Photo-Illustration: Intelligencer; Photo: Getty Images
President Trump’s tariffs continue to frighten businesses and consumers alike. Last week, stiff automobile tariffs went into effect, severely clouding the economic outlook of U.S. carmakers like General Motors and Ford. That’s on top of pre-exiting, eye-watering tariffs imposed on China, which are about to impose major costs on U.S. consumers. And then there are the 10 percent tariffs — table stakes for Trump’s trade war. As with so many Trump-related phenomena, the name of the game right now is uncertainty — the very thing businesses generally try to avoid. But if Trump did reverse course again — as he did with his even more ruinous “reciprocal tariffs” — could things really go back to the way they were before? To get some insight on this question, I spoke with Tom Orlik, the chief economist for Bloomberg Economics, who has written extensively about trade and China.
When President Trump announced his sweeping tariffs on almost every country in the world a month ago, there was a period of serious market volatility. Stocks plummeted, then soared, and this dynamic continued even after he announced a 90-day pause on those tariffs. Markets have stabilized quite a bit in the last couple of weeks, even though significant tariffs remain in place and there may be more to come. Why do you think things have calmed down? Is it just because people expect further deals soon?
I think there’s a couple of factors there. The first is that people have a little bit more faith in the idea of a “Trump Put”, right? Before coming into office, Trump was talking about tariffs, but stock markets were still optimistic because they thought, fundamentally, that Trump is watching the financial market news. He cares about the stock market. He’s not going to do anything that has too big a negative impact on corporate earnings. April 2 shook that confidence and the idea of a Trump Put. But some of the moves since then, taking the reciprocal tariffs off some countries, flagging a willingness to negotiate with China — they’ve partially restored confidence in that. The second thing, and I think this is probably in the end more important, is that this has been a seismic shock to the global trade system. When Trump came into power for his second term, the average U.S. tariff rate was just above two percent. Now it’s above 20 percent. That’s the highest level in more than 100 years. Absolutely enormous shock. I just don’t think the markets actually know how to price something like that in.
They’ve been off on this a few times lately — it’s not like they have accurately predicted what’s going to happen in the last few months in the first place.
I think there’s been a striking pivot. If you spoke to people on Wall Street after the election, if you spoke to the Davos set earlier this year — I wouldn’t say there was ebullience, but there a kind of confidence that they knew who this guy was and there was going to be a lot of talk about tariffs, but actually the substance of the presidency was going to be tax cuts and regulation cuts. It was going to be like his first term until COVID struck — good for the markets. And I think what we’ve seen in the last few weeks is a daunting realization that actually a lot of the things he said on the campaign trail, they weren’t just red meat for the Republican base, they were actually policies that he’s now going to try and implement.
And yet there have been some signs of deals on the horizon. This makes it even harder to read, in a way because he’s not quite going full bore — he’s also stepping off the gas a little bit at times. I mean, it’s not like he’s doing everything unilaterally. He is listening to the markets a little bit.
I think you put your finger on it. We’ve got much more tariffs, much more market volatility than anyone anticipated. At the same time, clearly the Trump put hasn’t disappeared entirely. There is some sensitivity to what happens with the market, sensitivity to what happens especially with treasury borrowing costs, a willingness to get on the phone and speak with chief executives and other heads of states. And I think what we’re grappling with and what the markets are grappling with is, well, exactly where is that line right now?
You’ve written a lot about China and the Chinese economy. They seem to have signaled some openness to trade talks with the U.S. after pretty much ignoring Trump’s demands before. The conventional wisdom has been that China could wait all this out in a way the U.S. can’t. What do you make of these carefully choreographed moves by the Chinese government?
The first thing is that, in a sense, the United States declared trade war on itself on April 2. China has a problem with its exports to the United States or its trade relations with the United States, but the United States now has a problem with its trade relations with everybody, because it’s imposed tariffs on everybody at the same time. So the tariffs on China are a problem for China, but the U.S. has imposed tariffs on everyone, and that’s created a big problem for itself. And I think that’s one of the reasons that we’re sensing this optimism from Beijing that they might have greater capacity to wait this out than the U.S. does.
The second piece of it is that China’s leaders know very well that there are some really big, really important U.S. firms with huge operations in China. Think about Apple, with its supply chains. Think about Nvidia, with its sales of semiconductors. Think even about some of the big retail companies, leisure and hospitality companies. So I think there’s also an understanding on the Chinese side that effectively creating this embargo between the world’s two biggest economies — it’s going to create some blowback for the United States, some blowback for some big name companies and for the U.S. markets.
And then the last piece of things is, well, President Trump has a kind of freewheeling businessman’s approach to dealmaking and has demonstrated some wins from that approach to dealmaking. The Chinese very much do not have that approach. They have a very careful, very methodical approach to dealmaking, and they are especially allergic to putting their top leader, Xi Jinping in a position where he could be surprised or even worse, embarrassed. And so I think the instinct in the White House is, “Let’s get Trump and Xi on the phone, man on man, and they’ll hash this out.” And the instinct on the Chinese side is, “Absolutely not. Let’s have extensive working-level discussions. Let’s get absolute clarity on what’s being agreed here, and then maybe we’ll do the Trump-Xi meeting. But we’re certainly not doing that to kick things off.” And I think that difference in negotiating styles is going to be an additional hurdle as we attempt to move past this impasse.
And of course, China does not appreciate the U.S. attacking it, and saying all kinds of disrespectful things. That seems to be a condition — simply respect us a little bit — and the Trump administration can’t do it.
I think that’s completely correct. China views itself as a peer competitor with the United States, another great power. China also has its own history to deal with, a kind of internal narrative about a century of humiliation — which came before the creation of the People’s Republic — and a desire to kind of stand tall and be treated with respect in the world. And obviously being insulted by anybody doesn’t help create a conducive atmosphere for negotiations.
What level of damage has already been done? Not only the tangible damage — international shipments are already falling, and there’s going to be fallout from that in the coming months — but more the intangible damage to the U.S. as a reliable trading partner. In other words, let’s say, in the best-case scenario, that things go back to semi-normal in the next month. What does the world look like after that?
First, in my view, Trump deserves a lot of credit for identifying a real problem here. The U.S. has an enormous trade deficit. That trade deficit means jobs and opportunities for middle-class Americans are being shipped overseas. We’ve seen the devastation that that has brought to communities in states like Pennsylvania and Ohio, where factory towns have effectively been closed down. Even worse, a lot of the trade deficit is with China, and China is America’s main geopolitical rival. And depending on your main geopolitical rival for crucial inputs, from semiconductors to the base ingredients for pharmaceuticals, I think there are some legitimate questions to be raised about whether that’s a good idea.
So I think Trump has identified a real problem. The question is whether his approach to solving the problem — really high tariffs and nosebleed-inducing uncertainty — is the right approach?
I have a hunch that the answer is no.
Yeah. To come back to your question, we’ve got tariffs at 145 percent between the U.S. and China. Tariffs at that level effectively shut off U.S.-China trade, right? There’s not a lot you can profitably do between the two countries with tariffs at that level. So let’s imagine the tariffs go down to 60 percent. Well, guess what? That also effectively shuts off U.S.-China trade. Once you go to a certain level, it’s just not profitable to trade with each other. And then to come back to another dimension of your question: If you introduce absolutely enormous uncertainty, if you demand concessions from your trade partners, and then when you get those concessions, you still move ahead with tariffs — well, it raises questions about whether other people can engage in good-faith negotiations with you. And that raises the possibility that, even if tariffs come back to their April 1 levels, then perhaps something is still broken. Something is still broken because trust is broken.
And I’m just thinking of all these companies, from huge conglomerates to small businesses who have to plan around all this, and move their supply chain for example, and then a month later might have to move it back. As everyone always tells me, uncertainty is the thing businesses hate the most.
On the Bloomberg Terminal, you can count the number of times particular words are mentioned in news stories. One of the things we’ve done in the last few weeks is create trade policy uncertainty indexes. It sounds fancy, but it’s actually pretty straightforward. We’re basically just counting the times “trade” and “uncertainty” are mentioned in stories. And what we can see is that trade policy uncertainty has rocketed to a record high. It’s really, really an extremely high level of uncertainty. Now, if you’re a deal maker like the president, I think you see some advantages to that uncertainty. You’re throwing your opponent off balance, you’re getting a better deal for the American people. And I think there’s some early signs that on the deal making side, it is delivering results, right? Think about the big commitments, which companies like Apple and Nvidia and TSMC and Hyundai have made to make big investments in the United States. That’s the kind of the fruits or the positive consequence of this uncertainty, which helps the president do deals.
But from a business perspective, this uncertainty is pretty disastrous. If you don’t know if you’re going to face zero tariffs next month or 25 percent tariffs or 50 percent tariffs or 100 percent tariffs, it’s really hard to plan. It’s really hard to decide if you’re going to hire, it’s really hard to decide if you’re going to invest, to sign a new contract. And when you have this kind of paralysis of indecision in C-suites, well, that starts to drag on economic activity.
This interview has been edited for length and clarity.
