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I, if you take your credit card and you go shopping and you run up a large credit card debt, you're running a trade deficit with all those shops. Now, it would be pretty strange if you then blamed all the shop owners for having sold you all those things. "You're ripping me off. You're ripping me off. You're ripping me off. I'm running a trade deficit." That is the level of understanding of the president of the United States.
The trade deficit does not represent at all trade policies. It represents spending relative to production or earnings. >> [snorts] >> We call that an identity. I teach it in the second day of my course in international monetary economics. Trump never made it to the second day. So, he says you're running a trade deficit. Look, they're all cheating me. But all that's happening is the United States is outspending its national income. And you can look at the national income chart. You can add up consumption and investment and government spending and you could subtract off gross national product and lo and behold, what will that equal? Not approximately, exactly. That will equal the current account deficit, which is the comprehensive measure of how much you spend on goods and services versus how much you sell in goods and services.
So, the United States runs a current account deficit because it spends more than it produces. Why does it do that? We have a big credit card in the United States. It's called the national government. The US government spends about $2 trillion a year more than it takes in in revenues. What it's doing is making transfers to the American people and to American businesses. It doesn't tax Americans for those transfers because here's another little fact, because the congressmen that vote on the budget got into office by being paid for their campaigns by rich people who don't like taxes. So, the political system says, spend but don't tax us. So, we run a chronic deficit in the United States. That spending goes out either as transfer payments or goods and services and that's more than our national income which is about $30 trillion and our spending is about $31 trillion. And that's our trade deficit and for that Donald Trump blames the world. Okay, I fail him for this if he were my student. He's my president. It's a little weirder.
Because when he did this, in two days the world lost $10 trillion of market capitalization. By the way, where did it go? Uh did it get transferred from here to here? No. It got destroyed. Why destroyed? Because trade, something also the President of the United States doesn't understand, is mutually beneficial. So, if you stop trade, everybody loses. It's not that one side wins, the other side loses. He cannot understand that concept as a guy that traded real estate in New York. So, his idea is somebody had to win and somebody had to lose. But, what happened when he made this announcement was $10 trillion was wiped out worldwide. It's not that the US went up and they went down. No, everybody went down. Because the whole world system is based on a division of labor, and he's breaking that division of labor into pieces. So, then people said, "This doesn't make sense." Even the very rich people that gave him the money for him to get into office started saying, "This doesn't make sense." The hedge fund managers who were his big campaign contributors, Elon Musk who paid for his election to became Prime Minister, uh he said, "This doesn't make sense." And then the markets said, "This doesn't make sense." Not only $10 trillion, but as the finance minister said, interest rates started to rise because people began to dump US Treasury debt. >> The safest thing in the world, apparently. >> So, interesting what happened. It's not quite true that he reversed things. First, he left on this 10% tariff, except for one country, for China. >> 145% on Chinese products. tariff >> That's because the United States has a deep neurotic attachment to China. The US political system hates China. Why? Cuz China's big and successful. And so that the US hates. It's a rival. It's a competitor. And so this is the one thing he left on. Now he's going to mess up everything with this, too, because in a trade war between the US and China, China wins. China does not depend on the US market very much. It's about 12% of China's exports. China will do just fine. It's just dumb policy. That's there's no more, sorry to say it, there's just no more explanation to this than that. It makes no sense.
Now it raises, if I could, just one last point. How can this happen when it makes no sense? And that, people should understand, we are in one person rule in the United States. Our political system is in a state of collapse. What President Trump did is an emergency decree. Everything he does is an emergency decree, literally. You can go on to whitehouse.gov and then type follow the menu to executive decrees. And there are dozens of them. And each one starts the same way, with the powers invested is in me as President of the United States, I hereby declare A, nonsense, B, nonsense. C, nonsense. Because he's king. Those powers are not invested in the president of the United States. They're invested in the Congress. You read Article 1 Section 8 of our Constitution. It says that all duties originate with the Congress. And specifically in the lower house, all legislation has to start in the House of Representatives. But the US starting in 1945 after World War II became a military state to a large extent. And so it sprinkled in its legislation emergency, emergency, emergency. And Trump doesn't have to prove anything's an emergency. He just has to say something's an emergency. So suddenly the trade deficit became an emergency. And on that basis he issues a one-person rule. Even his aids don't know what he's doing.
You raised one final interesting issue. Which is that the market recovered about $4 trillion when he reversed. Anyone who knew that 5 minutes before made billions. This is not the cleanest government in the world, I can tell you. I'd be hugely surprised if some people didn't know just a bit ahead of time. Starting with members of the US Congress, by the way. >> Look, we'll get into the more general issues about protectionism and the end of globalization {question mark} in a minute. But I think what's happening and the directives coming from the White House is such a perfect example of what this panel is about. I'd just like to stay on this just for a few more minutes.
Um Minister is protectionism always a short-term aim and does it always come at the expense of the longer-term gain? Donald Trump hasn't said it in public, but apparently in private during his first term, he was asked about the problem of the US national debt and his answer was, "I don't care because I'll be dead by the time it's a problem." And apparently that's also his approach to the climate crisis. So, is this protectionism coming from the White House a short-term fix which is going to hurt America in the longer term in terms of how it grows? >> It's not a fix. It's uh apparently a quick fix, but it's fundamentally flawed as Professor has very clearly stated. Look, protectionism is nothing new. If you look at post-global financial crisis, the number of annual trade restrictions have gone up dramatically. In fact, like last year, there were over 3,200 trade restrictions. That is almost 11 times higher than what it was pre-global financial crisis. So, this has been a trend, but what has you know, what we have seen over the past week or two is clearly a a new level. This This goes beyond you know, some protectionist measures, trade restrictions. This goes into something an all-out trade war. So, that's really worrisome because if you go back again, I mean, if you go if you look at 20 years to global financial crisis, global annual trade growth was two times world real GDP growth rate. So, in a way, trade was the engine of growth. >> Mhm. >> Now, that engine has been slow. So, if you look at post global financial crisis, global trade growth barely kept up with kept up with uh real GDP, you know, global GDP growth. So, that's no longer really one of the kind of like a strong engine. But, I think the way things are now, if you know, if if current state of affairs is sustained, we may end up actually protectionism dragging global growth. It is not only growth. It's really There are many, you know, additional fallouts from this type of policies. >> Absolutely, yeah. >> Yeah. So, the answer to your question, this is not a fix. This is a fundamentally flawed, you know, uh policy uh perspective. Obviously, countries have choice, you know, they they always have a choice. But, we would rather, you know, see world moving back to rule-based multilateral framework. You know, where everyone benefits. I think I agree with Professor, you know, over 1 billion people since 1990s >> [snorts] >> have been lifted out of poverty, predominantly in Asia. I'm talking about absolute poverty here. And that's largely thanks to, you know, trade and and growth associated with that trade. So, it is worrisome that we are now experimenting policies that may actually reverse some of these gains, which I think were very A billion people out of absolute poverty cannot be underestimated. It's quite simple. Now, admittedly, trade do cause geographic dislocations. But, the solution is not protectionism. The solution lies more internal sound policies, you know, structural remedies, but also you can deploy tax policies, incentives, and other things to address, you know, dislocations in regions caused by, you know, global trade openness. Uh so, it's not a level playing but protectionism will create more inequalities. It will create bigger problems. Uh already, you've got significant headwinds for global growth. Aging population, high global indebtedness, climate impending climate crisis. So, protectionism is going to be yet another big blow to long-term growth outlook. And that's why growth is barely, you know, at you know, sustained at at 3%. I think the risk is that we will move to a new era where per capita GDP growth will almost disappear if we continue down this path. >> Really interesting what you say about protectionism having fallout in other sectors, and we will get on to that about how it might affect cooperation on the climate crisis, global health, etc., etc. But, let's use one country as a particular example about how a nation can react to protectionism. So, we have the US tariffs, which in 90 days will come into effect beyond the 10% that Donald Trump has placed. Let's take two rich countries. UK and Singapore will stay at 10%. Bangladesh and Botswana will both go up to 37%. Laos will be 48%. Syria will be 41%. Lesotho in Southern Africa will be 50%. In 2023, the US exported to Lesotho $7.33 million worth of goods. Lesotho in that same year exported to the United States $228 million. The US GDP per capita in 2023 was $82.8 thousand per person. In Lesotho, it was $916. Gentlemen, how does a country like Lesotho deal with the protectionism coming from the US? Minister? >> Well, look, protectionism is an external shock, meaning it's not a decision by you know, the counterparty. It's it's essentially, so how do you deal with it? I guess you focus on regional integration. I mean, as a an antidote of protectionism. So, regional connectivity, regional integration would be one way forward. So, you know, instead of globalization on a big scale, you focus on how you can deepen and broaden your ties with your immediate neighborhood or countries that are still willing to entertain rule-based trade. So, I think that's the only way. Um Uh again, this is a major shock for many countries. I think global supply chains are going to suffer. Uh this will lead to I mean, already, I think the risk is that capital will be misallocated. Take us. I mean, take Turkey for Uh we have we are the world's second largest of white goods exporter. We need chips. Basic ones. Nothing sophisticated. We're not talking about 4 nanometers. We're talking about, you know, 30, 40, 70 nanometers. If we're worried that countries are not going to supply that, uh even though it may not be the most efficient way, we may have to go into a very large cap backs to see if we could produce them. We are good at something. Other countries are better at something. So, we would rather trade. And this is a very simple, you know, uh economics, you know, theory. Everybody benefits. So, I don't think, you know, X country or Y country, that there's not much they can do except to look at, you know, ways in which uh they could uh mitigate the fallout from not being able to sell goods to United States.
>> But Professor, that takes a long time to arrange because, of course, the shock is immediate. You can't make deals that quickly, can you? >> I think uh the particular uh tariff rates that Trump announced last week that led to that financial bloodbath are not going to come back. So, I don't think we're going to hear again about those numbers after 90 days. 90 days in US time now is infinity. It's eternity. Uh we'll never hear those numbers again. Where did those numbers come from? Something again so stupid you can't believe that that any uh country, any country, would would do this. But the idea is the following. As I said, if you want to know what your trade balance is, you earn some income, so you sell some services to somebody, and you buy things. And if you spend if you spend what you earn, you're in trade balance. Technically, you're in current account balance. Now, most of us, I work for one employer, uh my university. So, I run a a big trade surplus with my university. And then I run a pretty big uh trade deficit with uh the grocery store that I we buy our groceries from. And uh if I have to buy shoes, I run a trade deficit with the shoe store, and so forth. Trump's idea, just to add to the craziness of it, is that you should run a trade balance with everybody, not an overall trade balance, but a trade balance with everybody. So, you should sell a little but you should work a little bit for your shoe store, you should work a little bit for your grocery store, you should uh you should go around anytime you want to shop, you trade something. I'll you know, I'll write you an essay if you'll sell me shoes. And you make your living uh somehow uh trying to uh balance your trade with all of your counterparts. Well, this is insane. This is why we have a market economy. You don't have to have balance with every transaction that you do with somebody. And but what Trump said was, "Oh, Lesotho, they sell us more than uh we buy from them. So, they're cheating us." That's literally what he said, literally what he said. Okay, is it completely delusional or rhetoric? It's delusional, okay? Just so you know. Uh it's weird. But anyway, now then he calculated a formula, okay? Lesotho, we have to tax them by the amount to reduce the imports from them so that we have balance with Lesotho. And then they made some absolutely stupid formula that you would not accept in a first year, third week class. It came out of the US trade representative's office. They probably were told do it overnight, the boss wants it. And then they came up with a list of tariffs country by country based on the bilateral trade balance. You cannot make this stuff up. This is not It used to be not a Mickey Mouse country, my country. >> [snorts] >> But, this is Mickey Mouse. This is not And I'm sorry, I apologize to Mickey Mouse. He would not do this. Mickey Mouse is smarter than this. So, we are in a crazy land actually with this. Now, it stopped for a moment. We'll never hear those numbers again. I don't know what we'll hear in 3 months. God help us, really. Because it probably won't have to do with trade, it'll have to do with something else. But, we can't normalize this as what's the rationale, how to negotiate, what to do. Of course, 60 countries immediately said, "We'll rebalance with you." And the president of the United States literally used the language I'm about to use. I'm quoting him cuz otherwise I would never say this. He said, "60 countries are coming to kiss my ass." He said that in a public speech, the president of the United States. So, this is I'm sorry, I apologize. But, it's presidential language. Yeah. Okay? I'm only speaking at high political terms. So, we cannot normalize this. We have to say no. We didn't spend 100 years on 200 years 200 7 years since David Ricardo put forward the idea of comparative advantage. Okay? And we have been building the trade system since the ruins of World War II for 80 years. And we have been building the World Trade Organization, which the US led the creation of. I think it's fair to say for 31 years. This should not be normalized to try to figure out what is the theory of this. And it's a more fundamental point, ladies and gentlemen. The United States is a rogue nation right now on many things. Not just on trade, but on making Gaza into the US Riviera. Uh on whatever it wants to say. It's a little bit of a rogue nation. For the world to hold together, the rest of the world has to say, "We're not going down crazy lane." We're going to be responsible. We're going to go to the UN. We're going to go to the World Trade Organization. We're not going to get into this downward spiral. Because if we normalize craziness, there is no way out.
>> Uh you mentioned Mickey Mouse, but there's a kind of a theme here from Bloomberg, the news agency. These are its headlines in the morning and the afternoon of Tuesday, Wednesday, and Thursday. Tuesday morning, this is madness. In the afternoon, a clown show. On Wednesday, stocks keep falling. In the afternoon, could have been worse. Thursday morning, assessing the damage. Thursday afternoon, Trump blinks.