How Trump's tariffs on China could backfire

After Black Friday comes Panic Monday. Today stock markets around the world continued in a downward spiral as the ripple effect of Donald Trump's sweeping tariff announcements triggers fears of a global recession. But the US president remains unfazed by the havoc he's wreaked. Sometimes you have to take medicine to fix something, he says. It's quite unclear what exactly he's so eager to fix, but to many around the globe his medicine feels like too bitter a swallow. I'm Nicole Frilich in Berlin, and this is the day. Our country has gotten a lot stronger, and eventually it'll be a country like no other. It'll be the most dominant country economically in the world. There's pain in the market. At some point you're unwilling to tolerate this idea of a Trump putt. Is there a threshold? I think your question is so stupid. I mean, I think it's a, I don't want anything to go down. But sometimes you have to take medicine to fix something. That was Donald Trump on Air Force One defending the market turmoil caused by his tariff policy, calling it the medicine the global economy needed to take. Now China gave Trump a taste of precisely his own medicine in return. Last week Beijing was among the first to strike back with its own tariffs on US goods as well as export curbs on rare earths. Now Donald Trump has doubled down, threatening even more punitive measures against China. With China, as you know, against my statement, they put a 34% tariff on above what their ridiculous tariffs were already. And I said, if that tariff isn't removed by tomorrow at 12 o'clock, we're putting a 50% tariff on above the tariffs that we put on. I have a great relationship with President Xi. I hope it's going to stay that way. I have great respect for China, but they can't do this. We're gonna have one shot at this, and no other president's gonna do this, what I'm doing. A lot to unpack here. And for that, let's bring in Edward Alden. He's a senior fellow at the Council on Foreign Relations, specializing in US economic competitiveness and trade. Edward, welcome to the show. Global markets have been plunged into utter chaos. Was that Donald Trump's plan? Well, no, I don't think it was his plan. I think he wanted the tariffs to be disruptive. But I think what he believed was that there would be very quick responses by other countries promising to negotiate. Those that weren't willing to negotiate would adjust. They would be scared of additional US retaliation, so they wouldn't hit back the way China has done. He really overplayed his hand quite dramatically, and I think the market response underscores that. How worrying is it to you that Trump seems fairly untroubled by the market roller coaster that we've seen today? I'm pretty worried by it for two reasons. One, this is an old issue for him. This is something that Donald Trump has wanted to do going all the way back to the 1980s when he was upset with Japan over what he felt was unfair trade competition with the United States. So he is fixated on this issue, has been for decades. The second thing that concerns me is he doesn't really have anybody to blame. If you look at his Rose Garden press conference, he was standing up there alone. He has owned this policy, and that makes it harder for him to walk away. That said, I am sure that the phones are burning up at the White House and to all his top officials from all his business friends saying, look, this is a catastrophe and you need to do something and do something quickly. Yeah, because we're witnessing him take down the decades old global trade architecture that the US built. What exactly do you see as his end game here? You say he had a fixation with this long ago already. Does the way he's trying to get to wherever he's trying to get, does this methodology make sense to you? I don't think there's a strategy here, and that's why we're all scratching our heads a bit and the markets are in this state of massive uncertainty. He basically has a core belief that tariffs are good, that it will help to rebalance imbalanced relationships, that tariffs will bring in revenue for the US Treasury so he can do big tax cuts. And in some cases, revenues will force US trading partners to make dramatic one sided concessions so that he can take those deals and claim victory. And again, just to repeat myself, I think he massively overreached. It would have been one thing to go after a handful of countries that he thought for whatever reason were particularly bad actors. But to take on the whole world in this way was just too big a lift, even for a man as ambitious as President Trump. And so I think he's in real trouble now and does not know how to respond. Let's look at one of the biggest players on the global stage he took on, China. He says he's open to negotiate with pretty much everyone except for Beijing. He's also threatened an additional 50% tariffs on Chinese goods. Can he afford to play hardball like this? China needs the US, yes, but the US also needs China quite badly. Absolutely, I mean, and not just because of what we export from China, but because of the critical inputs into a whole range of US manufacturing industries and into the US defense industries for that matter under the Biden administration. And actually to give him credit, Trump before that, we've seen efforts in the United States to try to reduce dependence on things like rare earths from China that are critical for many industries and for the defense establishment. The United States reigns extremely vulnerable. If this had been a China only set of actions with reasonable support from Europe and from other countries, then I would say the United States was in a reasonably strong position. But President Trump has made enemies of every other nation at the same time. So I think left the United States in an extremely vulnerable position in trying to prosecute this trade war with China. I mean, China has a lot of chips. They are far from powerless. And this is going to be very hard for the United States to take on such a huge fight when it's also warring basically with every other country in the world at the moment. Yeah, and China didn't ponder its response for too long, did they? They gave Trump a taste of his own medicine. Is that you think the way to deal with him to rein him in maybe and show him the limits of where he can actually get with this kind of attitude on the global stage? Or is it just what gets us deeper and deeper into a trade war? Well, it's both of those, right? If you run basic game theory calculations in order to be credible with big threats, you have to be prepared to carry them out. And the hope is that this will cause the United States to change course. But if it doesn't, then you just further escalate the trade war. I mean, you can see the Europeans wrestling with this right now, making offers to negotiate, though, to be clear, the zero for zero offer is not a brand new one. The European Union has made that in the past, and the US hasn't bitten for various reasons. But Europeans are making offers to negotiate, but at the same time saying, look, we're prepared to retaliate and to pull that trigger. There are other countries that have not retaliated yet that are kind of waiting to see. I don't think anyone knows what the best response is. There's an argument for other countries to inflict as much pain as they can on the United States to try to force the president to change course. But if you're wrong, then that's a costly strategy. I mean, remember, terrorists just don't hurt other countries, they hurt your own consumers. They raise prices dramatically, so they are not a costless retaliatory tool for the countries that are using them. Let's look at the responses the EU is pondering right now. Brussels is considering activating its strongest trade tool, the anti-coercion instrument. That was initially drawn up with countries like China and Russia in mind. What do you make of the fact that the EU is even considering, even if they don't go through with it, but considering using what's being nicknamed the trade bazooka against its biggest trading partner? I mean, again, you kind of have to look, the US fired, I actually must confess, I don't know exactly what comes out of a bazooka, some very large round, but the US fired the first large round in this war. And so I think the Europeans are again doing that calculation in order to show the Americans that we're serious, what kind of response do we need to invoke? And the anti-coercion instrument gives Europe the power to do a range of things that go beyond simple tariff retaliation. But again, that's dangerous, right? If the Europeans start going after US tech companies or doing other things to try to damage core US interests, then the Americans may find other ways to respond as well. And this is, again, why you don't want to go into these trade wars, because they become very uncertain and very costly. And again, to get back to where we started, that's why the markets don't really know how to respond to all of this. There does not seem to be an off-ramp at the moment, and there is the possibility of seriously damaging further escalation. I don't think the US is going to do more than it's already done unless other countries respond, in which case the US could up the retaliation that much more. We're in a really, really dangerous game right now. We're talking about this a lot. And it very much sounds like you believe that the US- It's another news story, but it's big stuff, right? This is big stuff. It sounds like the US can't be viewed as a reliable trading partner right now. Can any good come of this, though? No, I don't think any good is going to come of this. I think there are tariff strategies that you can use to improve compliance with trade rules and to address imbalances. But this sort of sweeping across the board measure, I think, is harmful from beginning to end. And if we're honest about what the United States is doing right now, it's behaving like a rogue nation. I mean, no, nobody can trust the United States. Why should they, given what it's done over the last week? Not just the size of the tariffs, but the ridiculous crude formula that was used to calculate those tariffs and the lack of anything that looks remotely like intelligence strategic planning. No consultation with allies in advance. You can check box after box after box that shows the US has become an irresponsible player in the global economy. And that's just a real challenge for the world because the United States is the biggest player in the global economy and for a long time was, with some notable exceptions, a guardian of the rules. And that is simply not the case anymore. That's Edward Alden of the Council on Foreign Relations. Thanks so much. Great speaking to you. Good to be with you. Right. I'm joined now by Morris Obstfeld. He's a senior fellow at the Pedersen Institute for International Economics. Good to see you, Morris. Donald Trump has threatened to impose an additional 50 percent tariffs unless Beijing rescinds its tariffs on the US. Are you as worried as everyone else that China might stand firm here? I think there's a good chance China does stand firm. China has less trade with the US now than it did at the beginning of President Trump's first administration. They've taken steps to insulate themselves and the US has decoupled more from China. So I don't really see them backing down. And they know they can do significant damage to key Trump constituencies, for example, in the energy and agricultural sectors. What impact will China's retaliatory, I know we're asking to crystal ball here, but we don't have anything else to look forward with. What impact will these tariffs from China have on the US economy? Well, the basic negative effects of tariffs are to raise prices, also prices of some intermediate imports that go into producing essential goods. So the tariffs are going to just increase those costs by an order of magnitude. I think they'll be very damaging for the US economy. So, Morris, if we are to avoid a global recession, this relationship between the US and China is the most influential. Would you in principle agree with that? President Trump is at war with all of his trading partners. That includes Europe, that includes the rest of Asia, that includes developing countries. So I think the relationship with China is important, but to single it out as the key element, I think is wrong. I think this is a very broad based assault on everyone. And the global effects are going to be very pervasive for that reason. What about US companies and the private sector, the investors, they've lost a lot of money, all of them pretty much. If the big names with serious wealth start breaking ranks and criticising Trump, is that the point at which the president might rethink this strategy? So far, the big names have been remarkably quiet. I don't know at what point they begin to speak out. There's only been scattered hints of opposition. I see President Trump as being quite determined to pursue this path. He believes deeply in what he's doing. If there's one topic on which he's been very consistent for decades, it is his love of tariffs. And I think it'll take a lot to dislodge him from this path. And with that in mind, we start looking for potential solutions. The EU is working on one, and it's said to be floating the idea of dropping all tariffs on US goods and pitching a free trade between the US and EU. Is giving Trump something that looks like a victory a good idea, perhaps? Well, free trade between the US and the EU would be a good idea. And in the Obama administration, there was an initiative floated called the TTIP, which was going to create just that. It was one of two initiatives. The other one was TPP. And at the time, Trump pulled out of the TPP deal. It had been completely negotiated. He was not favourable to TTIP. But that would be a constructive way to move forward in resolving these issues. Now, if you look at the actual tariffs that President Trump imposed, they're not based on actual trade barriers. They're based on bilateral trade surpluses that various countries have with the US. So what he's been calling for in his most recent comments is an elimination of those surpluses. That's not something that can be done by putting down trade barriers, because those surpluses have macroeconomic causes linked to countries' saving and investment rates. Maurice Obstfeld at the Pedersen Institute for International Economics. Thanks very much for your time. Thank you.