00:00There's an old trope, which people have leaned on over and over again, that trade wars are unwinnable.
00:04The thesis of this is, in fact, you can win a trade war.
00:08Yeah, and the way that we do that is that we broaden the definition of winning.
00:13So think about winning not as becoming richer, but as kind of minimizing your wounds, right?
00:21So if you think about a real war, no one wins in a real war. People die. It's terrible.
00:25But in some cases, you might have to fight, right?
00:28And so winning, in that case, as in trade wars, means minimizing your wounds, doing as best as you can,
00:34because in this era of economic conflict, we can't avoid the battle.
00:39So before we get to how to do that, why are we in an era of economic conflict?
00:43Because one of the things you talk about is how trade used to be kind of something that you took
00:47a little bit for granted in foreign policy.
00:49It just kind of worked. I mean, I remember studying this as a kid in the early 2000s.
00:53There was this McDonald's rule, right?
00:55No economy that had a McDonald's had ever gone to war with another economy that had a McDonald's because the
00:59trade kind of was the buffer for that.
01:01And then Russia invaded Georgia the first time around, and that went out the window.
01:04But why did it work, and it doesn't work now?
01:07Yeah, so I think the simple answer is, you know, we used to have a rules-based system, right?
01:12And you essentially had the Americans as the kind of global Navy fleet, right, patrolling the seas, making sure everyone
01:18played by the rules.
01:20And essentially what happened is over time, you know, we had the emergence of China.
01:25They didn't play by the rules. Trust was broken down.
01:29And the Americans said, you know what? No, we're not going to be the Navy fleet anymore.
01:32We're going to be the pirates, and we're going to, you know, fight for ourselves, and, you know, pirates bring
01:38a lot of chaos with them.
01:40But, you know, the underlying problem, which is that you have China, you know, doing its own thing, not playing
01:46by the spirit of the rules,
01:48means that that old rule book just isn't going to work anymore.
01:51And so, you know, we've got this kind of, you know, playing field where we can't just switch off our
01:57brains and say, well, what would the rule book say?
01:59We need to, you know, engage and react and learn how to fight.
02:03As you talk, I think of that Mark Carney speech at Davos in which he really says the rules-based
02:07order has failed.
02:08There's a recognition now as this trade war continues to unfold that maybe it wasn't so great after all that
02:15a lot of economies were left to the wayside
02:16as kind of the larger powers were able to enjoy the benefits of it.
02:19How do you react to that?
02:21How good, I guess, to put it bluntly, was the rules-based order for most countries in the world?
02:27So, okay.
02:28I mean, yeah, I think there was always this sense that, you know, the rules-based, who wrote the rules,
02:34right?
02:35Winners and losers, yeah.
02:36The biggest player, you know, the U.S. wrote the rules.
02:38It was pretty happy with the rules when it wrote them.
02:41You know, that said, for a smaller country, right, if you're not in a rules-based system, you're in a
02:46power-based system.
02:47And they don't do very well in a power-based system, right?
02:50And so, okay, maybe there were some bits, there were some things about the rules-based system that weren't, you
02:56know, nice or fair.
02:57But it might be better than a chaotic situation where essentially might is right.
03:02And if you find yourself opposing, you know, on the other side of a U.S. or a China, then,
03:08you know, good luck to you.
03:09So, yeah.
03:10So let's look at the recent trip of President Trump to China as kind of an example of where you
03:17think that went well, where you think that fight was executed correctly, who you think came out on top, and
03:22maybe some tips for negotiating with China on trade in the future.
03:28Okay, so, now, I, as, you know, like every other trade nerd in the world, was watching this meeting closely,
03:35was expecting or hoping for some deliverables, some concrete things we could analyze.
03:41And, you know, at the point at which Trump left for D.C., there wasn't really much.
03:47And I think, you know, this really speaks to the fact that we're not on a world in which President
03:53Trump can, you know, beat the Chinese with tariffs and the Chinese will kind of meekly say, oh, well, what
03:57do you want?
03:57Do you want us to announce some purchases to make you feel good?
04:00Right, we've kind of moved on from that.
04:02Why doesn't that work?
04:03Can you break down why that's just not a winning way to approach this?
04:06Well, I mean, the simple answer is that China can fight back, right?
04:10I mean, we saw last year when China threatened the, you know, the restrictions of exports of rare earths, these
04:17critical components that go into the defense industry, the waters industry.
04:21You know, China has weapons too.
04:23And, you know, after the first Trump administration, the Chinese went away and said, okay, we didn't enjoy that.
04:29How do we prep?
04:30Yeah, and this speaks to the bigger lesson when you want to fight a trade war, which is, you know,
04:35trade wars are like real wars and logistics win real wars.
04:39Prep wins real wars.
04:40You need strategy, you need planning, you need to build up your defense before you run onto the battlefield all
04:46guns blazing, right?
04:48And that's what Trump didn't do last year.
04:50And now I think we're in this kind of stalemate because the Chinese are, you know, pointing at that nice
04:55big shiny weapon and saying, you know, gee, wouldn't it be terrible if we used it?
04:58There are the principles fighting this war.
05:00Then there are those who are kind of caught up in it.
05:02And we had a conversation about a week ago with these spice importers who fought back in the court system
05:06against the president's latest round of tariffs.
05:08And one of the things we asked them was how did they decide to do this?
05:11Why did they feel like they had a shot at subverting what had been put in place?
05:14And they felt like they had to, and they thought about the wider impact of what they might do.
05:18In a trade war, what is the role of the regular person or the regular company who may disagree with
05:22the broader principles of the war, wants to fight back, I guess, against those who are waging it?
05:27Yeah, I mean, well, within the U.S. system, one of the main constraints on President Trump's activity has been
05:33the courts, right?
05:35And in the medium run, in the long run, if the U.S. wants to restore trust in its, you
05:41know, trading partners, then it's going to need to show that it's going to behave less erratically, right?
05:46And so, you know, that court system is one of, you know, is an institution that actually should play to
05:52the U.S.'s advantage, right?
05:53And so, you know, like one of the U.S. strengths is it has the rule of law, right?
05:58It has this kind of, well, it's supposed to have this kind of predictability to what it does.
06:03And so, you know, good on that importer for saying, well, you know, what are the rules we have?
06:10We're at least going to play by our rules, and are we going to make sure we meet those?
06:14But, you know, I guess realistically, I think, you know, a lot of ordinary people are kind of caught up
06:21in this, right?
06:23And, you know, the sad reality is these are big weapons being thrown around by big, big players, and we
06:30really just have to hope the fighting ends.
06:32We've only got about a minute left, but how effective are tariffs when trying to create an even playing field
06:38for trade?
06:39I had somebody, an economist once, tell me, you know, trying to tariff your way out of a trade imbalance
06:44is like him walking into Home Depot with econ books
06:47and being upset that they won't even out their, you know, their lumber that he's bought for his house.
06:50But is there a better way to do this?
06:53I mean, look, tariffs are not going to, they're not a reliable instrument for reducing your imbalances, if that's the
07:00thing you care about.
07:01Now, if there are particular, you know, products that are only coming from one place, maybe tariffs can give you
07:07an incentive to diversify away from that place.
07:09You need to make sure it's not going through other places, but yeah, it's hard.
Comments