Paul Krugman on the ‘Biggest Trade Shock in History’
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 were also more confusing than people were expecting. He had suggested in the campaign a flat tariff of 10 to 20% on all important 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 sub-stack 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.
I’m 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 Klein Show 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 U.S. tariffs after Smoot-Hawley 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 getting these numbers from? It’s a podcast. We put the little explicit tag up. It’s a podcast. Yeah, 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’re 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.
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? OK, so every country has stuff that sells to other countries, has stuff that it buys from other countries. The trade balance within a 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. U.S. trade policy has been based upon reciprocity. The, you know, 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. There are 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 anyway. We’re going to try and we’re going to kick at you if you do that.
And that’s a, that wasn’t at all, at least in the selling of this policy, what they were, 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, ChatGPT and Gemini and Claude, and you said, what’s a pretty simple way to calculate tariffs on all other countries? It will offer you basically this calculation that was 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 ChatGPT 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, you know, Terminator, whatever it would be, Terminator 7, the movie would be actually Skynet doesn’t bother starting a nuclear war. It just gives bad tariff 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 ChatGPT does not. So, it really is kind of weird that they would come up with this.
And by putting different tariffs on 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. There’s the amount of paperwork involved in enforcing rules of origin is huge.
So, anyone who knew anything about trade would say, wait, you know, wildly different tariff rates on seemingly similar countries is a big, big problem. Probably a lot of EU goods transhipped 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, if it 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 U.S. economy dramatically to favor some U.S. 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 U.S. manufacturing are wrong. But one of them is that we’ve had now decades of integrating American manufacturing with other countries.
Particularly, no, there is no U.S. auto industry. There’s a North American auto industry, which has sprawled across Canada, Mexico, and the United States. And when you say, OK, we’re not going to allow the components factory here to send goods over to the assembly factory there, you’re raising the cost of the whole thing enormously. You’re creating huge disruption. So it ends up being bad for the U.S. 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 U.S. 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, you know, hurt things that are important to the U.S., maybe Tesla. I’ve heard people say, no, they should go all out because you’re trying to create a equilibrium where the U.S. 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, 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 a problem Americans really have. We tend to not think of other countries as real. But they are. They’re 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 get 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 aiming 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 who is actually governing a country.
And I would not advise Carney to turn the other cheek towards U.S. 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 U.S. 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 U.S. 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 foreigners turn 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 a recession certainly a whole lot more likely. Hey, 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 rebut 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, you know, maybe for more of the centricide, raise taxes. And it was that certainty about future path of government fiscal policy that was needed for corporations to hire again. And that turned out to be, and was obviously at the time, not true. But now you have that same party creating a level of, like, 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. I mean, 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 because of slow recovery. It’s all because of Obama and uncertainty and whatever. And that was a, yeah, I became 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 the 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 imagine, if Trump had, I think probably too late to fix it now, but if he had convincingly said, we will now have 20% tariffs on everybody from now on, that might have been absorbed, whereas businesses would start to invest on that basis. And yeah, we pay a price, but stable protectionism is a bad thing, but it probably 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. You know, how many programs are those 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 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 are really in a completely new space in terms of policy. There’s never been anything like this craziness in U.S. 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 punditing 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.
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 Besant at 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. 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 that 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 re-industrializing America. And to do that, if you believe tariffs 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 that he lays down tariffs and he gets something on 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, they have to stay on and be at a pretty high level if they’re going to 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 backfill, 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 it’s 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 re-industrialization 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 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 eliminated the trade deficit, would we re-industrialize or would we re-industrialize to an extent that you would notice? 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? And 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’d get if we could somehow eliminate the trade deficit, yeah, it’s significant. But it would get us 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 the way 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.
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-wage 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 want to 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. You know, international trade is governed by something called the General Agreement on Tariffs 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. But 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 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 a 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 trading 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, 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 U.S. 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, maybe, 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 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 sent 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 were, would tell the king what he wanted to hear.
One of the stories I find really interesting, there’s this, you know about it, I’m sure, but listeners probably don’t, Bob Lighthizer, who’s this long-time contrarian protectionist voice in Washington and generally regarded as kind of a, among my friends, a sort of dark satanic force in the trade policy debate, but is 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. 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 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 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 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 by which is the other most powerful member of the family. In Trump one, 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 HR McMasters, people who act as inhibitors of the very disinhibited Donald Trump.
And in Trump two, 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 the real intention of Trump’s second term was we will vet everybody to make sure there’s nobody who’s going to stand in his way. Elon Musk and Russ Vought 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, it’s that your judgment is right. Yeah. I mean, there was a moment a day or so ago 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, godlike divination powers of the leader.
There’s an essay by John Maynard Keynes in which he says that economics, although no one will believe it, is a difficult technical subject. Trump doesn’t, presumably, understand how feedback from your economic policies can come back and bite you on the rear. Left to himself, he just thinks, I know this, I’m a businessman, and God backs me. So, you get these, without somebody who can say no to him, and everybody who can 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. I hear talk of this Mar-a-Lago Accord. They have a lot to do with this idea of the dollar, and whether having the dollar as a world’s reserve currency has led to the de-industrialization of America. 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 a tremendous amount of mysticism about it. You wouldn’t believe how hard it was for me to write a Substack 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, saying 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-U.S. countries. A lot of international lending and borrowing is in dollars. 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 as reserve currency.
The United States also attracts a lot of inflow of foreign capital. We have a trade deficit as the counterpart of that. The balance of payments always balances. The fact that we sell more assets than we buy, as does 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? The answer, 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. That’s why we have a trade deficit. Foreign companies want to build plants in the United States. Foreign investors want to buy U.S. stocks. 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 that will re-industrialize America, is very appealing because it feels important. I have quoted on 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 U.S. de-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, erratic 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. On the one hand, they want America to be stronger, more feared, more dominant. On the other hand, there’s a broad view that we have overextended ourselves. 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 floats out.
Then on the military side, this idea that we have these bases all over the world. We have all these troops in Europe. 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. 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?
They say, no, no, no, no. Well, you 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 Pax Americana, we’ve 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. Then we build a system of alliances and we have NATO. We have the international economic institutions like the International Monetary Fund, which do actually kind of reflect U.S. interests, but at least on paper, we’re at most first among equals.
We are a polite, low-key, relatively generous imperial power. That is a very hard role for many people to understand. 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 ability to maintain military bases there. It doesn’t have to be U.S. 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, they 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 war direct. They want us to be a lot more like a traditional imperial power, which is foolish. The thing that we built after World War II with this soft imperial status 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 MAGA does.
I’ve wondered a bit if we’re not going to see Republicans begin to grow a bit of spine here. I was surprised to see Chuck Grassley and Maria Kent, well, 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 taxes 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, probably after Republicans lost that Supreme Court election in Wisconsin, that 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 very old. Many people have, over the years, kept on waiting for the Republican grown-ups to stand up against Donald Trump. Anyone 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 in the end, these guys will cave, as they always have. They’ll cave, and Mike Johnson and John Thune control the respective chambers. If they break with Trump, that will be the end of their leadership.
Yeah. No, I mean, in both cases, it’s hanging by a thread. We’ve seen that anyone who Donald Trump certainly has will retain until the end of his days 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. 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.
As you’ve said a couple times on your Substack, 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. 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’ve just ripped it up. That Donald Trump negotiated and bragged about. He took an existing agreement, 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. We actually have a reciprocal trading regime. We do have persistent trade deficits, which, in a lot of ways, you could say are actually a reflection of U.S. strength. Money flows to the United States.
Over the past 25 years, as the U.S. 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 U.S. has 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. If you just looked at the economic performance, we’re doing fine. There is a question of wages of ordinary workers have not grown as much as we’d like. We’ve had rising income inequality. 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 talking about globalization sounds like it must be 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, well, you’re always going off to some conference. When we ask you what it’s about, you say global schmobile.
Global schmobile is a very appealing story. People like to talk about it. But it’s probably well behind more mundane things like productivity growth and, for that matter, labor policy in terms of causing inequality. I think I can tell this story. I think you can too, whatever it is. It’s just us here.
Yeah. I was visiting in Oxford 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. I came out against TPP, which Obama was advocating. I just said, I don’t think this is a really good idea. You really shouldn’t be spending political capital on this.
A lot of us were feeling unease that the sort of uncritical pro-globalization argument had gone too far. Yeah, to say we need to step back, and we did. The Biden administration had some significant nationalistic economic policies, but that’s a far cry from saying, yeah, we do need to think a little bit more about buy America, and we need to think both national security and, to some extent, worker concerns.
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 a 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, fund manager Barry Ritholtz has a great book called “How Not to Invest,” which, believe it or not, is interesting even if you are into investing. He’s just a lot of fun.
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.” He’s always fantastic, heterodox. He’s pretty scathing, actually, about even Biden administration policy. But anyway, it’s a really interesting book.
Paul Krugman, thank you very much. Thank you.
This episode of The Ezra Klein Show is produced by Roland Hu. Fact-checking by Michelle Harris with Kate Sinclair and Mary Marge Locker. Mixing by Afim Shapiro and Amin Sahota. Our executive producer is Claire Gordon. The show’s production team also includes Elias Isquith, Kristen Lynn, and Jack McCordick. We have original music by Pat McCusker. Audience strategy by Christina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie Rose Strasser. The Ezra Klein Show is Annie Rose Strasser.
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From New York Times Opinion, this is the Ezra Klein Show.
Ezra Klein: So, on a scale of 1 to 10, how liberated are you feeling? We just had Donald Trump’s big day of liberation, where he announced a massive package of tariffs—much larger than markets were expecting. This announcement led to significant losses in market value shortly afterward. The details were more confusing than anticipated, too. During his campaign, he suggested a flat tariff of 10 to 20% on all imported goods, potentially more on China. However, what he announced was quite different: varied tariffs for nearly every country, with a list that included incorrect information regarding tariffs those countries have on the U.S.
So, what’s happening here? Why is Donald Trump choosing to absorb this much economic pain? What’s prompting him to risk a domestic or even global recession for this set of policies that most economists argue doesn’t truly make sense? To gain some clarity, I wanted to speak with my former colleague, Paul Krugman. Paul is a Nobel Prize-winning economist specializing in trade. He spent 25 years as a columnist at the New York Times and has been writing an insightful sub-stack where he critiques the reasoning behind this type of tariff policy, along with the peculiar realities associated with the tariffs that have now been announced.
Ezra Klein: I’m trying to understand what led to this specific package rather than one that might have better achieved the goals that Trump and his associates claim to be pursuing. As always, you can reach me at Ezra Klein Show at NYTimes.com. Paul Krugman, welcome back to the show.
Paul Krugman: Hi, good to be on again.
Ezra Klein: So, let’s dive into what Trump announced on Liberation Day. Most people anticipated some form of across-the-board tariff—uniform rates for everyone, or maybe two or three different rates. But instead, he unveiled a complex arrangement featuring different tariffs for every country, with rates much higher than analysts were predicting. We’re looking at something like a 23% average tariff now, which is huge—higher than U.S. tariffs after the Smoot-Hawley Act. Trade is also a significantly larger part of the economy now than it was in 1930. This marks the biggest trade shock in history.
Paul Krugman: The calculation behind these country-specific tariffs was puzzling. Initially, it raised an eyebrow—how were they arriving at these figures? In his Rose Garden speech, Trump claimed the figures were based on an examination of barriers from other countries. They supposedly calculated their tariffs along with other factors that count as tariffs. However, it seemed implausible that such a detailed assessment could have been carried out.
Ezra Klein: And how were these calculations actually made?
Paul Krugman: It turned out that they simply took each country’s trade balance with the U.S., divided the bilateral trade deficit by the amount of imports from that country, and decided that this figure represented their de facto tariff rate. Then, they halved it. It was a peculiar method—one that I wouldn’t have ever suggested when I taught trade courses. It’s certainly original, to say the least.
Ezra Klein: So, what does this imply about their view on trade deficits?
Paul Krugman: Well, you can understand why one might argue that tariffs from other countries are detrimental; they limit the goods and services that could flow into the U.S. However, this administration seems to be arguing something subtly different: if the U.S. has a trade deficit with anyone, that’s a problem that needs addressing.
Ezra Klein: Can we break this down further? What exactly is a trade deficit, and is it inherently bad?
Paul Krugman: Every country trades goods and services with others. A trade balance for a specific country reflects what we buy from them minus what we sell to them. There’s no logical basis to expect these numbers to balance out on a country-by-country level; numerous factors can influence them.
So there’s extensive research analyzing what leads to bilateral trade imbalances, but nothing that indicates they are inherently evidence of wrongdoing, which seems to be the belief of the Trump administration. U.S. trade policy has historically relied on reciprocity. The legal framework for the trade agreements set up over the past 90 years stems from the Reciprocal Trade Agreements Act of 1934 that FDR established. Essentially, the U.S. would reduce tariffs if other countries did the same.
Ezra Klein: So the argument here is that, typically, we’ve had agreements in place where tariffs are mutually reduced.
Paul Krugman: Exactly. While a few countries indeed maintain significantly higher tariffs than we do, most advanced nations, like us, operate with low tariffs. This inconsistency makes their declared policy seem odd. If that were genuinely the policy basis, no further action would be necessary since we’ve already achieved it. Additionally, their stance implies that if another country has a trade surplus with us, that’s evidence of misconduct, leading them to impose retaliatory measures.
Ezra Klein: Interesting. There’s been a buzz on social media, suggesting that if you queried leading AI platforms like ChatGPT, Gemini, or Claude for a straightforward method to calculate tariffs for other nations, the response would resemble the calculations made by this administration.
Paul Krugman: Yes, that raises some questions: one, did we inadvertently spark a global economic crisis due to some interns experimenting with AI for tariff calculations? Two, if this method is what these AI systems suggest after analyzing vast amounts of online economic discourse, could there be an argument in its favor that economists are overlooking?
Ezra Klein: That sounds like a wild thought.
Paul Krugman: Right. It’s problematic that what we now term AI—specifically large language models—picks up a plethora of ideas without discerning what’s sensible. There’s no academic paper in any reputable economics journal advocating for this tariff calculation approach. While some might be saying similar things out there, it’s not what anyone informed about trade would promote, as ChatGPT certainly lacks that depth.
Ezra Klein: And this varying tariff system introduces immediate challenges—right?
Paul Krugman: Absolutely. For example, we now have a substantially higher tariff on goods from the European Union than from Britain. So if a product from the EU crosses the English Channel, spends a few minutes at a British port, and then heads to the U.S., how does it get classified? Is it a British product or a European one? Enforcing rules of origin involves enormous paperwork and complexity.
Any informed individual in trade would immediately recognize that wildly differing tariff rates on seemingly similar countries create enormous complications. Inevitably, many EU goods may be routed through Northern Ireland to benefit from the lower tariff rate applicable to Great Britain. This situation emphasizes that if this recommendation did originate from large language models or AI, it serves more as a cautionary tale about AI than anything instructive in economics.
Ezra Klein: How are markets reacting to this, and what can we gauge from their responses?
Paul Krugman: Markets are indicating skepticism. For instance, the justifications involve claims of rebuilding American manufacturing lost to overseas production. However, when examining stock indices representing American manufacturing companies, I see little evidence of positive impact.
Take BYD, the major Chinese electric vehicle manufacturer. Their stock surged after Trump took office, climbing from around $70 to approximately $96 per share, while Tesla has seen declines. There are various factors at play, but one would expect that if markets believed this policy could substantially grow the U.S. economy, they’d be favoring certain U.S. stocks.
Ezra Klein: It sounds like the markets may have a better grasp of economics than the current administration.
Paul Krugman: Yes, it appears the markets recognize that protectionism is generally a poor strategy. There are numerous reasons why the belief that tariffs will restore U.S. manufacturing is fundamentally flawed. A key factor is that we’ve spent decades integrating American manufacturing with other nations.
We no longer have a distinct U.S. auto industry; instead, we have a North American auto industry that spans Canada, Mexico, and the U.S. When you restrict component factories from sending products to assembly factories in another country, you dramatically increase costs and create substantial disruptions. Thus, this approach proves detrimental to U.S. auto manufacturers and the factories involved.
Ezra Klein: How should other nations react?
Paul Krugman: There’s an argument that they should adopt a wait-and-see attitude, as implementing their own tariffs may just hurt themselves as well. Alternatively, some suggest targeting specific industries in the U.S., like Tesla, while others advocate for a decisive response to ensure the U.S. can’t bully them. If leaders from these countries approached you asking for advice, what would you recommend?
Paul Krugman: There’s a conventional saying that you shouldn’t hit back just because others have rocky coastlines. While this general principle may apply, it’s crucial to recognize that there remains a possibility of persuading Trump to alter his approach. Many Americans fail to view other countries realistically—they are real entities with national identities and pride.
The standard economist’s argument for free trade has always been to endorse it without exception, but in practice, that has never been politically viable. We didn’t arrive at a relatively free trade environment by simply persuading politicians with David Ricardo’s theories; it was achieved through a reciprocal approach—exactly what Trump aims to disrupt. I wouldn’t advise Mark Carney, the Canadian Prime Minister, to simply accept U.S. tariffs, even if that may appear reasonable from a cost-benefit perspective. It’s crucial to respond in a way that resonates with Canadian pride.
Thus, there’s a strong case for retaliating, particularly if it might motivate a shift in U.S. policy and address national concerns.
Ezra Klein: How severe could this tit-for-tat become? Do you think a U.S. recession is likely at this point, or are we staring down the barrel of a global recession due to this trade conflict?
Paul Krugman: Typically, I’d argue that while tariffs may be harmful, they don’t directly cause recessions. Instead, they reduce efficiency by forcing reliance on higher-cost domestic sources over lower-cost foreign ones. However, what’s unique about this situation is the unpredictability and instability created by protectionism. It’s this uncertainty that can induce a recession.
For instance, if you’re a manufacturing firm in the U.S., contemplating your next investment—let’s say in a components plant—you might wonder whether to base it in Mexico for cost efficiency or in the U.S. under potentially accumulating tariffs. Such uncertainty creates a significant risk of stranded investments across various sectors.
Ezra Klein: That uncertainty sounds reminiscent of the debates we had after the Great Recession. Corporations argued they couldn’t invest due to future fiscal uncertainties created by government deficit discussions.
Paul Krugman: Exactly. During the aftermath of the Great Recession, we heard the Republican narrative indicating that future deficits fostered an environment of uncertainty that inhibited investment. They advocated for austerity measures as a remedy, urging cuts and tax increases to alleviate this supposed anxiety. However, they create the very uncertainty they claim inhibits hiring.
Now, with the current volatility in trade policy, it’s hard to imagine the impact it has on decision-making for firms considering investments. Few seem to believe these tariffs will remain stable for long. The prior criticisms of uncertainty appears somewhat disingenuous when juxtaposed with the current, genuine turbulence surrounding economic policy.
Ezra Klein: No doubt. It feels like the discussions on uncertainty now mirror those from years ago but with fresh complications as the situation evolves.
Paul Krugman: Yes, and what’s unsettling is that we’re living through an unprecedented level of unpredictability regarding crucial policies that could change not just next week but over the next few years.
Ezra Klein: Trump could have established a more straightforward approach, such as announcing 20% tariffs across the board indefinitely. Businesses would have at least been able to plan around that framework.
Paul Krugman: Exactly. While stable protectionism poses its challenges, it likely generates less damage than the current instability. The more one understands trade dynamics, the less threatening stable tariffs seem. In contrast, the erratic nature of Trump’s policies, compounded by general instability in other areas like government programs, creates an unhealthy environment for business.
Ezra Klein: I keep getting asked by friends whether now is a good time to buy the dip. You don’t provide investing advice, but the underlying intuition seems to be that the stock market always finds a way to recover. Given everything we’ve discussed, do you think the current market correction is as severe as it gets, or could it worsen?
Paul Krugman: Well, we can’t ignore the possibility of a 1930s-style scenario reemerging. The real concern lies in the novel dynamics of our current policy environment. Historically, such craziness hasn’t been seen before in the U.S.
Of course, we’ve witnessed a remarkable surge in tech stocks and AI lately. Given my experience with the dot-com bubble in the 90s, I worry that such rapid growth can lead to prolonged periods of economic pain and market corrections.
Ezra Klein: Trump understands the market response—he’s been very attentive to it in the past. He’s aware of impending recession indicators, yet he willingly embraces this pain. What do you think compels him to make these choices? Is it solely Trump’s instinct driving this?
Paul Krugman: The question of what Trump truly comprehends is always pertinent. For instance, he often claims his approval ratings are in the 70s, which could suggest a disconnect with reality. People like Scott Besant at Treasury are surely aware of the indicators flashing red, but whether Trump grasps this is another question. It’s hard to tell whether anyone dares to inform him that his approach is misguided.
He might perceive market downturns as a lack of understanding of his policy brilliance.
Ezra Klein: So what do you think he believes is the brilliance behind his tariffs?
Paul Krugman: I think he holds a simplistic view: whenever someone sells more to us than we buy from them, they’re taking advantage of us. His objective is to rectify this imbalance so that his perceived shrewdness is finally recognized. There seems to be no more profound agenda—just the belief that tariffs can resolve trade deficits.
Ezra Klein: Yet the administration seems to present multiple, conflicting rationalizations for these actions.
Paul Krugman: Yes, one rationale suggests the goal is to re-industrialize America. If that were the case, we would need a stable tariff environment that facilitates decision-making for businesses. But there’s also the narrative that these tariffs are negotiating tools to exact favorable results on issues like fentanyl trafficking or immigration.
Another perspective argues that proceeds from tariffs could finance tax cuts for the working class. However, if that’s the premise, then those tariffs would need to be consistently maintained at high levels to yield any real benefits. This leads to contradictory policies that require varied tariff regimes, yet they seem to be invoked almost interchangeably.
Ezra Klein: The core of it seems to be that Trump fundamentally desires tariffs, and his supporters will provide them regardless of the additional rationalizations.
Paul Krugman: Precisely. Although there are many inconsistencies within the narratives we hear from the Trump administration, they aren’t the central motivating factors behind policy decisions. The intent remains firmly focused on implementing tariffs.
Ezra Klein: Is it feasible, within any tariff framework, to achieve the re-industrialization of manufacturing, which is one of their more emotionally compelling arguments?
Paul Krugman: There are two aspects to consider. Can tariffs substantially lower the trade deficit? The answer is complex, as many counteracting forces exist. It’s challenging to impact the trade deficit significantly with tariffs, although if they were high enough to essentially halt international trade, that could theoretically eliminate it.
However, even if we successfully reduced the trade deficit, achieving noticeable levels of re-industrialization is another matter. For instance, Germany maintains enormous trade surpluses yet has experienced declines in manufacturing’s share of total employment. Achieving levels of manufacturing similar to Germany’s might still leave many questioning where the industrial nation of the past went.
Ezra Klein: So drops in manufacturing are largely driven by automation and productivity gains rather than by trade deficits?
Paul Krugman: Yes, that’s correct. The decline isn’t primarily attributable to trade imbalances.
Ezra Klein: But there are two possible aspects to consider in manufacturing: one is about restoring jobs to the economy, and the other is boosting manufacturing capacity.
Paul Krugman: Exactly. Many who analyze China’s manufacturing ecosystem note they’re no longer just focused on low-wage labor for cheap consumer goods. They’ve developed remarkable levels of supply chain expertise, enabling them to outpace us. In terms of global geopolitical power dynamics, that poses significant long-term risks for the U.S. Hence, there may be valid reasons to invest heavily in rebuilding that capacity, even if it’s primarily automated. Dependence on Chinese manufacturing is problematic.
Ezra Klein: What’s your take on that argument?
Paul Krugman: It’s a sound principle. International trade has guidelines outlined in the General Agreement on Tariffs and Trade from the 1940s—Article 21 basically frees nations to act if their national security is at stake. This raises questions about the wisdom of relying heavily on Taiwanese semiconductors, which could be risky.
While the CHIPS Act aims to bolster our independence in semiconductors, high tariffs on imports from Bangladesh or clothing would be counterproductive. Such actions heighten living costs for American consumers and don’t contribute to security.
If the goal is to enhance national security—and the robustness of supply chains—then penalizing allies in this manner seems counterintuitive.
Ezra Klein: So, historically, the trade system that Trump is dismantling was partially about fostering national security in a broader sense.
Paul Krugman: Indeed. The post-World War II landscape illustrated a strategy partly aimed at promoting solidarity among democracies. Now, we’re undermining policies initially designed to enhance that security. The U.S. risks alienating allies while giving potential adversaries a foothold for collaboration.
Ezra Klein: This feels like a situation where no one is willing to challenge the king.
Paul Krugman: Precisely. More troubling yet is that we’re witnessing decision-making shaped by those who endorse Trump without question. They don’t just humor him; they embolden him to pursue ever more extreme policies that align with his instinctual preferences.
Ezra Klein: Is there evidence that supports this happening?
Paul Krugman: Yes. Peter Navarro, who was essentially Trump’s trade czar, was apparently brought in due to his vocal opposition to China. They sought figures who would endorse the king’s agenda, seeking them out through platforms like Amazon.
Ezra Klein: Let’s talk about Bob Lighthizer, a long-time contrarian in the trade debate who is widely respected for his expertise. Many expected him to influence this administration, yet he was overlooked. Why do you think that was?
Paul Krugman: Likely, it’s because he had his own views, independent from the directives of Trump. He might have challenged the idea of tariffs on Bangladesh, and Trump doesn’t seem to welcome dissenting opinions.
Ezra Klein: It’s fascinating. You can track the evolution of Trump’s administration through the influential figures surrounding him. In Trump’s first term, Jared Kushner brought in mainstream voices, serving to temper Trump’s more disinhibited tendencies. In contrast, Don Jr. and others seem to encourage an unfiltered embrace of MAGA ideals.
Are we seeing a shift in leadership dynamics where those around Trump now serve as accelerants to his instincts?
Paul Krugman: Yes. These shifts result in an environment where individuals telling Trump he’s right and encouraging him to extend further isn’t healthy. They instill a kind of blind faith in his judgment, discouraging critical analysis or debate, creating policies driven by unexamined instincts.
Ezra Klein: I feel like we’re also seeing theories forming around this set of policies, ideas that may be ambitious in a broader sense. There’s talk of a “Mar-a-Lago Accord” relating to the dollar’s role and whether its status has contributed to the de-industrialization of America.
Can you explain the connection between the dollar as the world’s reserve currency and America’s decline in manufacturing, if there is one?
Paul Krugman: Ah, this is a complicated topic with a lot of misconceptions. I struggled to condense the dollar’s role into a manageable explanation for a recent Substack post.
The dollar is highly significant in international commerce; many transactions occur in USD, including trade between non-U.S. countries. Over 60% of foreign currency stockpiles are maintained in dollars. This dominance gives the U.S. a trade deficit as a mirror effect—the trade balance always corresponds. We sell more assets than we purchase, corresponding with our import purchases exceeding our exports.
However, the idea that trade deficits are directly linked to the dollar’s reserve currency status is overly simplistic. While it contributes, it’s not the main factor. America remains an attractive investment destination, and that drives the trade deficit—not solely the dollar’s status.
Ezra Klein: MAGA world seems to wrestle with its relationship to American power. On one side, they yearn for more dominance while expressing concern over overextension—whether financially or militarily. They want to exert control without recognizing the military and economic obligations required to maintain that strength.
Paul Krugman: Indeed. The United States maintains a peculiar form of imperial power, notably through its approach in the post-World War II era, which contrasted with traditional empires. Instead of exploiting defeated nations, the U.S. rebuilt them and created alliances. This subtlety can be hard for many to comprehend.
They long for the power to exert unquestioned dominance without realizing that means abandoning the soft power dynamics inherent in international relationships. It’s a challenging balance to navigate.
Ezra Klein: Lately, I’ve noted some murmurs among Republicans hinting at a potential divergence from Trump’s tariffs. Chuck Grassley and Maria Cantwell, among others, have voiced opposition to the current tariff strategies, citing their harmful impacts on working-class Americans.
Mitch McConnell even stated that tariffs are bad policy. Could these voices indicate a shift, particularly after recent electoral setbacks for Republicans?
Paul Krugman: Historically, many have anticipated a breakpoint among Republicans, but those predictions have consistently failed to materialize. Considering their age and the waning political futures for figures like McConnell and Grassley, they may be inclined to voice these dissenting opinions without a real stake in their consequences.
Ultimately, they may cave in as they’ve done before. Leadership would likely fracture if they turned against Trump, jeopardizing their positions.
Ezra Klein: It sounds like they remain very aware of Trump’s power to influence their careers negatively if they challenge him.
Paul Krugman: Exactly. Trump’s influence lingers, and any Republican opposing him risks being ousted.
We’ve dissected the MAGA critique of the global trading regime. Those policies often don’t align with sound economic reasoning and frequently contradict one another.
As you’ve pointed out on your Substack, Donald Trump’s instincts drive policy while supporters try to backfill those decisions with theoretical justifications. There exists a broader disillusionment with the global trading regime that even figures in the current administration critique.
Ezra Klein: Is there a legitimate critique of these trading regimes—perhaps an argument for truly reciprocal tariffs—that you find compelling?
Paul Krugman: I don’t find the tariff argument convincing. We’ve held reciprocal trade arrangements—just look at the agreement with Canada and Mexico. Trump claimed to renegotiate it but didn’t make substantial changes. Likewise, Europe’s low tariffs align with U.S. tariffs.
Persistent trade deficits often reflect U.S. attractiveness for capital investment. Over the last 25 years, despite those deficits, the U.S. has outpaced productivity growth among advanced nations.
The narrative framing trade deficits as detrimental tends to overshadow the successful economic performance we’ve maintained relative to other nations, which generally reflects strength.
Ezra Klein: Absolutely, but there are notable inequalities affecting ordinary workers.
Paul Krugman: Certainly, trade dynamics do contribute to income distribution concerns. It’s important to differentiate between broad narratives of globalization and more mundane economic issues like productivity growth, labor policy, and their nuanced impacts on inequality.
Ezra Klein: You’ve clearly articulated this journey of ideas.
Paul Krugman: Yes, I can relate to those feelings of skepticism toward uncritically embracing globalization, especially during my early days.
Critiques advocating for moderation in trade—accounting for national security and worker considerations—highlight a significant departure from current policies.
Ezra Klein: It’s a different trajectory that underscores the substantial contrasts between emerging ideologies and current practices.
Paul Krugman: Alright, to wrap up: what three books would you recommend to our audience?
Paul Krugman: I recently read Zach Carter’s The Price of Peace, examining John Maynard Keynes and his influence—it’s fantastic. My friend Barry Ritholtz has a noteworthy piece How Not to Invest, which is engaging even for those uninterested in investing.
Lastly, Phillips O’Brien’s War and Power offers intriguing military history perspectives and is quite critical of the current administration’s policies.
Ezra Klein: Thank you, Paul Krugman.
Paul Krugman: Thank you for having me.
This episode of The Ezra Klein Show is produced by Roland Hu, with fact-checking by Michelle Harris, Kate Sinclair, and Mary Marge Locker. Mixing is by Afim Shapiro and Amin Sahota. The executive producer is Claire Gordon. The production team includes Elias Isquith, Kristen Lynn, and Jack McCordick. Original music by Pat McCusker. Audience strategy by Christina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie Rose Strasser.