Tuck Knowledge in Practice Podcast: Tariffs, Trade Wars, and the Global Risk Landscape

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Emily Blanchard: Tariffs on China on average were up to more than 30 percent. So now we're over 50 percent. That's most of what we buy. If I look around this recording studio that we're sitting in, these products are coming from all around the world. Everything's going to be more costly. And we'll talk about this, I guess, in a few minutes. It's not clear to me how our wages would increase by enough to offset those losses.

[Podcast introduction and music]

Kirk Kardashian: Hey, this is Kirk Kardashian. You're listening to Knowledge in Practice, a podcast from the Tuck School of Business at Dartmouth. In this podcast, we talk with Tuck professors about their research and teaching and the story behind their curiosity. Today on the podcast, we're fortunate to have Tuck professor and trade economist Emily Blanchard sharing her insights on the trade war engulfing countries across the world. Emily Blanchard is a leading expert on international economic policy and a research fellow with the Centre for Economic Policy Research. She served as Chief Economist of the U.S. Department of State from January 2022 to November 2023. Blanchard's research lies at the intersection of international economics and public policy. Her work explores how foreign investment and global value chains are changing the role of trade and international economic cooperation in the 21st century, and how globalization and education shape political outcomes and distribution of income within and across countries. An award-winning teacher, Emily, offers courses on global economics, international economic policy and cooperation, and competition in the global economy. She graduated with honors in economics from Wellesley College and earned a Master of Science and PhD degrees in economics at the University of Wisconsin-Madison. The last time we spoke for this podcast, you kindly shared a little bit about what it was like to be the chief economist at the U.S. Department of State, a role you served in during the Biden administration.

Kirk: In that role, one of the things you dealt with was the continuing effects of the tariffs President Trump levied in 2018 on steel and aluminum, as well as other imports from China. Fast forward to today, and it's safe to say the trade war has escalated. In the first few months of President Trump's second term, he has launched a series of trade actions that are significantly altering the landscape of global trade. There's now a 54 percent tariff on all goods imported to the U.S. from China. There's a 25 percent tariff on imports of automobiles and automobile parts. There's a 25 percent tariff on imported steel and aluminum. And finally, we're recording this podcast on Thursday afternoon, April 3rd, the day after Trump announced a series of reciprocal tariffs that respond to the levies that other countries impose on U.S. products. So, you've not only worked on trade policy, you've also done quite a bit of research on global value chains and trade wars. So, with that in mind, I'm curious if you could tell us how you've been reacting to what is becoming a global trade war.

Emily: Yeah. It's been a tough 24 hours for people like me and for me in particular. I try to look at the upside of everything. So, there is an upside to this trade war, which is that people are more interested in economics and thinking about trade policy in a serious way. And it's going to be great for my citation count. It'll also create a lot of data that I can use to write more papers. But beyond that, I see no silver lining. This is a really tough time. So, beyond the glib response that I put on everything when something scary happens, it's a fascinating time to be a scholar. This is a really sad time to be an economist. This is a really tough time for businesses globally, for American businesses, and businesses all around the world. I think this is going to be a very difficult period for the private sector. And most of all, I'm saddened as a citizen of the United States and a former diplomat. We are making, maybe deliberately, we're making life much more difficult for the vast majority of the world's population, billions of people who live outside of the U.S. borders. I think our diplomatic stature will be fundamentally forever changed after this action, even if we rolled back the tariffs tomorrow. And I'm incredibly sad for the American people. 

Emily: It is very clear that a lot of Americans have been struggling since the pandemic to come back from the pandemic. You know, aggregate U.S. economy numbers. You know, if we're looking at GDP, it's gone way up. If we're looking at real wages, they've gone up. But all of these are averages and aggregates. We know that so many families are not feeling like they're thriving. They're working really hard. Inflation has come down, but prices of course remain high. Right? We have price increases that went up dramatically during the pandemic and the post-pandemic recovery and just haven't come all the way back down. And we're going to make life harder for my neighbors, for people I grew up with, for people all around the country. And that's just a really tough thing to see. It's that the products that we want to buy are going to become more expensive. And now that we've expanded our tariffs from, you know, the 2018 tariffs were costly for Americans writ large and costly for American families, but let's be clear, they were applied mostly to merchandise imports, so stuff that we buy from China. Not to trivialize those tariffs, but that's actually a pretty small share of what we spend our money on in any given week. Right? Think about walking down the aisle of a grocery store. How much of what you're buying and putting in your cart is coming from China? Not very much.

Emily: So, the 2018 tariff shadow was relatively small as a result. Fast forward to today where we're talking about 25 percent tariffs on everything from Canada and Mexico. Now we've got a whole bunch of things that are coming from just north or just south of our border—fresh fruits and vegetables, grains, dairy products, proteins. That's just at the grocery store. Now, of course, we're also hitting merchandise imports from all over the world, our tariffs in China. Now if you stack them up, these new tariffs were already before the new announcement yesterday. Tariffs on China on average were up to more than 30 percent. So now we're over 50 percent new tariffs on most Chinese products. That's most of what we buy. If I look around this recording studio that we're sitting in these products are coming from all around the world. Again, so many of these electronics, they're pretty fancy. I see Mexico, I see Vietnam, I see Malaysia, I actually see in some of the really fancy stuff we've got Switzerland, which we just hit with a 30 percent tariff. That's where a lot of our lenses and high-end equipment is coming from Germany, likewise part of the EU. We've got 20 percent tariffs there. Everything's going to be more costly. And we'll talk about this I guess, in a few minutes. It's not clear to me how our wages would increase by enough to offset those losses.

Kirk: Yeah. Wow. It's definitely a scary time to be a citizen, it seems. Just because of the cost of things and the United States’ reputation in the world, I think is struggling a bit. But how do you think about this in kind of a structured way? You know, as a professor, I know, you know, that professors like to break things down into their component parts and think about them in very kind of framework-like ways. But how do you make sense of the objectives here, and how do you kind of match those objectives up with the likely outcomes?

Emily: Sure. Yeah. You know, it really helps me. I suspect it helps a lot of people, but it helps me to be as analytical as possible, especially at moments when there's enormous uncertainty and there's enormous change. And so, it can feel a little bit tempting to be overwhelmed or stick your head in the sand, but what I like to do instead is start breaking it down. So, let's do that. Let's break it down into a couple of pieces. First causes versus consequences. So, we'll talk about the consequences second. I'll start with just the causes. The choice, the cause here, the disruption, the way we think about it in economics, the economic shock we're talking about is a dramatic increase in U.S. tariffs, a minimum of 10 percent across the board with very few products exempted from that. And no trading partners are exempted, and then additional tariffs on top of that for all sorts of things, these reciprocal tariffs, but there are also some special levies for Canada and Mexico which seem to be going in special levies additionally for automotives, you get the idea. So where do those tariffs come from? What, why are we doing this? Got it! Here's the improved version with just the grammar corrected. So, there's apocryphally, it's often attributed to Biden, actually from long before he was president, but my understanding is that he's not at all the first person to say this. He just said it a lot; it was question judgment, not motives. So, I don't want to talk about the underlying motives that shaped some of the decision-makers in the White House to choose this tariff or that tariff structure, but I will talk a little bit about the judgment of like, do I think these tactics are going to work or what will the consequences be. And I think it's also worth taking a moment to think about the judgment in terms of the motivations. Like what is the problem that the administration is trying to solve with these tariffs? And I think we do ourselves a disservice when we talk about the tariffs and the consequences, many of which will be quite costly, without acknowledging the very real objectives that the Trump administration has. Some of this is laid out quite clearly, and in fact, it has to be to use some of the presidential authorities that have been used to levy these tariffs. But the Trump administration here has remarkably similar objectives and diagnoses of underlying problems, as did the previous Biden administration. And in fact, a lot of these line up with presidential administrations going back well before Trump's first term to the Obama administration and the Bush administration before that, and I suspect, along through history if you start to start to draw sort of broader analogies.

Emily: So, what's the diagnosed problem here? Well, one real concern is around national security. It's the idea that the United States does not make enough stuff—merchandise, goods—critical goods that we might need in an emergency scenario. So, there's some merit to that. The United States does not make as much stuff as we used to. That's absolutely true. And one of the things that we saw, we Americans, we in fact, citizens of the world, during the pandemic is during an emergency, during a simultaneous shock to both demand and supply worldwide under the pandemic, we did not have enough masks and gloves and ventilators and surgical tubing and a bunch of other stuff that I don't really understand what it is because I'm not a health care provider, but I understand it's very important. And one of the things that we saw, we Americans, we, in fact, citizens of the world, during the pandemic is that during an emergency, during a simultaneous shock to both demand and supply worldwide under the pandemic, we did not have enough masks and gloves and ventilators and surgical tubing and a bunch of other stuff that I don't really understand what it is because I'm not a health care provider, but I understand it's very important. Likewise, not only do we need certain medicines and drugs, but we need the ingredients that go into those which are called advanced pharmaceutical ingredients. We saw that there was not enough production or stockpiling of these goods, and where there was production was highly concentrated in a few geographies in the world and a few countries. If we're talking about API, it's disproportionately India and Brazil is also a very large player, too. If we're talking about masks and gloves and so many of the more labor-intensive products, personal protective equipment that are used in medicine, China is a huge player, right? During the trade disruptions of the pandemic, we saw that we couldn't get products from A to B, and there weren't enough products to begin with, so maybe it makes sense to diversify global production including by having more close to home, maybe even more in the United States. So, this is a problem that the Biden administration also zeroed in on. In fact, Biden was in office less than a month when he issued executive 14017, big deal, and asked for a supply chain report and said, hey, were American supply chains overly dependent on any one source? Where is there fragility that we should shore up now when times are good, right? What should we do on a sunny day so that we have the products that we need during a rainy day? I identified not only pharmaceutical products and ingredients but also things like critical minerals, advanced battery technologies, and semiconductors as being critical minerals, a key piece of both of those as well, being critical inputs that that the United States needs to work on creating more diverse, resilient supply chains. So that's part of what the Trump administration wants to do here, too—make sure that the United States has access to enough products that we really need when push comes to shove.

Kirk: That makes sense. It seems right.

Emily: It does. It makes a lot of sense, it seems. Now the question then becomes, okay, well, what is the best way to become resilient in these products? To have enough store or supply when you need it. So maybe you can stockpile an inventory. So maybe you don't need to make it at home. Maybe you could just import enough. And if it keeps on the shelf forever, that's great. A lot of things don't, so maybe you just want to have globally diversified production. For the United States, if we're talking about surgical masks and gloves, we can make some of that here. It's going to be very high priced. Maybe we'd be safe enough if there were more production in, say, Western Hemisphere countries in Central America, which has a clear, demonstrated, long-standing comparative advantage in textile and apparel goods. Those seem like pretty obvious and apt players in this market. Maybe we could encourage more investment there. 

Emily: So there are lots of things that we could do, and what that re-orienting or diversifying global supply chain looks like optimally really should depend on the product and the characteristics of the product. How much do you need? When do you need it? Can you store it? Can you not store it? Also, it has to depend on what it takes to produce it, right? If it's critical minerals, either you've got the critical resource in your ground, or you don't. So clearly, with most critical minerals, the United States, we have access to a lot of minerals here. We're a very large, very diverse, very, very fortunate country in terms of our many natural endowments, but we don't have everything we need.  So, who do we need to partner with and what might processing look like? Because that's a key piece of supply chains in critical minerals. So, all of these pieces require precision and care. You think about the semiconductor strategy. And again, this bipartisan push in the last few years to first Congress to pass the Chips Act, the Chips and Science Act, which is an enormous undertaking to encourage more supply chain shifts in diversification, including reshoring production of chips and fabs here in the United States, but a lot of people miss this. But coupled with global partners outside of, say, troubled geographies put it diplomatically, but more diversified geographies where we can work with other partners to make sure that our chips work in a thriving ecosystem where we have not only the fabs, but we can get the raw materials that we need at a competitive price. And if we have any downstream production after we do the really hard work, the high-end manufacturing if it's then put it in a box and wrap Saran wrap around it, maybe that's not the best use of American workers and know-how. Who can we partner with to do that piece of the process? So, these are things that require I think this is where we go from the objectives which I largely share to the tactics or the solutions, where I start to question the approach. these are things that require care and scalpels. And we've just taken in the last few months and especially yesterday, a very blunt instrument, to try and go about them. So that was a long answer, I apologize.

Kirk: No, no. That's okay. I mean, it sounds like to kind of sum it up, is that to achieve these objectives, you need to really be strategic in how you're approaching, the solution, right?

Emily: That's exactly right. And I think what we again, I really don't want this to become an exercise in sort of political he said she said. I disagree; It's not about that. There are shared objectives broadly by both sides of the political aisle, and I'll say these are objectives shared by many countries around the world, not just the United States. So the question is not about the objectives, but how best to meet them. What we're seeing come out of the administration the last couple of months and again especially yesterday with tariffs are tactics, the use of policy instruments, but what seems to be missing is the strategy in the middle. Like what is the clear strategy? And so a lot of people like me in academia and I'm very sure in the private sector, in corporate America, C-suites, are looking at these actions and saying, okay, what do we think the underlying strategy is so that we can anticipate what's next? so that we can know, like, is this working and we're going to see more of it, is this not working and we'll see less of it? These tactics, these tariffs are in service of exactly what strategy? And that one becomes tougher to intuit back out from the tariff choices again because they are so blunt. A fundamental reality that any Tuckie will know well is that from economics there's no free lunch, right? Resources are limited, so we have to pick our battles. So, if we have decided which I again share this diagnosis, if we have decided that some industries are incredibly important and the private sector for various reasons could be imperfect information, probably something about externalities, if the private sector is going to under-invest in certain key sectors like chip manufacturing in the United States, we think that there's just not enough, okay. So, if we want more chip manufacturing in the United States, we're going to need resources to do it, right? Workers, capital, land. Where are those resources going to come from? The U.S. economy, it may not be everybody's favorite constellation of output, but the U.S. economy is very strong. Unemployment is remarkably low. It's at historically low levels. So where are the workers not going to be? I mean, I don't know if you run a business or try to—well, actually, I know you do not, Kirk—but if you try to hire somebody in today's economy, it's really tough, right? Trying to find somebody to work on your house—I would like help replacing windows because my husband says he doesn't want to replace the windows on the house himself. He can do it, but it's tough. And also, we're getting older, so it would be nice to hire some folks to help us do this. We just can't get help. Not only is it very expensive, but folks are also booking two and three years out. You see in the windows of every business help wanted. Where are all the workers going to come from? So, I think the strategy would have to recognize that there are constraints. So, what are we going to prioritize? And if we're going to make everything in the United States, I guess we consume less, a little less of everything. I'm confused.

Kirk: Yeah. And that kind of gets to another objective, I think, which was to bring not just national security important industries back to the U.S. and manufacturing, but just all types of manufacturing. So, that's an objective, right? To just kind of restore lots of manufacturing in the United States, right?

Emily: Well, certainly it's a stated goal of the Trump administration, and I'm glad you brought this up. This is also something the Biden administration talked a lot about, too, is we just need more manufacturing in the United States. Not in any sort of difficult way. But a lot of economists, including me, would say, Okay, oh fine. Can you just explain why so that I make sure we meet that underlying objective, why manufacturing in the United States? if it's because manufacturing provides the things that we need for daily life, or daily life in an emergency, or being militarily strong, heaven forbid if we need to be, or resisting a pandemic or weathering a pandemic if we need to. Good. Then the reason we need manufacturing is because we need to have certain things available to us. So, is there another way to have things available to us?

Emily: Likewise, if we think that the goal of bringing manufacturing back, I think this is implicit and sometimes explicit in both what Trump says and the way Biden talked about manufacturing, they both talk about manufacturing jobs, right? So, this is something about jobs. Certain kinds of jobs are better than other kinds of jobs. So, number one, that's a proposition we can hold up to the data. And I will say the manufacturing jobs premium—that if you look at wages in manufacturing compared to wages in other sectors, number one, you have to be very careful to make sure that you're controlling for all sorts of things: age, experience, whatever. But if you did that and you ran those careful regressions to ask, controlling for all the things we can see about a job and the workers who take those jobs, are wages systematically higher in manufacturing than in other jobs? 20, 30 years ago there was a small manufacturing wage premium today. Today, no, that's not the case. That is in the U.S. data and that is despite the fact, interestingly, that what we do continue to produce here in manufacturing in the United States are those jobs where workers sort of marginal contribution, the marginal value product of their labor. That's the nerdy econ way, but so many of our Tuckies will appreciate that, I hope or have PTSD, so I apologize in that case. But those are the jobs and the sectors where the wages would be the highest. If you'd expect to see a wage premium, it'd be on those manufactured goods that we still make, because we're still really good at making those things. But as we talk about reshoring manufacturing across the board—apparel, underwear, T-shirts, and socks from Bangladesh, or putting together flat-screen TVs that's now done in Vietnam, or even some of the more basic auto parts that may be produced in Mexico. Those are not great jobs, right? So, are those jobs better than the other jobs that we're still doing now where we've got employers gainfully employed today? Will they earn higher wages by switching from, for example, being a daycare worker to making t-shirts? It's an empirical question. There are lots of reasons to think that they probably would not. And I'll also gently point out that as we have more and more of our workforce engaged in manufacturing activity today in the United States, workers in manufacturing are less than 10 percent of the U.S. workforce. I think we're right around 8 percent—last year's statistic. So, suppose we were to double that. That would be a huge increase in manufacturing employment. I mean, a stunning increase in our manufacturing sector. Where are all those workers going to come from? They're going to come out of the service sector. Again, last I knew, we had help, wanted signs in child care, in nursing, in teachers, in firemen, and in police. Where are all these workers coming from? And are those jobs somehow better? So implicit in this focus on manufacturing is this idea that maybe these jobs are better in some way, and that may have been true 40 years ago. There is very little reason. There's very little evidence to suggest that that would be true today. Again, especially if we're bringing back not just high-end advanced manufacturing, but everything from everywhere. I mean, look at where the tariffs that were announced yesterday are the highest. These are the places where those imports are least likely to compete. They're highest on countries from well, mostly ASEAN countries from Southeast Asia—it’s Bangladesh, it's Cambodia, it's Thailand, it's Vietnam. These aren't high-end manufacturing jobs for the most part.

Kirk: Yeah, I mean, it's almost like the administration is saying we want those jobs here. Is that kind of the way you're interpreting it in a bit?

Emily Blanchard: I think so. And again, maybe there is something else going on as well, so I wish we had colleagues from the administration here in the room to explain that with us, but that's often what they say. And in fact, if you look at some of the pictures or the video clips from yesterday's Liberation Day Rose Garden announcement, you'll see lots of people wandering around the White House, and the Rose Garden lawn with construction hats. And these are representatives from organized labor unions in the U.S. So clearly the president's message is we're going to boost demand for manufacturing workers' time and talents.

Kirk: Going back to that Rose Garden ceremony, it seems like another objective of the administration is to kind of restore some fairness to the global trading system.

Emily: Yeah. So, this gets into, this fairness question is always fun. And that I've never thought of this as politically charged until very recently. But the fairness conversation is tied up with this idea of trade deficits.

Kirk: Yeah.

Emily: And in fact, if you look at the reciprocal tariffs, and here we're in a podcast, so maybe not everybody can see me, but I'm making air quotes because of reciprocal tariffs, the idea is the U.S. is imposing high tariffs on countries that impose high tariffs on us. But if you look at the tariff structure that's actually imposed, it doesn't match up with other countries with higher or lower tariffs against U.S. products. Instead, it lines up perfectly with bilateral trade deficits. So the tariff formula and the administration has said, look, you know, it's and this is a reasonable point absolutely, it's very hard to measure not only tariffs which are easy to see but non-tariff barriers, things that make it hard for American firms to sell or to export to foreign countries. And so we're going to look at bilateral trade deficits as a proxy for not only tariff barriers but non-tariff barriers as well.

Kirk: Would a non-tariff barrier be like a GST or like an extra tax on something? Or is it something else?

Emily: Well, so a GST, or actually a VAT—so it's a generalized tax or a value-added tax, sales tax—aren't things that we traditionally, I would say, most mainstream economists would not think of as trade barriers because they're applied in exactly the same way to domestically produced products as to foreign products.

Kirk: Okay, Okay.

Emily: So, we think of a non-tariff barrier traditionally as something that makes it relatively more difficult for an American firm to sell to a Malaysian consumer than a Malaysian firm to sell to that same Malaysian consumer. That said, you're right that the administration or some in the administration have pointed to value-added taxes and said that those should be viewed as non-tariff barriers. I think the economics argument to support that is significantly weaker. I struggle to understand that one, but you know, maybe they can explain. So, that's the idea. But here's the thing, and again, anybody who has taken GEM, which is everybody who's graduated from Tuck in at least 30 years, I think, will know that trade deficits, or current account deficits a little bit more formally, are just the flip side of the coin to capital account surpluses. Which is to say, if a country is a net borrower from the rest of the world, as the U.S. is—or let me say that in a slightly different way: if there is more demand and purchasing by foreigners writ large, people who are non-Americans, of American assets then there is a net of American purchases of foreign assets, that makes the U.S. a net borrower from the world, or equivalently, the rest of the world a net purchaser of U.S. assets. So, think of it as the U.S. running a trade surplus We call that a capital account surplus.

Kirk: Okay.

Emily: So, we export assets. People want to buy U.S. Treasury securities. Why? Because we're a global reserve currency, because the U.S. dollar is viewed as being very safe, because U.S. Treasury securities are a promise by U.S. taxpayers to repay debt, which is viewed as incredibly safe because we always have. It's a very liquid market; it's very deep. And likewise, we've got a lot of purchases of U.S. private sector debt. ​​So, people who want to buy shares in Apple, Tesla, Nvidia, GM, or Corning—take your pick of a great American company—there's enormous foreign demand for those U.S. assets and we welcome that investment. It allows our firms to borrow at lower interest rates, which allows us to do more R&D and engage in more capital expenditures to develop our economy—not just making stuff to consume today, but using our resources to engage in research and development and real investments, building everything from infrastructure to new factories to educating our kids, to make sure that we can be more productive and innovative in the future. So, we are a net asset exporter running a capital account surplus. The flip side of that, is how's the world going to pay us for all those assets? Well, you might say, aren't they just going to pay us, you know, money? Okay, sure. But then what are we going to do with that money? We don't eat money. We're going to use the money to buy stuff. And what are we going to buy? Goods and services—anything that's not assets. And that's everything that makes up the current account deficit. So, the trade deficit is all about global demand, global net demand for U.S. assets. And yet somehow, it's being treated as a scorecard for whose tariffs are higher, then one country's tariffs are higher than the other country's tariffs. So, as an economist, and here I am in the vast, vast, vast majority, I can't think of very many who would disagree with the assessment, we are a bit perplexed at the use of a trade deficit as as some metric of the fairness of global trade. That's really not what the trade deficit measures.

Kirk: Now, I don't know if it's just me, but I find that relationship between trade deficit and foreign investment a little confusing and hard to kind of wrap my head around because I've never thought about it that way before until you talked about it, I think on NPR maybe last week.

Emily: Probably. I'm an old saw.

Kirk: But I'm still kind of struggling to understand, like how it works. Could you break it down in maybe in a more concrete example, like as far as importing stuff into the United States, and the money that we spend on those imports going to a foreign firm that then brings into the United States, right?

Emily: Perfect. Okay. Here's another way to say it. That's great. The hard part, so number one, everybody struggles with this, and I will say every single year, every single GEM student has a moment of, wait, what? I thought trade deficits were about tariffs. And you're saying, is that just theory? And then we have fun where I explain nope, that's an accounting identity. And it's got you know it's like green eggs and ham. It's, you know, in a boat over a moat, in a box with a fox, like a capital account and current account are two sides of the same coin. It is an accounting identity; it must be so. But it's so not theory, just, the way it is. But it is kind of hard to get your mind around. So, let's give an example. So, suppose I'm an American, right? So, suppose I import a product from overseas. And let's be more specific. My husband yet again bikes. You're also a cyclist. My husband buys another beautiful Italian bicycle from Italy. Okay, so what do I do? Or what does he do? Really? He pays for the bicycle, right?

Kirk: Yeah.

Emily: So, he pays for the bicycle and their currencies and exchange rates, but let's make things easy. You can build in the exchange rate here, but it's not important to the story at all. So, he pays for the bicycle, some number of euros. And then those euros are perfectly convertible with dollars. Okay, whatever, the prevailing exchange rate is. Fixed. Floating. doesn't matter, kids, for those of you paying close attention to your GEM. Those dollars, that money, what does the Italian exporter now do? Suppose he hasn't bought a Bianchi for a while but suppose it's a Bianchi. What does Bianchi do with that? Well, they've got two choices, right? They can buy something else, right? And let's make things simple and assume there's just the U.S. and Europe as a bloc or Italy if we want. Where are they going to buy something from? Well, they could buy something locally from Italy, from another buyer. So that that Italian seller, takes their dollars and gives them a product. Now you've got a new Italian seller. What are they going to do with their dollar? You can imagine a lot of trade like this within an economy. At some point somebody is likely going to say, okay, well I've got a dollar, I've got some euros, you know what I want to spend on, I want to buy a thing from not here. I want to buy a thing locally. And they're going to buy either an asset or a good or service.

Kirk: From the United States.

Emily: Well, if we imagine a two-country world from the United States. That's your only choice.

Kirk: Say they want an American bike. They want a Trek.

Emily: Exactly. They want a Trek. Beautiful bicycles made in Wisconsin. Lovely, right? And Trek's going to see some business, I'm guessing. Except that they import a number of their components. So, Trek's going to have a tough time too anyway. So, they're going to buy maybe a Trek, right? Great. So, either they spend that U.S. import is exchanged for an export, and if it's exactly equal dollars for dollars we have balanced trade, or they say, oh, I'm going to buy a Trek, but I've still got some money left over. Maybe, I also want to save for tomorrow. I want to save for a rainy day. So how are they going to save? They could just hold on to U.S. dollars, which are an asset though one with zero interest rate. Probably they're going to want to hold some asset that returns a yield, right? So maybe they buy a share in Trek stock. That's a way to save, right? To buy a share of Trek stock. Hey, check it out. We just added up imports and exports. So, every U.S. dollar or every import that everything the United States buys we pay for and then the people that we pay are going to buy something from the United States could be an export and then we have balanced trade, or it could be an asset. Often, it's both. But when you add it all up in the aggregate, the very strong preference in the world for U.S. assets looks like this has been true for a long, long time. Maybe not true forever, but on net, the rest of the world is using a bunch of the money that we pay them for our imports. They're using it to buy our assets. And again, that's good for us because it gives us access to credit at  lower interest rates, right? If somebody buys a share of Trek stock, that means that, or Trek corporate paper, it could be a corporate bond too. Let's not narrow ourselves; that means Trek has access to capital to design the next model and come up with a new idea so that they can continue to thrive, be dynamic in the future, and remain a market leader. Does that kind of make sense?

Kirk: Yeah, that totally makes sense. It's really, really helpful. Thank you. Especially thinking about it with bikes.

Emily: You know, I try to speak to my audience.

Kirk: It sounds like in summary, when we spend money abroad, that money, some of it comes back and helps the United States.

Emily: It always comes back and helps the United States. It always comes back to buy something. It's just a question of what? Now this brings us to another really interesting moment where maybe economists are going to be a little bit more confused about the apparent distaste for trade deficits. So, it seems to be, and let's be clear, this very strong foreign preference for U.S. assets. The fact that foreigners, when they buy a bike from overseas, they buy some Trek stock, not just Trek bicycles, which means they're buying some assets as well as our exports. There seems to be a preference. But when you look at trade deficits and say that's a problem, to say, well, no, I say that's the U.S. selling assets, which sounds good, but maybe it's just the U.S. borrowing, which is also true. And so maybe the U.S. is living beyond its means, right? We're borrowing too much. As a household, we imagine this idea of thrift being really important in a household, I certainly do. I try very hard never to never to be a net borrower, especially at this stage in my life when I'm saving for retirement, and I have to pay for my kid's college. I would be really worried if I were living in the red year after year. And that's effectively what you're doing when you run this trade deficit. So, then the question is when the U.S. borrows from the rest of the world, what are we doing with that borrowed savings, with the foreign saving flowing in? What are we funding? And again, that's an empirical question. I will say U.S. investment remains enormously high. We have an incredibly dynamic private sector that leads the world in research and development and is at the frontier of technology. We have incredible institutions of higher education. We have a skilled workforce that's the envy of the world. I think we invest in a lot of really high rate of return things. But you would see those same trade patterns if we were just borrowing a whole bunch and going out and partying every night, right? And that's one of the hard things, is you look at the data and we can see what happens, but the underlying motivation is whether this is a healthy trend, or an unhealthy trend requires us to dig a little bit deeper and come up with different narratives. And there is a narrative around that says, well, the U.S. is just borrowing to fund fat living. So, suppose the U.S. is borrowing, and so much of that national-level borrowing is because the government is borrowing to spend on things that don't yield high returns on investment—just wasteful government spending. If that's your view, then the imbalance looks more problematic. But then notice the solution to that is to stop borrowing so much. And so, for those who say—and especially in the last few years, as the U.S. deficit has ballooned since the pandemic and has not come down the way it needs to—I do worry about U.S. federal government deficit spending year on year. It's enormous. You know, our debt-to-GDP ratio is starting to look problematic. And let's be clear: as interest rates rise, the cost of—here's the back of the envelope— that’ll scare you. If you have a 100 percent debt-to-GDP ratio, which is right around where we are now, right? So, 100 percent, if interest rates on your government debt average 5 percent, that would mean servicing your debt every year is going to cost 5 percent of GDP

Kirk: Wow.

Emily: And that's just to service your federal debt. It's like this becomes quite costly, right? So, I am not one of these we don't need to worry about the deficit Pollyannas by any stretch, but I think if the diagnosed problem is we're living beyond our means because of wasteful government spending, then the solution is not obviously through tariffs. And again, that's going to have a lot of unintended consequences that we've talked about and maybe we'll come back to, but why don't we get the deficit under control? That's going to be hard. The president has talked about the importance of tightening our belts and doing hard things because it's important, and I very much appreciate and share his clarity with the American people to say, 'Yeah, sometimes we have to do hard things because it's worth it. Let's have a serious conversation about reducing the fiscal deficit. And a key piece of that, by any mathematics you want to engage in, is going to be raising taxes, or at least not extending the tax cut. But it's really weird to me, that we're having this conversation around trade deficits, and it is not linked to a conversation around fiscal deficits, when I think to many, that's the heart of the real problem we need to solve here.

Kirk: Wow. Yeah, that seems to be a conversation that no one's really having in Washington, D.C. right now anyway.

Emily: Well, so that's definitely a fair observation. I will say a lot of people in Washington, D.C. are having this conversation, and some of them have even come to Tuck in the last year to talk about this, but they are not at the front of the podium. They're not the ones with the microphones in their faces. And I suspect that that may change in the next couple of months as we shift from Liberation Day, as yesterday was coined, to the next big thing, which is going to be talking about the Congressional decisions on the federal deficit and whether or not we're going to extend the 2017 tax cut.

Kirk: Right, right. Yeah, that's going to be a big conversation in itself. So, we can shift away now from, I think, objectives and what the administration was trying to do with these tariffs and maybe just acknowledge the reality that we're in. Where do we go from here? What is going to happen? How are you thinking about the future?

Emily: Yeah. Great question. And I like to do that too. We spend a long time, and props to anybody who's stuck with us on the listening, on what are the tools and what might be the motivations behind them too, and the consequences. And what do we do next? The consequences are it's going to be a period of enormous uncertainty and instability. I say uncertainty, which might seem weird because the administration has, for almost two months and certainly the last month, been saying there's a big decision coming, there's a big decision coming, so obviously there's uncertainty. But now we have that decision, and the decision seems pretty clear in a lot of ways. In fact, a lot of uncertainty was ironed out. There have been, with previous tariff announcements, real questions about whether these were cumulative or would substitute. So for example, if we put a tariff on autos and Canada, do those both apply, or is it just one or the other? Maybe you get the minimum of the two tariffs. So that wasn't ironed out until yesterday; They're additive by the way. They are cumulative though ergo tariffs will be very high, fun fact. So there's less uncertainty in that sense, but there is more uncertainty because very few expect these tariffs to stay set in stone the way they are today. So, why don't we expect the tariffs to remain the same? Well, the administration's been very clear about this. These are the opening bid in a negotiation. And that negotiation will be, we think about it, and they talk mostly about it between Washington and other sovereign governments, between other countries' governments, and we'll certainly see that. So, some countries are going to work really hard. You heard Keir Starmer yesterday saying well you know the UK, and this morning, the UK was facing the lowest tariff at 10 percent, but we continue to negotiate a free trade deal, so maybe we'll get that down. That's the idea. And countries might be whether you're going from 10 percent to 0 percent or 48 percent to 38 percent. There's some negotiation and some shift.

Emily: But it's also quite clear that companies, individual companies, will be going to the administration or already have been and saying, 'Hey, these tariffs are going to be incredibly costly for us,' especially if those American companies are manufacturing firms in the kinds of sectors that have been identified by the Trump administration and, again, correlated highly with the Biden administration's diagnosis of really important sectors. Think semiconductors or EVs or medical equipment or pharmaceuticals. Those companies will be going to Washington and saying this structure of tariffs is going to kill our business. And again, why might that be? Let's just be clear. These tariffs apply to all of our imports from a given trading partner, and the majority of U.S. imports, more than half of U.S. imports are for intermediate inputs. So they’re parts and components for making other things, especially manufactured things. So you can imagine that there are a lot of American firms who might say, on the one hand, I love the fact. o, if I'm a car manufacturer in the United States, if a car manufacturer is producing and assembling in the United States, you can imagine they might say, 'Gosh, maybe it's really good for me that you've applied this tariff because demand for my cars is going to go up. I can charge higher prices and maybe hire more workers and earn more profits, too.’ But all their parts and components that are imported also got more expensive. So that balance, the devil's in the detail. You're going to have a lot of companies going and asking the administration for carve-outs or exemptions. And actually, these exemptions were really fruitful and very active in the previous Trump administration. We had a more active and activist exemption process than I think the United States has ever seen before, by any measure—sort of the number of exemptions, the size of exemptions, and the speed of exemptions. Actually, my colleague Davin Chor has a very cool paper with Dartmouth colleague Matt Grant and some other co-authors on that. So, I commend that paper to everybody here. Butt that means that companies, not only are they not going to know the tariff rates in the end because the foreign counterpart is negotiating, but they’re also probably negotiating too. Or maybe their suppliers are negotiating, or their customers are negotiating. And we never know, these tariffs do seem to reverse sometimes. So, all of that uncertainty makes things very, very difficult. So, I think we're in a period of enormous uncertainty that's likely to slow down business investment that's going to make a lot of supply chain officers, if you're the chief supply chain officer of a major manufacturing company, I don't envy your job today. Trade compliance officers are going to be very, very busy. But the upshot is a lot of firms are going to stand pat and wait for the dust to clear. And waiting for the dust to clear does not mean hiring. It often means if somebody was set to retire or step down from their position, maybe you're going to wait a little while to rehire. So, we worry about softening labor demand, maybe immediately. And I'll add to that, on the other side, you've got a whole bunch of companies that are not manufacturing firms in the United States. Again, the vast majority—more than 90 percent of American workers—are not in the manufacturing sector. For them, they've seen their costs go up, input costs go up. Uber drivers—their cars got more expensive, right? Nurses—the equipment that they use every day got more expensive. If you work in retail, which is a huge slew of workers, all of the products that the retailer sells are more expensive now. And so, I hope we don't see layoffs. I hope we don't see job cuts. But it's very hard to imagine that hiring will continue to be robust the way we've seen in the last couple of years, and that starts to point to a scenario where demand for workers' skills, where labor demand is falling even as prices for everything you buy at the store are going up.

Kirk Kardashian: So, is there a name for that, like stagflation or something?

Emily: Yeah, it is. It's exactly stagflation. And it's real wage declines from the perspective of the individual across an economy. If it's slowing growth, if it shows up as slowing down aggregate GDP numbers, real GDP, at the same time that we have an increase in the CPI, the consumer price index, or the PPI or the WPI—take your favorite price index—that's exactly stagflation. And so that makes everybody quite concerned.

Kirk: Yeah, I mean I imagine consumers would be really concerned too. And I can only guess that people are not feeling great about the prospects of the economy right now.

Emily: No. And you see that in consumer confidence numbers that were pretty strong at the end of 2024 and actually had been growing steadily and robustly from the post-pandemic recovery through January, then started to drop in January. Could be other things, could be seasonal affective disorder, I don't want to put it at the president's feet. But those consumer confidence numbers fell again last month. I would be quite surprised if they were up dramatically next month and that makes us very nervous. I'll also point out, that amid all of this, we can talk about consumers and individual households as well. We should. But distributional consequences are really important. It is critical to recognize that higher tariffs affect everybody who spends most of their income on goods and services, on stuff. So, if you are living paycheck to paycheck, all those price increases are going up. The only thing that didn't get more expensive is saving. Low-income households, middle-income households, anybody sending a kid to college right at that moment, that means your budget's just going to go a whole lot less far, right? High-income households tend to fare better. They're still going to pay higher tariffs, their champagne from France—maybe if we have 800% tariffs, much more expensive. But still, a greater share of their income goes to saving. And so in some sense, it's protected from the direct impact of the price increases. The other thing to recognize is not everybody works. And you might say, well, lazy bums. I'm not talking about lazy bums. I'm talking about retirees who have a fixed income or income only from investment yields. If they're doing better, but everything that they buy got more expensive and their wages won't go up, even if there's a manufacturing renaissance. That's not going to help them in their lifetimes, because they are not part of that direct workforce. And likewise, the other group of folks who are not helped in the near term are children because they're not working. The price of raising kids just went up. And actually, I know I'm getting too in the weeds here, but I get excited about this stuff. We have colleagues, particularly some colleagues at the Federal Reserve Board of Governors, who've looked at the data and looked at baskets of goods consumed by different households, and you see that the share of imports from places—from lower-income countries like Vietnam, China, Mexico, and Bangladesh—are places that produce apparel and toys. Those are families with young children. Life got a lot more expensive for those families compared to everybody else.

Kirk: Wow, yeah. Not good news. So, is it too early for us to start thinking about how this all ends?

Emily: Yeah, it's a yes.

Kirk: I mean, it's a trade war. It has the term war in it. I think when you think about a war, you think about how war ends. How does a trade war end?

Emily: Yeah, it's a really good question. A colleague, Professor Chor, and I were talking in the hall earlier today and sort of asking this question: when the U.S. has had moments like this before, what does the future look like? And an observation that I would make is there's kind of always been an intervening event—not causally, let me be crystal clear—but where things kind of went back to the lower-tension, lower–trade barriers way they were before, because of other forces, a shake-up, and maybe a moment, an opportunity to reconsider. So, the classic example is Smoot-Hawley tariffs in the early 30s. We didn't change our trade policy significantly until after the Second World War. And that was the period during which the Bretton Woods agreement and the World Trade Organization, but so many more agreements over global capital flows and the IMF and the World Bank and all of that stuff grew out of that late 1940s moment of reconsideration. So, then the question is, what happens next? And I sort of divide: suppose there's a big reshuffling event—and heaven forbid, I can't really imagine a happy reshuffling event—so I hope we're not in that scenario. And so, let's focus on there's not a big reshuffling event. I don't think we have a textbook because we haven't had a time when we didn't have a reshuffling event intervene.

Emily: I will say, it was already a really tense time geopolitically before the Trump administration came into office. The United States and allies and partners around the world—and actually all countries in the world—were grappling with heightened great power competition, really worried about strategic competition with countries with very different modes of governance, the rise of autocracy—dictatorship, effectively—very real concerns around national security. And we saw over the last few years, countries coming together, working in coalitions to try to manage those tensions responsibly to avoid escalation. So, things like semiconductor chip controls that the U.S. imposed on China in 2022—so that would be under the Biden administration—required really close coordination by key allies, particularly the Netherlands and Japan, because of the kinds of semiconductor-making equipment that they produce and sell uniquely in the world. We saw that alliances were really important there, or combating, pushing back against Russia's brutal invasion of and aggression against Ukraine. Again, that was not just one or two countries. That was an alliance of G7 plus saying we agree and we're going to work together to do two things to put pressure on the Kremlin to change its policy because we think invading neighbors is outside the boundaries of agreements long held in modern history and just basic, fundamental humanity. But we're also going to try to coordinate, to deprive Russia of the material it needs to wage this war.

Emily: So again, we've seen a period where great power competition is manifest in the rising importance of working closely with allies. So, it's the U.S. working very closely with the Five Eyes partners, so that's, you know, Canada, Australia, New Zealand, UK. And it's also working very closely with the G7 plus. So, it's the G7, it's Europe, it's Japan. Many of those same Five Eye partners, and critically, South Korea. So hugely important work there. At the same time, we need more cooperation to battle climate change. It's like since the election, we've forgotten that our planet has reached unprecedented global temperatures with existential threats to humanity, to our life and well-being in our children's lifetimes. I mean, this is terrifying, but we've got to cooperate. And it's also like we've forgotten about COVID and the pandemic and the fact that we've got a bird flu that's already jumping from zoological to humans, from animals to humans. We've got concerns about the Mpox outbreak. And we've again, this is not our focus in this podcast, but we've pulled back funding for vaccines around the world. So, the U.S. was two years away from eradicating malaria globally with a new malaria vaccine. We're also seeing polio make a raging comeback. The WHO is predicting numbers that we haven't seen in decades in global polio outbreak. We've got measles making a comeback. All of these things require working with allies. And so, I hope the way this ends is we find some balance. We come back and find a little bit more balance in the United States where we say, yes, we have very clear economic goals. We really do want to ensure that there's greater prosperity and economic opportunity for all in the United States, particularly those who have been especially frustrated for the last few years or few decades, like we've got to do, do better and do more there. But we do this in a way that strengthens our allegiances with other countries, not just because of some nice thing to do, not just because we're great humanitarians, though I kind of hope we are. That is core to my sense of American values as well. But even it's just naked self-interest. It's a dangerous world. It's a hotter world. We're really worried, as we should be about disease and outbreak, and I haven't even brought up things like technology and AI and existential threats from that. Like, hopefully, we have a moment where we say, okay, even if all we care about is making America great again or as great as possible or whatever, there's probably a better strategy or a more holistic and careful strategy where we put away the hammers and we get out the scalpels so that we fix the problems that need fixing, and we don't start every war with everyone all at once.

Kirk: Okay, well, I think it's probably good to leave it there.

Emily: We've been here a while. Sorry, Kirk. You're very patient.

Kirk: No, this is a fascinating conversation. Emily. I really appreciate your time. Thanks a lot.

Emily: Sure.

Kirk: I'd like to thank my guest, Emily Blanchard. You've been listening to Knowledge and Practice, a podcast from the Tuck School of Business at Dartmouth. Please like and subscribe to the show. And if you enjoyed it, then please write a review as it helps people find the show. This show was recorded by me, Kirk Kardashian. It was produced and sound designed by Tom Whalley. See you next time.

[podcast outro and music]

Kirk: Yo, T-Bone, did you produce this?

Speaker3: Sounds good. Right?