Maurice Obstfeld, former chief economist at the IMF and professor emeritus at Berkeley, joined "Forbes Newsroom" to discuss President Donald Trump's tariff plan after he put a pause on most reciprocal tariffs for dozens of nations, kept the baseline 10% on most foreign imports, and continued to escalate the trade war with China.
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NewsTranscript
00:00Hi, everybody. I'm Brittany Lewis, a breaking news reporter here at Forbes. Joining me now is
00:07Maurice Absfeld, former chief economist at the IMF and professor emeritus at Berkeley. Maurice,
00:12thank you so much for joining me. My pleasure. I really appreciate you joining me today to really
00:18make sense of this tariff roller coaster we've all been on for the past week and a half. As we know,
00:24on Liberation Day, April 2nd, President Trump unveiled his sweeping tariff plan and the markets
00:30reacted swiftly to that. Stocks plunged. Trillions of dollars were lost around the globe. This
00:37Wednesday, President Trump reversed course. He implemented a 90-day pause on the reciprocal
00:42tariffs and he ratcheted up our trade war with China. What is your reaction and how do you make
00:48sense of what's happened in the past week and a half? President Trump has set out to reshape the
00:57world economy in a way that the U.S. has balanced trade with all partners. And that is a fool's
01:05errand, if I can put it that way. The U.S. has an overall deficit with the rest of the world because
01:13it spends more than it produces. And moreover, that deficit will, if anything, increase as Congress
01:22goes ahead with its fiscal plan of cutting taxes and increasing the path of deficits. So President
01:34Trump is trying to do something that is not really feasible. And in the process, he's bringing down the
01:40world economy. He's destroying trade relationships, which he says he wants to negotiate. The goal of
01:49these negotiations is really unclear. And he's probably driving the U.S. into recession. We see
01:57this in consumer expectations and business expectations. Early indicators of activity all are pointing
02:06downward. You're saying that this is a fool's errand to reshape the world economy. I mean, what are the
02:14implications here? Because as we know, he was he introduced a tariff plan and he largely rolled that
02:20back, largely paused that. So explain what you mean by fool's errand. I mean, what is this going to shake
02:26out to be in the short and long term? Well, the first thing you have to ask is why does the U.S.
02:33engage at all in trading relationships with the rest of the world? And the basic reason is that,
02:40you know, the same reason that you engage in trading relationships with a range of economic partners.
02:47There are some things you do relatively well. There are other things that others do better. It makes
02:53sense for you to specialize on what you do well and to purchase goods and services from those who are
02:59better equipped to deliver them. And the same principle applies in international trade.
03:07We import vanilla from Madagascar because we can't grow vanilla. Madagascar is too poor to buy a lot of
03:16the things that we're good at producing in the U.S. So we have a bilateral trade deficit with Madagascar.
03:24That doesn't mean, as President Trump and his team seem to believe, that Madagascar is discriminating
03:32against U.S. goods. You're engaging in unfair trade practices. Now, if you look across the whole range of
03:39our trading partners, we have more deficits than surpluses. Again, that's not because they're all
03:47cheating in trade. In some cases, there's cheating, but that's not the dominant factor. The dominant factor
03:56is that we spend a lot. Our federal government deficit is 6.5% of GDP, more or less. The private sector
04:10has a very low personal saving rate. And yet our investment remains pretty robust. So to finance that
04:17investment, if we can't finance it out of our domestic saving, it's got to come from the savings
04:25of the rest of the world. And so we end up running an overall deficit. The tariffs are not going to change
04:31that. Forcing countries to reduce certain non-tariff barriers is not going to change that fact. And if you
04:42insist on reducing this deficit through exorbitant tariffs on our trade partners, you may succeed in reducing
04:53it by driving the U.S. economy into recession. In other words, by reducing our consumption and investment
05:00so much that we actually have a higher trade balance to the rest of the world.
05:09World leaders were swift in their reaction of President Trump's trade policy, essentially saying,
05:14hey, America, you don't do this to your friends. It's essentially like the U.S. is holding a gun to all
05:21our allies' friends, saying, hey, you need to come to the table and negotiate or you're going to be
05:25stuck with these huge tariffs. What does that type of trading policy do to our partnerships around the
05:31globe? Well, there's a very intimate relationship between trade policy, foreign policy,
05:43and the international status of the dollar, for example. You know, when we strike out at our allies,
05:55when we indicate to them that our aid, our security assistance, all are contingent on their
06:10bowing to our economic demands. That really undermines the global community's trust in the United States
06:24as a responsible steward of the world monetary system and the world trade system. And part of
06:30its stewardship is the dollar, which is the world's currency, in effect. The closest thing the world has
06:40to an international currency is the dollar. It's widely used in markets throughout the world to
06:48denominate financial transactions, to invoice trade, and as a reserve currency. And when you undermine
06:57belief that the U.S. has strong institutions, that these strong institutions favor responsible
07:09international engagement, then people begin to doubt the reliability of the dollar. And in fact,
07:16what we've seen in the last week or so, starting a couple of days after Liberation Day, is rising
07:27Treasury yields coupled with a sharply depreciating dollar, which is an indication of loss of confidence.
07:36Generally, when Treasury yields go up, the dollar strengthens because the rate of return on dollar
07:44assets has made the dollar a more attractive store of value. But if the world is basically selling off
07:56Treasuries and selling off U.S. assets because they've lost confidence, then the yield on Treasuries has to rise
08:04to persuade people to keep holding them, and the dollar is going to fall. And that's what we've been seeing
08:09in markets for the last few days.
08:12Can you talk about a little bit more the long-term impacts of that? What will happen long-term when
08:18around the globe, people are doubting the reliability of the dollar?
08:22Well, long-term, I think countries will try to separate themselves from the dollar system.
08:34You know, foreign corporations, foreign banks will be less likely to borrow in dollars than they are now,
08:43just because the reliability of the U.S. is in question. It will also be the case that the
08:55interest rates at which the U.S. can borrow, at which the federal government can finance itself,
09:02are going to rise. And that's going to make the deficits of the federal government, which seem
09:09set to increase, even more expensive to finance over time. That puts the U.S. fiscal position in a
09:17perilous spot. I want to now turn to the U.S. trade war with China, because when President Trump announced
09:24the pause on the reciprocal tariffs, he also announced that he was ratcheting up tariffs on
09:29Chinese imports to 125 percent. The White House clarified those were at now 145 percent. China
09:36retaliated with 125 percent tariffs of their own. What do you think of this tit-for-tat trade war with
09:42China with the two world's biggest economies here? Well, the U.S. and China have begun a process of
09:51decoupling. This really started in the first Trump term, and so trade with China is less than what it was,
10:00say, eight years ago. On the other hand, it remains pretty extensive. And it's a two-way street. We do
10:10have a very big deficit with China, but we import items from them that we absolutely need, such as
10:18rare earth minerals, pharmacological precursors. They're a very important source for those commodities,
10:29and those are essential to several of our industries. It's also true that a lot of small
10:39businesses in the U.S. absolutely depend on Chinese inputs. And if you raise the price of those by 145
10:51percent, it's hard to see how those businesses can stay in business, at least at the levels
11:00that currently prevail. Those businesses employ workers. They're going to have to lay those workers
11:06off. It's not a really pretty picture at all. So the trade war comes with significant costs for us.
11:16Also costs for China, but China's politics are very different from ours. You know, just take an example,
11:25farmers in the U.S. are getting hammered by Chinese trade barriers. Back in the first Trump administration,
11:35that happened. Trump's administration then deployed $28 billion in relief payments to farmers.
11:45These are being discussed again. But you can't go around paying everyone off to compensate them for
11:55the negative effects of tariffs. It may be that you compensate farmers to some degree,
12:05because they're in critical states with Republican senators. You can't compensate everyone. You
12:13can't compensate all the small businesses that are going to go under. And even the farmers
12:20say, look, we don't really want compensation. We'll take it. But we'd rather, you know, have strong export
12:26markets. And there's long term damage. You know, after the last round of trade wars in Trump's first term,
12:37China substantially shifted its soybean demand to Brazil. That hasn't come back. Now their demand is
12:47probably going to just dry up completely because they simply can't rely on the U.S. as a source of
12:58agricultural goods if they're going to have to be responding to tariffs like the ones that Trump has
13:05imposed.
13:06I want to read a quote that you wrote in The Economist pre-pause about President Trump's
13:13tariff policies. This is what you wrote. Trump won the 2024 election by convincing voters that his
13:18policies, tariffs included, would produce butter, lower prices, growth in manufacturing jobs,
13:24all without economic pain. The reality that Liberation Day revealed is different. The president has launched
13:29a costly all fronts assault to restructure the global trading system. It has already caused the
13:35odds of recession to jump. Now we're sitting here post pause. But while recession fears were stoked when
13:42the tariff policy was announced, pre or post pause, people are still scared about a recession. They're
13:47saying, hey, the odds are still just as high or almost just as high. Where do you think we are in
13:53terms of a recession? Do you think we're still heading in that direction?
13:56I would say the odds are significantly better than 50-50. I know that some forecasters
14:05sharply reduced their odds after the pause. But look where we are. The trade war with China has only
14:13escalated. We still have tariffs on autos, on steel, on aluminum. These are really going to be
14:24crippling for several industries. We have a general 10% tariff, which has remained in effect, which is
14:32going to raise costs across the board. And, you know, the perception after the initial relief from the pause,
14:43is that the administration goals are pretty unrealistic. The idea of meaningfully negotiating a reduction in
14:57trade barriers with a large range of countries in a period of 90 days is just not realistic.
15:09So you very quickly have to look at the end game. You know, where will we be in 90 days?
15:17There's no certainty that trade deals will be reached. It's not even clear what the Trump
15:25administration is asking for. Are they going to ask Europe to dismantle its value added tax?
15:30Europe isn't going to do that. So where are we going to be three months hence? Meanwhile, one of the main
15:38causes of the recession forecasts, which is the huge uncertainty about trade policy that
15:46continues to spook consumers and deter investment, that remains in place. So, you know, thankfully,
16:00the sort of immediate, I would say,
16:05not very well motivated, but very high Liberation Day tariffs have been paused. But there's huge
16:14uncertainty about where we go from here. And of course, some of our trade partners also pause their
16:22retaliation for 90 days. But that very much remains on the table. So I, yeah, I think I think we're very
16:33much on edge and the economy is very much on edge about where we go from here.
16:39And despite the pause, I mean, we're still seeing the highest tariffs since the Great Depression.
16:45So I know that we have 90 days, a little less now because the 90 day pause was announced just a few
16:50days ago. But what specifically are you looking out for between now and then? And I do know there is
16:55a ton of uncertainty. But are there any signals, any indicators that you're looking for?
17:00Well, I'd like to see how negotiations proceed. So far, you know, we literally know nothing other than
17:14the vague assurances that large numbers of trade partners are approaching the US looking for
17:24looking for deals. But the the likelihood that those deals make any progress, I think is is very
17:34unclear. I'm also looking at how the asset markets react in terms of assessing recession prospects. I
17:45think the bond market is incredibly important. I think these spikes in Treasury yields are very negative
17:53for the economy. And I think I think the you know, we focused a lot on the trade war in terms of the
18:01Treasury yields. But I think not enough attention has been paid to what is going on in Congress
18:08in terms of advancing the president's budgetary priorities. Congress is preparing a large package of
18:19tax cuts. They're claiming that these really aren't tax cuts because of their argument that extending the 2017 cuts is not a cut. But it is a cut in terms of
18:35CBO practice and in terms of CBO forecasts of the deficits path.
18:44And, you know, what they're doing is basically pretending that they're not raising deficits down
18:53the road and undermining the norms of the reconciliation process that have been followed up until this point.
19:04And all of that is very negative for the US fiscal position. If the US is going to be pumping out all of this debt
19:12into the world in the next couple of years, that's going to push yields up.
19:18I think the the markets are anticipating that. And if that happens in an environment of a trade war,
19:26where countries, especially China, which is a very large holder, become much more reluctant to buy Treasury debt,
19:37that's going to be very negative for bond prices and Treasury yields. So I think that's something to
19:43watch going forward. There's a there's a there's a real negative feedback loop between
19:49Congress's budgetary negotiations and the trade war. And I suspect one of the reasons why the president
20:00backed down so quickly when bond yields spiked is because, you know, on that very day,
20:08his administration was trying to persuade several holdout Republicans in the House to back the budget
20:15plan. So these these developments fit together. They're all negative for bond prices. And
20:28you know, I would hope that our policymakers in Washington recognize that the fiscal position is
20:35fragile and the fragility is magnified by what's going on in the trade sphere.
20:42Well, there is certainly a lot to keep our eye out for, and especially as the budget negotiations
20:49continue to play out. I hope you come back on and join me. Maurice Opsfeld, thank you so much for coming on.
20:55My pleasure. Thank you.