University of Chicago Booth's Rajan on Global Economy

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00:00I'm guessing tariffs will feature prominently in your welcome remarks?

00:04Big issue, I think, for everyone. Governments, businesses, financiers.

00:08The question is, where will they land? We're talking of a respite for now, down to 10%.

00:16Are they going to stay there? Are the reciprocal tariffs going to come back on July, what about,

00:2210th or 11th? Are we going to get a smooth transition? Well, okay, now we will keep the

00:28tariffs at this level until the negotiations are over. Trade negotiations take time. Nothing

00:33is going to be settled by July 10th for the most part. Yes, there will be a few agreements,

00:37but not everything. So we need more certainty.

00:40How useful is it to make economic forecasts at this point? Is it possible to game, I guess,

00:48likely scenarios? You would want to game scenarios. I mean, see what happened to the IMF forecasts

00:56of growth. They turned on a dime from the beginning of the year till the April meetings. Global

01:02growth down by, you know, close to 0.8%, 0.9% for the US. That was a huge decrease in growth

01:10forecasts from the IMF. Those kinds of changes in forecasts would suggest there are big event risks.

01:18And ideally, if you're a business, United did this. If this happens, we will have this kind

01:24of outcome. If that happens, we'll have a different kind of outcome. Maybe that's where we need to go

01:29right now. Point forecasts are pretty useless when policy is so fluctuating. Right. Now, the current

01:35settings, let's call it the US and China for now because there are many tariffs on many different

01:40fronts. It's currently at 30%. And the notion that people are using this window of 30% to front load

01:47exports. What's your sense of how much shipments do you think will be front loaded? And I guess the also

01:52is 30%. That's still quite restrictive. Yes. So again, where is it going to end up at? Okay. Is the US

02:02going to see China as a partner? Or is it going to see it as a challenger? And they're both views

02:11represented inside the administration. I mean, Elon Musk sees it as a partner. Right. And you have people

02:17like Bannon who see it as a challenger. If you're a challenger, tariffs may even go up relative to

02:25where they have been sort of set now. If you are a partner, maybe the end game is 10% like everybody

02:32else. So I think the US can be a partner and a challenger with China on different dimensions,

02:39right? Different areas where we're competing, different areas where we're cooperating. So a lot

02:46is up in the air. And nothing is going to be settled by now for the Chinese. It's August again, 10th, 11th.

02:55The question is, how does it prepare business for what is to come? Are we going to say the 30%

03:01remains? Remember, 20% of that is fentanyl. Is that going to come off? Are there negotiations going on

03:08on that? Lots of uncertainty. Yeah. And who knows what else is part of that? Like,

03:12are exchange rates part implicitly for conversations? I guess the question I have now is,

03:17for monetary policymakers, what's the best thing to do? To sit until it's clear what you need to do?

03:24Or do you deliver insurance cut in case things go pear-shaped? Well, in the US, I think it's a very

03:30difficult position because the hard data are still with an economy which is growing at or above potential.

03:36Yeah. And so with that and the likely tariff effects yet to be seen but coming,

03:45you would have to be a fairly confident Fed to say, we cut now in anticipation of slower growth.

03:52My sense is the overwhelming opinion there is, let's wait and see. Of course,

03:57there are voices saying, should the Fed do a preemptive hike? That's the other thing.

04:01Yeah. My sense is that is probably off the table. For one, because, I mean, I think if the Fed hikes

04:08and then you have a serious downturn, the Fed gets blamed for the hike. The Fed is not political,

04:15but I think that will be part of the, do we know enough to hike now rather than wait and see and then

04:23react accordingly. So my sense is pause until you either see a significant slowing or you see a

04:30significant and expected sustained increase in inflation. I think only after you see that,

04:36you will not hike in anticipation of inflation. You don't have the data and you're not sure.

04:42So I think right now the best case is pause for whatever time it takes.

04:47I mean, the fact that you can make a good case for all three scenarios just tells us how complex

04:53this situation is. There's been a, maybe a separate story, questions around the fiscal

04:59integrity of the United States. Treasury yields are starting to see a premium. The dollar is starting

05:06to see a separate premium. What do you think markets should be thinking about?

05:10Well, there are a couple of forces certainly at work already there, right? One is

05:14the issues of fiscal sustainability given volatile administration policy. That was already emerging

05:22on the cards before this administration, but it has become front and center for this administration.

05:28Right. The second issue is foreign financing of US financial markets. And that's become more of a

05:36concern with the kind of weaponization, for example, of taxes. We have a clause in the current

05:43great tax bill in which the US reserves the right to tax certain foreign entities, if need be, if it's

05:53unfair, believed to be unfair for the US. Now, all that is determined in a not very systematic way.

05:59And so foreign investors are concerned that they might be overexposed to the US and therefore are in

06:06the process of trying to diversify. So both those factors are coming in at the same time. Worries about fiscal

06:11sustainability with the kind of expansion of the fiscal deficit embedded in the sort of extension

06:18of the Trump tax cuts, as well as the potential that foreigners might be singled out and therefore

06:26a worry which is causing them to diversify away. And to pull back a little bit, one of the other topics,

06:32I want to get your thoughts on this. You're, of course, with Chicago. The conversations around what's

06:38happening with Harvard and foreign students. And I think the news this morning around, I think,

06:43the other pausing interviews for student visas. How is that being, how is that playing out in your

06:48community, in your circle? Well, let's put it this way. Every country has the right to vet,

06:55you know, people coming in. But we must also remember that the US has benefited hugely from the

07:02influx of foreign students. The Sergey Brinz of the world came as students and did wonders for the US

07:09economy. So to some extent, the problem is the universities haven't made the case that they are

07:15so central to US growth, but also central to the distribution of that growth. The number of people

07:22Google employs is vindication of bringing in foreign students, for example. So my sense is,

07:32first, this is a political action which will play out over time. Second, the universities have to make

07:37a very strong case that they are essential for the United States future and not just in across the board

07:45education, but even in elite education. That's where the R&D comes, which keeps the US ahead of the

07:51rest of the world. If you start killing that, you're killing what is essential about the United

07:57States. How is this playing out, you ask? Well, there is an environment where universities are

08:03getting more worried about speaking out about their longer term interest because they fear it will,

08:09in fact, invite undue administration attention. And individual professors still speak out,

08:16but a lot of it depends on how safe they feel in visa protections, in their citizenship, etc.

08:24So it is not a great environment. This is an environment which is inhibiting the ultimate

08:30production that the universities contribute to the US economy. And I think it's worrisome in the longer

08:37run for the future of the United States because people remember what happens. And they do worry,

08:42well, even if views change in the administration, what happened once can happen again. And foreign

08:49students have choices. We were just talking, right? There are, you know, schools here in Hong Kong have

08:54put out statements and saying, you're welcome. You're welcome. I mean, do you think we will see an exodus

08:59of foreign students or a decrease? Not yet. Not yet. I mean, US universities still are seen as

09:05as the place to be. But I think if you erode the environment, somebody faced with, you know,

09:11I might be knocked out of my degree after three and a half years of work. Or I might see funding cut

09:17after working in a lab with a professor for two and a half years. People worried about the uncertainty.

09:24Same as businesses. People are making investment decisions. If uncertainty increases,

09:30you tend to either postpone the investment or take it to a place where things are more certain.

09:35You're absolutely right. I've talked to a bunch of university presidents while outside,

09:40and they're actually salivating at the idea of getting resources. Very smart talent.

09:44Very smart talented people from the US, not just students, but faculty members. One university

09:50president told me the normal hit rate for getting faculty was 40%. They made 100 offers. They got 40

09:57acceptances. Now he says the hit rate is closing on 100.

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