Front Burner - What did Trump just do to the economy?

Episode Date: April 11, 2025

U.S. President Donald Trump announced a 90-day pause on much of what he calls "reciprocal tariffs" barely a week after first imposing them — while also implementing a 10 per cent tariff across the board on most countries, and a whopping 145 per cent tariff on China.Markets first soared at the news, then went back into freefall. Members of Trump's cabinet claimed this was the strategy all along. The chaos even brought the stability of U.S. government bonds into question.Justin Wolfers, a professor of economics at the University of Michigan, unpacks what's really going on here, and why Trump's past dealings with Canada could provide some insight into how it will all shake out.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts

On the 80th anniversary of the liberation of Auschwitz comes an unprecedented exhibition about one of history's darkest moments. Auschwitz, not long ago, not far away, features more than 500 original objects, first-hand accounts and survivor testimonies that tell the powerful story of the Auschwitz concentration camp, its history and legacy, and the underlying conditions that allowed the Holocaust to happen. On now exclusively at Rom. Tickets at rom.ca. This is a CBC Podcast. Hi everyone, I'm Jamie Poisson. Today on the show, Justin Wolfers is with me. Justin is a professor of economics at the University of Michigan.

He is a contributing columnist for the New York Times. And at one point he was named by the IMF as one of the 25 economists under 45 shaping the way that we think about the global economy. I've been following his analysis of what's happening on social media and have found it to be super helpful so we were very glad that Justin said yes to our invitation to come on to the show. I spoke with him midday on Thursday about what he's making of Trump's tariff pause and the intensifying trade war with China, among other things.

All right, let's get to it. Justin, hi. Thank you so much for being here. I wish I could be here under happier circumstances. I do too. I do too. But I'm really glad that you're able to join us today. So as you know, Trump paused his reciprocal tariffs for 90 days on countries with the exception of major tariffs that remain

on China. Then there are these 10% blanket tariffs, which it turns out don't apply to Canada, but we do have steel and aluminum tariffs and auto tariffs. How are you thinking about the pause? Was it a major walk back? Right. So what we know is that financial markets were ecstatic on the news. American stocks rose nine and a half percent yesterday, which is just extraordinary. It's been amazing. We had a big day yesterday. There will always be transition difficulty, but we had a, in history, it was the biggest day in history, the markets. So one view would be, oh, he walked back the tariffs. That's what drove all of that. But the reality is he didn't walk back a lot of the most important tariffs and in fact, a

majority. We are watching the opening of the US markets one day after stock surge on news that US tariffs on dozens of countries would be put on hold for 90 days, but it looks like the markets might be heading lower once again amid the ongoing trade war with China, which was exempt from that. One way to think about this is what is the average tariff rate that Americans will pay on all of their imports? So this averages across all the different countries and all the different rates and

all the different things. And as of yesterday morning, it was 32%. Most industrialized countries are around about one or 2%. The US used to be one on 2%. So it rose from one or 2% to 32%. So 15 or 20 times higher than any other country around the world. Sort of depression era Smoot-Hawley style tariffs.

That 32% came down to 25%, which is still at least as high as it was during the Smoot-Hawley tariffs. Still puts us 15 times higher than most of our major trading partners, but does move the United States from being the world's most tariffy nation to now being number two behind that economic powerhouse, Bermuda. Wow. So actually, three quarters of it's still here. Now why then did markets respond so positively?

Why has the press breathed a big sigh of relief? I felt relief flood through my body, I'll tell you the truth. And I think it's because we learned something else. One reason why the markets responded so negatively to the first set of tariffs is they were frankly insane. They had no rationale. They were poorly thought through. They were barely implementable.

The different rates in different countries made absolutely no sense. And that was a big call. Hey, the lunatics are in charge of the asylum. What we learned yesterday is it's a bad thing to have lunatics in charge of the asylum. What would be even worse is if the asylum chief was not willing to ever listen to outside advice or reverse course. What we learned is that when President Trump was staring straight down the barrel of an almost certain recession, he was willing to walk back.

And so what you really heard was a big sigh of relief from financial markets, not really just about tariffs, but actually about the general nature of the administration. I've seen reporting saying that, you know, it was a lot of things that probably convinced him, but that it was ultimately what was going on in the bond market that tipped the scales. And I just wonder if you would agree with that. And also if you could explain that to me. Well, I don't think it's obviously true. None of us are in the room where it happened, but, uh, you know, secretary of the treasury, Scott Besson said yesterday, actually the president already decided this last Sunday, the problem with this administration is you can't

tell when he's lying when he says we were lying earlier this week or he's telling the truth when he says he was lying earlier this week. But if that were the case, then that happened before the bond market ructions. So look, the chances of recession rose dramatically. And if Trump had stayed the course, it was Trump had stayed the course, it was increasingly close to certain. You had stocks falling dramatically day after day after day. And you had business leaders calling the White House saying, this is Lunacy, please stop. So it would have taken a lot to just keep going. Now is it the bond market? So now let me come back to what happened in the bond market. So the market of US treasuries, a particular kind of bond, is when the American government borrows money.

It can't just go to the bank. What it does instead is it sells a bond. Basically, I can give the American government $100 and then in a year's time, they might give me $103 back. That's what a bond is. And what we saw was that the interest rate on those bonds started to rise pretty dramatically. Normally, when the world becomes more tumultuous, investors rush to buy American bonds. And the reason is, with the strength of the American economy and a great history

of paying its debts, American bonds are regarded, US treasuries are regarded as being the world's safest way to save your money. Mm-hmm. So normally you would have expected these to become more attractive. And when they become more attractive, they don't have to offer as high of an interest rate. What we saw was the opposite happening. We saw the interest rate on these rise. People didn't want to be lending money to the US government. So this is effectively the bond market having a vote, the vote being I don't really trust that the American government has its house in order and I'm really worried.

I don't want to be a part of this. Why does that matter? Well, remember this is the interest rate that the United States government pays on its debt. We have a massive debt. Does any of your listeners know if you've ever looked at your mortgage, if you change the interest rate by even just a quarter of a percentage point, it has massive implications for your monthly payments. Well, the same thing is true here. So we saw markets no longer willing to trust the US government. We also saw a few emerging signs of technical problems in the financial plumbing.

It's honestly a bit too dull to get into, but it can cause fears that something like 2008 global financial crisis on a different scale right might be in the works. I want to get into with you now the impact of the current tariffs, you know, because as you said, they're not small. The US has placed a 145% tariff on Chinese goods. China has placed an 84% tariff on American goods, and then we have these 10% blanket tariffs and then additional tariffs like I mentioned. What kind of effect is that going to have net for people? Right. So the Chinese tariffs are so high that it's almost like you close the border.

Because if you double the price of something, most people wouldn't buy it. That's not quite true. There are some things like rare earth minerals that we have to get from China either way. So what that now means is that's going to become immensely more expensive. So bad news for the US, also bad news for China. Now realize though that the US has instituted a trade war against every country in the world. So that's going to be hard for us to find who knows what happens when the pause ends. So the following was definitely true yesterday and may be true in 91 days.

It's going to be harder for Americans to find reliable trading partners. But for China, China is not in a trade war with the rest of the world. It's only in one with the United States. And so they have plenty of willing trading partners, people interested in doing business together, forming relationships, getting a little bit closer. And so I think the pain in China may turn out to be smaller than that on the United States. I saw Scott Bessent say on Wednesday, This was driven by the president's strategy.

He and I had a long talk on Sunday, and this was his strategy all along. And you might even say that he goaded China into a bad position. They responded. They have shown themselves to the world to be the bad actors. What do you think he's talking about here? I think this is what, look, I'll tell you the truth. I was in the 11th grade and my high school girlfriend dropped me. Just dumped me for no reason.

And I said, yeah, I was going to do that anyway. Right. It turns out none of my friends believed me. I don't know why it could have been true. Um, but you know, Scott Bessent sounded a little bit like 11th grade Justin. Um, look, the administration has known it wants to do tariffs, but hasn't understood why throughout this whole entire thing. Right. So remember tariffs, first of all, were about border security, then they were about fentanyl,

then they were about national security, then they were about on-suring manufacturing, then they were about tax revenue, and then they were about unfair trade practices, and then they were about bringing trading partners to the table. If what you wanted to do was bring someone to the table, the simplest way to be honest is just call them. The US has shown that it can do that because Trump did that with Canada in his first administration. Did he ever? Yeah.

So, you know, we've seen that movie before. So to say it was all about bringing everyone to the table, if that were the case, why did we have different tariff rates on Vietnam than on Australia? The design of these tariffs tells us that this was not the original plan, as does the direct language used by the administration throughout. On the 80th anniversary of the liberation of Auschwitz comes an unprecedented exhibition about one of history's darkest moments. Auschwitz, not long ago, not far away, features more than 500 original objects, firsthand accounts and survivor testimonies that tell the powerful

story of the Auschwitz concentration camp, its history and legacy, and the underlying conditions that allowed the Holocaust to happen. On now exclusively at ROM. Tickets at rom.ca. I've just been to Specsavers and upgraded my lenses to extra thin and light with 50% off. Now, what else can I upgrade? My cat? Wow! My scooter? Oh yeah! Get 50% off lens upgrades in the Specsavers Spring Sale. Hey, I can upgrade my kids!

You chill, Mom. I'll load the dishwasher. Awesome! Exclusions apply. See specsavers.ca for details. Offer ends soon. Well, where do you think that this is going to go from here? Like, how do you think this is going to go? So here, I think actually, it's wonderful that I'm talking to a Canadian audience because I think you guys have actually, you know, written the first verse of this song. So let's go back to the first Trump administration. Trump arrives and he says, boy, I'm sick of us getting ripped off. Weird.

Um, and rips up NAFTA and starts a trade war with Canada. And then eventually he says, Oh, what we need to do is negotiate. I'm going to strike a deal. This is Trump out of the deal. And so the thing is NAFTA basically had zero tariffs between Canada and the United States. I say basically because in each country, there are particularly powerful lobby groups that is there to defend particular and small politically sensitive parts of the country. You know, one obvious example would be Canadian

dairy farmers. I'm not saying they deserve special treatment. I'm just saying they managed to make it so that Canadian leadership never wants to cross them. Yeah. Yeah. It's a very politically fraught topic here in Quebec, especially. Yeah. So if you want to make a deal with someone that's just like, well, let's take all the fraught stuff off the table, both sides more or less agreed to do that. And then they're like, okay, let's agree with zero tariffs on everything. And so, well, actually that, we did that, it was called NAFTA. And so then Trump ripped it up and then basically got to the exact same deal because the problem

is you can't get tariffs below zero, which is what it was for most of the economy in both Canada and the United States. And unless you figure out a way around the political roadblocks like the dairy farmers, you're going to end up in the same place. So Trump inherited nearly zero tariffs, ripped it up and ended up renegotiating and ended up with nearly zero tariffs. That's what happened in Canada. Does that seem like a reasonable description, Jamie?

Oh, I think it's an incredibly reasonable description. And I mean, he seems very obsessed right now with our supply management system, with dairy description, Jamie? Oh, I think it's an incredibly reasonable description. And I mean, he seems very obsessed right now with our supply management system, with dairy, poultry, eggs, which is basically the only thing tariffed here. The same thing's true with Australia and Australian beef. So now he's going to sit down with 75 other countries. Here's where the analogy is powerful. Australia also had a free trade agreement with the United States and just like the Canadian

one, it involved no tariffs on most stuff and tiny carve outs for where it was politically too painful. Trump has just ripped it up and imposed 10% tariffs on us. Now the Australians are going to call and what's going to happen? Well, Trump says he wants a great deal. So the Aussies are going to say, well, how about zero tariffs? And the Americans will say, I think the Americans will say, Trump says he wants a great deal. So the Aussies are gonna say well How about zero tariffs and the Americans will say I think the Americans say oh, that's a good idea That way we can have access to your markets and then they'll buy say I just need a couple of exceptions to get this through back home and

Then they'll resign basically. What was the original free trade agreement? Then there's a bunch of countries that don't currently have a free trade agreement with the United States. But guess what? Most countries around the world, and particularly most industrialized countries, effectively have free trade. The average tariff rate in Europe is, I think, 1.3%. The average tariff rate in Vietnam is 1.1%. So I'm going to commit a terrible mathematical sin and round those down and say basically tariffs are zero.

And so what's going to happen when he negotiates with Vietnam? They're going to walk in and say, oh, tell you what, I'm going to offer you a great deal. How about tariffs of zero? The Americans are going to say, oh, zero. That sounds like no trade barriers. Terrific. They're each going to say, oh, I've got a couple of few politically sensitive topics. Can we just leave them out? They're both going to agree. They'll got a couple of few politically sensitive topics. Can we just leave them out?

They're both going to agree. They'll sign a new free trade deal. And just like we ended up with the US MCA, which was rebranded NAFTA, we're going to end up with rebranded low trade barriers with each of these countries. But in each and every case, Trump will walk out in the front lawn of the White House and announce that the art of the deal is here and he's managed to get Vietnam to drop all its trade barriers.

The thing I'm terrified about is the American press not understanding that they're effectively zero already. Right. But this is something he likes, right? Sit down, negotiate, screw them, get a deal, announce it, and they're going to have to come and kiss the ring before it's announced as well. China specifically, I mean, where do you potentially see that going, right? Like because it's different, it's a different beast here. And like how much pain could just the tariffs with China cause for American consumers?

Enormous pain. China is one of our most important trading partners. China matters to us nearly as much as our very good friends in Canada. So things are quite different in China. So the first thing I want to acknowledge is there are legitimate reasons for beef with China, things like intellectual property theft and the like. So there are real issues and there are geopolitical strategic issues. And they could be solved, but the tool for solving that is not a pissing contest between

two of the world's great powers. But realize that one of those two countries is not a democracy and doesn't have a population that will quickly hit the streets if they're feeling that their way of life is being undermined. And that's the sort of guy you don't want to go up against because, you know, the Chinese politicians have the ability to have their population withstand enormous pain. We saw that say during COVID. Whether Trump could stand up to that, you know, it's not who I would go pick in a fight with.

I think commerce in both directions is so immensely important to both countries that they'll eventually sort it out. Will they, this is the one exception where we probably won't get to the zero tariff, zero-ish tariff agreement. I have rather wondered whether what's happening inside the White House is the grown-ups to the extent that they're there have sort of dangled, come on Mr. President, beat China up, let's let everyone else off the hook. Not because they want to beat China up, but because they suspect that's enough of a distraction for the xenophobe in chief. And, you know, so maybe we get them back down

to really low, but maybe they get stuck at 20%. At 20%, Chinese factories are still enormously more productive than American factories. And so a lot of the trade would continue. Some of it wouldn't. And there would also be what we called trade diversion. In some cases, the goods go from China to for the final stage of production to another country, or you see things like, you know, Apple already said that maybe it would move some of its production from China to India. None of which makes Americans better off, but at least is a reasonable workaround. Before the pause, you wrote this op-ed in the New York Times that was titled, Your Life Will Never Be the Same After These Tariffs.

And I just wonder if you could take me through briefly what you were arguing there and then how your assessment has changed at this moment. Jamie, can we take this in two parts, which is I want to give a lyrical answer and then a mathematical one, if that's right. I love it. Okay, so the lyrical answer is that our lives are integrated with the rest of the world in ways that I think many of us don't realize.

And so I want you next time you go to the store, and Canadians have been forced to do Our lives are integrated with the rest of the world in ways that I think many of us don't realize. And so I want you next time you go to the store, and Canadians have been forced to do this in recent weeks, as you put things in your cart, look at where they're from, where is your olive oil from, where are your vegetables from. And if an American does that, they'll discover that enormous amount of what is in their family's pantry comes from the rest of the world. Some of it still will say made in America, but it might be made in America from wheat grown in Australia.

And then, you know, go a step further, think about the next big purchase you're going to make, whether it's a refrigerator or a washing machine or a dryer, or think about your house, where the lumber comes from that's built, that's used for framing your house, where do the tiles come from and so on. Go to the car yard. That one's particularly politically salient. Um, and a lot of people around here, I'm in Michigan, like to buy what they call American cars.

Um, now to them, American means assembled in the United States, maybe General Motors or Ford. But it's usually assembled in the United States with parts from all around the world, including from Canada. Yeah. You know, I was eating my dinner last night and I just stared down at my veggies in wonder. In wonder that there was a farmer in Mexico who thought that maybe what Justin would want tonight is fresh vegetables, that there were farmers in Peru who understood that those

vegetables would go well with a side of quinoa. And it's really just an astonishing thing. in Peru who understood that those vegetables would go well with a side of quinoa. And it's really just an astonishing thing. And the automaticity in which I can just take all of this for granted, and I understand the prices and the value and so on, but I'd never think about where it's coming from. And if the tariffs remain as high as they are, I'm going to have to think a lot harder about that.

So that's the lyrical version. The mathematical version I think is more interesting. It turns out if you study a little bit of economics, what you'll learn is that the pain of a tariff rises in the square of the tariff rate. We can talk more about why if you want, but it has an immediate and important implication, which is a small tariff, which is what we basically had with Canada previously. The cost of a small tariff is small times small, but if you move to a large tariff, now it's large times large, and that's a much, much bigger cost.

And so moving from a tariff rate of about 3% to a tariff rate of over 20% is actually going to create costs that are roughly 50 times larger than what we saw in the first Trump term when we moved from 1.5% to 3%. So the first Trump terms tariffs didn't matter much because they weren't across the board and they weren't very high and we already had very low tariffs. This time they matter because they are across the board, they are very high and they're going to move our average tariff rate very, very high. I wonder if I could ask you broadly, I actually want to bring up these memes because I think they're illustrative.

They've been circulating recently. They go back to COVID actually, I think. They're always some version of like a younger person looking stressed out or like they've just kind of given up. I saw one that had a photo of like Ben Affleck smoking, just looking really disheveled and forlorn. And the text on the meme is some version of like me as a millennial dealing with my third generation

defining global economic disaster. And just how do you think that this current moment fits into that broader context of the last quarter century of economic history here? Great question. Look, I remember the 2008 financial crisis very well. It was set at the time and it's correct. It was a once in a century financial crisis.

I remember the sheer fear and abject terror that I felt because no one knew where the bottom was and how bad things could get. We knew the financial system was being destroyed from within and we suspected it was essential for a functioning economy. Fast forward, of course, it doesn't take many more years before we get the second once in a century shock. The COVID shock was another once in a century shock. When I look at my students at the University of Michigan, I feel for them that they've had to go through so much so quickly. This is not yet of the same scale. What this is is a whole different kind of despair, which is recessions are usually caused

when bad things happen to you. I've never seen a recession caused by the occupant of the White House deciding to just take a healthy economy and take a sledgehammer to it. So the despair is not the depth of the recession. I don't think it's going to be unusually deep. It's not the duration of the recession. We've seen the deepest that was COVID and we've seen the longest, that was the financial crisis. The feeling of helplessness is watching a man in his late 70s refuse to understand the basic rules of economics and charge ahead with destructive policies. So the ennui may be very similar, but it comes from a different place and fortunately comes

with very different economic implications. I think that's a good place for us to leave it. Thank you so much for this. It was really such a pleasure to be able to talk to you. Thank you. And thank you. All right. That is all for today.

Frontburner was produced this week by Matthew Amha, Matt Muse, Ali Jainz, Jorthish Ngupta, Cecilia Armstrong, Lauren Donnelly, and Mackenzie Cameron. Our intern is Iza Adil. Our video producer is Evan Agard and our YouTube producer is John Lee. Our music is by Joseph Shabason. Our senior producer is Evan Agard and our YouTube producer is John Lee. Our music is by Joseph Shabison. Our senior producer is Elaine Chao. Our executive producer is Nick McKay-Blokos. And I'm Jamie Poisson.

Thanks so much for listening and we will talk to you on Monday.