The following is a lightly edited transcript of the July 30 episode of the
Daily Blast podcast. Listen to it here.
Greg Sargent: This is The Daily Blast from The New Republic, produced and presented by the DSR network. I’m your host, Greg Sargent.
You’ve probably heard that President Trump and the European Union have reached a big trade deal. This is being widely portrayed as a win for Trump and a big humiliation for the EU. But we think the claim that Trump won is just bizarre. First, the details of the deal themselves cast some doubt on this idea. And second, it’s not at all clear what we gain as a country from this deal, particularly in the long run. Surely the phrase “Trump won” has to mean more than “Trump gets to claim a victory and the media plays along,” right? Well, maybe not, it turns out. Economist Paul Krugman has a great new piece on his Substack casting a lot of skepticism on the deal, so we invited him on to walk us through all of it. Paul, thanks for coming on.
Paul Krugman: Thanks for having me on.
Sargent: So the basics of this deal are that the U.S. is imposing a 15 percent tariff on most imports from Europe with some exceptions. There’s some talk about the EU agreeing to buy $750 billion in American energy spread out over three years and an increase of $600 billion in investment in the United States. Paul, to start with, can you walk us through the tariff piece of the deal? What does it amount to, and what does it mean?
Krugman: Well, it means that anybody bringing European goods into the U.S. is going to pay a tax equal to 15 percent of the value. And that in itself doesn’t tell you who pays it, but there’s overwhelming evidence that the great bulk of that is going to end up being paid by U.S. consumers. Certainly, none of it is being paid by the Europeans. The way to look at it is to say, Has Europe reduced the prices of stuff it sells to the United States? And actually, the Bureau of Labor Statistics has a measure of that, and it hasn’t gone down at all. So the Europeans aren’t paying it. At the moment, probably a lot of it is being borne by U.S. businesses, which haven’t yet passed it on to consumers, but they will. And so this is a sales tax on a bunch of stuff that American consumers buy.
Sargent: Right. And no matter how you slice it, those tariffs are going to be a loser for lower-income consumers, right?
Krugman: Yeah. People with lower incomes spend a higher share of their income than people with high incomes. There’s at least some indication, although this is true more for some of the other tariffs, that the goods that are being hit hard are things that lower-income people spend more on like basic clothing. And the main thing is: This tariff is part of a package. We’re also getting big tax cuts, and the tax cuts are entirely for high-income people. And we’re getting benefit cuts for low-income people. Put the whole thing together, and this is a huge upward redistribution of income from people who really can’t afford to lose the money to people who don’t need the money. That’s the summary. And the trade policy is just fundamentally part of that. It isn’t really about trade at all.
Sargent: Right. And so can you walk us through which goods we’re talking about? There are a bunch of goods that are exempted here, but the vast majority of goods that we import from Europe will be hit by this 15 percent tax. Can you just break that down a little bit for us?
Krugman: Well, what we import from Europe is mostly manufactured goods, a few agricultural. It is true that wine will pay more, and maybe that’s somewhat an upper-income thing, though not very much. Also olive oil, which is used in a lot of things. So agricultural products, many of them … if you buy a box of better-quality pasta, it’s going to cost more. And then cars—we do import a fair number of cars from Europe, and they’re not just luxury cars. So that’s going to cost more. We import a lot of intermediate goods, like capital equipment. A lot of the machinery that’s used in U.S. production comes from Europe. And so that will cost more, and that’ll end up being a higher price.
There’s a particular quirk here, which is really quite important: Cars from Europe will now pay a 15 percent tariff. Cars from Canada—there are some complicated rules that somewhat mitigate this, but basically cars from Canada pay a 25 percent tariff. The thing about a car from Canada is a lot of the content of the car and a lot of the parts out of which the car are made are made in America. So basically products that involve a lot of U.S. jobs are now paying a higher tariff rate than cars from Europe, which don’t. So we’re actually tilting the playing field against U.S. manufacturing. And on top of that, we have 50 percent tariffs on aluminum and steel. So if you think about making a car in Michigan versus making a car in Germany, it’s gotten substantially more attractive to make it in Germany as a result of this whole deal.
Sargent: It’s hard to see how that’s a loss for Europe and a gain for us, is it?
Krugman: No, it’s a loss for Europe because, in general, we’re cutting back on the possibilities of beneficial trade. But if the agenda was to boost U.S. manufacturing, well, this is the opposite. This is tilting in the opposite direction.
Sargent: Well, let’s go a little bigger on that very question. Obviously, one of the core goals, at least I think, of Donald Trump is that he wants to use this entirely overhauled trade regime to spur more manufacturing in the U.S. Will it do that when you take both this set of new tariffs that just were agreed to in the European deal and also the whole global regime? What’s the long-term impact here?
Krugman: The U.S. runs a trade deficit overall. We buy more stuff from abroad than we sell. That’s not because U.S. goods are uncompetitive, really. It’s basically because the U.S. has been an attractive investment destination, which keeps the dollar strong. And it’s just arithmetic that the inflow of capital to the U.S. equals the trade deficit. I know arithmetic has a well-known liberal bias, but you can’t really reduce the trade deficit unless you reduce the flow of investment into the U.S. It’s not really about tariffs at all. Other things Trump is doing—making the U.S. looks like a crazy place—may end up reducing that flow of investment, but the tariffs won’t do that at all. So that’s the broad macroeconomic picture. And then if you look at the micro—sorry, economist talk—but if you look at what it’s actually doing to industries, Trump is in general putting higher tariffs on the goods that we use to produce manufactured goods than he is on the consumer goods that are produced with those inputs. So he’s actually raising the costs of U.S. manufacturing more than he is giving them protection from foreign competition.
So the overall thrust of his strategy is actually anti-manufacturing. During Trump’s first term, a bunch of studies went through trying to figure out the impact of the tariffs on manufacturing, and they all came to the conclusion that Trump’s tariffs on … overall cost the U.S. some manufacturing jobs. And we thought, Well, he won’t make that mistake again. But he is. He’s making that mistake again, but five times bigger.
Sargent: How long would you give this? In fairness, how long should we wait? How many years do we have to wait until we can say definitively that Trump has failed to restore manufacturing in the U.S. with his regime? How long do we have to wait?
Krugman: I would say … I mean, it’s never going to happen. But if you look at it, maybe here’s a point of comparison. Biden had the Inflation Reduction Act, which had nothing to do with reducing inflation but was a lot about promoting green manufacturing and so on. And you could see within two years, it was obvious that the IRA was generating a huge boom in investment in manufacturing in the U.S. So I think to give Trump more than two years to show that this is actually doing something positive would be holding him to a different standard. If you don’t see this in two years, then it’s a failure. I have no question: There’s just nothing in there.
If you actually looked at the trade deal with Japan and now with Europe, who was hopping mad, screaming, This is a terrible deal? It was a lot of industry groups. The auto industry was in hysterics over last week’s Japan deal because it was just clear to them. They said, Stuff that we have a stake in, which includes manufacturing in Canada and Mexico, is being disadvantaged relative to cars from Japan, which is not us. Anyway, I don’t think we’re going to see anything. Now if we can talk about the other provisions of the deal later on, it turns out they’re completely empty. If we’re not seeing a boom in manufacturing investment by the end of Trump’s term … to even wait that long would be giving him more time than people gave Biden, and Biden’s policy actually did boost manufacturing.
Sargent: It’s just so crazy. This is just never talked about. These two things are never talked about together. On the one hand, Trump is doing all these tariffs to supposedly try and spur manufacturing in this country. Meanwhile, they’re functionally doing all they can to wipe out the nascent green energy manufacturing industry in the U.S., which is actually something that competes well with China if it works over the long haul. The whole thing is so ridiculous. Why don’t more people point that basic disconnect out: that they’re wiping away the manufacturing jobs of the future while imposing tariffs to create manufacturing jobs? Why don’t we hear that said more often?
Krugman: Yeah, the media is really—well, not only on this—dropping the ball. And I have to say, I don’t think it’s the reporters. I think that the reporters at major news organizations may not all be top-ranked economists but they do know enough about it to know that the whole switch in policy [is] actually toward reduced manufacturing and wiping out a lot of jobs. They’re editorial decisions. To cast this as a win for Trump, that’s an editorial decision. I’m sure that wasn’t the reporter’s idea of how to portray it. And we can talk … that’s a whole other discussion. Basically, for the most part—not my department, but this is crazy—the fact that we’re actually going backward and undermining a lot of the industries of the future barely [gets] reported.
Sargent: And never in the context of Trump and Vance’s constant rhapsodizing about manufacturing. You mentioned that there were other things in the deal that are empty; I want to quickly touch on those. You wrote in your piece that the promised $750 billion in spending on U.S. energy and the $600 billion increase in investment in the U.S. are probably illusory or nothing. What’s the deal with that? The whole thing is starting to look awfully like a pretty big scam, as so much that Trump does is.
Krugman: I should say, by the time people hear this, there will have been a second Substack post, which is already in the can for the day after we had this conversation, looking into those things. So yeah, the Europeans said we’re going to do $600 billion of investment in the U.S. Take them in two pieces. Not clear that that actually helps, but the question you should immediately ask is, How are they going to do that? Europe is not China. The Chinese government can tell companies or banks, Send the money there, but Europe doesn’t work that way. Europe is a market economy like ours. And this was a deal with the European Commission in Brussels, which isn’t even a government. The European Commission negotiates trade deals, but it has absolutely no authority over domestic economic policies within European countries.
So you ask, How are they going to make this happen? And there’ve already been some pretty frank interviews with European Commission officials who say, Well, actually, this is aspirational, or, We actually have absolutely no ability to affect how much money gets invested in the U.S. We’ve talked to some companies, and numbers like this might happen but not because of us. There is no policy. This is just saying something that they hope will make Trump feel good. There is no policy for the investment. And then they’re supposed to buy $750 billion of U.S. energy products over three years. And that, first of all, has the same problem: How does that happen? The decision about where to buy your oil and liquefied natural gas in the European economy is made by private companies. The bureaucrats in Brussels don’t have any authority over that. They would never think of trying to assert it. And even the governments of Germany and France are not going to really intervene in that. So there is no policy.
But then beyond that, [it] turns out that those promises are physically impossible. Moving money is one thing, but moving oil and gas involves infrastructure, especially liquefied natural gas. That’s a tough problem. You require very specialized infrastructure to load and unload liquefied natural gas. The U.S. exports a lot, and we have specialized facilities for that, which are running at capacity. So we actually don’t have the ability to export any more. Then receiving it on the other end also requires specialized facilities and infrastructure, and the Europeans are also running at capacity. So they have no ability to take any more U.S. LNG and probably no ability to take any more U.S. oil. And they could invest. But they’re promising to do this over three years, and these investments take time. There’s basically no chance that they would even be physically capable of importing any significant fraction of what they just promised within the three-year timeframe that was part of the deal.
So I think that, and they know that, basically they just scammed Donald Trump. They humiliated themselves and then abased themselves before him—but they also made a fool of him. They also made a promise that they know they can’t fulfill. And then they’ll come up with all sorts of reasons why, Oh, I’m sorry. They’ll approach him with tears in their eyes and say, Sir, but all kinds of reasons why it can’t happen. But they know perfectly well that this is not going to happen.
Sargent: On your point about the media, I think there’s a structural problem built into the media discourse here. When you read through the coverage of the deal, you come away with this vague impression that because Europe might be hurt by these tariffs, that somehow means we’re winning something. In some stories, the lead is “Trump won, Europe lost,” and then, in the twentieth paragraph, it’s explained that the benefits for the U.S. are unclear and that it probably won’t translate into more manufacturing shops in the U.S. later. So it’s like Trump’s zero-sum worldview is baked into the way the media talks about this topic and presents it to Americans. Europe is losing, so we’re winning. Right? You see the problem I’m getting at here? No one should … the whole zero-sum worldview is based on a flawed set of assumptions, yet the press just apes it in some sense.
Krugman: Yeah, in some ways I understand the difficulty. Here’s the thing. You assume Trump is fire and brimstone and the Europeans have been treating us very badly and we’re going to have to negotiate a deal. And then he slaps on these tariffs. Now the reality is that the Europeans were not treating us very badly. In fact, once you include services, which are an important part of the world economy, trade between the U.S. and Europe was almost balanced last year. Small deficit on the part of the U.S., but that shouldn’t matter anyway. The average tariff on U.S. manufactured goods sold into Europe was 1 percent, so we had almost free access. U.S. corporations are earning lots of profits in Europe. Europeans actually do invest quite a lot in the U.S.; European corporations invested more than $150 billion last year. So there is no actual problem. But to say that the president of the U.S. is making drastic policy changes in order to cure a problem that only exists in his imagination, that’s a very difficult … that sounds unbalanced. That sounds like you’re shilling for the Democrats, when it’s in fact just reporting the flat truth.
And so I think the media organizations have still not figured out how to deal with that. The fact of the matter is that Trump’s whole trade war is based upon a deluded version of how the world economy works. But aside from the fact that the Trump administration may try to punish your organization if you report that, it also just runs very counter to the “people want to sound objective.” And unfortunately, again, it’s the old Stephen Colbert line, “Reality has a well-known liberal bias.” If you report what’s really happening, it sounds liberal.
Sargent: Well, just to underscore your point there, you pointed out in your piece—to put some figures on this—that in 2024, U.S. exports to Europe were $998 billion and U.S. imports from Europe were $1.1 trillion. So we were pretty close to parity.
Krugman: Yeah. By the way, both the Europe and the U.S. are enormous economies. We’re close to a $30 trillion economy a year; close to $25 trillion there. A little bit over $100 billion trade imbalance is practically a rounding error. We are not talking about big numbers relative to these mammoth economies—certainly not something that would justify just tearing … the U.S. is breaking both domestic and international law here. The domestic law, you know—our tariffs with Europe are not just something that we decided on. They’re something we negotiated—that the U.S. and most of the rest of the world signed solemn trade agreements in, mostly 30 years ago but they still stand, that basically say that what Trump is doing is illegal. He’s breaking a contract. And that’s a huge step to take based upon nothing. [It’s] not the Europeans have been nasty. They’ve been good boys. They’ve been behaving well.
Sargent: Yeah, but Trump’s worldview doesn’t permit an acknowledgment of that. That’s basically the essence of this. You mentioned that everything is based on a set of delusions. You could argue that the very claim that Trump won or that we win from this deal with the EU is itself based on a pretty massive set of delusions. And as well, if you add it all up, you’ve got—what?—higher prices on lower-income consumers. I’ll tell you what, a lot of Trump voters are lower-income consumers. You’ve got harm to auto manufacturing, which, there’s a lot of that in Trump country. Trump voters are getting scammed here because of Trump’s delusions. Is that about right?
Krugman: Yeah. It’s going to hurt all of us a little bit, but Trump voters are particularly in the class of people who are hurt by what amounts to a sales tax, basically. And they’re not going to get the benefits of reduced capital gains taxes and that sort of thing. So it is a scam on his voters. And again, it’s going to almost surely … put it all together, we’re talking about an anti-manufacturing policy. The Europeans are really mad about this deal. I think the people at the European Commission don’t quite understand how badly a lot of Europeans feel betrayed. But it’s mostly about the optics, which matter. The European Union is a big economic superpower; a little bit smaller than us, but not [by] very much. Trump went and imposed these massive illegal tariffs, and the Europeans had every right under international trade law to retaliate. And instead, the Europeans didn’t retaliate and they offered concessions—which are basically fake concessions, but still. They help Trump create the illusion of a win, and they shouldn’t have done that. Yet another institution collapses in the face of Trump aggression. But in terms of the substance, America didn’t win anything here. The Europeans allowed us to get away with shooting ourselves in the foot. That’s not exactly what I would call a win.
Sargent: Well, Paul Krugman, we’re giving them two to three years to show whether this thing actually is going to work according to Trump’s prescriptions and his predictions. And by the way, if there’s any poetic justice here, it’s that JD Vance, who rhapsodizes constantly about manufacturing, is going to have to be the person who defends this policy if it fails—as it probably will—as he’s running for president. What do you think? That’s going to be actually a pretty serious weight for JD Vance to bear.
Krugman: Well, are you sure that we’re actually going to have an election? Or that Trump is ever going to leave? And by the way, in terms of rebuilding manufacturing, yeah, two to three years. But in terms of consumer prices, we’re talking months, not years. This stuff is going to be showing up. It’s already starting to show up. The anecdotes are a lot clearer than the official statistics, [which] takes time. But people are really going to be seeing it in groceries. They’re going to be seeing it in a lot of the things that ordinary people buy—and not next year but just a few months down the pike.
Sargent: A few months down the pike and into next year when there are going to be midterms. Paul Krugman, thanks so much for coming on. Great explanation for us. We really appreciate it.
Krugman: Take care.