Trump’s Tariffs Are Part of a ‘Tectonic Plate Shift’ in the Global Economy

So that near financial meltdown we just went through, what was all that about? Even if the Trump administration could clearly articulate its goals and could achieve them, are they goals we actually want to achieve? I sat down this week with Peter Orszag, the head of the major investment firm Lazard and a former director of the Office of Management and Budget, to talk through what he thinks they’re trying to achieve, and whether it’s actually a direction we should want to go in. What follows is an excerpt of our conversation. You can listen to the whole thing by downloading the podcast, wherever you get your shows. So from your perspective, as somebody talking with a lot of different companies, who has a perspective on markets, what does it mean for these tariffs to go into effect? How does that change your estimation of future U.S. growth? How are you advising, or would you advise, companies to act, given that there’s been a lot of volatility here? Like what does this point mean for the economy? I think splitting the world into China and ex-China probably makes sense for this purpose, just given the dramatically different tariff rates. So a 10 percent across-the-board tariff rate — and yes, there are some exclusions and this and that. But let’s just call it 10 percent. I mean, remember: We were at of 2 percent to 3 percent. So when I talk about the underlying tectonic plates of the global economy, it will have an effect. The China part, I think, is more complicated, because I suspect that if you ask me to bet a year out, the tariff on China is not going to be anywhere remotely like 125 percent or whatever it’s going to land at now. And instead, what will happen is there will be some set of agreements with all the ex-China parts of the world and then an attempt to reach some negotiated settlement with the Chinese that involves a higher tariff rate than we had before but nothing like what we’re seeing right now. So there are two forces here. There’s, one, the tariff rate. And if the tariff rates — if anybody believed they were stable, we could simply model that out: OK, a 10 percent tariff here, a 60 percent tariff there. We could think about that like a tax policy. But then there’s the uncertainty. Like you’re saying here, you don’t expect the China tariffs to be what they are today in a year or in two years. I think a lot of people don’t even expect the bilateral tariffs on a bunch of different countries to be what they are today in a year or two years. So one of the things the Trump administration says they are trying to achieve is persuading companies to make investment decisions based on these tariffs, specifically to persuade them to invest in the U.S. But if companies don’t trust that the tariff environment today is going to be the tariff environment in a year — and these are long term capital expenditure decisions — it would seem that the obvious thing to do is to just wait. Yeah. And that’s — in every discussion that I’ve been having with C.E.O.s across the globe pre this announcement — but I suspect a lot of it will continue because you can wait 90 days, see how it plays out. There were a lot of decisions on hold, and it was for a variety of reasons. You highlighted one, which is: We don’t know the level of the tariffs. But also we don’t know the response of foreign governments. Many foreign companies are under pressure from their own governments not to invest in the U.S. You saw President Macron say that explicitly, but others have said it more in private. So most of the corporate decision-making seemed to be on hold. And I would suspect that that is going to remain largely the case until there’s more clarity. I’ll give you one example. The administration had come out with a variety of these bilateral reciprocal tariffs. And one problem, along with others, in terms of creating uncertainty is: You couldn’t argue that was the worst case. Even the x percent — 17 percent on Israel — you couldn’t argue that was the worst case, because the administration also said that if a country retaliates, it will raise the tariff rate from the billboard. And that’s exactly what’s happened with regard to China. So they’ve shown they’re willing to do that. So what was interesting today is administration officials, including the Treasury Secretary, said: You can now be assured that what we showed you before is the maximum. There is some tension, I think, some further clarity that needs to be provided of how that works with the simultaneous thought that if any country were to retaliate, we may go above what was put forward before. So these are the sorts of questions that, over the coming days, I think are going to need to be answered, in addition to whatever deals ultimately are cut, before firms are going to feel confident that they can make some investment decisions. And then the second problem is one that I know you’ve identified and spoken about before, which is: We do have elections in the United States, and the policy structure can change. I don’t any company that’s making an M&A decision or an investment decision for two and a half years. It’s making these decisions over a much longer period of time. And so the other question is: How much of this will stick thereafter? And what I’d say — not to do the Lazard advertisement. But just really briefly: I created a geopolitical advisory team a couple of years ago, and the demand for that team is off the charts, because you can’t make a business decision today without taking these sorts of things into account for exactly the reasons that we’re discussing. But how can you make the decision at all? Because as good as your geopolitical advisory team might be — And they are excellent. I’m sure they’re wonderful. Like, I do this professionally. I’m pretty good at it. I know the people involved. And I can tell you that they cannot tell you what Donald Trump will do in 30 days — or 90 days. Because the only person who knows is him, and he doesn’t know. I don’t know what he knows and what he doesn’t know. But what I would say is I agree with you. What I have been saying internally is we need to make sure we are not presenting false conviction here in terms of what will happen, because fundamentally, people don’t know. I do think once we get through this stage — so let’s assume that there are a set of deals — the variance in outcomes may be less extreme. So it’s not that businesses can’t decide under uncertainty. They do that all the time. The world is an uncertain place. That happens all the time. It’s just the levels of uncertainty here were so extreme it was freezing people in their tracks. So I think what the administration presumably would want to do is bring that level of uncertainty back into a manageable range. And that’s one interpretation of, with these different factions within the administration, what just happened today. Has there been a signal, aside from wait and see, that, in your experience, companies are taking from the reorientation of American policy? There are investments you cannot pause forever. There are decisions you have to make. Companies make, as you said, decisions under uncertainty all of the time. And obviously Donald Trump has intuitions. People know what those are. In the decisions that do need to be made, have you seen a pattern on the way people are trying to plan for the uncertain policy equilibrium we are likely to be in, to some degree, for a while? I’d say it’s too early. I mean, it’s been roughly a week, and — It’s felt very long. [Laughs] It’s felt very long. And I’ve done a lot of C.E.O.-level discussions, and most of them just wanted to talk through what might happen, what the scenarios were. And they were just at the beginning of: ‘Let’s put things on hold for now.’ But not getting to the: ‘And therefore this means that’ or what have you. In general — not always — there are usually not that many decisions that need to be made in the span of a week. So the question becomes the longer the uncertainty persists, the more economic damage there would be. And some of it becomes irreversible, not just on the corporate side, but in terms of the foreign investor attitude toward the United States and what have you. So I think right now we’re at another period of peak uncertainty, because the uncertainty has come down, but we don’t know whether it will persist or not. So you were talking about the need to return to a view that the debt market matters, the debt level matters. And we have some problems here. And that’s something I actually do hear a lot from the Trump team. Now, I tend to discount parts of it because they’re so intent on doing a giant tax cut that it makes me wonder how serious they are. But taking them at their word, one of the things they often say — to go back to something that’s in the Stephen Miran paper — is that this also reflects our global defense commitments and the way we act as an architecture of security for many countries around the world. I have heard weirder theories about the tariffs as an effort to bring down interest rates, which would change the long-term value of the debt. When you look at what is going on here from the fiscal position — given that I think they do believe that our fiscal position is unsustainable and it’s dangerous for the future of the country — how do all of these trade machinations and the broader set of economic policies you’re seeing from them — how does it fit into your worries or your projection of the relationship between our policy and our debt? Well, look, I guess before this pause — so just taking the previously published tariffs by country, the Yale budget team had estimated that the revenue impact would be something like $300 billion a year. So if you want to shave that down, assume everything’s just 10 percent outside of China — I mean, maybe it’s $150 or $200 billion a year — that’s something. But relative to deficits that are 10 times that size, it’s certainly not a panacea. Well, that’d be something like $1 trillion-plus over 10 years, which is significantly less than the cost of the tax cut they’re planning. I do think what you’re going to see on the tax cut is the possibility that something very unusual happens, which is either the Senate parliamentarian rules in a particular way, or the chair of the Senate Budget Committee just goes around the parliamentarian — both of which are possible — in a way that basically makes the extension of the existing tax cuts look like it’s cost-free. However they score the tax cut — The deficit in 2026 — would still require us to pay for it. It doesn’t matter if you’re 6 feet because you were at 3 and you went up, or you just stayed at 6 feet. You’re at 6 feet. So I guess my question here is whether or not, in all of these efforts to reorder the global financial system, where Steve Bannon and Stephen Miran, for different reasons, will tell you that the U.S. is badly overextended by its role as a global reserve currency and its role as a global defense protectorate, their theory is that if you unwound that role the U.S. is playing, you could solve or significantly ameliorate our debt problems. Do you buy that theory? You might slightly reduce the debt problems by reducing some of the burden of defense spending and what have you. There would be an offsetting role on the cost of the debt, fundamentally because foreign investors may be less interested in buying U.S. debt in that world. I think this is a really important debate to be having, which is: Do we want the U.S. to be at the center of the global economy or not? That is, I think, a fundamental underlying philosophical or fundamental debate that is being kind of papered over a little bit by the toing and froing over tariffs. But at the heart of it, that is a deep question. I personally think we are better off if we’re at the epicenter of the global economy. But that’s a debate to be had.