Columbia Business School. In his youth, he served as senior staff economist at the Council of Economic Advisors under President George HW Bush. Welcome Richard, it's great to have an opportunity to speak to you about your extremely timely book.

 

 

>> Richard Baldwin: Thank you, Stephen. It's great to be here and yes, it is timely book. I had to rush it to get it out between the suspension and the July 9 deadline. So, yes, it was a bit of a rush.

>> Steven J. Davis: And events have already moved on. Despite the speed with which you wrote and published the book.

 

We'll get into some of that. Your book advances what you call the grievance doctrine as an explanation for what I refer to as Trumpian trade policy, or perhaps lack of policy. And you write, we should not think of the hack as trade policy, but rather as vengeance. Economically, the tariffs are riddled with contradictions, but at an emotional level, they make perfect sense.

 

Elaborate on that for our audience, if you would.

>> Richard Baldwin: Okay, so let me start out by explaining the journey, the intellectual journey, which got me to this point. So, like most trade economists, most economists, period, I'm very uncomfortable talking about emotions, and I'm certainly very uncomfortable about psychoanalyzing policymakers and why they're doing things.

 

But anytime people talk about Trump's trade policy, especially in a second term, they use words like erratic. Erratic, chaotic. Makes no sense, that's crazy. And they keep saying the same thing day after day. At one point I thought, well, maybe there's a different way to look at it.

 

And I actually read the introduction to the President's trade agenda for 2025, which is normally a very bureaucratic, technocratic thing written in diplomatic tradees complaining about other countries trade policies, normally. And the introduction is usually very stodgy. This year it's like a Greek myth. It starts out with, America is the greatest nation the world has ever known, and goes on to say that America, and this is, remember the President's trade advisor writing more or less in words for the President, America played by the rules and got played.

 

Globalist elite abroad and globalist traders at home stuck it to the middle class in America and got rich as the middle class atrophied, stole our jobs, all this sorts of stuff. And I thought, well, maybe actually that's what he's thinking. Maybe he has a sense of victimhood, a sense of grievance.

 

And what he's doing with these is striking back not so much with economic goals, but with a goal of finally standing up against this system that's rigged against the United States. What I found was that once you start looking at what he's doing in these terms, everything makes perfect sense.

 

It's not chaotic, it's not erratic, because it's not aimed at normal trade policy goals. That's why I call it the grievance doctrine and suggest that we should be thinking differently about, about Trump's motives and why he's doing what he's doing.

>> Steven J. Davis: Okay, so I think there's something to that, and there's no doubt that Trump is a successful grievance monger in the political arena, not just with respect to trade, but with respect to other aspects of policy.

 

By that, I mean he cultivates a sense of grievance, and that resonates with elements of his political base. And it's how he's long generated attention. And from what I can tell, he actually believes some of the nonsense that he spouts about trade, which may not be true about many other things that he says.

 

But I don't think that's the full story. And I think there's another element to it that is consistent with many of the facts, more about how he governs than his manner of politics. I guess since you've got a doctrine, I'll put one on the table, too. My doctrine for interpreting Trump's trade policy is the doctrine of supplication.

 

That is, the chaotic, back and forth, erratic nature of the policy is useful when you're trying to draw attention to yourself and cultivate supplicants, because you are the one who is creating the chaos and the erratic nature of policy. And you are the one who, if properly genuflected to and praised and strike a deal that makes the President look good, well, then you'll get some relief from all the chaos.

 

So I think that's an important part of Trump's governing style as well, as distinct from maybe how he politics about trade. And somewhat in some respects, that's even an even darker view than the one you've advocated. But it does fit with many of the things Trump does. It also aligns with the notion foreign governments, immigrants and the like, they're easy scapegoats for the grievance part.

 

They don't have as much of a stake as the formal electorate in or that stake is not the right term. They don't have as much ability to push back politically. And so that also makes them a convenient target. And it's somewhat at the mercy of Trump's blessings or relief.

 

So that's how I see it, it's not inconsistent with what you say, but it's another layer on top of it.

>> Richard Baldwin: Sure, no, I wouldn't disagree with that at all. In some sense, the things he's doing are useful in part because the supplication is essentially foreigners admitting that they have to pay tribute to the United States.

 

And Trump in his erratic imposition, removal, delay, rising, lowering tariffs, is essentially showing that America's in charge. And every time he does something bold that makes the globalist elite upset, that's a victory in itself. And then when he off to avoid some sort of chaos or market meltdown, he looks wise at the end.

 

As you said, supplicants, all they have to do is make sure he has happy headlines, he declares victory and everybody moves on. But in essence, if you're thinking that what he really wants to do, for example, is balance the trade deficit. Or he wants to re industrialize America, then this sort of volatility is doing exactly the wrong thing.

 

But if you think that what he really wants to do is get even and strike back, then all this uncertainty makes perfect sense. So the supplication is actually part of the goal of the policy, but notably it's not an economic policy.

>> Steven J. Davis: Yeah, so we're totally on the same page about the contradictions and the counterproductive elements of Trump's trade policies.

 

They won't achieve the objectives that he purports to be pursuing.

>> Richard Baldwin: Stephen, can I just jump in there?

>> Steven J. Davis: Yeah.

>> Richard Baldwin: One point. So, I think an interesting discussion about this chaos, which was on my journey to the grievance doctrine, was whether this chaos is driven by incompetence, malevolence.

 

And there's kind of two schools of thought that there's a kind of Machiavellian thing going on where he's using this as a fog for doing other things or as a mad dog strategy, very wisely increasing his negotiating leverage. That's the sort of Machiavellian view of it. Or he simply lives in a wishful thinking bubble this term anyways, this administration, and he whispers about trade policy, the people around him tells him it's a genius level idea, they turn it into trade policy, it goes out into the real world and strikes reality, and then he has to change it.

 

So that's the kind of incompetence or to undermine the process way. But I think if you really want to understand the fine tuning of why he does what he does, it's clear that he never does the kind of staff work or rarely does the kind of staff work that I was in the White House, as you mentioned, with George Bush Senior.

 

Everything that trade policy that came out of the United States went through layers of lawyers and economists and trade diplomats, State Department. What would it do? So everything that came out was sensible. He may not have agreed with it, but none of it was flippant or had to be reversed immediately.

 

Whereas I think with Trump, there is none of that process and it's sort of winging it. And his instincts are what's driving this together with a whole circle of yes sir advisors who tell him everything he says is wonderful.

>> Steven J. Davis: So let me just add a little bit to that.

 

I wanna make a distinction between economic competence and political economy competence in the sense of maintaining power as a populist. Okay, so you can has a long history of economically incompetent populists who nonetheless maintain political power. Effectively for some time. And I see Trump somewhat like that. So there's a sense in which the economic competence is actually not the near term goal.

 

Eventually, enough economic competence may undermine support for Trump. I think a little bit of that has happened already. But for him, that's not really what he's all that concerned about. It's political competence in the sense of maximizing his own personal power and perhaps to some extent, US Power on the global scene.

 

I don't think he's doing an effective job of that either. But you mentioned about America. Trump wants to demonstrate America's power and America's weight in world affairs, but he also wants to demonstrate his personal power in American affairs. It isn't just, it even isn't so much primarily against foreigners.

 

I mean, he wants Apple's Tim Cook to come and beg for relief so he can manufacture his iPhones in a, in an efficient way so you can go on and on with the list. It's really, I think, about Trump's personal power and maybe that of his immediate family and cronies that motivates much of what he does.

 

As for his advisors, I don't think there are definitely some yes men. There are definitely some people there who have loopy views, to say the least. But I also think some of his advisors are, especially in his first term, maybe less so in his second term. They're dealing with a president who has all kinds of impulses and contradictions that immediately get transformed into policy without the kind of careful vetting that you described.

 

And they're trying to craft some kind of coherent messaging and strategy around that that often gets undermined by the president himself. You can see this very clearly in HR McMaster's book where he discusses his experience as a national security advisor in the first Trump administration. It's how I see some of what the US treasury secretary currently tries to do.

 

They're working mightily to try to paint some coherent picture here in terms of the economics or the grand political strategy. I don't think there really is one. And they're doing their best to deal with that as at least some of them are as they seem as they see fit.

 

So you may want to respond to some of that, but I also, before we move on, but go ahead.

>> Richard Baldwin: I think what you say is absolutely correct. The only thing I would add onto it is that some of the advisers around him are instrumentalizing the chaos to concentrate power in the White House in a way that the media is not really noticing.

 

They're chasing one right in LA. They're chasing a meeting with China in London. One of the things when actually some very serious shifts in the distribution of power in Washington are happening. So I think it's also possible that there are people around him who are using his sort of chaos generating nature and his embrace of chaos, really, which has other reasons as well, but they're also pursuing it to do other things.

 

And I think that is something to keep in mind, if anything, I mean, this is above my pay grade. I'm an economist, so I talk about trade policy, but some of the more worrying things that are going on in Washington aren't trade policy. It's this kind of concentrating power in the White House in a way that hasn't happened, at least according to my history lessons, basically not in peacetime.

 

 

>> Steven J. Davis: Yeah, that is worrisome. And I think Trump is the most extreme case of that. There's been a drift in that direction in the United States for a long time. Recall Obama with his pen, the first Trump administration. The Biden administration, they pushed the boundaries as well, but Trump too, is taking it to a whole different level.

 

So we may come back to that theme, but I wanted to pick on something where I think you and I have somewhat different views and that at least around the edges, this is based on reading your book. And that's the question of will American protectionism last? You, at least in the book, come across as firmly convinced that the answer is yes.

 

I'm not so convinced, but let's have a discussion of that. So why don't you explain why you think American protectionism will last and then I'll say a few words about why it might not last.

>> Richard Baldwin: Okay, good. Well, so let me start out by saying I hope it doesn't last.

 

This is a prediction, not a wish or a policy recommendation. So my dad, for instance, worked as first chief economist of the STR and the Kennedy administration, preparing the United states for the US Kennedy Round. So multilateralism and trade openness is a deep history in my family. So, anyways, this is not new, and I think it's gonna last.

 

So I think there is a tendency to think that Trump has completely broken the mold. But I think the way I view it is from Reagan to Bush Jr. America was super pro trade. Democrats, Republicans, Democrats, Republicans, so much so I was a voting Democrat but had no problem whatsoever working in the Bush senior White House.

 

Because there was no difference between Democrats and Republicans on trade policy, with tiny little differences here and there. And it was Clinton who pushed NAFTA, it was Clinton who got the US into WTO. Bush Jr had all sorts of free trade agreements that he loved. Then came the global financial crisis.

 

Now that had lots of downsides, but especially the Great Recession hit the American middle class very hard. And I think it started what you might call the grievance narrative or victimhood narrative or the idea that the system was rigged against the American middle class because the car companies got bailed out but not the car workers.

 

The banks got bailed out and none of the bankers went to jail. But people who lost their homes because of lack of mortgage payable, they did not get paid out. So the idea that the system was rigged against the middle class really started taking hold. And that's why Obama, who is ultimately a Davos man like everybody else in the traditional Democrats and Republicans, he had to treat trade as if it was a four letter word in his first term.

 

So in particular, he put on ice all the trade agreements that Bush Jr had started and he had started tons of them. He also was the first one to block the appointment of a WTO appellate judge, which was the start of a long process. And people will take disagree as to what exactly he was doing there.

 

But in any case, it was the beginning where the US was no longer forward leaning leader of trade liberalization and the WTO. Obama's second term, he did allow the TPP to go forward, and the negotiations got done, but he didn't use the capital, he had to get it over the line.

 

So then when Trump came, he killed it. So he went from trade hesitancy to trade hostility under Trump. Now in my mind what's happened here is the grievances of the middle class in America, which are actually real and long lasting, couldn't be addressed through something like Canadian social policy.

 

And so the alternative was to blame globalization. And when Trump came, he would fit right in with his idea that trade was the cause of many ills, that was trade hostility. And when Biden came in, although he also was one of these post war multilateral skies, he couldn't be pro trade at all.

 

He was engaged in worker centric trade policy, if you remember. And he also continued to block the judges. And for example, the last year in his term, he didn't pay the WTO dues that the US Had. So this was not, and he also removed very few of the tariffs that Trump had put on.

 

So we went again from trade hostility of Trump one to trade hesitancy under Biden, but he also continued to attack China in ways that was deflecting blame for the middle class malaise, as I view it. And then Trump too came back in and all bets were off. So, if this goes back to 2008, 2009.

 

So I don't think it's a new thing. And I think what I think about is would things have been that different if Harris had won instead of Trump? And I think probably we would not have seen such an enormous disruption of the trade system. But I think she would have continued Biden's more or less trade-hesitant, not signing any free trade agreements, not really supporting the WTO, and in particular continuing the sort of using, weaponizing trade against China.

 

So I think in some sense, nobody could run for president now and said, let's go back to the Clinton days when we let China in and we cheer that that's a good thing. Or we support the WTO or we go back to liberalizing trade as a good thing.

 

I don't think anybody could get elected as president under that. So therefore, I think it's here to stay.

>> Steven J. Davis: Okay, so let me respond a couple aspects of that. So I agree with your diagnosis of the US Shift to trade hesitancy, where I think Donald Trump was a departure.

 

And you said this in a different language, but I want to amplify it, is the shift from trade hesitancy, which I think would have continued if Hillary Clinton had defeated Trump in the first election. Or if Harris had defeated him in the second Trump victory. The shift from trade hesitancy to trade hostility and especially the complete destruction of an ignoring of US Treaty obligations and so on under Trump, too, I think that is just partly an aberration that Trump got elected.

 

He has these peculiar views, and I think there's a whole host of, it's worth remembering that the 2016 election was a squeaker. Many things could have been slightly different, and Trump never would have been president the first time and hence not the second time. And we would have probably continued with a regime of trade hesitancy.

 

In my mind, it's an open question as to whether Hillary Clinton would have found some way to continue the US Involvement in the Trans Pacific Partnership agreement and eventually endorse that. With no doubt some kind of changes that, at least on the surface, look like bigger US Victories.

 

And then in the second look, Trump won by a large margin in the second election, but I don't think it's at all obvious that he won for reasons related to trade grievances. In fact, I think that's unlikely. So I just wanna remind people of the host of things that contributed to Trump's victory that had little to do with trade policy, starting with Democratic efforts to foist a cognitively impaired president on the American people.

 

And when that failed, the party elite basically anointed a weak candidate who had a dismal track record in previous presidential elections. When he turned to the issues, there was a southern border that had ranged from overly porous to out of control during Biden's presidential term or during most of it, resulting in millions of, let's call them, either unlawful or irregular.

 

They were deemed lawful, in many cases by the administration, irregular immigrants that resulted in highly visible strains in some communities. That was overplayed by Trump and by some media circles, but it was a real phenomenon. There was obvious Democratic sympathy for violence and civil disorder in the wake of the George Floyd murder, support for Defund the police and related nutty ideas.

 

There is Democratic support and sympathy for other ideas that most Americans regard as simply crazy. Including the idea that transgender male athletes have a right to compete against girls and women in athletic contests. And then inflation, inflation, inflation, eating away at real incomes. And I go through this whole list because I left off this is probably a lesser issue for most people, but a serious issue for some who are concerned about national security and foreign policy.

 

And that's the disastrous, humiliating exit of US Troops from Afghanistan. So I didn't put trade in the list there. You could add trade too, but it's just one of many things, and I don't actually think Trump sees it that way. I don't think you can read the election as some kind of mandate for some massive shift in US trade policy.

 

Now, that said, aberrations have consequences. I think the fact that we got Trump once and then twice is something of an accident. There were some deeper structural forces that he tapped into, but it's something of an accident. And accidents can have persistent consequences. There's path dependence. And there's no doubt that Trump has cultivated a much greater sense of grievance around trade policy issues than would have been the case.

 

Otherwise, I think it's an open question as to how durable those will be. As you know, there are efforts underway in the US Court system to essentially say to Trump, look, most of your tariff hikes were unlawful and in some cases, perhaps unconstitutional in their abrogation of congressional authority and so on.

 

So we'll see how that plays out. But I don't see the United States as fundamentally as protectionist as you do. I think it's more trade hesitant, as you described it earlier. And that means there's room for skillful political leaders to navigate our way towards productive trade agreements, which is what I think Clinton did during his presidential term, to his credit.

 

And it wasn't an easy political challenge then, either. But for all his flaws as a human being, he was an extraordinarily skillful politician and had some sense, I think, lacking today, of what constitutes a productive economic policy. So that's kind of one dimension along which I disagree a bit with your assessment.

 

There's a second dimension, but I just said a lot there. Let me come back. Let me see if you want to respond to any of what I just said.

>> Richard Baldwin: Sure, of course. I think what I agree with is that this Trump extreme hostility is unusual, and I think it has very little support in the Republican Party, certainly not the Democratic Party.

 

But it has an emotional resonance with a certain base. So I agree with that. It'll be hard to continue at that level at that pace. I mean, basically, he declared war on the world trade system. It's not a trade war. He broke every trade promise America had ever made to anybody at any time in any forum, and it then acted as if there were no rules, and that that was a plus with this idea that those rules were agreed by the global elitist traders in America.

 

In guiding the system, what most of us think about was enlightened self interest, guiding the system, growth, prosperity for everybody. For him, those were treaties moves. So breaking those rules is actually a win, not a cost. So I think that's so extreme that that's not going to continue.

 

But as you pointed out, it'll be very hard to get back the trust. Trust comes on foot, leaves on horse and there's very little trust now in the US especially since this was Trump's second term, not some one time aberration. So that I think is is an issue.

 

So I can see that maybe the next president could think that probably restoring America's role in the trading system would be a good thing for America and could sell it as such, as long as it didn't involve signing free trade agreements with low wage countries or some hot button issues like that.

 

So I agree it could dial back to trade hesitancy. My point though was that the world has for two generations relied on the United States to be the leader of the world, the trading system, not just somebody who goes along, but to take the lead in getting things done.

 

To start the Doha Round, to finish the Doha Round. That was the US who did that to sort of move towards the joint studies initiatives, which is these smaller groups working on issues like plastics or fishing. That was also US leadership. And that kind of leadership I don't think will be popular for the foreseeable future because it reminds the middle class that, you know, this idea that they need to be that they were victims of globalization.

 

Despite that, the elite are pursuing trade liberalization or supporting the trade system. So I think it's that middle class perception which is now locked in, that it was globalization that did it to them, rather than automation or any other big trend that that will be very hard for any American president to reverse.

 

And therefore the US, we're in a sort of post American leadership era. So maybe that's a refinement on protectionism as permanent. But I think America has, at least for the foreseeable future, stepped down from leadership of the world trading system. Would that fit?

>> Steven J. Davis: Yeah, a couple things.

 

One, look, both of us share the view and I want to make it explicit in case it's not already completely evident, Trump's trade policy, and Trump too has been tremendously destructive. I gave some remarks at Hoover, which recently, a month or so ago, which you were kind enough to cite in your book, and I titled them Destructive Trade Policy.

 

It's just astonishing what has happened. As you pointed out, the US has been the leader in building and sustaining and supporting the global trading order throughout the entire post World War II era and has now just treated all of that as a dead letter. And it's more consequential than any other country behaving that way.

 

Given the history of the US role, and given at least in my judgment, there's no obvious replacement for the US There can be partial replacements from Europe and perhaps China in some respects, but. But no other country is presently in a position to play the role that the United States has historically played in the global trading order.

 

Something profound and deeply important for global economic prosperity and US economic prosperity has been lost, as you also point out. And here's where I agree, but I will also diverge a bit from your reasons for pessimism. The US is not going to easily regain the trust that it had among trading partners around the world, even if we get a new president who has a less hostile stance towards trade.

 

Because it's now been revealed that at least for a period of a few months and perhaps indefinitely, and that remains to be seen, but at least for a period of a few months. There aren't effective restraints on the arbitrary exercise of US executive authority in the trade policy arena that can inhibit a president from just ignoring US treaty obligations and other trade related agreements that it's entered into.

 

To your metaphor about trust arrives on foot with a slow slog, I would add, and leads can leave on a speedy horseback. That metaphor is just right. So, it'll take a long time to rebuild that trust if it happens. I also think It'll take internal US reforms that make it evident to the rest of the world that we can't repeat trust Trump too.

 

We're a long ways from doing that right now in the United States. So to me, that's the reason to be somewhat pessimistic. It's less about just domestic US Concerns. Here's where I wanted to get into a second line which I disagree with your diagnosis of what's happened and I think to the American middle class and what you call the middle class malaise.

 

So you, I'm gonna poke at you a bit here. So in your book, one of the things you point to as support for this notion of middle class malaise in the United States and a failure of the US Social safety net to address those concerns, you point to a Pew Research study.

 

I went and looked at that, sure enough, if you go look at that, you see that if I'm trying to remember the dates, I think since the 1970s, since 1979, if I remember right, it might be some other year. In the 1970s, you see a decline in the share of American households that are working class, as the Pew Research Institute defines it.

 

It goes from something like 61% to 51%. And you can see that as a hollowing out of the middle class. But 80% of that was people moving from middle income to high income groups. That doesn't really sound like such a bad thing. Then the same Pew study also points out that real incomes have risen sharply since the 1970s across every income decile in the United States, including their own definition of middle class, which is a somewhat slippery concept that it's risen 60% in real terms.

 

By that I mean adjusted for inflation. That doesn't really sound to me like on narrowly income grounds, there's been some kind of big headwind against the American middle class. The other, in my view, somewhat misleading narrative that you propound in the book on these lines is the notion that somehow the United States social safety net hasn't responded.

 

I think that's a misconstrual of what actually happened as opposed to the political rhetoric around what happened here. I refer to work by the CBO, and there's a September 2024 study by the CBO that demonstrates quite convincingly the considerable expansion of the redistributionist aspect of the American social safety net since 1979.

 

They're tracing 1979 through 2019 or early 2022, I can't remember which. But it shows there's a great deal more redistribution through the American social safety system. By that I mean Social Security, Medicare, Medicaid, SNAP unemployment insurance benefits, and so on. So, I realize that runs counter to people say, well, Ronald Reagan somehow completely engineered a sea change in the role of government in American society.

 

But that's just a false narrative. So I don't actually think the malaise in the American middle class, to the extent there is, one has to do either with slow real income growth or a failure of the social safety net to expand. Hasn't expanded as much in Europe, but it's expanded a lot in the United States in the last 50 years.

 

There are other failures of the American system that we might wanna get into, but it's not that. It's not the one that I see you as primarily attributing the failure to.

>> Richard Baldwin: Okay, so let me take those. So first of all, the spending on the social policy has gone up, but to a large extent because medical care in the United States has become so expensive compared to other countries.

 

So the outcome though is worse. So the US life expectancy, which is quite a good, neutral, hard to debate measure of overall social well being because it affects your treatment and nutrition from the day you're born to the day you die, and also of millionaires who can afford, and that's a lot of people these days, millionaires who can form amazing end of life treatment extends them for five or ten years.

 

That doesn't change the bet. So I think the idea that the spending has gone up misses the point of that. The real effect hasn't. So I mentioned life expectancy in the US is distinctly growing slower than the whole rest of the advanced economy. In fact, China just caught up to the US Believe it or not, China has an income above the level of Peru.

 

The other is all the social ills. For example, the opioid epidemic, the obesity epidemic, frequent school shootings, what Ann Case and Deaton call deaths of despair, suicides, alcohol and drugs for young men, especially young white men especially. The lack of marriage and increase in out of wedlock births, the increase in mother mortality, we can go on and on.

 

And the social ills in the United States are distinctly higher than they are in any other advanced economy in the world. So if you measure the support to people who are in distress, and that distress in my view came from a globalization shock and an automation shock that hit in the late 80s, early 90s, which I call globotics.

 

So it's automation through ICT and that same ICT turbocharged offshoring of manufacturing jobs and both of them hit people who work with their hands on tools, but helped people who work with their hands on keyboards that led to this great divergence and a sort of schism. I would still stick with the idea that the American middle class feels at least like they're suffering.

 

And if you compare it to not in terms of spending shares, but in terms of outcomes, I would argue it's the same way. And let me just throw one more thing in there that it's not about safety nets necessarily. It's also about active labor market policies that help people adjust to the shocks that come along.

 

And I would point out, for example, that in Europe there is a populist narrative, but it's against immigration, not globalization, because the policies have allowed people or help people shift out of jobs where you have your hands on tools to jobs where you have on keyboards. They've done that or supported them in between.

 

The migration in Europe is a different issue. And that's where the kickback has been. So those are my statistics that I still think middle class malaise, as I'd like to call it, is a dominant force in America.

>> Steven J. Davis: So a few things. There are a lot of social ills in the United States.

 

They're concentrated in certain segments of society where the outcomes really are quite bad. I agree with that but that's not due to a lack of spending on social safety net programs. It sounds like we've converged. And it's not because the American middle class has seen declining real incomes, they've seen rising real incomes.

 

It's not because the social safety net is deteriorated, it is the case that the US achieves remarkably inferior outcomes in the healthcare arena, given how much we spend both through the public sector and the private sector. It's not that the United States spends very little through the public sector or direct support for people through healthcare.

 

It spends a lot and probably spends a comparable amount or more to many European economies, and yet it achieves very bad outcomes. You mentioned the opioid academic, and that has been a serious issue in the United States. Again, it's an example of social ills. There's a new NBR working paper out which I mean to read.

 

All I've done so far is glance at the abstract, which claims that we know there's a lot of spatial variation in the severity of the opioid addiction crisis in the United States. But this paper traces much of that to what it calls quasi exogenous variation and prescribing patterns that by itself is tied to some extent to Medicare and Medicaid policies.

 

So, I think the point and the other social ills you mentioned, yes, people who work with their hands have not done well in the United States, men in particular. But that's partly because of a failure of our public education system to respond to the really profound changes in the kinds of skills that will serve you well in the labor market.

 

My view summarized briefly many public sector failures in the United States that contribute to these social ills you're describing. But it's not the lack of spending in that sense. There is some convergence between your views in mind. So, let me see what let's talk about. One of the things you do in your book, you talk about where we might head next and maybe, maybe we can shift to that.

 

And so you sketch out three scenarios for and by we, I mean the global economy, the global trading system. You sketch out three scenarios. So let me let you flesh those out a bit, one you call managed multilateral drift. I'll let you define it. Fighting trade blocks and reglobalization without America.

 

I may add a fourth one, but I'll let you describe those three.

>> Richard Baldwin: Okay, so there is an initial one, which is the 1930s redux. And I dismiss that as unlikely but something scary and to worry about because in trade wars, like regular wars, controls first thing you lose.

 

So who knows where this is gonna go. We should be worried about it, but I don't think it's gonna happen. The second is this multilateral drift. And I think that's what's actually happening. So the Trump tariffs were like a stone thrown into a pond. It caused ripples and those ripples are changing trade policies all over the world in real time.

 

So just since April 2nd, which is lightning speed when it comes to trade talks, which normally take years, the UK exceeded to the CPTPP. After a long drawn out negotiations, the UK signed a deal with India after.

>> Steven J. Davis: Just define that for people, CPTPP.

>> Richard Baldwin: Sorry, yeah, that's the Trans Pacific Partnership got done after Trump withdrew from it.

 

 

>> Steven J. Davis: Without the US.

>> Richard Baldwin: Without the US yeah, Japan led a herd of countries, a consensus to put it back together, strip out a few things that the US wanted and then they called it the Comprehensive Partnership and TPP. So it's essentially a number of ASEAN countries, including Vietnam and Japan and then now some more countries are joining.

 

In any case, that was a big deal that a European country joined that because it sort of made it more of a global bloc than just a regional bloc. And it looks like that that's going to expand some more because people who used to be exporting to the US, those exporters are pushing their governments to get better market access elsewhere.

 

So that led to the final push that got the UK to make the compromises to actually get in the final compromises that India and UK made to sign a free trade agreement. And recently China and Brazil did a free trade agreement that had been long and lingering. But this extra push now that the US market is closed is leading exporters to lobby their governments to open.

 

So that's what I call domino liberalization. And that has its own logic because now that Brazil has a special deal with China, other Latin American countries will also want it. So probably we'll get a China, maybe not Argentina, but Uruguay, some of the other ones. But on the other side, the same kind of trade deflection can lead to Import surges in third countries.

 

For instance, with electric vehicles, the US shut them out of the US, Canada put up tariffs to prevent them flooding into Canada. Then Europe put them up to prevent them flooding into Europe. So this kind of cascading protectionism can come because of the trade deflection, but this time on the political activism of importers who see an import surge.

 

So we're seeing a bunch of this higher tariffs as a result of some trade deflection and more trade liberalization. But all of these so far have more or less respected WTO rules because there's many, many ways to raise tariffs under WTO rules. You just have to go through certain procedures.

 

They have to be limited to particular complaints in particular countries. But in any case, you a perfect right to put up dumping duties against Chinese exports that used to go to the US for instance. And as long as people stick to that, it's still multilateral, maybe not as central as it was.

 

The second one is sort of a scenario.

>> Steven J. Davis: Fighting trading blocks, you call it.

>> Richard Baldwin: Yeah, fighting trade blocks is the second one. It's a scenario that people have been talking about for a very, very long time, but way back to Jagdish Bhagwati. And the idea now in the modern version is that there's sort of a US centric bloc which Canada and Mexico would have to even reluctantly be part of and could pull in some more countries who are heavily dependent upon the North American market.

 

And then there'd be the European bloc, which is Europe's by far the largest trader in the world, if you include the trade inside, and it's about the size of the US if you include just external. But there's a whole bunch of countries all around Europe who would come to that trade bloc.

 

And then there's a Chinese trade bloc, which is defined by these industrial supply chains. And in this case, WTO rules would be broken as the blocs start to fight with each other. So, for example, if the US and the EU deal goes very badly and Europe starts retaliating with grievance against the United States, violating rules, not sticking to the W2 rules, that could trigger some fighting trade blocs.

 

And moreover, the US is getting countries it does trade deals with, in particular the UK, to try and strip China out of their supply chains. And China has said that they will retaliate against that kind of thing. So again, you might see, if EU agreed to that sort of thing with the US, you might see China retaliate against the EU, and then the EU might retaliate against China and we'd be off to the fighting trade blocs.

 

So that's not quite the 1930s, but it's not a good situation whatsoever. And in any case, the WTO system is dead because lots of people are ignoring the rules. Now, the last one is kind of, if you cast your mind back to before the global financial crisis, there was a narrative of merging mega regionals.

 

So there was a time when the WTO wasn't doing so well. The Doha Round had died and trade liberalization seemed to be going through deep regional trade agreements. And there was a whole noodle bowl or spaghetti bowl of them. But then they started coalescing together. And there was one narrative of the Trans Pacific Partnership, which would knit the US and the Pacific into the ASEAN and other countries.

 

And then there was the Trans Pacific. Transatlantic Investment and Trade Partnership TTIP that would have knit together the EU and the US. And so we would have very soon come to a situation where we had these mega regionals which were writing the rules underpinning trade and global value chains now that could be reunited.

 

It stopped when the US stopped being a leader on anything and withdrew from those two major agreements. But it's possible that if the US decides to have high tariffs and people retaliate against the US just becomes more closed. It's possible that that same incentive of smoothing out the trading system and modernizing the rules through regional trade agreements, that could restart.

 

So that's re globalization without the US and I don't know how likely it is, but if the US isolationism goes on long enough and gets extreme enough, I think that is what will happen. Because the rest of the world kind of likes the world trading system. Everybody has its beefs and everybody has beefs with everybody.

 

But the rules kept the beefs into commercial disputes and everybody could continue growing, innovating, trading and investing and all that good stuff. So I think that might snap back. So I think scenario one, drifting multilateralism is actually happening and will probably continue. If it continues long enough, I think it'll go into the reglobalization of the US.

 

 

>> Steven J. Davis: Okay, two things, first, we do have, fortunately now, 80 years of history of a gradually globalizing economy that has coincided with and in my view. And I think your view, been a main driver of tremendous prosperity, really unlike there's been a growing global economy since the Industrial Revolution.

 

But the last 80 years for the world as a whole have been the best. And I don't think it's a complete accident that happened as the rules based trading system was growing. So that's kind of point one. And people, Donald Trump excluded, but many people around the world see that and recognize that, including political leaders who want their own countries to thrive economically.

 

So that's point one. Point two is, and you talk about this in the book, and I think this is a very important point that is not yet penetrated much of the policy discourse in the United States. You point out all three of these scenarios have important implications for the United States, which you kind of summarize in the term lost markets and lost leverage.

 

And the reason that the lost markets come about is if the US just stands pat and does nothing while other countries are reducing trade barriers amongst themselves, the US is effectively disadvantaged. Because if you can now buy cheaper cars from South Korea, then it looks less attractive to buy cars from the United States just standing back.

 

This is true in all three of your scenarios. To a greater or lesser extent, the US will be disadvantaged by standing back in direct economic terms, but it will also lose, and this is your lost leverage point. Much of the geopolitical leverage that it has that China now has because it was such an important trading partner for countries around the world.

 

So on both those scores, the United States is gonna lose if it just stands back and does nothing. I think partly for that reason that's eventually going to dawn on and I think can become widely understood in the United States. May take a long time, but it'll happen.

 

And it's one of the reasons why I put another scenario on the table. It's not the only reason, I'm less pessimistic about the protectionist element in the United States and you are, as we discussed earlier. But I think the fourth scenario is that the United States reengages in the sense not under Donald Trump for sure.

 

But where a future US administration seeks to resume a leading role in a rules based trading system and probably tries to, and this will be partly for political reasons, partly for underlying economic reasons. Modify and reshape the WTO or a WTO successor in directions that are more to the liking of the United States.

 

Top of the list there is probably more sensitivity to national security concerns. I think there has been a durable shift towards extreme skepticism regarding the intentions and the effects of China, the People's Republic of China, on the global economy. So there's going to be a push to in the United States to treat China as a less privileged member of any trading club in the United States.

 

We could go on. There are other things I think the United States might push for or should push for. But I've already said a lot and I don't wanna take the conversation in a whole new direction. So I just wanna see, you didn't put that four scenario as even in your low probability category.

 

It strikes me as unduly pessimistic.

>> Richard Baldwin: Yeah, so when you said you believe that a future administration could realize that they've lost this leverage and geopolitical leverage, which helped the United States in the war on terror. It helped the United States in the war on drugs, it helped the war United States in the Cold War.

 

So this kind of leverage had concrete benefits the United States, which is why we called it enlightened self-interest. It was not a charity exercise for the United States and it helped Americans do business all over the world. It spread the soft power, etc. So it's possible that they've realized that.

 

And let me just put in a little color underneath what you're saying or threads to get there is I think it's gonna be pretty clear by the end of 2025 and maybe 2026 that tariffs are a terrible way of fixing any of these ills. It actually hurts the middle class because so few of the middle class work in jobs that are protected by tariffs, which are goods producing sectors.

 

And so many work in service sectors where it's simply a cost, it's a tax rise for them. So I think that will back off. And so the idea that tariffs are the most beautiful word in the day may actually come off the wheels may come off that while Trump is actually president.

 

I could say.

>> Steven J. Davis: Can I just add to that, like 100% agree with that. But on top of that, the kinds of terrorists that the Trump administration has emphasized, or in many respects particularly perverse. So tariffs on intermediate inputs, steel, aluminum imports, of which there's something like 200,000 people who work in steel and aluminum production in the United States.

 

And we're driving up costs for all the other manufacturers, exporters, and producers for the domestic market who make use of steel and aluminum inputs. That's just nutty if you're given the stated goals of the Trump administration. So even if you were trying to design some sensible import substitution policy, which many countries have tried and failed, maybe a handful have actually had some success with it, but not very many.

 

You wouldn't design it that way. So that's kind of nutty element number two. In addition, you gotta have nutty element number one. And then something we've also talked about before, all of the uncertainty and the lack of any reason to trust even the trade agreements that Donald Trump enters into.

 

Cuz one of the first things that he did was tear up, effectively the USMCA, which he negotiated with Mexico and Canada in his first term. So you, as a business person, won't be interested in making investments either in production facilities in the United States or in distribution facilities that run through the United States for purposes of domestic manufacturing production or exporting abroad.

 

So this is an extremely ill conceived trade policy. Even if you were to accept the premise that we ought to have high tariffs on some imports in order to support the growth of manufacturing activities in the United States, even by that standard, this is a terrible policy.

>> Richard Baldwin: Absolutely, I couldn't agree more.

 

And I think that is one of the things that led me to think about grievance was driving it rather than he talks about.

>> Steven J. Davis: Clearly, economic logic is not driving it.

>> Richard Baldwin: It's not driving it cuz everything he's doing with the tariffs is actually de-industrializing America. So let me go with that to sort of underpin.

 

Let me lay out a scenario where it might go your way, but I'll lay out another scenario where it might diverge even more. So let's say that comes around July and all these deals are supposed to be done, all the tariffs go down to 10% even across the board.

 

10% doesn't disrupt the world trading system. And if everybody gets 10%, Trump is implicitly following the MFN principle, the non discrimination principle. So this idea that everything, as long as they stay at 10%, it wouldn't be the end of the world if that's.

>> Steven J. Davis: And we're confident they'll stay at 10%-

 

 

>> Richard Baldwin: And confident, that's right.

>> Steven J. Davis: That's the other thing, they gotta be confident they'll stay there.

>> Richard Baldwin: Yeah, but then if he used the tariffs, he declared victory and went home, these are the tariffs, then I could see how people in the next administration might keep the 10%.

 

Which would be largely offset, by the way, by the dollar. But in any case, they might then try and re engage and help American multinationals or maybe they would try and organize a coalition against Chinese subsidies or do something like that. But on the other hand, Trump has talked about this Miran Mar-a-Lago Accord where he's moving the craziness into the financial system, the dollar in particular.

 

And in the bill, I don't know if it's still there, but the big beautiful bill has a section 899 which would give Trump a whole new arsenal of tools based on taxation of domestic of foreign investors inside the United States, based on unfair tax treatment of Americans abroad.

 

Now Trump defines the value added tax as unfair. And basically America and one or two other countries are the only ones who don't have value added taxes. So it could essentially, with this Section 899, put taxes on anybody, anywhere, including holders of T-bills, of 10-year Treasuries, and there's part of this Mehran MEMO.

 

So what I'm a little worried about is that if the tariffs settle down and he realizes that they really are not a way to be popular in the United States, that he would turn to this foreign taxation stuff, which would be equally populist, you know, lashing out at foreigners, give them equal unilateral power.

 

Like you said, it may be just about the supplication in his personal power. That would then start a whole new sequence of loss of trust in American economic leadership, so that's what I'm worried about. But re-engaging, if it stays at 10%, I can see them starting to re-engage.

 

But what I don't see is any American president standing up and say, let's go back and have lots of free trade, especially with the countries we don't have free trade with, which is the low wage countries. So that's where I would leave it at.

>> Steven J. Davis: Okay, so two notes.

 

First, just your very brief reference to 10% uniform tariffs on the United States would affect the dollar. And what you're referring to there is the, and we're not gonna explain the logic of it here now, but there's good reasons in economic theory, and we've seen this play out in practice.

 

That a uniform tariff hike will put upward pressure on the exchange rate value of the dollar, which will to go a long ways to undo the effects of the tariffs on the price of foreign goods relative to domestic goods. So that's what you're referring to there.

>> Richard Baldwin: Yes.

 

 

>> Steven J. Davis: Second note, the previous guest on this podcast was Ken Rogoff.

>> Richard Baldwin: Okay.

>> Steven J. Davis: The podcast is titled Dollar Dominance, and we talked about some of these issues. We didn't get into the details of Trump's antipathy to the vat. But you're quite right. This is another domain in which Trump's policies, including trade policies, but not just trade policies, are eroding the dominant position of the dollar in the US Monetary and financial system.

 

The trade policy is part of that. I discussed that with Ken Rogoff. That is another worrisome as of Trump's trade policy, it's also one that is quite counterproductive in that there are many benefits, there's some cost, but there are many benefits. And on that I think there are large benefits to the United States of having the world's dominant currency in the international monetary and financial system.

 

Not least of which that kind of goes hand in hand with the United States having the world's most influential and impactful central bank that conducts monetary policy to suit US economic interests rather than the interests of the rest of the world. We can do that in part because of the dominant position of the dollar.

 

So, yes, that's another line of concern about Trump's trade policy that intersects with our discussion today. And for people who are interested, I encourage them to tune in to my discussion with Ken Rogoff, also based on a recent book, your Problem.

>> Richard Baldwin: Ken is great and he's the guy you should talk to about that.

 

But let me just also point out that the market turmoil between April 2nd and April 9th, when Trump backed down on his tariffs, was a large part and the scariest part was in the bond market. And it was really a worry that the United States was no longer reliable economic governance and people were worried about the status.

 

So you saw the dollar dive, the bond prices dive and equities dive all at the same time in ways that sort of smelled like the second global financial crisis. And so the spillover between trade policy, when it's sufficiently crazy enough, and international financial things, I think is something to be worried about.

 

And if the tariffs don't redress the trade deficit, which it won't, it could end up leading to other things. So let me, if I can just on that, the other thing that's really costly to the United States of this is having to pay more on its debt. So right now the US has what, over $35 trillion of outstanding debt?

 

 

>> Steven J. Davis: Something like 38 trillion.

>> Richard Baldwin: 38, and it consumes about 20% of all federal tax revenue just simply to pay the debt. That's like a big credit card. Beginning every month, 20% of your income goes to pay the debt what you didn't pay off before. And if that goes from four and a half percent to 5%, that's like a huge increase impact directly this year on the budget.

 

And so I think the status of safe currency has some immediate effects. Now, I'm hoping that that is at least one of the things Trump thought about when he took his 90 day suspension and I hope he thinks about before he puts it back on. But that is certainly one of the things that Scott Bessett and-

 

 

>> Steven J. Davis: His advisors are thinking about that.

>> Richard Baldwin: Yeah, they don't know much about trade, but they definitely know a lot about the bond market. So that's, I think, hopeful that that kind of immediate punishment for irresponsible behavior in the financial sector will keep him from doing the crazy.

 

That's my hopeful me talking.

>> Steven J. Davis: Okay, so, yeah. Then the bond markets act more quickly than the Supreme Court.

>> Richard Baldwin: There you go.

>> Steven J. Davis: Another place to look to for relief. Okay, thanks Richard. This has been a really fun conversation. If we do get to a point where it looks likely that the United States will re-engage in an effort to be a global productive leader in the world trading system, we'll have you back and you and I can talk about what that might look like.

 

 

>> Richard Baldwin: Right, okay.

>> Steven J. Davis: So I might be back before then anyway, but certainly you'd be a good person to chat with about that.

>> Richard Baldwin: Sure, I'm going to do probably a couple more chapters after July, after this deadline, depending upon what happens, because I think that's another fork in the road for the international world history, I mean, economic history, that if, you know, if this diverges, it's one thing.

 

If it settles down, it's another thing. And I think it's worthwhile commenting even after July 9th, assuming he doesn't push it off to another 90 days.

>> Steven J. Davis: You may have to keep writing chapters for your eBook on this topic until the end of the Trump administration.

>> Richard Baldwin: And beyond, I hope so.

 

I write a column on LinkedIn every Friday called Factful Friday, and it used to be about economic history, but then when Trump started being a serious candidate again, I turned it over to trade. So every Friday I write something on trade. So that's-

>> Steven J. Davis: Okay, great, so our audience should check out Factful History.

 

And going back to my remarks at the beginning of the show, it's also worth checking out Vox EU, which you founded and are the editor in chief of, which isn't your stuff only. It's economists, thousands of economists who are writing short pieces that are designed to be accessible to a broad audience but grounded in research.

 

 

>> Richard Baldwin: Yeah, so the trick is that we get the authors of the research to write it up in a way that's accessible to anybody who can consider themselves an economist. So it's not for the average newspaper reader, but I lots and lots of people who go there first to see what the research is without having to read the whole whole thing.

 

So it's about two or three every single day, seven days a week since 2007. So there's a lot of them out there, thousands and thousands of them. One of the interesting things is you can actually see the history of thinking, for instance, on the global financial crisis or COVID, or any of these big shocks.

 

You can see how the profession evolved its thinking in real time. It's all up there.

>> Steven J. Davis: Okay, all right. Thanks, Richard. Great to have you on the show and take care.

>> Richard Baldwin: Take care.

>> Steven J. Davis: Thanks for the good work.

>> Richard Baldwin: Thanks. Thank you for the conversation.