China now faces 125% US tariffs in trade war
26:28 Share

This BBC podcast is supported by ads outside the UK. If you're just starting your personal finance journey, Financially Inclined is exactly what you need. I'm Janelia Espinal, host of Financially Inclined, and each week we discuss money lessons you need to know. Listen to Financially Inclined wherever you get your podcasts.

Hello and welcome to World Business Report here on the BBC World Service. I'm Rahul Tandon and we're going to get straight into what is the

Only business story that people are talking about at the moment. It's been a dramatic few hours for the global economy. Donald Trump has announced a 90-day pause on all tariffs over and above his 10% baseline, except for China. Their tariffs have been raised to 125%. Let's hear some of what the US president has been saying. Well, I thought that people were jumping a little bit out of line. They were getting yippy, you know, they were getting a little bit yippy, a little bit

unlike these champions, because we have a big job to do. No other president would have done what I did. No other president. I know the presidents. They wouldn't have done it. And it had to be done. What was happening to us on trade, not only with, you know, if you look at it, not only with China, but China was by far the biggest abuser in history. Mr Trump also returned to a familiar line when it came to tariffs, that one of doing deals. A deal's going to be made with China. A deal's going to be made with every one of them.

and there'll be fair deals. I just want fair. There will be fair deals for everybody. But they weren't fair to the United States. They were sucking us dry, and you can't do that. You know, we have $36 trillion of debt for a reason. We don't have it there for fun. They have it for a reason.

We're going to hear from somebody who knows Donald Trump well in a minute. But first, we want to bring in Susan Schmidt, who'll be with us throughout the programme. Portfolio manager, exchange, capital, resources. Quite a few hours on the market. Susan, just explain to our listeners what happened. Quite a few hours. So the markets and investors have been

Really unsettled by the trade tariffs, President Trump's comments over the last week, concerns of how this will reverberate through not only the U.S. economy, but the global economy. And today's about face, a 90-day delay suddenly announced before the tariffs are enacted because so many countries have approached

President Trump and the administration to negotiate that we are delaying these tariffs 90 days before anything goes into effect, keeping that 10% tariff, of course, there. There's still a little something hovering. But for investors, that was a breath of fresh air. And

led to elation in the market, a big sigh of relief. We saw moves in the market that we haven't seen in quite literally decades. One of the largest increases ever for that tech-heavy NASDAQ, those tech companies really taking a hit with the tariff talk, up 12% today. S&P 500 up almost 10%. So really seeing that investors are...

feeling some perhaps short-lived relief, but nevertheless, some relief today. Yeah. Let us bring in Everett Eisenstadt, who is currently a partner at Squire Partner Boggs. He also was deputy director of the National Economic Council during Donald Trump's first term. Thanks so much for joining us once again, Everett. Is this reversal of policy a clear indication that Donald Trump's attempts to change global trade were not going to work?

Oh, I don't think so. In fact, I think it's a validation that his strategy of bringing others to the table to try to reorient the global economy is working. Now, it may be an unorthodox way of approaching it, but the reality is that a lot of economies around the world are looking at, you know, both internal restructuring and also their relationships with other markets that simply would have been contemplated, you know, a year ago. So,

We're seeing some dramatic movements. It's going to take some time to work out, but I think we're going to see some progress over the near term as well. Yeah, when you say it's going to take time to work out, he set this 90-day deadline. Do you expect to see lots of deals within that period? Because it's a short period for international trade deals, isn't it? Well, deals can be done in various stages, right? It's not, I think, you know, the idea that you have a completely...

a concluded global negotiation within 90 days. That's not realistic. But I do think there is the ability to have pathways to agreement. And sometimes those pathways have different phases. You could have a phase one agreement that could have certain elements in it. And that could lead to, you know, phase two and ultimately have a final agreement. So as I said, it'll take time, but you got to start somewhere. And this starts today. Yeah.

Yeah, it looks like it will start today here. A lot of people are asking a question here. If we look at the current global trade model, which you know very well, what's wrong with it? Because the U.S. has done very well out of it. It's the world's largest economy. It's done much better than many others over the past few years. Well, it's a good question. I think part of the issue has been one that is not really –

It's attributed to this administration, but I think it's much broader than that because the global trading system was built around a series of rules. And those rules were created and articulated, of course, through the World Trade Organization in a very different period of time. Global economy was different. The accession of China to the WTO, the fact that they came in as a special and differential treatment, they had different rates than others. They had different flexibilities that were not afforded to other economies because they simply were not at the same level.

capacity. Over time, China has clearly become a major global player, but the rules haven't kept up. So I think part of what you're seeing with this sense of unilateralism is a frustration with the multilateral system's inability to deal with the rise of China as a global entity. So you're either going to change the rules through a global negotiation or you're going to have unilateral measures. And that's why I think we're seeing more emphasis on the unilateralism right now.

Everett, always a pleasure talking to you on the program. Let's bring in somebody who I think has a slightly different view. Natasha Sweeney is a professor of law at Yale Law School. She also served as Deputy Assistant Secretary for Economic Policy and later as a counselor to the former Treasury Secretary Janet Yellen. Natasha, thanks so much for joining us here on World Business Report. Thank you so much for having me. Yeah, Everett's right there, isn't he? I mean,

You know, Donald Trump's managed to achieve something that Secretary Yellen, President Biden weren't able to achieve, which is bring countries to the table to get more favorable terms for the U.S.?

I just so disagree with that assessment. I mean, he has managed to achieve something that the Biden administration did not manage to achieve, which was a self-made economic calamity. The worst three days of trading that we have seen since the financial crisis in U.S. markets.

and also a reversal of the U.S.'s safe harbor premium, as you saw what bond yields were doing earlier today before this reversal. So I think it's hard to really claim victory in any way as a result of this, again, self-induced financial panic that we found ourselves in over a trade war that the president ignited. And the point that I think it's like really important to emphasize is that

Maybe we could have a conversation about whether or not this was a successful tax set of tactics that the administration was taking if we understood what the objective was. Well, isn't the objective clear? He wants to bring back manufacturing to the U.S. and he's using tariffs as a tax to do that.

So if he wants to bring back manufacturing to the United States, then – and if he wants to, as many members of his administration have said, use these tariffs and the revenue from the tariffs to pay for –

extending the tax cuts that are set to expire this year, then definitionally these tariffs have to be permanent. That's the only way they bring manufacturing to the U.S. That's the only way they are able to create revenue that can be used for anything. If instead, as the Trump administration suggested today, what the tariffs are is or were

I guess, until this pause is a negotiating tactic vis-a-vis our global partners, then that's a totally different set of calculus. And then there's going to be no real net impact or no real restructuring that's going to happen vis-a-vis domestic production. But if he's able to, sorry to interrupt you there, Natasha, to get better trading deals...

For the US with the likes of the EU, with the likes of countries in Asia, won't that help production? Won't that help manufacturing? So not really in that. And it's kind of related to the question that you asked, Everett, what do better deals actually mean?

Like we were in a situation where earlier this week, you know, Vietnam was conceding to the Trump tariff agenda by saying we're going to lower our tariffs on U.S. imports from 1 percent to 0 percent. Like, is that any real victory that one can claim vis-a-vis American manufacturers or American consumers?

consumers. And importantly, like I have been part of crunching these numbers with respect to what these tariffs are actually going to mean for American households and what they're going to mean if this pause does not stay in place.

is a $4,000 increase in prices that consumers are going to face for literally everything. And by the way, the fact that these China tariffs are now in place and are in place at much more punitive levels, it's still very relevant to American consumers. That's like

70% of their personal electronics. It is. And let us see whether they stay in place. Natasha, thank you so much for joining us here on World Business Report. I want to bring in Susan Schmidt. We've talked about the bond market before. That is a way that governments raise money. There was a lot of uncertainty in that market. Has the U.S.'s reputation as the world's great financial power been damaged by this, do you think, Susan?

I think it certainly has. There will be some paint left on the U.S. market as a result of the past several weeks. Investors like certainty, stock investors certainly appreciate certainty, bond investors even more so. And the U.S. dollar has been impacted by this talk of trade equity.

currency gets impacted by that, the dollar is weakened relative to other currencies, that then goes into U.S. government-backed debt in those bonds. So there has been some uncertainty there. We've seen the bond market react. The price of U.S. bonds has fallen. Investors have been reacting to that. And that generally determines and indicates a confidence level that investors have. That

haven of security that US dominated instruments might have had in the past. Those US dollar backed government bonds may not be seen as such a haven of security after all. Yep. Donald Trump admitted to himself that he had been watching closely that bond market. You're with World Business Report from the BBC World Service.

If you're just starting your personal finance journey, Financially Inclined is exactly what you need. I'm Janelia Espinal, host of Financially Inclined, and each week we discuss money lessons you need to know. Listen to Financially Inclined wherever you get your podcasts.

Donald Trump has, as we've been talking about, hiked American tariffs on Chinese goods to 125%. Despite that, the president seemed confident the two countries would be able to do a deal. Nothing's over yet, but we have a tremendous amount of spirit from other countries, including China. China wants to make a deal. They just don't know how quite to go about it. You know, it's one of those things. They don't know how quite. They're proud people.

And President Xi is a proud man. I know him very well. And they don't know quite how to go about it, but they'll figure it out in the process of figuring it out. But they want to make a deal.

So how do American shoppers feel about trade tensions with China? These people who live in Washington, D.C., have been speaking to the BBC. I'm sure I consume much more Chinese products than I realize. I have an iPhone in my pocket, which could now be $3,000. I don't know what's going to happen. Increasingly negative relations with China I don't see is good for the global economy or the U.S. economy. So what are the Chinese leadership thinking? Are

Are they prepared for a trade war with the US? We wanted to hear from somebody who knows them well. Professor Graham Allison is the author of Destined for War, Can America and China Escape the Thucydides Trap? He recently returned from China after meeting key figures in the Chinese leadership. Several years ago, he said, you know, there are changes afoot the like of which we haven't seen in 100 years. And many people in the West almost took that like a joke.

But I think he appreciated that there was a risk that the U.S. and China would find themselves in an economic war and that he was preparing for turbulent or choppy waters ahead, as they put it. So I think that at least from all the evidence that I've seen, they've been preparing in each of the departments and each arena to be resilient if something like this should happen and to retaliate in kind.

When you say that China is prepared for this economic war, from your time talking to the leadership, is it a war that they're convinced they'll win? First, this is a great rivalry. China is playing a long game. China believes in their grand narrative that China is inexorably rising and the U.S. is irreversibly declining.

And that's happening over years and decades. So in that world, if the U.S. engages in a tariff war that puts the U.S. in a recession, maybe even in stagflation, and then a midterm election when political leaders get called to account, from a Chinese strategic perspective, this is positive. If China has to move from 4% to 5% growth to 2% growth,

Is this a threat to their regime? I don't think so. To Xi's rule? I don't think so. I could imagine there's some folks there saying it's lose-lose for sure, but we can deal with the loss more easily than they can. And in the longer run, if this persuades the European community that it wants to trade with us more than it wants to trade with the U.S., the U.S. might even succeed in decoupling itself from a lot of the global trading economy.

You travel to China frequently. You meet with some of the decision makers there. How would you describe their mood on your last visit? Confident? Worried? I was quite surprised how confident the team feels. I had the chance to see the Premier and he was very upbeat about both where the Chinese economy stood now and where he thought it would be in 2025.

Many people, many quite sophisticated people in the investment community also agreed with that. And for the political leadership that I had a chance to talk to, I think they believe they have their picture. They have their strategy. They think they're prepared for anything.

But...

China faces its own severe economic problems, doesn't it? Youth unemployment is huge. They're not even recording it anymore officially, are they? Their property crisis is there as well. So a trade war will do great damage to the Chinese economy, which is already faltering.

I think you're absolutely right. So they've been struggling with their own economic issues. They wouldn't choose a trade war at this point. But if the choice is between a trade war and capitulation to American tariffs that they regard as unjust and unreasonable, my bet is Xi is prepared for a pretty tough trade war. And I think they think that Chinese are probably better at suffering than Americans are.

Susan, really interesting to hear from Professor Allison there, who knows that Chinese leadership well. It was interesting to see companies like Tesla and Apple having big jumps today, but they face significant challenges ahead if these tariffs are not withdrawn.

That's exactly right. And it's the big tech companies that have taken the biggest hit. That's why we saw the tech-heavy NASDAQ index perform the best today, because the biggest companies in that index are the ones that are on the forefront of technology, who have the most exposure to China, and who have had the most damage done to their share prices in the last week. It's a challenge for those companies to figure out how to do their manufacturing elsewhere. Remember that when President Trump was elected,

in office the last time, he did already ask companies, effectively forced them to move away from China. They've done that, but it's still integral to the overall manufacturing process. It means those components, should they come at these 125% now tariff levels that President Trump still proposes for China, that's going to cause a huge

difficulty for them in operations and a huge hit to their profitability. So China is now in an escalating trade war with the United States. Let's look at the world's next largest trading group, the European Union. The reciprocal tariffs of 20%, of course, have now been withdrawn, but EU will still face that base rate of 10%. Germany's next leader, the chancellor-in-waiting, Friedrich Merz, well, he had this message for the American president. The key message to Donald Trump is Germany is back on track.

Germany will fulfill the obligations in terms of defense and Germany is willing to strengthen their own competitiveness. And that is not just Germany, that is Europe, the European Union and Germany will be again a very strong partner within the European Union and we will bring the European Union forward.

Karin Carlsberg is a Swedish MEP. She's also the vice chair of the EU's Committee on International Trade. We are not close to have a trade deal with the White House. Instead, we receive new messages from

on social media, actually. I have to say that President Trump has more or less transformed the White House to a playground. Social media and X is not the right place for trade negotiations.

So this is far from over. He's removed the reciprocal tariffs on the EU, so you're back to 10%. But those tariffs on aluminium, steel, automobiles, they remain. So what should the EU do now? That's how we interpret it tonight. But once again, trade negotiations should be done in a proper way.

What can I just interrupt you there? You interpret it. Are you still not sure? As we read from international press for the very moment, there needs to be clarifications because it has to be confirmed. But I think that is how most of us understand this for the moment.

But trade is a very serious thing. And what actually President Trump does by acting like this is to run a full-scale experiment with the global economy. And ordinary people, companies, pay a very, very high price for this uncertainty. But I think that the strong reactions from the stock markets

it has also played as a signal to the president to perhaps make him understand that this is going to go in a very, very wrong and difficult direction. The EU exports $582 billion worth of products to the US. Do you now think that the US is an unreliable trade partner? Yes, because what we experienced this year

these days, this is not trade negotiations. It's, it's something else actually. And I would say... Well, he's doing it in a different way. I mean, you know, there is a way that people do things. He's trying to do it in a different way. And he's doing these negotiations for what he thinks is the benefit of the US people. It's not the, it's not the way they're done. It's the result that's important, isn't it? Yeah, it's the way he thinks is correct. But I,

would like to kindly remind you that we have international rules about trade. We have a multilateral system. We have the rules-based trade system. But President Trump, he is playing his own with his own rules. And it doesn't work because his politics and his strategy, it's part

of a bigger change in the American foreign policy, which I used to call campaign diplomacy, because you have to see this in the context of the hostile tone towards the EU, Ukraine, Greenland. And this is not a development we want to see. We don't want a trade war with our best partners

partner and allies for decades. We don't want to have these political tensions with our NATO ally in the US.

who is a Swedish MP. It really has been an extraordinary couple of hours and what's already been an extraordinary seven days. Let's bring in Libby Cantrell, head of US public policy for PIMCO, the investment firm which manages almost $2 trillion worth of assets. Libby, everyone's trying to work out what is Donald Trump trying to do and why has he changed his policies?

Do you want to answer that for us? Yeah. Yeah. An easy question to begin with. Yeah. So I think that, you know, we go back to sort of fundamentals in terms of what the president believes. And as he has said himself, he has been talking about goods trade deficits, about unfair markets.

kind of playing fields for decades. And so we have to take him at his word that he wants to reduce the trade deficit. I think if it were up to him, just without any sort of external pressures, he would be

imposing and continuing to impose these very significant tariffs. Now, of course, what we saw over the last few days in terms of weakness and fragility in the equity market and then in the bond market, also some pushback from Capitol Hill, I think he has sort of come to the practical conclusion that maybe the more kind of draconian approach that he pursued was

Last week is not realistic, but I think the upshot here for investors is that, and you were sort of alluding to this before, is that there's still going to be very high tariff rates. We are going to have a 10% baseline tariff that has implications for growth and for inflation in the U.S. and globally, 125% tariffs on China, of course, the USMCA tariffs on Mexico and Canada noncompliant goods.

Yeah. So I think the bottom line here is that even though there's obviously a real equity market rally here in the United States, sort of going into the close, is that the tariffs are going to remain high. And again, we have to take Trump very seriously on this. I think his goal is to reduce the goods trade deficit. We may agree with that or disagree with that, but I think that is what his operating principle. And that's a really important point, isn't it? Because if

in this 90-day period. He doesn't get the deals he wants. And then he thinks these trade deficits, well, it's not working in these negotiations. He could go back to tariffs again.

Yeah, I think that is going to be a possibility. Now, I think there is an argument that maybe, you know, folks have sort of touched the stove and won't touch it again. They realize that, you know, maybe this was a bit of a bridge too far. But I think that, you know, in terms of what we're telling our clients is that trade policy uncertainty is going to obviously hang over this, you know, this administration for the next three plus years, as long as President Trump is in office.

And that there will be a risk that in 90 days or 180 days or what have you, whatever the timeframe is, that he could impose higher tariffs. But again, even if he doesn't do anything more, I think this is the most important point, is that we could see an effective tariff rate of around 20%. To put that into context, it was around 3% going into this administration. So again, that has implications for growth just as it is. Let's just bring Susan Schmidt back into this conversation. And that

What Libby is describing there, that's not going to be good for businesses because they don't want uncertainty. And even though we've had some clarification from Donald Trump today, that's going to remain.

That is going to remain, and we've talked about this, investors hate uncertainty, businesses hate uncertainty. It causes everyone to have confusion over how best to operate going forward. And if that persists, and it will persist, businesses are now setting themselves up to be on permanent pause for the rest of the year until they have some clarity on the

as we've already seen, that can change dramatically in a very short period of time. That doesn't help build confidence back in the U.S. currency, the stock markets, or the direction for these tariffs. Libby, last thoughts from you. 20 seconds is all you've got, I'm afraid. Relieved?

You know, I think, yeah, I mean, maybe maybe temporarily. I mean, I think what we hope is to Susan's point about some more certainty is that we get some framework for what success looks like. Is this more defense spending? Is this cut in tariff rates? Is this a cut in taxes? This is a cut in, you know, a change in FX management. I mean, I think all of that would be helpful for the markets. That's it from World Business Report.

If you're just starting your personal finance journey, Financially Inclined is exactly what you need. I'm Janelia Espinal, host of Financially Inclined, and each week we discuss money lessons you need to know. Listen to Financially Inclined wherever you get your podcasts.