Paul Krugman on the ‘Biggest Trade Shock in History’
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From New York Times Opinion, this is The Ezra Klein Show. So scale of one 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 would 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 called where he's been tearing into the theory behind this kind of tariff policy, but then also the very strange reality, the practical tariffs that have now been announced and trying to understand what led to this package instead of one of the packages that might have more cleanly accomplished the goals that Donald Trump and the people around him say they are seeking.
As always, my email, EzraKleinShow 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 a close. Who would be doing that? careful assessment of other countries' trade policies, country by country. That's a massive undertaking. And it seemed implausible, 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 balance. 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 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.
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