Brad Setser on the Damage From Trump's Gigantic Tariff Shock

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, another day, another emergency podcast.

Joe Weisenthal (0:27)

We're gonna do a lot. This is a fact, this is the-

Tracy Alloway (0:31)

I should just resign myself to this inevitability, right?

Joe Weisenthal (0:34)

The story of the tariffs, the market reaction, the global reaction is the central story of our time, one of the biggest stories of our entire career. I think perhaps, depending on how things could go, a bigger story than the past two big stories of the great financial crisis and the COVID shock, we're gonna be doing a lot of episodes about what this all means.

Tracy Alloway (0:57)

This is what is mind-blowing to me, because when 2008 happened, I remember thinking this was the biggest thing that had ever happened in modern finance and the modern economy. And then in 2020, I remember there was a very vibrant debate about whether or not the pandemic and the market sell-off would end up being the central crisis for a new generation. I think in retrospect, it certainly was. A lot more people remember 2020 than they remember 2008 now. And here we are, just five years later, having another discussion about how big this is inevitably going to be. So on that note, we are recording this on Friday, April 4th. The market is selling off yet again. We had Trump's new tariff announcements. Those were released on Wednesday, April 2nd, Liberation Day. Investors have been, I mean, I would say, pretty much panicking since then. And what's more, overnight, coming into Friday morning, we've started to see some reaction from other countries, notably China. The US is one of the U.S.'s biggest trading partners. And they say they're instituting a 34% reciprocal tariff on US goods. So things seem to be escalating.

Joe Weisenthal (2:10)

Totally. You know, I'm just going to make one short comment here, which is why I think this might be end up being a bigger story than the great financial crisis potentially. And that is banking crisis happen. They happen around the world. They've happened in the US. They've even happened in the US between massive crises. And there is a playbook and there is a response. And you try to reflate the economy and stuff like this. This is different because this is a policy choice purposely aimed to completely reorient America's relationship with the rest of the world and reorient the internal economy. And so it's very different than sort of like, oh, you have a run on the bank, which happens for, we had one in March, 2023, we had a run on the bank. You know, this is very different in terms of the entire relationship of both the internal and the external economy. And it may end up being more consequential for better or worse than the great financial crisis.

Tracy Alloway (3:04)

I don't disagree with you, but I'm just gonna say one thing. Number one, that's not a short comment. Number two, you're right. This is an entirely self-inflicted own goal, basically, by the Trump administration. Like, it is their decision to do this. And they presumably knew what the results were gonna be, right? They decided not to hold the Tariff Press Conference while the markets were open. They knew that coming out was something that was worse than a lot of professional economists and analysts had expected was going to have this impact on the market. And here we are. So this is something that the administration has chosen to do. Obviously there's lots going on. Obviously we have a lot of questions. Who do we turn to when we have trade questions? We do in fact have the perfect guest. We're gonna be speaking with Brad Setser, senior fellow at the Council on Foreign Relations and a longtime trade expert, one of our favorites to talk to. The last time we saw him was actually at our pre-election event at a live show in New York. And Brad, I remember speaking to you there. There were a lot of concerns about what Trump could do on trade. How has the reality shaped up to expectations here?

Brad Setser (4:16)

Well, look, Trump did campaign on an agenda that was tariffs and more tariffs. He campaigned on a 10% across the board tariff and prohibitive tariffs on trade with China.

And at times, he did suggest that 10% was the minimum. That said, a lot of people close to Trump, a lot of people who found their way into the administration, were sending different messages privately to people in the financial markets. People like Scott Besant were talking about how Trump's plan was escalate to de-escalate. The tariffs were a negotiating tool. They weren't a tool to upend the global economy. I think what the announcement on Wednesday showed is that the decision of the administration, not surprisingly, was to follow President Trump's instincts, not the instincts of his more moderate advisors, to go all in. And that the goal really is to, as you guys suggested at the beginning, to radically restructure the US and global economies using tariffs as a tool, with some flexibility, perhaps, to negotiate at the edges. But fundamentally, this is a test of what you can and cannot do with tariffs. And there was very little restraint, I would say, apart from, strangely enough, Canada and Mexico, USMCA, on the level of the tariffs. So the tariffs are set at levels which are just going to, frankly, be painful.