What Trump Gets Wrong About the Global Economy

DAN KURTZ-PHELAN

Adam, great to have you here. You have written, over the last several years, a slew of trenchant essays for Foreign Affairs about the global economy and America’s role in it. The most recent one from early April was called “Trade Wars Are Easy to Lose.”

ADAM POSEN

Thank you so much, Dan, for the opportunity to work with Foreign Affairs and to be with you today.

DAN KURTZ-PHELAN

So given the hour-to-hour changes in the state of U.S. President Donald Trump’s trade wars, let’s start with a relatively straightforward assessment of where things stand. Can you take us back to April 2, Trump’s so-called Liberation Day, and explain how you understand what has transpired in the two months or so since then?

ADAM POSEN

I think there’s more of a pattern and coherence, Dan, than people give [Trump] credit for, and it’s partly, I think, cognitive dissonance that nobody wants to believe that the world has changed as much as it has, which is understandable, but I think misleading.

The first point is, if you had spoken to me in November, December after the election, I would’ve said to you, “Where this is going to end up is punitive tariffs on China, very high tariffs in four or five key industries—steel, autos, pharmaceuticals, semiconductors—across the board de facto tariffs of ten to 15 percent, and then pressures on Mexico and Canada ahead of renegotiating [the North American Free Trade Agreement (NAFTA)] for the second time. And that’s basically where we are. I mean, we’ve backed off the suicidally high tariffs that were initially threatened on China and their retaliation, but we still got extremely high tariffs on China by historical standards and affecting a huge range of trade between the sectoral tariffs and the China-specific tariffs.

And none of this seems likely to change much. We’ve seen even with close allies like the [United Kingdom] and Japan little offer from the Trump administration to undo these tariffs. And the one worrying thing—well, there’s a lot worrying—but we’re seeing the same kinds of attitudes creep into the tax legislation, review of export controls, review of foreign investment. And that has implications, as I’ve written about for Foreign Affairs, that actually in some ways are bigger than the trade wars.

The second thing I think that emerged is we’re into a regime of an ongoing state of higher uncertainty, that inherently—partly deliberately by the Trump administration, but partly just because of the nature once you start going down this road of retaliation and pressures—that nobody’s going to know for certain what the outcome is. And I make an analogy to Brexit. Not that this has the same effect on the United States; it’s different, it has a much bigger effect on the rest of the world than Brexit was. But in the sense that in Brexit, from the 2016 referendum through the 2020 implementation, there were a lot of people going back and forth, “Oh, the problem with Brexit’s the uncertainty. Is it going to be a hard Brexit? It’s going to be a soft Brexit? Is it going to be Boris Johnson or Theresa May negotiating? Are the EU and the UK going to reconcile?” And I kept saying, “No, the problem with Brexit is Brexit, not the uncertainty about Brexit.” And since 2020 we’ve seen that. Total amount of investment has been flat and total amount of uncertainty stayed high.

There are going to be specific deals that are going to matter. There’s a lot of uncertainty about what specific deal might be concluded with China. I tend to take the skeptical view on that. I think we’re going to stand pretty much where we are. But anyway, in the broad we are where Trump said we’d be, even with the results that he didn’t promise.

DAN KURTZ-PHELAN

We’re supposedly going to see a slew of great deals that emerge from negotiations with dozens of trading partners over the next month or so. There have been, of course, pauses announced, but we’ve only seen, I believe, one deal so far and that’s with the United Kingdom. Is there anything we can extrapolate about other negotiations from what we saw in the outcome of that one?

ADAM POSEN

I think the first thing to say is that the security relationships actually matter a lot for the trade relationships. So if you look around, the deals are most likely to be first the UK, then with Japan and Korea, then by necessity with Mexico and Canada. And then there’ll be a number of smaller economies—Taiwan, Israel, Peru, Chile, Colombia—who are very heavily tied to the United States economically and politically. And they’ll be the ones most likely to do the deals, at least the deals that matter, and to accommodate a lot of U.S. demands.

And then with places like China or Russia, obviously, which are seen as national security threats, it’s going to be much harder to get a deal. I mean, you may get a deal in the sense of a confidence building measure; we’re not going to actively throw missiles economically at each other. But not in the sense of a deal that builds something. And then there’s going to be countries to play for, like Saudi or Brazil or even India.

I think India is the most interesting one in a lot of senses. There’s a lot of uncertainty. Decades have been spent both by internal Indian reformers and external U.S. governments, the [World Trade Organization], British, European governments trying to negotiate down the regulatory or bureaucratic Raj as it’s called, and India has played a spoiler in a lot of international trade. But there are some indications that [Indian Prime Minister Narendra Modi] wants to do a thing similar to what [former Mexican President Ernesto Zedillo] did 35 years ago with Mexico, which is lock in and create some internal reforms through a trade deal with the United States. And additionally obviously there’s a security side vis-à-vis China and Pakistan. And so that is the place where I think it’s most interesting from an economic upside point of view, that there could be a meaningful deal. Not for sure by any means, but I think that’s the highest upside chance.

DAN KURTZ-PHELAN

It’s been noted by you and others that there are a number of mutually contradictory, to put it mildly, declared objectives for tariffs by the administration. You can talk about revenue to offset tax cuts, you can talk about protections to facilitate the reconstruction of the American manufacturing base, you can talk about leverage on other issues. I think the most ambitious rationale you hear for the administration’s trade policy comes from, probably, Robert Lighthizer, the former [U.S. trade representative]. You hear a version of this from Stephen Miran, the current head of the Council of Economic Advisers, where they talk about rebalancing the global economy and have an ambitious vision of what that looks like.

Can you explain the best case for this? I’m not asking you to endorse it, but if you give it some credibility, what does that look like, and do you see any sign that we’re seeing that kind of rebalancing?

ADAM POSEN

I think the first point before I give the best credible version is that a lot of what Lighthizer said, including the article he published in Foreign Affairs and in his book prior to the election, is economically unsound. I mean, there isn’t something to fundamentally rebalance. Or if there is, it has to do with fiscal imbalances of saving and investment being out of whack in the U.S. economy, not other people. But anyway, if we look at what they best want, I think there’s two complementary ways it could go.

The first is, you manage to create a one-off where the United States does create both tariffs and an ongoing threat of tariffs, but also a downward adjustment in the dollar on average versus many of our trading partners. And this one-off does not cascade, does not lead to knock-on effects to inflation, to people worrying about U.S. commitment, to worrying about U.S. economic stability, and that maybe doesn’t have huge economic effects but politically makes the engagement of the United States with the world economy more sustainable because it makes the trade deficit on average be a little bit smaller maybe. It makes the export sector of the United States a little bit more competitive. It makes a little less visible the signs that people feel the United States is being exploited. Maybe as a result of that, you actually get to a modus vivendi that I think is worse, but is certainly viable. The United States isn’t being taken for a “sucker” anymore, in the Lighthizer-Trump terms, but the rest of the world just sort of gets on with it.

I think this is shortsighted in both the general equilibrium, meaning unintended consequences sense, and how the private sector reacts. I also think it’s shortsighted in that it’s repeated games—that when you do this, it’s unlikely to be just a one-off. But it’s possible. And if you got that, and it was a one-off adjustment, maybe it’s a good thing. Certainly it would probably be politically beneficial to the Trump administration and arguably beneficial to them in foreign policy terms.

Relatedly, there is another part of the Trump administration and the ideas people around it for creating, let’s call it, something between “Fortress America” and a “New Commonwealth.” The idea that—a big piece of this that President Trump has articulated repeatedly is the feeling that, whether it’s Korea or Japan or Germany or France, have been free riding on the U.S. providing security, and they have to do more to provide their own security and to pay more for what the US provides. And there are nastier and more reasonable versions of this, but essentially the list of countries I gave you for most likely for deals is essentially the list of what becomes a sort of co-prosperity sphere, which again, in economic historical terms is usually a bad idea, but imagine if you will, that the UK, Japan, Korea, Mexico, Canada, Israel, Taiwan, maybe Australia, possibly, if you’re lucky, India, and a few smaller Latin American countries all get together, they trade off having more privileged access to the U.S. market versus other people for being more aligned with the United States on security terms. They pay higher insurance premiums essentially, but they still get the insurance. And as a result they’re more willing to align with the United States vis-à-vis China on tech and trade and other things.

And again, I don’t think this is wise because I don’t think it works, but you can imagine a world where that is a good and possibly stable outcome. And depending on your starting point, if you think China was an imminent threat and our ocean and our nuclear weapons were not the right way to deal with it and that other countries free riding supposedly on our security guarantees really was a costly problem, which I don’t, but if you can believe that, then this is not a bad outcome. And then you hope over time other countries align with this bloc but at a minimum you’ve got more security and more economic sustainability for that security.

So I think those are the two good scenarios. This could be a one-off adjustment, not rebalancing, but just makes it more politically viable for the deal for the United States in international trade; and the creation of a broad Fortress North America, with allies, that stands up more to China.

DAN KURTZ-PHELAN

You mentioned, as part of that, the correction in the exchange rates, in the value of the dollar, and there does seem to be an interesting philosophical or ideological, I suppose, difference in thinking about the role of the dollar in the global economy. Treasury Secretary Scott Bessent occasionally says that they’re committed to a strong dollar, but it does seem that there’s kind of skepticism about that in other parts of the administration. Is there a real philosophical debate about what we want the dollar to be in the global economy and whether a strong dollar is in fact in our interest?

ADAM POSEN

I think people debate this. I don’t pretend to understand their motivations, but my view from the outside is Secretary Bessent’s statements are kind of pro forma, that the vast majority of people in the administration want to see the dollar feel less overvalued and extract more value from others for the benefits of using the dollar. And I think Secretary Bessent at times has been sympathetic to this as well. So I think that’s the general thrust.

And this is similar to what [U.S. President Richard Nixon] and [Treasury Secretary John Connally] viewed the world in the early 1970s when they took us off the gold standard and broke the Bretton Woods system. And it was a view that the rest of the world was gaining unfair advantage. Most mainstream economists, however, don’t think it’s an ideological debate. They think it’s an empirical debate. That there is an argument at any given moment that the U.S. dollar could be slightly overvalued and that hurts some of our export industries, but that on balance, as former Treasury Secretary Robert Rubin said repeatedly, a strong dollar is in the U.S. interest because it keeps interest rates down, it leaves our markets more liquid, it creates greater purchasing power, it creates more stability, it makes it easier to fund government deficits beyond the direct interest costs.

And so it’s very hard in my view to make a case that the United States is in a bad position because of the strength of the dollar. And unfortunately more because of our domestic fiscal policies or follies, but also because of the attitudes of the Trump administration, the dollar is being decentered. And I choose that word because sometimes people talk about reserve currency status—it’s all either your reserve or you’re not, there’s only one. That’s misleading.

There’s very clear evidence in the last few months that the dollar is being reduced in its centrality to the world economy. This is showing up in things like U.S. Treasury interest rates jump up and the dollar goes down, which is more what we see in emerging markets that people have fears about the ability to pay. And there’s also a sense that, again linking the security and the economics, many allies feel they have to diversify a bit and self-insure against the dollar and against U.S. politics. Whereas it always used to be even if the United States caused a problem, people would put more money in the United States when times got scary. There’s a very good new study by Hélène Rey, the distinguished French economist, showing, and others have done this in looser ways, that that dynamic really seems to have fundamentally reversed over the last few months.

DAN KURTZ-PHELAN

You noted both in your piece shortly after the most recent tariffs were announced and also in a piece you wrote for Foreign Affairs before the election, that you expected that this aggressive use of tariffs by the Trump administration would have a couple of effects on the domestic economy. One, it would lead to shortages in critical inputs for pharmaceuticals and appliances and lots of other things that we all use every day, and that it would also mean higher prices for American consumers. I think you cited a study that your institution did, the Peterson Institute did, that found that tariffs would cost an average household at least $2,600 a year. Have we started to see any of those effects come in yet or is there a lag on that that we shouldn’t expect those to appear in data yet?

ADAM POSEN

We’re starting to see them, but there is a lag. In part because as you mentioned, President Trump has created these holds or temporary suspensions or succeeding dates of implementation. But we did see already some signs about the number of ships that were coming from China to the ports of [Los Angeles] and Seattle and so on. And there are starting to be jumps in prices and certain things that are hard to get. And then there’s the obvious and very national security—very important issue of rare earths, potentially shortages. And arguably that’s part of what brought China and the United States back to the negotiating table. That China knows that if it cuts off rare Earths, it escalates into a real economic war situation. But the United States knows if China cuts off rare earths, huge amounts of our industry are disabled temporarily.

So anyway, it’s there. Inflation has not spiked up as much as I expected it to, but there’s still. . . Give it time. Especially since the dollar is now moving the wrong way, as it were, rather than going up, when you put on tariffs.

DAN KURTZ-PHELAN

I want to come back to the rare earths, but before we do, I just want to focus on the short-term responses to the last couple of months of tariff policy. One thing that has been striking is that the stock market has more or less returned to where it was before Liberation Day. I think the S & P is more or less the same. If we had this discussion a year ago and said, we were going to land at, I don’t know, ten or 15 percent average tariffs, I think we would’ve expected a much more dramatic reaction by markets. Is this a sign that American industry can kind of deal with this once we know where things settle out, or do you think this is delusion on the part of the markets?

ADAM POSEN

I think it’s more delusion or mistake on the part of the equity markets. And I would stress, I mean, there are things I’ve gotten wrong. Like I said, the lags to inflation have been longer than I initially expected. But I was very careful even talking with you and others a year ago, never to say it’s about the stock market. Because it’s determined by so many other things. And right now, as is well reported, a huge amount, depending on what time period you look at, but some vast share of all the increases in the stock market are due to the seven or eight key tech network companies. And most of the other stocks are flat or down, again depending which period you look at. So those companies—their prospects may rise or fall in ways that have little to do with tariffs and more to do with, are their digital taxes implemented in Europe? Is the protections that the Trump administration puts up and how well they get along with certain industries beneficial to these companies? Is the lack of antitrust enforcement likely to enhance? It’s not an ideological thing.

I don’t view the stock market as a good indicator or a reliable indicator of what’s going to happen to the average U.S. household, which as you said, colleagues of mine like Kimberly Clausing, Mary Lovely, Warwick McKibbin, and others have come up with numbers of how much they’re going to hurt. And other independent organizations like the center-right Tax Foundation or the center-left Yale Budget Lab have both come up with numbers that are higher than ours in terms of the damage to the average household.

The key point to go back to is, even if the tariffs work in the sense we said, we talked about a few minutes ago, Dan, that doesn’t mean they’re not harmful because ultimately what you’re doing is you’re reducing the purchasing power and the availability of goods for American businesses and American households. If you happen to have an economy that’s not very heavily into manufacturing and you have an economy that you can do large redistributions internally through the tax code for profits, through antitrust for oligopolies, through regulation for how much private sector companies can extract, they can turn profitable and drive the stock market irrespective of what the tariffs are doing to the average household or to American growth. And so it’s not that the stock market’s evil or stupid. I think it is focused understandably on other things than the stuff Foreign Affairs readers, or I, or you should care about.

DAN KURTZ-PHELAN

I want to focus in on the U.S.-China piece of this. Treasury Secretary Scott Bessent along with, I believe, Commerce Secretary Howard Lutnick, and U.S. Trade Representative Jamieson Greer are meeting with their Chinese counterparts in London, I believe as we record this. At the core of this issue is the question of leverage. And this was really the focus of the piece that you wrote in early April for Foreign Affairs. Members of the Trump administration have insisted that the United States has the upper hand, and they argue that because the United States exports less to China than it imports, China’s more reliant on us than we are on them. The numbers are pretty striking. I think last year the United States exported about $200 billion or so to China and imported close to $500 billion from China. And China’s, of course, a smaller economy that is more reliant on trade than the United States is.

In your April piece, you explain that this logic is exactly wrong. You look at the concept of escalation dominance that is familiar to the Foreign Affairs crowd from looking at it in security terms and in conflict. But you say very clearly it is China, not the United States that has escalation dominance in this trade war. What is the administration getting wrong in assuming that the United States has the advantage?

ADAM POSEN

I’ll stand by those arguments, Dan, and I think the fact that the administration immediately backed off its extreme tariff threats to merely very radical levels of tariffs bears this out. But I just want to first emphasize that there isn’t an inconsistency with China still wanting to have peace. So it can be that China has escalation dominance, but they recognize that they’re worse off in the state of a trade war with the United States. It just means that if it comes down to it, they can inflict more harm on the US than the US can inflict on them. But it’s still perfectly consistent for a self-interested, reasonable Chinese government to say, “We’d still rather have a deal than fight.”

But once you start down the road of fighting—and the rare earths demonstrates this or pharmaceuticals or low-end semiconductor chips that are used in autos and appliances and things—China has a hugely dominant market share. And if we cut off importing those, China loses some money, which they can adjust over the whole economy and find substitute sources of money. And we end up being without critical things that we need.

Ultimately, if the United States says “No, we don’t want any imports from China,” China says, “Okay, that’s minus three percent of GDP.” And the United States says, “Okay, that means no autos because we don’t have semiconductors or rare earths. No batteries because we don’t have rare earths. No over-the-counter drugs or prescription drugs going up ten times in price because it’ll take three years for Mexico, India, and Israel to start producing large-scale pharmaceutical products. And people are dropping dead or don’t have cars or there’s no appliances.” To me, there’s no comparison.

Additionally, linking it back to what we were just talking about, there’s also a finance side. China has been a major financier of U.S. public sector deficits by buying large amounts of U.S. Treasuries and other dollar-denominated U.S. assets. And at times Treasury Secretary Bessent and others in the administration say, “Well, that’s not good. We want others to buy it. We want domestic to buy it. We don’t want to be selling our assets.” But if you sell assets, you retain the actual productive capacity, whether it’s the government or the company, and you get a stream of income. If they stop financing us, our interest rates go up, our availability of credit goes down, our ability to invest, whether it’s publicly or privately, goes down, and potentially the dollar goes down. And even—and this is why I think the Treasury occasionally says things about a strong dollar—they don’t want a free fall of the dollar; they shouldn’t. So China in the end has the leverage again, with the caveat that they recognize they are better off in a host of ways if we don’t have the trade war. But they will win if it escalates.

The last point I would make is, I made an analogy to the Vietnam War in that article I put out through Foreign Affairs—that this is a slog to no clear end, that it could just end up throwing money and treasure for no purpose. I think that’s still true. But I think I’ll make another analogy, though. I think where we’re ending up is like the phony war at the start of World War II, where there’s about a year period between when Germany invades Poland but the British, French and Soviet forces are not directly fighting with the Germans in any big way. But there’s always a threat because you’re bumping up against each other. There’s the possibility of escalation, the risk of things getting out of control as well as deliberate. And I think that’s where U.S.-China trade policy is going to be.

I think we’ll get something out of the discussions between the U.S. officials, the cabinet officials, and their counterparts, and it may take the form of confidence building measures, it may take the form of specific declarations around access to rare earths in return for the United States easing on certain export controls. But we’re going to still be in the state of active hostilities where things could escalate at any time.

DAN KURTZ-PHELAN

It strikes me that there was an implicit admission or recognition by the administration that the inputs are ultimately the thing that really matters in this dynamic when they responded to the rare earths restrictions by China with restrictions on semiconductors and other kinds of manufacturing equipment to China in the last few weeks.

ADAM POSEN

I agree with you, Dan. I think that’s the right way to interpret it. And again, for both the United States and China, if you have several years and you plan this out, just as China has been doing for several years and toward its Made in China 2025 program, you start substituting, you start finding alternative sources, you start creating domestic sources for producing things you stockpile. And you’re still worse off, but it’s viable. You’re not vulnerable to the same degree.

And one of the critiques I made in that piece in Foreign Affairs a couple of months ago was to say that it’s silly to do this in the U.S. case without having done all that preparation. It may not be economically optimal, but it may be security minded or diversification minded, it’s a good idea to do this—but it takes a year. So we want rare earths from somewhere else, we have to reopen mines somewhere else, we have to build processing plants, so you have to get that all arranged. The Trump administration didn’t do that before escalating, and that was a mistake. You want self-sufficiency, this is one of the rare cases where I think we could learn something from China. They took a multi-year prolonged approach to ready themselves for that possibility.

DAN KURTZ-PHELAN

You have a great line in the April piece that I want to read because it captures this really punchily: “When it comes to real war, if you have reason to be afraid of being invaded, it would be suicidal to provoke your adversary before you’ve armed yourself.” And I think we’re seeing the results of that right now.

I mean, it’s striking to me that even I think probably any U.S. administration for the foreseeable future will be engaged in this kind of supply chain warfare with China in one way or another. Is this just a high-tech version of something that we’ve seen in other instances in economic history, or is there something fundamentally new about this?

ADAM POSEN

No, I think it is mostly the same, and I think this is part of what the Biden administration and the Trump administration got right and got wrong. I mean, they were right to say we probably went too far in allowing too much reliance on China in particular industries, too much concentration in certain things like semiconductors in Taiwan. There is a reason to worry about that.

What they all got wrong—Trump 1.0, Biden, and Trump 2.0—is they didn’t actually do anything. And now the Biden people, occasionally, after they’re out of office say, “Well, it’s really hard.” And it’s like, well, I’m sorry, but that’s the job. So this is going back to where you said, Dan—what are possible good scenarios? I mean, this is what the Biden administration talked about and failed to deliver on, and what the Trump administration could do with their Fortress North America approach but isn’t doing: friendshoring in a positive way, right? You incentivize and make it win-win for Japan and Singapore and Britain and Germany and Chile to co-invest in production that allows us to substitute for China.

But to do so, we have to be willing to let them export to us. We have to be willing to let there be investment both ways to make it work. There has to be enhanced or at least reassurant security alliances that if they go this route for us, we will go this route for them. And that’s all doable. Again, it’s not easy, but it’s doable. And it’s arguably the right strategy. And we’ve now—in three successive administrations in a row, they’ve put the cart before the horse. They’ve decided to start separating from China before they’ve done any of this, or being unwilling to deliver on this friendshoring relationship building.

Again, there is an underlying legitimate concern here. It’s not the economic concern normally of, oh, we got trade imbalances. It’s the economic concern of, oh, we can’t be overly dependent on concentrated sources, and especially ones that we don’t like, such as China.

DAN KURTZ-PHELAN

Just to give a nod to the history here, you, I believe about six months ago, told me to read a fantastic short book by Albert O. Hirschman called something like National Power and the Structure of Foreign Trade. Very boring title, but a book that was written during World War II that in some ways predicts, almost as well as anything I’ve read written in the last year, what would happen in the dynamic between the United States and China right now.

ADAM POSEN

And Hirschman, as some of your listeners know, and this came up in my piece about China a couple of years ago, was one of the most brilliant, iconoclastic political economy minds we had in the twentieth century. And he was writing in real time. He was looking at Nazi Germany, Imperial Japan, and how they were setting up their co-prosperity arrangements. But the idea that when you feel there’s a national security threat that is real, that you take measures to align countries and sources and think about that strategically and occasionally you use force or threats of force to get that done, yeah, as a predictive way of thinking about the world I agree with you. I think Hirschman was right.

DAN KURTZ-PHELAN

I want to focus a bit on that piece you wrote a couple of years ago called “The End of China’s Economic Miracle.” This was a moment when I think a lot of observers were just starting to register that the supposed post-zero COVID boom that was going to come in China wasn’t in fact coming and that was a sign of much deeper weaknesses in China’s economy. I think some Americans, including those in the administration who have assumed that the United States has an upper hand, have seen the fact of China’s economic weakness after a period of booming growth as a source of leverage for the United States. Why is that not affecting China’s behavior or Xi Jinping’s decision-making more than it seems to so far?

ADAM POSEN

It’s a good question. I think we have answers, but it is a good question. I think part of what I was trying to say to you a few minutes ago about the idea that China would still, even if it has ultimately higher leverage than the United States, would rather not have the conflict, or rather have a much more limited conflict in economic terms, goes to that.

Domestic growth in China is hard to come by, and if people shut off their global growth options, then it’s harder to get growth and support things in China that they want to do. So I think that is a contributing factor to the idea that even though they have the upper hand, they still want to negotiate, they still want to tamp it down. And in my interactions with senior Chinese officials, which are limited but there, that’s essentially the message, along with some rhetoric about “it’s better for the world,” which you can argue is self-interested in terms of their foreign policy or not.

But I also want to stress when we think about historic patterns that countries tend to be able to suffer a lot economically in service of nationalist goals. In a sense that’s part of what some of the people in the Trump administration are supporting, in the Trump administration say is, “Okay, even if the economics doesn’t work, that’s not the be all and end all. Well, you need to achieve this and that and the other national purpose and therefore it’s worth an economic cost.” And obviously in a democracy you can argue that, and if you get the votes you win. But in a nondemocracy like China, President Xi can just say, “That’s it.”

So there is a number of writings, of China experts saying this has been a gift from Trump to Biden but then even more so, Trump has been a gift to Xi because he gets to shift a lot of the blame domestically for bad economic outcomes on these nasty Americans who are trying to stick it to us: “They don’t want us to succeed. They’re trying to take us down, stand with me, suffer for the sake of China.” That strikes me as both what’s actually happening and not a great outcome for either the Chinese people or for the United States. But that’s what’s happening. And, you know, we’ve seen this in Ukraine and Russia. I mean, that’s a very extreme case, but we also saw this in southern Europe—like Greece and Portugal and Spain during the Euro crisis 15 years ago—that economics ultimately isn’t everything.

So depending on the issue, people can decide, societies, polities can decide, “We’re willing to give up a lot economically for the sake of some goal.” Whether it’s to maintain independence in the case of Ukraine, or whether it’s to invade Ukraine in the case of Russia, or whether it’s to stay in the euro in the case of Portugal, Greece, Spain. So this is not unprecedented, that the economic problems in China don’t compel them to submit.

DAN KURTZ-PHELAN

I mean, it struck me in reading, going back and reading that essay from a couple of years ago, about the Chinese economy. That in some ways the root cause of China’s economic struggles and some of the tensions with the United States flow from the same source, which is really the nature of autocratic power in China. That Chinese consumers don’t want to spend because they’re aware of the potentially arbitrary nature of economic policy flowing from Xi Jinping, and that’s also the problem in the trade imbalances, to the extent that’s a problem, and you can’t really solve that without really addressing this fundamental problem of political economy in China.

ADAM POSEN

That’s right, Dan. And in recent days leading up to the meeting you mentioned between cabinet officials of the United States and China, the Trump administration has been emphasizing that aspect, which is similar to things that [Treasury Secretary Janet Yellen] under the Biden administration or the Obama administration also emphasized—this idea of using the term differently, “rebalancing”—that the Chinese economy needs to have more consumption and lower savings for their own sake, but for the sake of the United States and the rest of the world.

And that’s a legitimate point, but ultimately two things come out of that that I don’t think people recognize. First is, if you’ve got a society that ultimately is living in fear, initially just because of economic uncertainty and then because of arbitrary expropriation threats from an autocratic leadership, it’s going to be incredibly hard to get them to save less.

But secondly, I think we tend to exaggerate the extent to which China’s savings decisions impact the rest of the world. And this is something that is more contentious; it’s not something where every mainstream economist, let alone the Biden or Trump administrations agree. But I think there’s a legitimate case to be made that in times of global contraction and recession like 2008, 2010, having China export a lot is essentially exporting unemployment and you’re essentially forcing the adjustment on others—but that that’s a cyclical thing. Whereas what you’re talking about is a structural thing, meaning something that lasts a long time. And when the United States is at close to full employment as we’ve been since 2021, or as we were for much of the 2014-2019 period, it mostly is beneficial for the United States for example, or for Europe, that China’s producing a lot and not causing us to rely on our shortages of labor and cause inflation and so on.

So yes, the one way to resolve things that would be win-win is for China to have less household savings, more consumption. It is extremely difficult to get from here to there because of things inherently in the Chinese set up, the autocratic set up, particularly post-COVID, as I argued. And it’s not as much of a cause of so many problems that are ascribed to it by the United States or others. It’s real. It matters. It matters in particular industries like electric vehicles or steel. But it’s not a primary driver the way some people make it out to be.

DAN KURTZ-PHELAN

I want to turn back to the United States with reference to another essay you wrote in Foreign Affairs, in 2021, called “The Price of Nostalgia.” A piece that argued against the conventional view of how the U.S. economy has developed over the last few decades. The way most people see it is that really since the end of the Cold War, there was this shift to a pro-globalization, “neoliberal” system where the United States got increasingly opened and increasingly reliant on trade and global investment flows and everything else.

You argue in the piece that the last couple of decades at least have actually taken us in the opposite direction, that, quoting you here, “Contrary to popular belief, the United States has, on balance, been withdrawing from the international economy for the past two decades. For all the claims that globalization is the source of the country’s political woes, the reality is the opposite.” What is the evidence that we’ve in fact been going in the opposite direction? What do you think the conventional story misses there?

ADAM POSEN

Look, if you look at the facts, roughly around 1995, after NAFTA gets implemented, and certainly by 2000, when China permanent normal trade relations, China joining the WTO get implemented, the United States is declining in many ways to be engaged in the global economy, and certainly declining to increase its engagement during a time when everybody else, I mean everybody else except maybe Myanmar and North Korea is increasing their engagement in the global economy.

And so the popular wisdom is that, whether it was NAFTA or [permanent normal trade relations with China] or WTO, were these forced betrayals of U.S. interests by some neoliberal corporate elite. We actually saw the opposite. Immigration from Mexico and elsewhere just starts going down as a result of NAFTA. And you get surges, occasionally, of immigration, surges that are to be taken seriously. But average levels of immigration actually are going down. And a lot of countries at the same time that traditionally were much more anti-immigration than the United States, like Australia and Japan even, started taking in more immigrants.

The U.S. share of the economy that’s exported and imported goes up a small bit over 20 years and then basically flat lines. The rest of the world—and you can look at it on average, you can look at it country by country, we have all the data on the Peterson website—it goes up enormously in the amount that’s traded; even India, and to its benefit. Global flows of money into the United States in net terms remain high, but actually foreign direct investment like we had in the 1980s and 1990s from Japan, Germany, and the Netherlands, flatlines. Again, in other countries, they’re increasing. Even in China, they’re increasing the amount of internal investment getting from abroad and the share of assets from abroad. These are three big measures—flows of people, flows of trade, flows of long-term investment—where the United States basically doesn’t have an increase after these big moves.

And part of the misperception, I think, is people think of NAFTA or WTO for China as opening the doors and reducing the rules and protections, where it was actually the opposite. In both cases, though it got sold occasionally as, “Oh, it’s going to create jobs, it’s going to open this, it’s going to open that,” what it really was doing in both cases was, “We already have this growing economic relationship—this country, whether it’s Mexico or China, is getting bigger and having more impact on us. We need a better way of managing it. We need rules and dispute settlement mechanisms and ways to actually regulate the trade and the migration and the investment because otherwise it gets very messy and it’s politically difficult.” And so what actually get blamed as irresponsible, neoliberal, laissez-faire openings were actually attempts—not entirely successful, but largely successful useful attempts—to put more structure and more protections and more regulation in the broad sense around existing economic forces.

The other misperception that goes with this is that the share of the U.S. economy that was vulnerable to trade wasn’t going up. And I mean, what you see is many of the same places that were in trouble 20, 30, 40 years ago—by places, I mean rust belt Ohio, northwestern Massachusetts, that were in trouble 20, 30, 40 years ago—were either still in trouble after NAFTA, after China in the WTO, after 2000, or were in less trouble. Like Pittsburgh totally turning itself around, North Carolina totally turning itself around in large parts.

And so the story of this devastation of the United States—I hate the term heartland, that’s part of the nostalgia distortion I hate, but anyway, the so-called heartland—it’s if anything, in certain places gotten better. And the worst declines in these areas took place in the 1960s, 1970s, 1980s, before any of this happened. And a lot of it had to do in manufacturing with jobs moving to the non-union south and the lower labor costs lower tax south from the north in the United States. I was growing up in Massachusetts—Lowell and Lawrence Mass had never recovered from losing the textile industry in the late nineteenth century. And that had nothing to do with globalization of the last 30 years.

This even shows up in the data, as many people have documented, that the declines in real income for American male workers, in particular, were mostly in the 1980s, when you had union busting and tax changes and competitive changes in the U.S. economy introduced by Reagan and Bush and the Congresses then—not in this period of huge trade expansion that supposedly took place. The facts just don’t fit that story. We do know things. And Ohio did not suddenly get into trouble sometime between 1995 and 2001. Ohio got into trouble sometime in the mid to late 1970s and, if anything, didn’t get much worse.

We fought wars of choice in Afghanistan, Iraq, and elsewhere, and had huge numbers of American young men and women get hurt and get traumatized. We had a fentanyl opioid crisis done through our horrible medical system and our horrible incentives of policing of that medical system. We had political division for noneconomic reasons. And these things matter at least as much as anything economic for the depths of despair and the state that the country is in. And the idea that somehow this gets blamed on globalization is just wrong.

DAN KURTZ-PHELAN

And so if we’re constructing an alternative and what you would see as the right story for why people are so angry, what has gone wrong, it’s a combination of technological change that did affect manufacturing, changes in labor policy and tax policy, I mean kind of “neoliberal policies,” but not on international economics but instead on some of these domestic issues. And then you add fentanyl and the effect of the wars. That to you is the real explanation.

ADAM POSEN

Yes, these are the things that really made people angry. And one of the things which I sort of say in that price of nostalgia piece and others have developed is the idea that there was a relative shift in the prospects for certain kinds of workers—particularly certain kinds of exurban, white male, less formally educated workers, vis-à-vis higher educated urban workers and people of color and women—and that that relative shift seems to be a source of anger, but it gets blamed on the idea that there was this absolute hit. And again, I can understand both from people’s perceptions and from political opportunism why you would come out that way, but that’s not the story.

The other thing I would say, though, just to be more than fair, but I think importantly, is that the neoliberal experts, as others have been writing about, were wrong in two profound ways, just not about globalization. The financial deregulation of the early 2000s and the way the financial crisis was handled, and how little the financial sector suffered versus how average people suffered was a huge discrediting thing to laissez-faire economics. And the mixed results at best we got about masking and school closures and so on—not vaccinations, vaccinations there’s no question, but on many of the other measures that were demanded during COVID—was also seen as a failure of not neoliberals, but east coast urban experts versus common sense.

And I think those two things along with the wars and fentanyl legitimately, understandably made people angry and skeptical of people who write for Foreign Affairs telling them what to do. All we can do is try to recognize those failures and talk honestly. But again, those are failures that are not failures because we sold out the country to the Chinese or the Mexicans. Those are failures because we sold out our best ideals to vested interests domestically.

DAN KURTZ-PHELAN

Do you see policy options for addressing and helping those who have been displaced by economic changes, whatever the cause, that we haven’t used yet? You note the failure of trade adjustment assistance, the usual throwaway line that a politician would offer to help those who have lost jobs as a result of trade, and that has been extremely ineffective. But you also note, I believe this is the price of nostalgia piece, that other countries spend really an enormous amount of their GDP, I think it’s something close to one percent in Germany, helping people find new jobs, and even those places, it’s not super successful. Is there anything we can look to give us hope here?

ADAM POSEN

Yes, there are things we can look to. Denmark is a great example, and then Germany and others; Nordics and some other parts of Europe have picked it up. You spend one, two percent, even up to one and a half percent of GDP, which is a lot, on what are called active labor market policies. Where you really invest in helping people who get displaced, particularly people who get displaced in large numbers in a concentrated region, to find new work. That can matter.

I think a lot of things that are justified on a social human basis also would help with the economics, such as making sure that people do have portable health insurance and portable pensions and some government safety net beyond what we now have, so you don’t have people scared to move or terrified because they’re losing their retirement or because they have pre-existing conditions that can’t get health insurance.

I think some of the proposals that are out there, I’m not an expert on this, but I buy the basic logic and evidence of giving children assets at birth and making sure that they have a path to some savings and some assets. I think making sure that the housing policy in this country, which is not a federal policy, which is mostly run at the local level with some interference from states, is more reactive to demand in a constructive way and doesn’t favor only high-end housing construction or non-construction. I think these are all things that could make people’s lives better and would have the additional benefit of making adjustments to changes from technology or trade or whatever better.

Whether it will work politically to make people happy and satisfied is a bigger question, is a more uncertain question. Because as you and I just discussed, I think there are a lot of other things out there that are driving people’s anger and unhappiness, even though for a variety of reasons, it gets blamed on globalization or anti-migration in particular. But we see this in Europe that there are an awful lot of countries—western democracies, eastern European democracies, Ireland right now—where you have a strong welfare state, you have labor market adjustment programs, you have national health insurance, and still people are really angry. And I think that emphasizes that even if we should be helping people, workers of justice, you suggest, Dan, and there are things the United States doesn’t do that we should be doing, it doesn’t in a sense make the political societal divisions go away.

DAN KURTZ-PHELAN

It is obligatory in any discussion of trade and global economic policy to close by asserting that artificial intelligence is going to make all of these changes seem like child’s play. I have no idea if that’s right, but I’ll share that confident assertion. How do you think of the effect of AI and any lessons we should take from the last 30 years of the economy in preparing for it?

ADAM POSEN

My colleagues and I at Peterson have only just started really seriously thinking about this. And this is an area where I want to indicate genuine intellectual humility, not just for me, but I think for the economics profession. I cannot think of an area where you’ve had such a wide range of speculation among mainstream, serious, well-intended people. There's a huge range among people in terms of how much job displacement we’re going to get from AI, how fast AI is going to be adopted, what are the productivity benefits. Just enormous ranges on each of these scores.

What I think gives me hope is the idea that AI may be different, but every technology until now, including this displacement of manufacturers, every major general purpose technology that has come along in the last 300, 400 years of human history has in the end resulted in job growth and income growth. And in the end, the amount of displacement has occasionally been high but generally manageable. It’s possible AI is going to be different, but we should not view it as foreordained that it’s that way.

And the other thing I would say, which, linking it back to some things you and I are talking about for future writing, is I think the more decentered from the United States, or as I wrote several years ago, the “post-American world economy,” makes a world where it is going to be harder to deal with this. We’re going to have more differences in standards. We’re going to have more politically arbitrary diffusion of who gets which technology. We’re going to have subsidies wars between blocs of Europe, China, the United States, and different rules and different companies favored.

And in a sense that may be sand in the gears, which if you’re in the very negative forecast for AI impact, which is not unreasonable, maybe that’s a good thing. But it probably means it’s going to be harder to avoid some races to the bottom in certain areas, which is the scary part. And that’s one of the reasons why you and I both care about globalization is that, like I said, with NAFTA and China in the WTO, it’s not about forcing markets open and forcing markets and international onto people. It’s about accepting economic realities like the rise of China or the creation of AI, and trying to manage them better once their economic reality exists. And I fear the deglobalization we’re undergoing, with the withdrawal of the United States, is going to make it harder to manage.

DAN KURTZ-PHELAN

Adam, thank you for this incredibly rich conversation. You teased future pieces, so people should look forward to those in our pages in the coming months.

ADAM POSEN

Thank you for the opportunity, Dan, not just today, but to engage with these issues with your readership and your thinking. Thank you.