The Ezra Klein Show - Paul Krugman on the ‘Biggest Trade Shock in History’

Episode Date: April 5, 2025

The tariffs President Trump unveiled this week were both bigger than most people expected and a lot more confusing. These aren’t the flat tariffs he proposed during the campaign. And they aren’t reciprocal tariffs, as he claimed in his Rose Garden speech. So what is Trump actually doing here?I knew my former colleague Paul Krugman would have some thoughts. Krugman is a Nobel laureate trade economist who was a New York Times Opinion columnist for 25 years. He now writes an excellent newsletter on Substack, where he’s been trying to make sense of the theories behind Trump’s tariff policies and, now, their strange reality.Mentioned:“Stop Looking for Methods in the Madness” by Paul KrugmanBook Recommendations:The Price of Peace by Zachary D. CarterHow Not to Invest by Barry RitholtzWar and Power by Phillips Payson O’BrienThoughts? Guest suggestions? Email us at [e-mail] can find transcripts (posted midday) and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs.This episode of “The Ezra Klein Show” was produced by Rollin Hu. Fact-checking by Michelle Harris, with Kate Sinclair and Mary Marge Locker. Mixing by Efim Shapiro and Aman Sahota. Our executive producer is Claire Gordon. The show’s production team also includes Elias Isquith, Kristin Lin and Jack McCordick. Original music by Pat McCusker. Audience strategy by Kristina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie-Rose Strasser. Unlock full access to New York Times podcasts and explore everything from politics to pop culture. Subscribe today at nytimes.com/podcasts or on Apple Podcasts and Spotify.

From New York Times opinion, this is the Ezra Klein show. So, scale of 1 to 10. How liberated are you feeling? Because we just had Donald Trump's big day of liberation, where he announced a huge package of tariffs. Larger by far than markets were expecting, which led markets to lose a lot of value in the hours right after. They're also more confusing than people were expecting. He had suggested in the campaign,

a flat tariff of 10 to 20% on all imported goods, maybe something bigger on China, but this was very different, different numbers for basically every country. Then there was a column listing the tariffs that they had on us and that column was simply wrong. So what is going on here? Why is Donald Trump absorbing this much economic pain? Why is he risking domestic recession, a global recession for this package of policies that almost every economist will tell

you does not really make sense? I wanted to talk to my former colleague Paul Krugman about this. Paul is a Nobel Prize-winning economist with a focus in trade. He was a columnist here at the New York Times for 25 years, and he's been writing an excellent substack where he's been tearing into the theory behind this kind of tariff policy, but then also the very strange reality, the practical tariffs that have now been announced and trying to understand what led to this package instead of one of the packages that might have more cleanly accomplished the goals that have now been announced and trying to understand what led to this package Instead of one of the packages that might have more cleanly accomplished the goals

That donald trump and the people around him say they are seeking As always my email ezra clineshow at nytimes.com Paul krugman, welcome back to the show. Hi, good to be on again. So let's just start with what Donald Trump actually announced on Liberation Day. Wow, I think most people thought it was going to be some kind of across the board tariff, the same on everybody or maybe two or three different types of tariffs. Instead, he announced this whole complicated different tariff for every country at levels

much higher than the smart money or the money that thought it was smart was betting, something like 23% average tariff now, which is huge. It's higher than US tariffs after Smooth Holy was passed and Trade is a much bigger part of the economy now than it was in 1930. So this is the biggest trade shock in history How does the tariff country by country? Seem to have been calculated Okay, that was interesting because on the first thing was where the hell sorry, but you know, where the heck are they? It's a podcast. We put the little explicit tag on the first thing was where the hell, sorry, but where the heck are they getting these numbers from? It's a podcast, we put the little explicit tag up.

It's a podcast, but where is this coming from? And in the Rose Garden speech, Trump said, this is all based on, we've examined the barriers that countries are putting up, and this is our calculation of their tariffs plus other things that count as tariffs. And we were trying to figure out where is that coming from?

And that's a, I mean it wasn't inherently implausible. Who would be doing that careful assessment of other countries trade policies country by country? That's a massive undertaking and it seemed implausible that basically impossible that they could have done that implausible, that basically impossible that they could have done that. And it turned out that they basically took each country's trade balance with the United States, the bilateral trade deficit that we have with them, divided by the amount of their imports and that we said was their de facto tariff rate and then they cut it in half. So it was this kind of weird calculation, not grounded in anything that back in the days when I used to teach trade courses that I would ever have put in.

But they came up with this sort of out of the blue calculation method that is country by country. And it's certainly original. I guess you could say that. The implication of it is that you can understand why you might say a tariff on America is bad. That's locking up the goods that might flow into another country or a service that might flow into another country. But what they're saying is something subtly different, which is that if we have a trade

deficit with anybody, that is bad and it should be treated as evidence of market discrimination or at least something we want to fix. So this gets as you like to say, wonkish, but what is a trade deficit? What is a trade balance? And is it a bad thing when we have one with someone else? Okay. So every country has stuff that sells to other countries, has stuff that it buys from other countries.

The trade balance with any particular country is what we buy from them minus what we sell to them. There's no particular reason to think that these numbers should be balanced country by country. All kinds of things can go on. So there's a whole discussion, there's a whole literature in the research on what explains bilateral trade imbalances, but nothing that says that they are ipso facto evidence of foul play, which is what the Trump people seem to believe.

US trade policy has been based upon reciprocity. The legal basis for all of these trade agreements that we've had these past 90 years is the Reciprocal Trade Agreements Act of 1934, which is FDR establishing a system where the United States would negotiate that we will cut our tariffs if other countries cut their tariffs. And for the most part, there are a few exceptions, a few countries that actually do have substantially higher tariffs than we do, but other advanced countries actually, like us, have very low tariffs. So it was really kind of strange that that was the claimed policy because that was, you know, if that was the policy, then there was nothing to do because we'd already done it.

And then they have this other thing which basically says, if you are running a trade surplus with us, then we're going to take that as evidence of bad behavior or anything. We're going to try and kick at you if you do that. And that wasn't at all, at least in the selling of this policy, what they said they were going to do. One of the things flying around social media has been that if you went and you asked the various leading AI programs, Chachi PT and Gemini and Claude, and you said, what's a

pretty simple way to calculate terrorists on all of the countries? It will offer you basically this calculation that you used. And I think that raises two questions, which is one, did we just have a global economic crisis created by some Doge interns asking Chachipiti how to calculate tariffs? But two, if that's what these systems trained on the inhaled output, I guess, of all economists writing online say you should do, is there something to it? Is there some steelman case that this is a pretty straightforward, simple way to think

about tariffs on other countries, that there is an argument for it, the liberals are missing, as we sort of point out, differences between, you know, words and policies here? Yeah. So, I mean, the Terminator, whatever it would be, Terminator 7, the movie would be actually, Skynet doesn't bother starting a nuclear war, it just gives bad terrorist advice. So this is part of the problem in general with what we're calling AI, with large language models,

is that they pick up what's out there without necessarily being able to discriminate what's sensible and what is not. There's certainly no paper I would imagine in any economics journal saying do this. So, but maybe some people out there are saying something like this, but it really is not, it's not something you would recommend if you know anything about how trade works, which chat GPT does not. And so it really is kind of weird that they would come up with this.

And by putting different tariffs for different countries, you create an immediate problem. So we just put a much higher tariff on goods from the European Union than from Britain. So if something from the European Union crosses the English Channel, spends five minutes in an English port, and then heads for America, is that a British good or is that a European good? You would have to have what we call rules of origin, which are very onerous. The amount of paperwork involved in enforcing rules of origin is huge. So anyone who knew anything about trade would say, wait, you know, why are they different

tariff rates on seemingly similar countries is a big, big problem. Probably a lot of EU goods trans shipped through Northern Ireland to get the lower tariff rate that applies to Great Britain. And you know, it's crazy. So this recommendation, you know, it really is coming from large language models from AI. This recommendation, which really is coming from large language models, from AI, this is a kind of, it's more of a cautionary tale about AI than it is something about economics. How are markets responding and what do you take from their response?

One thing that I have thought is when you listen to their justifications, they'll say things like, well, we're trying to rebuild American manufacturing. We've shipped American manufacturing overseas. And then I'll go look at an index of stocks that reflect American manufacturing companies, which I guess in theory are meant to benefit here. And they don't look like they're doing well to me. If you look at BYD, the big Chinese electric vehicle car company, they are way up since Trump's inauguration.

They've gone from around $70 to around $96 per share. Tesla's way down. There's a lot of reasons for that. I'm not an efficient markets guy. I don't think markets absorb all information, but you would expect them, I think, if they believe this was going to grow the US economy dramatically to favor some US stocks that they thought were going to grow dramatically. I'm not seeing anything like it.

Yeah, it's almost as if the markets actually think that the economics textbooks are right. And this kind of protectionism is a really bad idea. And specifically, I mean, there are multiple reasons why this whole notion that tariffs are going to restore US manufacturing are wrong. But one of them is that we've had now decades of integrating American manufacturing with other countries, particularly, there is no US auto industry, there's a North American auto industry, which is sprawled across Canada, Mexico and the United States. And when you say, okay, we're not going to allow the components factory here to send

goods over to the assembly factory there, you're raising the costs the whole thing enormously. You're creating huge disruption. So it ends up being bad for the US auto industry, for those auto plants. And there are layers and layers of wrongness here, but the most immediate one is right away, this is actually hugely disruptive to US manufacturing, not a support for it. How should other countries respond? I mean, I've seen economists arguing they should do nothing because to place down further

tariffs only hurts them as well. I've heard them say they should do specific forms of tariffing that hurt things that are important to the US, maybe Tesla. I've heard people say, no, they should go all out because you're trying to create a equilibrium where the US can't bully everyone. If these heads of state were coming to you and saying, you know, what should we do, Paul? What would you tell them? Yeah. So there's an old argument that says you should not respond because other countries have rocky coasts should we block up our own harbors. That's the way it's sometimes put. And in straight economics 101 101 that is mostly right but

first of all there is still some hope of swaying Trump from this course and then look other countries this is problem Americans really have we tend to not think of other countries as real but they are they have their real they have their own national identity they have their pride economists have a standard argument for free trade which does say you should always do free trade regardless. That has never worked politically. We did not yet to our world of relatively free trade by convincing politicians to read

David Ricardo. We got to a world of relatively free trade by actually exactly the thing that Trump is saying to do by reciprocity. I would not advise Mark Carney, the Canadian Prime Minister, you know, that I could imagine. I actually do know him. For once I actually know somebody with who is actually governing a country. And I would not advise Carney to turn the other cheek towards US tariffs, even though on a straight cost benefit position that might make sense, because you have to respond to that.

You have to do something that appeals to Canadian national pride, which very much exists. So I would say that there's a pretty good case for retaliatory stuff. Yeah, if you can target it and go after Tesla, that might help. But for retaliatory stuff, partly just to, in some hope of changing US policy, and also with some hope of at least offering some satisfaction to national concerns. How bad can this tit for tat get? How likely at this point do you think a US recession is? How likely do you think a global recession is kicked off by this trade war?

Okay. Now, there's a funny thing here, which is that ordinarily, I would say that while tariffs are bad, they don't cause recessions. It makes the economy less efficient. You turn to higher cost domestic sources for stuff instead of lower cost foreign sources and foreign was turned away from the stuff you can produce cheaply. But that's a reduction in the economy's efficiency, not a shortfall in demand. What's unique about this situation is that the protectionism is unpredictable and unstable.

And it's that uncertainty that is the recessionary force. If you were a manufacturing company in the United States and your next investment is going to be, well, let's say a components plant or something, and well, should you put that components plant in Mexico where it's cheaper? Well, not if there's a 25% tariff, but should you put it in the United States where it's more expensive? Well, what if the tariff comes off? And so either way, you run a substantial risk of just having stranded investments, and that's

happening across the board. So this is the instability of policy. The fact that nobody knows what's coming next is, I think, makes the recession certainly a whole lot more likely. I feel like you're going to remember this with some of the same anger that I remember it. But I remember in the years after the Great Recession, when Washington wanted to turn to austerity when you still had high unemployment, and what you began hearing from the Republican

Party, and Lord, how many words I spilled trying to remember about this, was, oh, the future deficits were creating so much economic uncertainty. The corporations couldn't possibly invest and the way to unlock the economy again was to cut spending, maybe for more of the centric side, raise taxes. And it was that certainty about future path

of government fiscal policy that was needed for corporations to hire again. That turned out to be and was obviously at the time not true. But now you have that same party creating a level of such genuine uncertainty. I can't imagine being a company right now trying to decide where to place a factory or whether or not to make investments. Nobody even believes these tariffs are going to be the same in a year, as best I can tell, as they are right now.

So, I don't know, there's this argument I think got a little bit discredited because it was used in such bad faith. And then all of a sudden the same people who made it, in many cases, are at least accepting or promoting this tariff policy, which has created a genuinely unfathomable to me level of economic uncertainty. Yeah. And the arguments were very much in bad faith in the aftermath of the Great Recession. It was just an excuse for somehow saying that this fiscal austerity that Republicans in

Congress are forcing is not the cause of slow recovery. It's all because of Obama and uncertainty and whatever. And that was a, yeah, I became, you know, viscerally hostile to anyone invoking uncertainty. But then along comes this, which is like nothing we've ever seen before. That's a very Trumpian phrase, like you've never seen before. But I can't recall. I don't think there is any case in American history, short of, you know, onset of World War II or something, where there's been so much uncertainty about what really important policy will be even like next week, let alone over the next couple of years.

You could, we could imagine if Trump had, I think probably too late to fix it now, but he had convincingly said, we will now have 20% tariffs on everybody from now on that might have been absorbed whereas a Businesses would start to invest on that basis. And yeah, we pay a price but those Stable protectionism is a bad thing, but it's probably less does less damage than many people Imagine it's one of those things where the more you know about it, the less it worries you. But unstable protectionism, coupled with all the other instabilities out there in policy, how many programs is Doge going to axe?

How many federal workers are going to be laid off? What's going to happen to Medicaid? That all creates an environment that is really bad for business. One thing I am getting asked by a lot of people in my life is, should I buy the dip? And I know you don't offer investing advice, but I think the intuition is that, look, the stock market goes down at times, up at times, but it always just kind of keeps its march upward over time. And you know, how bad can this really get?

It's just a kind of spat over tariffs. He's going to back off. Do you look at the market correction here and say, well, this is as bad as it can get, we're probably at the bottom of this? Or do you look at the history here and say, no, you have no idea how bad something like this can get. I think, I mean, God knows, I mean, the 1930s scenario is always there. I guess my concern would be, first of all, that, yeah, we're really in completely new space in terms of policy.

There's never been anything like this craziness in US history. And so that would make you worry. And then there are other things. I mean, we've had an incredible boom in tech stocks and AI and so on. And I have been in the punting business since the 90s dot com bubble. So I do worry that these things can be big and they can lead to years of painful losses. So the Trump administration can see all this. They know markets are crashing. In his first term, Trump was considered to be very sensitive to market reaction.

They know that various indicators of a future recession, forecasts and this and that are beginning to blink more red. They are choosing to take on this pain. This is completely optional. Why do you think they think they are doing it? Or if they is not the right unit here, why do you think Donald Trump thinks he is doing it? Okay.

It's always a question. What does Donald Trump actually know? I mean, there's a guy who goes out around saying that his approval rating is in the 70s. So yes, I mean, I'm sure that Scott Besson, the Treasury, knows that those indicators are all flashing yellow or red. Does Trump know it? Is there anybody who's brave enough to go in and say, Mr. President, this is really working out badly? It's not clear. But he knows the markets. He knows the markets. He can see the stock market.

Well, but he may think that they just don't understand the brilliance of his policy. Okay. So what do you think he thinks they don't understand? What is to him the brilliance of his policy? I think he's got this very crude view that whenever somebody sells more to us than we buy from them, that they're taking advantage and he's going to end that and people will see that he was smarter than everybody else all along. So I mean, there's no indication that there's any deeper agenda, any deeper thought. I mean, if nothing else, anyone who thought that there was a bigger agenda, that there was some subtle reasoning going on here, the shape of those tariffs that were announced yesterday should tell you that no, it's just Donald Trump doesn't like trade deficits and

he thinks the tariffs can cure them. I know too, there's a deep contradiction in the way it's been getting justified from two sides of the administration or maybe the Republican Party. So one which you'll hear is that this is about reindustrializing America. And to do that, if you believe terrorists could do that, which I don't really, but let's put that aside for a minute. If you believe they could do that, what you need is a highly stable tariff regime. And then there's another justification you're hearing, John Thune, the Senate majority leader,

said something like this, which is that these are all a negotiating tool to get a better deal out of other countries. This is more of the sort of reciprocity argument. It's also the he lays down tariffs and he gets something on, you know, fentanyl, trafficking, enforcement, gets something on immigration. But if these are all negotiating tools, then they're not a stable cost structure that companies can use to decide if they're going to reinvest in America. And then I guess there's this third one, which is that the tariffs are going to raise money so they can cut income taxes or pay for Donald Trump's tax cuts.

And the Treasury Secretary said the money would be used to get rid of the tax on tips, to get rid of taxes on social security. So really this is a tax cut for the working class. And again, in that case, then they have to stay on and be at a pretty high level if they're gonna finance that. So these are contradictory policies that require different tariff regimes, but I'm seeing them sort of all invoked

basically constantly. Yeah. I think what you need to bear in mind is that the starting point for all of this is Donald Trump wants tariffs and people around him are going to give him those tariffs. And then everything else is kind of backfilled trying to rationalize what they're doing. And there's no reason to believe that any of this is actually motivating what they're doing. This is just who they are and what they want to do.

So yes, there are multiple layers of internal contradictions in what we're hearing from the Trump administration and its supporters, but not clear that any of that is real. That's just all problems with the stories they're telling, but the fundamental policy is we're going to slap on a lot of tariffs. Is it possible in any tariff regime to do the reindustrialization of manufacturing that I think is the most emotionally resonant of their arguments? There are two levels to that. One is, can tariffs really reduce the trade deficit a lot? And the answer is, it's really hard. There's a lot of stuff, offsetting forces, so that even lots of tariffs won't do much

to reduce the trade deficit. But if you put them high enough, if you basically shut off international trade, then yeah, you can't run a trade deficit if you can't trade. So there's a bit of a story there. But then there's the second level, which is even if we eliminate the trade deficit, would we re-industrialize or would we re-industrialize to an extent that you would notice? Germany. Germany runs enormous trade surpluses. And even Germany has seen a large decline in manufacturing as a share of total employment.

So if we were to somehow raise ourselves to German levels of manufacturing, people would still say, what happened to the industrial nation we used to be? Then there's a calculation, which I probably won't conflict on our listeners here, but if you try and figure out how much additional manufacturing we get if we could somehow eliminate the trade deficit, yeah, it's significant, but it would get us like from 10% of employment to maybe 12.5% of employment, but not back to the 30% of employment that used to be once upon a time. And basically the decline in manufacturing employment is mostly driven by automation

and productivity growth, not by the trade deficit. Well, that gets to though, there are two things you might want to restore in manufacturing. One which I think you hear a lot of in politics is manufacturing jobs. You want to go back to the economy of 1965 or something. The other is that what you want to restore is manufacturing capacity. My colleague, your former colleague, Tom Friedman, was just in China and was really astonished at the kind of campuses that Huawei is building,

the speed with which phone companies are becoming car companies. And basically everybody I know who goes to China or writes seriously about their manufacturing sector will now tell you that what they're doing is not just low wagewage labor leading to cheap manufactured consumer goods, that they now have incredible levels of supply chain expertise that allow them to do things we maybe can't at a speed we certainly can't.

And that in terms of the balance of geopolitical power is a very dangerous thing for us in the long run. And so very high costs are worth paying to rebuild that capacity, even if it's all automated, right? Because you do not wanna be so dependent and for the world to be so dependent on Chinese manufacturing. What do you think of that argument?

I mean, it's fine as a principle. The international trade is governed by something called the General Agreement on Terrorist and Trade, which goes back to the 40s. And Article 21 basically says, forget about everything else we said here. If your national security is at risk, do whatever you feel you have to do. So we can ask whether being so dependent on semiconductors from Taiwan was wise. And I actually think probably not. Although those are exempted from the tariffs.

Yeah, because there would be such a huge cost. So there is just obvious how much it would raise costs. But in fact, we have the CHIPS Act, which is supposed to make us more, among other things, more independent on semiconductors. But Trump says that's terrible. If you were asking what does our national security oriented industrial policy that tries to keep production of strategically important stuff in the United States look like, it looks like the chips act.

It looks like what the Biden people were trying to do. Now probably bigger than that. In an ideal world, we'd be doing substantially more, but that's how you do it. The idea, you know, putting high tariffs on imports of clothing from Bangladesh is exactly what you shouldn't be doing. That's the kind of thing that is disruptive, raises the cost of living for American consumers, does nothing to make us more secure. There is a national security rationale for domestic production, but also for friend shoring and for near shoring because stuff that's close by is a lot easier to secure.

If that's what we're wanting to do, then we would not be levying tariffs on Vietnam and Bangladesh and we would certainly not be putting tariffs on Canada and Mexico. So if one of the things you're trying to do is as a national security play, make our sort of supply chains more robust from China, it seems you wouldn't want to be tariffing our friends and allies in a way that pushes them to pull away from us and integrate more and move into sort of common economic defense with China. Yeah. I mean, again, if you go back to the, you know, how did we end up with the training

system that Trump is now demolishing? It was actually, it was partly about economic efficiency, but it was also very much about a kind of enlightened broad view of national security. Go back all the way to Cordell Hull, FDR secretary of state. He viewed enhanced economic linkages across the free world as a way to draw us closer together, as a way to create greater solidarity among democracies against the, at that point, the threat of Stalinism. So what we're doing is tearing up, partially in the name of national security, a policy that was actually partially intended precisely to enhance national security.

No question that the US is alienating its allies or its erstwhile allies by doing all of this and in some cases making it, they're making common cause with our potential enemies. I mean, this policy does look to me like what happens when nobody will tell the king no. Yeah. And worse than that may be that when the king begins to favor the people who he knows aren't suppressing the no. There are people in any room who you can kind of tell don't really agree with you and are

trying to humor you. And then there's, you know, the intern, the mid-level person who you can tell is really into what you want to do and maybe you charge them with it. This just doesn't feel to me like a constructed policy. And it's hard because I think that like our tools are usually to try to track back the policy rationale. But there's too many policy rationales. None of them actually fit.

Well, we have even, we have some direct evidence that that's what's happened. I mean, Peter Navarro, who is sort of Trump's trade czar, I don't know if he's still called that, but effectively, at least according to some of the reporting, he was recruited because they basically set Jared Kushner out to search through Amazon to find somebody who'd written books hostile to China. Right? And so they actually looked for people who would tell the king what he wanted to hear. One of the stories I find really interesting, there's this, you know, but I'm sure, but

listeners probably don't, Bob Lighthizer, who was this long time, you know, contrarian, protectionist voice in Washington and generally regarded as kind of a, and my friends as a sort of dark satanic force in the trade policy debate, but, but as respected because he clearly knows his stuff and people had sort of assumed that he would play a big role in this administration and he was passed over and almost for sure that's because he is independent. He this, he's his own man. He didn't come to this out of fealty to Donald Trump. And he was passed over and almost for sure that's because he is independent. He's his own man.

He didn't come to this out of fealty to Donald Trump. And so he might actually say to the king, no, no, not tariffs on Bangladesh. And so this is clearly a kind of courtier driven catering to, and Donald Trump has been a, you know, has had this thing about tariffs going back 40 years, so Here we are the idea that there's some master plan or some deeper strategy. It just it requires torturous ignoring of What's very clearly happening? Well one of my broader views about this administration I keep meaning to write a piece about this is that you can really tell the story of Trump one and Trump two I keep meaning to write a piece about this, is that you can really tell the story of Trump 1 and Trump 2 by which is the other most powerful member of the family.

And in Trump 1, it's Jared Kushner. And Kushner brings in very mainstream people. You're Gary Cohn's, you know, is a Goldman Sachs president, you're H.R. McMaster's, people who act as inhibitors of the very disinhibited Donald Trump. And in Trump 2, it's not Jared Kushner, it's Don Jr. Who's been marinating in the fever swamps of MAGA in the interim years, who helped bring in people like JD Vance, who said like the real intention

of Trump's second term was we will vet everybody to make sure there's nobody's gonna stand in his way. Elon Musk and Russ Watt are sort of out there trying to traumatize the federal bureaucracy, destroy any deep state resistance or frankly just any deep state capacity. And so you have people around Trump now who are accelerants, not inhibitors. And this is what you get when you get a bunch of people telling Trump, no, no, no, go further. You're right.

You've always been right. You were saved from an assassin's bullet by God to make this country great again Follow your instincts. Don't listen to the markets the naysayers the critics the media. They don't know anything Like if we've learned anything is that your judgment is right? Yeah, I mean there was a moment a day or so ago I guess when Mike Johnson the speaker of the house Was asked about how this tariff thing is going to work.

And he said, we must trust the president's instincts. And I was like, this is America? We're not supposed to believe in the mysterious God-like divination powers of the leader. There's an essay by John Mary Keynes in which he says that economics, although no one will believe it, is a difficult technical subject. And, you know, Trump doesn't, presumably doesn't understand how feedback from your economic policies can come back and bite you on the rear. And left to himself, he just thinks, I know this, I'm a businessman and God backs me. And so you get these without somebody who can say no to him and everybody could say

no is gone, then he's going to do very strange stuff. So behind all this, there's been a set of theories that have taken root that are not well expressed in the tariffs, but I think have become increasingly influential in Washington, in the media. You know, I hear talk of this Mar-a-Lago accord, and they have a lot to do with this idea of the dollar and whether or not having the dollar as a world's reserve currency has led to the deindustrialization of America. And so when I hear then people in the Trump administration begin to say, well, what we're doing here is a fundamental realignment of the global financial system.

While it may all start with Donald Trump's intuitions, I think it's made a lot of them very ambitious. This idea that maybe they can be part of the next Bretton Woods, that there's something you can do here. Can you talk through for people who are confused by it, what is the role of the dollar here? How should we understand the relationship between the dollar being the world's reserve currency and America losing some of its manufacturing base if there is one? Okay, by the way, this is a topic that is, there's tremendous amount of mysticism about

it and you wouldn't believe how hard it was for me to write a sub-stack post about the role of the dollar because I kept on wanting to stuff too many things into it. And basically had my editor-in-chief, otherwise known as my wife, say, no, no, that's too many charts and too many tables. So okay, look, the dollar is very special. A lot of international commerce is conducted in dollars even between countries, even trade between non-US countries. A lot of international lending and borrowing is in dollars.

And one of the things is that countries that want to hold a stockpile of foreign currency to be able to intervene in the markets in times of need. A lot of that, something like 60% of those stockpiles are held in dollars or dollar assets. So that's the dollar is reserve currency. The United States also attracts a lot of inflow of foreign capital and we have a trade deficit as the counterpart of that. The balance of payments always balances. So the fact that we sell more assets that we buy as its counterpart, that we buy more

goods than we sell, has to be. The arithmetic tells you that must be true. How much of that capital inflow is caused by the special role of the dollar? And the answer, most of us, most of us who do follow these things is a little but not much. The idea that the trade deficit is sort of a one-to-one relationship with the dollar's role as reserve currency is much, much weaker. It's maybe a fraction of the story, but it's really not the main story.

The main story is that America has been an attractive place to invest, and that's why we have a trade deficit. Foreign companies want to build plants in the United States. Foreign investors want to buy US stocks, and that keeps the dollar strong and means that we have a trade deficit. But the idea that you can do a sort of magic fix, that you can somehow tell foreign countries to not stockpile so many dollars and that will re-industrialize America is very appealing because it feels important.

I have quoted multiple occasions my old teacher Charles Kindleberger who said anyone who spends too much time thinking about international money goes a bit mad. It sounds important, it sounds sophisticated, and it's also kind of antiseptic. If we could just have an international monetary conference and that will solve the problem of USD industrialization, that sounds a lot easier than having to muck around with industrial policy and all of that. So it's a very appealing prospect to a lot of people, but it's not realistic. We could undermine the dollar's role as a reserve currency. We may be doing that as we speak because of who wants to hold an unreliable, Iranian country's

currency as a reserve, but that's not going to solve any other major problems. When I try to dive into MAGA world's thinking here, something that I tend to hear is a somewhat contradictory relationship or a troubled relationship to American power. And so on the one hand, they want America to be stronger, more feared, more dominant. And on the other hand, there's a broad view that we have overextended ourselves. And on the one hand, financially, we've made the dollar the reserve currency, we've allowed all these other countries to buy our assets and buy our money, even as our industrial base float out.

And then on the military side, this idea that we have these bases all over the world, we have all these troops in Europe, you know, we're part of NATO, we're spending more, you know, as a percentage of GDP than some of these other countries. And that too is part of why we can no longer take care of our people. And so on the one hand, there's this feeling that, well, for America to be stronger, it can't be operating this global umbrella of financial and military protection. But then do you say, well, do you want the dollar to not be the reserve currency? And they say, no, no, no, no, we definitely want to keep it the reserve currency.

Do you want America's military to be weaker? Do you want people to not be tied to us in the way they are now? No, we actually want more leverage over them. There's something here that I think is very strange and very unresolved between this, in this movement that wants both more dominance and somehow at the same time to pull back from the actual architecture of that dominance and leverage. Yeah, I would say, you know, America, the packs of Americana, you know, we have been a kind of imperial power.

Some people say more than a kind of, we've been an imperial power in many ways since the end of World War II. But it's a very strange, it's not like any previous empire. The Pax Americana starts with the Marshall Plan. Instead of plundering our defeated enemies, we rebuild them. And then we build a system of alliances and we have NATO, we have the international economic institutions like the International Monetary Fund, which are all, you know, they do actually kind of reflect US interests, but at least on paper, low key, relatively generous imperial power.

That is a very hard role for many people to understand. It's sort of the, take Greenland. There are stories under which Greenland could become strategically important. It's a territory of Denmark, which is an ally under NATO. So we actually have the right and the ability to maintain military bases there. It doesn't have to be US territory. That's a little too hard for a lot of people to wrap their minds around.

They want us to be, on the one hand, don't want us to be spending resources supporting our allies. On the other hand, they want us to be exercising power, but they want something that's more direct. They want us to be a lot more like a traditional imperial power, which is foolish. I mean, the thing that we built, the thing that the old US establishment built after World War II with this soft imperial status, and it was a pretty good one. We're able to build a world that was comfortable for us to live in

without bloodshed, without a lot of the downsides of Empire, but it is subtle, and subtle is not something that Manga does. I've wondered a bit if we're not going to see Republicans begin to grow a bit of spine here. So I was surprised to see Chuck Grassley and Maria Cantwell, Chuck Grassley being a Republican in the Senate, come out with a bill to restore congressional authority on tariffs. Then Mitch McConnell tweeted, as I have always warned, tariffs are bad policy and trade wars with our partners hurt working people most. Tariffs drive up the cost of goods and services. They are tax on everyday working Americans. Preserving the long term prosperity of the American industry and workers

requires working with our allies, not against them. Now, that's not what we're hearing from most Republicans, but it seems to me like an early signal, particularly after Republicans lost that Supreme Court election in Wisconsin, that, you know, as the economy suffers here, they may not be all that excited about standing by him. The thing about everybody you mentioned is they're all very old and don't have much of a future political career just because they're all very old and don't have much of a future political career just because they're very old.

And many people have over the years, over this past decade, kept on waiting for the Republican grownups to stand up against Donald Trump. And anybody who's made that bet has been very, very badly wrong again and again. So I don't think you should count on that. It seems to me much more likely that when in the end, these guys will cave as they always have. They'll cave and Mike Johnson and John Thune control the respective chambers. And if they break with Trump, that will be the end of their leadership. Yeah. No, that would mean that in both cases, it's hanging by a thread. And look, we've seen this, that anyone who Donald Trump certainly has will retain until

the end of his days, will retain the ability to destroy the career of any Republican who opposes him. We've been talking here about the MAGA case against the sort of global trade regime. And I think it's pretty easy to pick it apart because the policies don't make sense and they're not going to work and the arguments are contradictory. And as you've said a couple times on your on your sub stack, this is a case where Donald Trump has an intuition. And all these people are coming behind him to try to apply theory to it.

But there has been a wider disillusionment with the global trade regime. Jake Sullivan, the national security advisor for Joe Biden said that the postulate that deep trade liberalization would help America export goods, not jobs and capacity was a promise made, but not kept. Is there a version of the critique against the trading regimes we have, an argument for tariffs, maybe truly reciprocal tariffs that you buy? I don't really buy a tariff argument. Again, it's really important to understand that we have reciprocal tariffs.

We have a free trade agreement with Canada and Mexico. I guess we just ripped it up. That Donald Trump negotiated. That Donald Trump negotiated. And bragged about. He took an existing agreement and changed a few semicolons and they called it his agreement. But Europe has very low tariffs on our exports just as we have very low tariffs on their exports and so on. So we actually have a reciprocal trading regime.

We do have persistent trade deficits, which are in a lot of ways you could say that they are actually reflection of US strength. Money flows to the United States, you know, over the past 25 years as the US has had persistent large trading trade deficits, we've also had much faster productivity growth than other advanced countries. We've really pulled away from Europe in particular. We have better demography because we have somewhat higher fertility but also immigration, which has meant that our economy has grown a lot faster.

The US is a, we have basically maintained our share of world GDP despite the growth of China because we've grown so much faster than the rest of the advanced world. So if you just looked at the economic performance, we're doing fine. Now there is a question of wages of ordinary workers have not grown as much as we'd like. We've had rising income inequality and some of that is due to imports. That actually is trade economics 101, that trade can have effects on income distribution. So yeah, there's something there, but the idea that it again comes down to this talking about globalization sounds like it's must be, it's sophisticated, it's

important, it's global. When I was much younger, my parents got me a sweatshirt that said global schmobile on it. I asked why, they said, we were always going off to some conference and when we asked you what it's about, they said, global schmobile. So global schmobile is a very appealing story. People like to talk about it. It's probably well behind more mundane things like productivity growth and for that matter, labor policy in terms of causing inequality.

But yeah, they're, I think I can tell this story. I think you can too, whatever it is. Just us here. Yeah. I was at, I was, I was visiting an Oxford back about 10 years ago and it's extremely rude to step out of the dinner party in Oxford to take a phone call, unless the phone call is from the president of the United States complaining about the op-ed you just wrote. Because I came out against TPP, which Obama was advocating.

And I just said, I don't think this is a really good idea. And I think it's particularly, you really shouldn't be spending political capital on this. And so, you know, a lot of us had, were feeling unease that the sort of uncritical pro-globalization argument had gone too far. So yeah, to say we need to step back and we did. I mean, again, the Biden administration had some significant nationalistic economic policies, but that's a far cry between saying, yeah, we do need to think a little bit more about, by American, we need to think both national security and to some extent worker concerns.

But there's a world of difference between that and what we're getting now. I think that's a good place to end then. Always our final question as a veteran of the show, you know it, what are three books you'd recommend to the audience? Okay, well, I just read, it's been out for a while, but I just read I had a discussion with Zach Carter's The Price of Peace, which is about John Maynard Keynes and his role in the world and then beyond, fantastic book. My friend, the fund manager Barry Ritholtz has a great book called How Not to Invest, which believe it or not is interesting even if you are in investing, he's just really

a lot of fun. And oh yeah, I'm just reading the latest book by Phillips O'Brien. He's a military historian, and he has a new book called War and Power. And he is always fantastic, heterodox. He's pretty scathing actually even about Biden administration policy. But anyway, it's a really interesting book.

Paul Krugman, thank you very much. Thank you. This episode of The Azuclan Show is produced by Roland Hu. Fact-checking by Michelle Harris with Kate Sinclair and Mary Marge Locker. Mixing by Afima Shapiro and Amin Sahota. Our executive producer is Claire Gordon. The show's production team also includes Elias Iskwith, Kristin Lin and Jack McCordick. We've original music by Pat McCusker. Audience strategy by Christina Samuelski and Shannon Busta. The director of New York Times Opinion Audio is Annie Rose Strasser.