Since U.S. President Donald Trump announced his “Liberation Day” tariffs on countries around the world, the United States has experienced a stock market crash, a bond market crash, a blizzard of recession predictions, contemplations of catastrophe of various kinds, and then a sudden policy reversal and a fragile reprieve on financial markets. What’s left is an outright trade war with China and the outlines of a new global economic status quo.
How did we end up with a policy of decoupling from China? What have we learned about Trump’s understanding of power? And does Trump ultimately want the U.S. economy to look like China’s?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Chartbook newsletter.
Cameron Abadi: What kind of global economy are we left with now, after Trump’s policy announcements and reversals of the last week?
Adam Tooze: All the headlines that say, “He’s called it off,” “He flinched,” I’m really quite suspicious of that reading. The fact that we have ended up with trade-ending tariffs on the most important axis of the world economy [between China and the United States] would be, under any other framing—like if you told us at the beginning of the year, this is where we were going to end up—we would have thought the sky had fallen. This is absolute disaster from the point of view of global trade. It’s a worst-case scenario. It is the hardest of hard uncouplings. This is assuming both sides are taking it seriously. And I think from the Chinese side, there’s no doubt about that. And God knows what the Trump people are doing.
They have turned what essentially was a broad-based, broad front assault on the global trading system into a trade-ending level of protectionism on the most important axis. And we’re all going, “Oh, he flinched.” And I don’t get it. If you actually break down the average level of tariff to be paid by an American consumer, since American consumers consume so much stuff from China, the level of tariff we’ve ended up with after all of the concessions on average for the American household is higher than it was on Liberation Day on Wednesday. So there is no pullback—there’s in fact an intensification. Because it doesn’t make sense to treat all of the countries of the world as equal parts. They’re not. China stands out enormously as a supplier of basic consumer goods to U.S. markets. And so if you end up at 125 percent with China, it doesn’t matter that you’ve gone to 10 percent with Ethiopia and 10 percent with other smaller players in the global trading system. It’s trivial.
CA: So the tide has gone out, and what’s left behind is decoupling with China. And as you also alluded to, for years we’ve been having a discourse about trade with China, with de-risking and reducing trade as a policy that seemed to sort of have built some consensus around it. And then whenever decoupling came up, it was always in the context of people quickly dismissing it. But now here we are with decoupling, the policy that for years, no one was willing to openly back?
AT: I think that brings in another important dimension, which is if you look historically at how that happened, the American strategic conversation was always much more hard-edged on China. [Former U.S. President Joe Biden’s] people realized that it really freaked Europe out. And the de-risking concept came from Ursula von der Leyen’s [European] Commission. And Ursula von der Leyen has now been reappointed as president of the commission. And Biden’s team really wanted to valorize the European Commission because the Biden people really wanted treat Brussels as the capital of Europe and the president of the commission as really the leader of trade policy, international policy. And so they quite deliberately, I think, picked up this term.
And it’s very, very much a case of a European buzzword migrating across the Atlantic that way rather than the other way around. And then it was universally adopted. And part of that that—again, you were so nicely describing of, “Oh, God, no, of course we don’t want decoupling, we’re serious people, we want de-risking”—was a way of signaling we understand the sensibilities of the Europeans and above all the Germans, because the Germans really have skin in the game in a bilateral relationship with China. It’s not just soybeans and Boeing aircraft—it’s a much denser relationship between the German manufacturing economy and China. And so that’s where the de-risking thing came from. And as you say, it’s just gone completely out the window now.
CA: But was the initial debate between the Biden camp and Europe on China at the time mostly a terminological one? Was anyone really in the Biden camp interested in ending trade with China?
AT: There was a pro-labor division within the Biden camp that was maybe closer to the Trump people. Because when you look at actual numbers of employment, you’d have to do pretty comprehensive protectionism to actually make a difference. Then there was the green lobby that believed that you couldn’t get an American coalition for the energy transition in the U.S. unless it was anti-China.
And then there was the tech lobby, there was the chip lobby, and they were, by way of [National Security Advisor Jake] Sullivan, the people that articulated the American version of de-risking, which had another harder edge, which was the “small yard, high fence” model, which I actually for FP. And it’s like bizarre logic, which is America gets to define a zone, which is off limits for competition from China, and in the rest of it, [Treasury Secretary] Janet Yellen would graciously concede China was free to pursue its economic development and growth without challenge from the U.S. But if it strayed into these areas of hard national security interests, then it will be regarded as a threat and should expect American sanctions. So that’s how they managed it.
And they fell into line, therefore, behind the Europeans who also did this—the Europeans had this formula where the Chinese were competitors, rivals, and partners depending on the zone of policy. So partners in climate, competitive under World Trade Organization rules in business and just general commercial competition, and then rivals at the ideological level when Brussels wanted to get serious about the whole rhetoric of the alliance of democracies and expanding NATO’s mission into East Asia.
So, yes, there’s been a variety of different kinds of conceptualizations of this relationship. And now it’s been replaced with a 125 percent tariff.
CA: We talked last week about the process of Trump’s policymaking, the absurdity of Trump being solely responsible for determining tariff rates. But I wonder if you think we should also be impressed—in a morally neutral way—by how Trump applies power. Just the idea of using his power to create facts and then see what happens—a recognition that the essence of power is in its use. What have we learned about Trump’s understanding of power?
AT: At the mechanical level, they may have just randomly picked the formula they did last week, which was this absurd formula, in part because they knew it wasn’t going to matter. They just needed some big numbers. So all of the kind of wonkish indignation, you know, everyone has just been gleeful about how stupid it is, misses the point that it wasn’t ever going to be used for anything other than a bargaining tool. And they didn’t really dare to say that because Trump maybe hadn’t made up his mind, but the one thing they were going to end up with is this split strategy where you reward those who are loyal. People have called it different teams—one team is defiance, and the other team is compliance. And you reward the compliant, and you punish the defiant, and where did you know Beijing was going to end up? It was bound to end up in the defying camp.
So I agree, there’s a kind of a ruthless brutalism to this exercise of power. It’s like, what are the constraints that a deep respect for process procedure and the rule of law puts on progressive politics? And they’re very, very tight. You know, [former U.S. President Barack] Obama has been giving these hapless interviews where he says, “Well, just imagine if I had behaved like this. I couldn’t possibly have.” And it’s just kind of like, well, maybe you could have tried occasionally, let’s see. I mean, the real issue from an economic point of view is that you have to have singularly hapless counterparties for this not to have long-run cost. It might even work where you’re building a casino somewhere, and you just bully people for as long as it takes to get the permits into place, and then you build a casino.
But what happens if this is a very complex, multipolar, repeated game with a very long time horizon? What happens when you play that kind of game this way? And ultimately what is this protectionism for? What are they hoping for? And the answer is, they want some kind of reallocation of economic activity. I think we have to take that at face value. I think their visions are facile and naive and silly, but they do have an idea of relocating manufacturing industry. And it isn’t going to happen under these conditions. Because you don’t have the certainty, right? If this is a negotiating basis, it’s precisely not what a long-run investment needs, which is the guarantee of certain cost conditions and certain market access. And it won’t even work for the fiscal argument because another thing they adduce for tariffs is that it’s going to raise a lot of revenue, hugely regressive, going to hit American consumers. But of course, you can’t do budgetary planning if, the next moment, you’re going to give away the tariff, right? That’s not how that works. So I agree, one can admire the forcefulness, the willingness to break convention, all of that, fine. But will it work? Because trade policy, industrial policy is something that has a time horizon of years, not weeks, not days, not hours, but years. And can it possibly work on that time frame? It seems implausible to imagine that that’s the case.
CA: To consider some of the other potential rationales at work, one that comes to mind in this context is just hurting China—maybe hurting oneself in the process, but hopefully hurting China more than one hurts oneself?
AT: Yeah, if you were really cynical, you’d say, look, if you really wanted to decouple, and you were serious about absolute decoupling, it was always going to produce a stock market shock, so why not wrap it as part of something that you can then, in fact, pull back on? So wrap it as a bigger shock, generate a bigger shock, and then once you are moving forward and the Chinese have escalated, then you can pull back on the broader sanctions, and the market recovers at least a little bit.
CA: Trump does seem genuinely committed to tariffs as a concept, but for what purpose, it does get harder to understand. He seems to want the United States to have trade surpluses with other countries. So, is he actually envious of China—China as a country with surpluses or Germany as a country with surpluses, for that matter? Is that what he wants America to achieve?
AT: I think, in fairness to him, he doesn’t talk much about America generating surpluses. I mean, thank God, because that would be the height of self-deception. I mean, the phrase they use is balanced trade. And that’s not an unreasonable thing to want in general, right? I agree with [economists Michael] Pettis and [Matthew] Klein and everyone else who says that the giant chronic trade surpluses of the Europeans in particular, there’s no good excuse for them and it’s a reflection of fundamental imbalance in their policy mix and at least as much Orwellian delusion about what makes economies tick than anything that Trump people exhibit. I mean, the way the Germans talk about their trade surplus is utterly self-deluding. So I think the aim of the game is balanced trade, fair trade—it’s that kind of notion.
But the question, of course, is when you say that, that’s fine to say with Japan or Germany, but it’s not reasonable to say it with regard to China, which is a middle-income country with 1.4 billion people. And it’s really not reasonable to say in relation to Vietnam. I mean, it’s so unreasonable as to kind of beg the question of whether they can be at all serious, which is why there’s a bit of me that thinks all of the kerfuffle around the crazy formula for Vietnam last week was kind of beside the point because even they cannot have actually meant it. Because Trump is a fairly widely traveled guy. He knows what poor countries are like. He knows perfectly well they can’t buy the equivalent amount of goods that they can produce and sell to America for good prices. He’s not, I don’t think, irrational at that level. So, at that level, it must be a bargaining chip, and there must be room in the Trump universe for a trade imbalance between Vietnam and the U.S.
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