Jun 17, 2025
On May 27, The Capitol Forum held a conference call with Sander Tordoir, Chief Economist at the Cender for European Reform, to discuss the future of the EU’s industrial policy, trade agreements, and more. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good afternoon, everyone. And welcome to our Conference Call on EU Industrial Policy. I’m Teddy Downey, Executive Editor at The Capitol Forum.
And I’m joined today by Sander Tordoir, Chief Economist at the Center for European Reform. Sander brings deep expertise on Eurozone policy, having held roles at the European Central Bank, IMF, and German Finance Ministry. His research has been featured in the Financial Times and The Economist.
And also participating in the conversation is our very own Beth Baltzan, Senior Advisor at The Capitol Forum and former Counselor for Trade and Investment to the U.S. Trade Representative. And thanks to both of you for doing this today.
SANDER TORDOIR: Thanks for having us.
TEDDY DOWNEY: And just really quickly, before we get going, if you have questions, please type them in the questions pane in the control panel. We’ll collect questions and we’ll try to get to them towards the end of the call. Or you can email us at editorial@thecapitolforum.com and we’ll try to get to your questions.
So, Sander I think top of everyone’s mind is the latest and greatest on the EU-U.S. trade negotiations, trade dispute. Would love to get your perspective. You know, we’re here, Beth and I are here, in the U.S. watching Trump sort of willy-nilly go around threatening people and would love to get your perspective how the EU views things, this trade negotiation. And we’re also fresh off Trump seemingly completely reversing his views on this Nippon Steel deal.
TEDDY DOWNEY: And just get your perspective on how everything that Trump’s doing plays into how these negotiations might unfold.
SANDER TORDOIR: Maybe it’s helpful to talk a bit about the triangle—China, Europe, U.S.—and then come back to where the trade issue stands. I think under tail end of the Biden administration, there was a growing awareness in Europe of the problems that China’s industrial policy and its macroeconomic imbalances pose for the German economic model in particular, but the wider European industrial export-driven model. And so, you can see a kind of incipient signs of a transatlantic convergence on certainly the trade and industrial policy dimensions of Bidenomics, maybe even to an extent the fiscal policy dimension.
Now, of course, under Trump, we have a second flank for the European side, which is that the U.S. itself is waging a trade war against the Europeans. And in many respects that provides a real headache. Because on the one hand, the EU has lost significant export market share in China and elsewhere to China, and on the other, the US market which was an offset to that.
European exports, French and German exports, have been growing at less than 1 percent a year for the last four years. Global trade grew at three percent before the reciprocal tariffs. So European exports are falling compared to global trade. But at the same time, exports to the U.S. were growing rather quickly.
Even in clean tech, Teddy, you’ll remember the European freak out about the Inflation Reduction Act creating a great sucking sound of European companies moving to America. Nobody would want to produce in Europe anymore. Beth certainly had followed that debate from the USTR’s office. And in effect, what actually ended up happening was that, given the U.S.’s limited manufacturing capacity, European exports of clean tech to the U.S. went up from like $30 billion in 2020 to almost $50 billion in 2023.
And so, this complementarity between the U.S. and the European economies real but something that Trump is very much aggravated by. The kind of complementarity where Europe sends industrial goods to the U.S. and has a surplus in those. If you take out pharmaceuticals and tax distortions from Ireland, it’s less of a surplus, but there’s still a surplus of cars, machines, steel, et cetera. And the U.S. sends tech and services back, roughly speaking.
And so, Europe is in a bind because they it has pressure from China on the one hand, and now they’re losing potentially access to the U.S. market, which was a big offset, on the other.
China retaliated harshly against Trump’s tariffs and then got Trump to walk back and postpone and lower the tariff rates back to 30 per cent. The Europeans decided, in fact, not to retaliate, not even to the steel and aluminum tariffs, and to try to negotiate. And now that Trump has upped the threat to raise tariffs to 50 percent, then postponed them again a few days later, it shows that those negotiations are not going well.
TEDDY DOWNEY: And Beth, I don’t know if you have a follow-up, but maybe I’ll just follow-up with there is this sort of taco meme going around, Trump always chickens out. Europe is sort of notoriously—sort of slow to do policymaking. Negotiating on behalf of a lot of different sovereign countries is probably pretty tricky.
When you look at what the U.S. is ostensibly interested in getting and what the EU is willing to give up, and just like this idea, how do you see things going? And also, is there really that sense in Europe that like, hey, you can just sort of wait Trump out and sort of give him a little bit here and a little bit there, and he’ll go away eventually, or cave eventually? Or am I being a little too naive? What’s the European perspective on all this?
SANDER TORDOIR: Yeah, I don’t think that the Europeans are as sanguine or as confident in the taco trade as some others maybe are, particularly on the side of Germany, which exports a lot to the U.S. And, in fact, the U.S. overtook China as Germany’s largest trading partner about a year ago or a year and a half ago.
I think the sense of panic and frustration at these tariffs, which are seen as illegitimate and unfair, is real. And I think the offer of the EU to negotiate is real. I think what the Europeans have offered to do—hard as it is to know what the Trump administration really wants because there have been quite a wide array of demands, but I think some of the more longstanding American asks from the European side, I think there’s real willingness to meet the U.S. halfway.
So, think of buying more American LNG, which Europe anyway needs because it’s weaned itself off Russian gas and we still need gas as a transition fuel. I think there’s real willingness to basically commit to buy more American LNG.
Another one is clearly moving quickly on the European side, which is to step up defense spending, which was not only a Trump demand, that was in fact a demand that many successive American administrations have asked the Europeans to do, but it was more comfortable for the Europeans to just rely on the peace dividend. So, I think some of that criticism is justified and Europe is now rapidly expanding defense spending.
And then the third bucket is the kind of Mar-a-Lago, Stephen Miran, Bessent ask of a global rebalancing where Europe provides more demand and less supply to the global economy and actually increases the exchange rate of the Euro. And there too, actually Europe has delivered already or perhaps Trump has delivered because his tariffs were so poorly designed and so harmful for the U.S. versus the rest of the world, that the Euro has appreciated quite a lot against the dollar in 2025.
So, across those dimensions, I would say, what can the Europeans offer on top? It’s not that easy to see. Some of the more outlandish requests from the Trump administration, for example, to change Europe’s VAT, Value Added Tax, regime because it supposedly discriminates against American products, is impossible for European countries to comply with because VAT is an enormous source of fiscal revenue for a number of European countries and they’re quite fiscally constrained, some of them. Similarly, letting go of our regulatory sovereignty of some of the stricter oversight on Big Tech firms, all those are, I think, a bridge too far.
And so, it’s really hard to see kind of where the landing zone between the U.S. and the EU may end up. What the Europeans want is the kind of real reciprocity in the old sense, which is zero percent tariffs between the U.S. and Europe on all goods, basically, which is an offer they’ve made. And that was usually rejected by the Trump administration in minutes, if not hours.
And so, the American offer on the table doesn’t look particularly appetizing from the European side. You’ve already essentially done quite a few of the things that the U.S. has long asked for. Germany is embarking on large deficit spending. The defense part is happening. The exchange rate has adjusted a bit. LNG purchases have actually increased already. And what else can Europe still offer?
And in exchange, the Trump administration is offering what? Like still a 10 percent base tariff and 25 percent on pharma, on semiconductors, on steel, on cars. It’s just not a very good offer. And so, I’m pretty concerned about these trade negotiations. I don’t really see them progressing very well unless the Trump administration does indeed pull a taco.
TEDDY DOWNEY: Beth, do you have a question?
BETH BALTZAN: Yeah. Sander, on the zero for zero tariffs on reciprocity, in 2018 at the G7, Trump had floated the idea of zero tariffs for all G7 countries. And it was actually Angela Merkel who said, ooh, that would take a long time and that would be hard to do.
When you say the Europeans are looking for zero for zero tariffs on industrial goods, is that because they are not looking for zero for zero on agriculture? Because the difference for those two sectors is actually a big deal for the United States where we generally don’t have export-led growth, but we have a lot of exports of row crops.
SANDER TORDOIR: Yeah, that’s a great point. I must admit, Beth, I work a lot on manufacturing. So, I’m less of an expert on the agricultural front. My understanding is that there’s a willingness to make concessions on agriculture as well. And maybe that’s the hopeful case where there could be then a landing zone if indeed the Trump administration is interested in the world of 2018. I’m not so sure.
I think the second Trump administration’s demands are much more far-reaching and much more deep and profound foray into the sovereignty of some of the U.S.’s key allies. But if that offer is on the table, I would strongly suspect that the Europeans would constructively work on it. Of course, thinking back on 2016 or 18, the failure of TTIP, the failure of Merkel, to kind of meet Trump on these kinds of offers is probably a regret for the Europeans. Although, signing USMCA also didn’t really help Canada and Mexico all that much [avoiding tariffs]. So, it’s hard to know how much difference it really would have made at this stage.
TEDDY DOWNEY: And you mentioned the defense spending. I’m particularly interested in buy-European policies. You’ve worked on that. How much can Europe sort of give itself more runway and negotiating leverage by coming up with some of their own policies to sort of stimulate, support, their manufacturing industry, green tech, EVs, that type of thing? Or is that really not something that’s part of the conversation in Europe?
It just seems like the U.S. came hard at Europe. Hey, do more defense spending. And Europe was rewarded pretty well by the investors for just being willing to spend on defense. Is there more opportunity there? Or is that not really on the table?
SANDER TORDOIR: No, it’s definitely on the table. And I think all the elements you outlined are moving, although at different speeds. So, if you think of defense spending, it’s rapidly going up in Europe, albeit from a low level. But Poland is at 5 percent of GDP in terms of defense spending, which is a lot higher than the U.S. Germany and a few of the other laggards are breaking through too and aiming for three or three and a half. There’s a summit of NATO this summer where there seems to be some chatter inspired by Mark Rutte, the NATO Secretary General, to go for 5 percent with a bit of an accounting trick, which is three and a half percent on classic defense spending and 1.5 on defense adjacent spending. Think reinforcing bridges or railroads or roads to kind of cater for moving defense equipment. So, say, dual use infrastructure.
So, yeah, that’s really happening. And the industrial policy side of it’s really interesting. I think there are huge challenges for the Europeans. The EU collectively still builds 14 types of main battle tanks, 14 types. Obviously, in low series numbers. There’s very little standardization. And so, they’re bloody expensive basically, right?
There are also huge concerns about the kind of contracting that these defense firms would get. Are we doing cost contracting, which historically has been the best way to do defense and to avoid that firms basically just pocket a lot of profits without having an incentive to become more efficient?
And so, this whole debate is still there. And it’s a very complicated European debate because all these member states have their own small or bigger defense industrial complexes that are close to their national defense ministries. So, the potential to waste a lot of this taxpayer money is significant.
The two sources of hope are (1) that Europe’s kind of laziness in this department or lagging nature means that they can jump to what is now the frontier of military tech based on the tragic experience in Ukraine. But it’s shown, I think, that a lot of the military tech that we traditionally thought was the key, like tanks, are still important, but maybe not as important as say drones or AI capabilities or others. And so, that allows Europe maybe to basically jump to the frontier a bit more cost effectively. And the other hope is that the Europeans do figure out a way to kind of share the defense industrial base across the continent.
I don’t really think that Europe has a real fundamental issue of getting this right. The European industry is larger than the U.S. So, manufacturing is 16 percent of European GDP, 11 percent in the U.S. Europe has twice as many manufacturing workers as the U.S. But as you alluded to, some of the traditional core manufacturing sectors of Europe, particularly cars, but also clean tech, also steel, have been under pressure particularly from China’s exploding exports. And so, there’s a real hope that some of this may move into the defense sector.
My plea to European policymakers is always don’t think that defense gets you out of the woods completely. Because even if you spend three and a half percent of GDP on defense, German manufacturing is 20 percent of German GDP. The arithmetic doesn’t add up. So, you will have to think about dual use clean tech defense.
I’ll mention two examples. One is batteries, a key input for drones. We saw that China has cut off American drone makers from batteries at times, then throttling supplies to Ukraine and Taiwan. So, you need to have your domestic battery production to actually service not only your EV sector but also your defense sector.
Another example is so-called permanent magnets which you need for radar systems but also as a key input to wind turbines. Let alone steel and chemicals which you need for all types of industrial products. And so, there’s a real case, I think, for thinking civilian industrial policy and military industrial policy a bit more holistically and across the European single market using the various comparative advantages that European countries have.
For example, Greece and Spain have seen really strong manufacturing growth in the last 10 years because they have a lot of solar and wind power. Does it make sense to then still produce all the steel you need in Germany where it’s very expensive? Or will you let some of that move to your European partners and then focus more on high value and kind of German classic engineering machines or robots or other aspects? So, I think that’s a really hard intra-European debate. But the pressure from the U.S. and China is huge on getting it right.
TEDDY DOWNEY: Beth, do you have a question?
BETH BALTZAN: Yeah. Well, I’ll say it’s a quick one, but on rearmament and European rearmament, is there a conversation in Europe about reinvigorating the industrial base? And one of the things I think you in particular are great at is reminding us that Europe already has a very strong industrial base from which to work.
So, in terms of boosting that industrial base, in the context of strategic autonomy and in the context of doing more trade negotiations, is there a conversation about what kind of supply chains will be involved in that effort to rearm? Will it be mostly European? Is there an effort to diversify away from the PRC and the United States? What’s the lay of the land at the moment?
SANDER TORDOIR: Yeah, great question. . I think the desire to not be dependent on the U.S. was very strongly enforced by—reinforced by—Mr. Trump and his trade agenda and not at least his threats against Greenland and Canada. And so, clearly a lot of this will have to be sourced from Europe.
And in effect, a lot of European defense already actually comes from Europe. Especially France is fairly self-reliant. Poland is one of the countries that doesn’t actually have a big defense industrial base. And so, they tend to buy a lot of it from South Korea and the U.S. But across the board, there is this debate now.
The question is how to do it. And it also ties into the trade negotiations we just discussed. I specifically didn’t mention European willingness to buy more American weapons. Because that willingness, I think, has eroded to a very large degree.
Now in some areas, I’m not a defense expert but I read those papers of course. And if you think of what they call strategic enablers, like the ability to move troops around quickly using aircraft, satellite, intelligence capabilities, in all those areas Europe is completely reliant still on the U.S. And there’s no viable way, I don’t think, to quickly have an indigenous capability to match that of the U.S.
So, you see this kind of fine balancing act of European diplomats trying to not lose the tie to the U.S. completely whilst at the same time trying to even build up domestic capacity in those critical areas where Europe really doesn’t have any homegrown capacities.
I mean, your point on the wider manufacturing capacity I think is right. And so, if you just think of aircraft production, Airbus produced twice as many planes as Boeing last year. If you think of steel, the EU produces 50 percent more steel than the U.S. Ships is a particularly striking example. I think there are only a few commercial ships built in the U.S. every year. Europe still produces a few hundred. In all those markets, China is by far larger than the U.S. and Europe. And the kind of lack of manufacturing capacity, in a world in which the U.S. and Europe would work together, it would be a shared concern. But now it’s kind of splintered concern on both sides. But I think Europe definitely has fairly good cards and a pretty strong industrial base to at least support this push, with the exception of a few high-tech areas where dependencies are real and pretty scary, I think, for European politicians.
TEDDY DOWNEY: Just to stay on that for a second. So, you have this U.S.-China feud where we get a lot of our manufacturing from China. I always thought it would be natural for the U.S., I mean, obviously, we don’t have a lot of manufacturing capacity to just like all of a sudden rely on that. Germany in particular could be a good partner for the U.S. to diversify away from China. Does that ever come up in any of these conversations? It seems like the most obvious sort of, or at least a pretty obvious, pivot away from China. Obviously, it would take some time for the U.S. to rebuild manufacturing, get some of that machine tool capacity and expertise potentially. What’s your take on that? How does that play in any of these conversations? I mean, is that a useful talking point? Or am I just making this up?
SANDER TORDOIR: I think it is a useful talking point. But it’s also the world we lost, I think, with transatlantic tensions flaring up the way they have. I think that was certainly part of the debate under the Biden administration in the TTC and the kind of discussions around, for example, semiconductors and coordinating export controls, the Biden administration was keen for. The Netherlands’ ASML—the world’s leading producer of the machines you need to make computer chips—to stop supplying as much kit to China. And in the end, Japan, the U.S. and the Netherlands cut a export control deal, which you could have built on and made better.
So, if you look at the U.S., every time the U.S., I think, trying to reduce its reliance on Chinese kits, and given the manufacturing constraints you outlined, it ended up pulling in more European products, particularly machine tools. If you think of it as trade, if you think of it in terms of trade imbalances, China’s surging trade surplus in manufactured goods increasingly got pushed to third markets and the European market. And Europe’s trade surplus increasingly ended up in the U.S. That was, I think, the development we saw in the last few years. And now it’s unclear where that’s going.
Now, my contrarian sort of thesis is that after all this is said and done, the U.S. will fail to reindustrialize in particular because the Trump administration doesn’t employ sectoral tariffs. It doesn’t choose which areas of machine tool building or clean tech or steel, et cetera, which ones to prioritize. They have some sectoral tariffs, but a lot of them are across the board and across a lot of different countries.
Now, that’s probably not going to actually reindustrialize the U.S. because you create as many incentives to start building Nike shoes in the U.S. again, as you do semiconductor machines, right? It just won’t really work. And especially if they erode the Inflation Reduction Act, especially if they erode the Chips and Science Act, pure trade policy without industrial policy in areas where you’re far behind is just probably not going to work because you’ll lack the skills. You’ll lack the capex, the manufacturing capacity.
And so, my hunch is that down the line, if the U.S. really wants to reduce its reliance on China and this reindustrialization project that Biden started, which was starting to bear fruits, actually stops or goes in reverse, then the U.S. will actually have to rely even more on European or Japanese production or Korean or other allies. But that’s basically the list, right? There aren’t many producers big enough to supply American demand outside of Europe.
It will be Europe. And Europe for its part, which wants to reduce its reliance on Big Tech and American software, I am skeptical that Europe will manage, maybe on the margin, maybe in some niches. Like ASML is a kind of niche tech slash industrial company. They can find spaces there, but can they replace Google or Amazon or Apple or cybersecurity firms or cloud computing? I doubt it. Europe is so far behind. And the level of investment required to replicate American tech will be so high that essentially in two or three years, we may just end up in the same place where we were last year, which is we need each other and we’ll figure out that we need each other.
TEDDY DOWNEY: I don’t want to poo-poo the U.S. tech industry too much. But you really think that you guys can’t come up with ways to, I mean, some of this is like cloud computing. It’s not rocket science. And then others of it is like, are you really, you start, what’s a—I’m trying to come up with a—we have a lot of surveillance here. We have a lot of negative outcomes from some of our Big Tech. You can’t come up with ways to do tech in the EU and invest in it without, you know, it’s just like you said before, you kind of skip the line. You’re like, well, that’s not really what we want anyway. So, maybe we can build it on our own. I mean, certainly servers and cloud stuff isn’t—I’m curious what you think the barrier to entry there is where you can’t at least move ahead with some tech, a European tech stack, that sort of doesn’t have the same surveillance issues, doesn’t have the same negative consequences of sort of radicalization and so forth that we have here. Or am I reading between the lines too much? Is that not really feasible?
SANDER TORDOIR: I think the jury is out on that. It’s clear that the Euro tech stack, or whatever you want to call this, these kinds of initiatives that they’re garnering some momentum. Whether it’s enough, I would say there are two reasons to be worried that the Europeans will not actually be able to indigenize it.
One is just the level of private investment that Big Tech has in the U S is absolutely stunning, right? If you think of AI, the investment budgets for investing in chips and computing centers and data centers, the kind of money that the U S tech firms are throwing at this, I don’t think there are many European companies that have those kinds of investment budgets. And then essentially, the public sector would have to step in to pull in private capital of that scale. I’m not sure that’s possible. Maybe it is.
The other reason that’s something the Europeans could in principle fix is that a lot of European companies fail to grow into a scale large enough that they can compete in those markets because Europe’s market is still so fragmented.
So, the now infamous statistic from the IMF, they calculated tariff equivalents within the European markets. So, essentially where is trade between Belgium, the Netherlands, Germany, Ireland? And where would you expect it to be? And the tariff equivalent is 110 percent in services and 44 percent in goods. Between U.S. States in goods, it’s like 15 or 10 percent. That’s something the Europeans could fix. And that’s the plea of former Italian prime ministers Enrico Letta and Mario Draghi is to fix this internal market problem.
And funnily enough, the more I read about Canada, the more I realize Canada has that very similar problem to the Europeans, that their internal markets fragmented. And they too worry that they don’t have enough tech.
I certainly would think that the Europeans would do it with more of an eye on the social costs of surveillance and too much market concentration that you’re talking about. In fact, that’s one of the central tensions in the transatlantic trade negotiations now is that the Europeans don’t want to give up on their regulatory curbs on Big Tech. Whether they work perfectly is up for debate. It’s not my field. But it’s clear that in Europe, there is a political majority, or at least so far there was, to try to regulate tech. In the U.S., I think there’s much less the case.
One point to make is—to add to your sort of skepticism about whether tech is the end all be all of economic development—it does matter a lot for productivity, but it’s quite poor in terms of providing jobs If you look at tech in the U.S., it scales profits and revenues like crazy. But the number of jobs it provides is what? Maybe around 10 million. Whereas, Europe’s manufacturing sector alone has 30 million jobs. And Europe’s tech sector also has like three or four million.
So, for Europe to kind of sacrifice its manufacturing sector in the hopes of replicating the American model, I am not so sure that’s a recipe for social stability. The U.S. economy is quite bifurcated with this one kind of hyper successful sector, a lot in the middle eroded, and then normal services.
TEDDY DOWNEY: I was saying that we also apparently have only three friends per person and obesity epidemics and all sorts of other complications. So, you guys could have that as well as if you don’t get your own tech sector. Beth, do you have a question? I think it’s your turn.
BETH BALTZAN: Yeah. So, I was listening to King Charles giving the throne speech to open parliament in Canada today, speaking of responses to the turmoil that’s going on. And he mentioned that exact issue, which is Canada tearing down more of its internal barriers, but also Canada thinking about its allies and how to diversify.
On this question of buy-European, it seems like there’s one contingent that is buy-European and that’s the 27 member states versus buy-European plus friends. And the friends I’ve jotted down, but I’m curious what your response is—and then also how you think this might play out—UK, Norway, and Canada sound like that sort of inner circle of potential partners for the Europeans to work with, whether it’s on rearmament, industrial policy more broadly, or the effort to move into the tech space.
SANDER TORDOIR: Yeah, that’s essential tension. I think for the buy-European push, there are a couple of models. One is to use resilience criteria or national security criteria or climate criteria in subsidy schemes, such that Chinese products or Chinese producers or other countries you may not want to rely on the kit from don’t qualify, but European producers and potentially your allies do qualify.
Now, let me give you an example. The French scheme to subsidize the purchase of EVs, which is meant to support their domestic electric vehicle transition, is a beautiful climate scheme the way only a few graduates from ENA [France’s former top public policy school] can come up with. It’s a climate scoring scheme with, which takes into account emissions in production and transport. For example, what kind of energy was used to build the steel in the car, et cetera. But at the same time, it discriminates against large vehicles because it biases in favor of small EVs, which tend to be built in France. That means that large luxury electric vehicles that tend to be built in Germany or in South Korea, another European friend, don’t actually qualify for the French scheme.
So, this first model sounds very appealing and in some areas it may work. You could think of like, for example, North Sea wind turbines. Maybe you just want to mandate that from a national security criteria. You want the kit to be built in the UK or Denmark or Germany, which have large wind turbine industry. But that whole model is, I think, fuzzy and difficult.
A second model, which is cleaner and more simple, is to just say, we want local content, which says built anywhere in the EU is fine. Plus friends. And you can define friends as allies, military allies in some sectors, as you were saying, Beth. Clearly with defense, you want the UK and Norway and possibly Canada, but maybe not a random free trade partner because it’s too close to your security.
Or you include all of the EU’s 72 free trade agreement partners, which would allow for a lot of competition and kind of diversity of supply chains. I think these are the two competing models. The first is more compliant with a favorite topic of yours, World Trade Organization law, or at least not blatantly violating WTO provisions.
The second simple fix where you just mandate built in the EU or built in one of our friends or allies is clearly a violation of—or at least put you in a difficult spot in Geneva at the WTO headquarters. And I think that’s the kind of challenge that the Europeans are thinking through.
One potential hook there that I haven’t explored much, but that I was thinking about is that it also could play into the negotiation with the U.S. Whether you put the U.S. on the friend list or not, the U.S. and the EU don’t have a free trade agreement. So, there’s some discretion. But again, whether that moves the needle in negotiations is unclear to me. But I think it’s one area that you may want to think about if you are the European Commissioner for trade affairs.
TEDDY DOWNEY: Beth, is it cool if we switch back to the currency stuff?
BETH BALTZAN: Yeah.
TEDDY DOWNEY: So, you mentioned the Mar-a-Lago Accord before. Beth and I spent a lot of time thinking about what is the U.S. goal when it comes to currency? They say they want the U.S. to remain the reserve currency. But then Trump goes out and threatens tariffs and all key allies and sort of damages the U.S. brand and just does all these things that make it seem like that’s not really the goal.
But what’s your perspective on how things are going when it comes to currency policy? What do you think the U.S. goal is? This is probably the hardest question. There’s no answer to that, obviously. But what’s your perspective on all this and how do you see it playing out? And even including the massive tax bill that we have coming out and just taking everything into account, your expertise on monetary policy and currency? How do you think about things and what’s your perspective on all that?
SANDER TORDOIR: Well, in terms of the U.S.’s goals, I would say it’s a barrel full of contradictions. And so, I’m not entirely convinced, first and foremost, that the Mar-a-Lago rebalancing plan, the goals of which I have sympathy for, by the way, is carried at all by President Trump. The two people that speak about this are Bessent and Miran from his team. But Mr. Trump just seems to like tariffs and dislike bilateral trade deficits and dislike the EU and dislike China, et cetera.
So, whether there’s a kind of concerted plan here to address America’s twin deficits, namely its trade deficit with the rest of the world, which is over time an issue, and its very large fiscal deficit, is a big question to me. So, if you believe the plan, the plan is basically to have a lot of tariffs to force the surplus countries that are on the other side of America’s deficits, Japan, the EU and above all China, to come to the table and to basically revalue their currencies and to increase their contribution to global demand versus supply, which would lower pressure on the U.S. to basically be the consumer of last resort, which ties into having a strong sort of structural demand for the dollar, given its dominant nature as a currency. All of those things, I can see how there’s a case for a global rebalancing.
My take is that the Europeans have to some extent already done what the U.S. wanted, which is to increase their deficits, their deficit spending, to boost domestic investment, to boost internal demand. That’s exactly what Germany is doing. It is also what some of the Nordic countries that have historically run very large trade surpluses and been very large lenders to the rest of the world and lenders to the U.S., they’re doing that already, right? I think part of that was about buying defense.
I think where it gets tricky is that on the one hand, American policymakers say they want the U.S. dollar to remain as strong as it’s ever been. And on the other hand, they want to force foreign holders of treasuries to take a hundred year treasury bond with no coupon to solve America’s fiscal deficit problem. Now, no investor in the world, no country in the world, is going to sign up for that deal.
So, I think there are lots of tensions there. Plus, the tension of the tariffs. So, if the tariffs are a segue to a global currency realignment where the euro is revalued and the yen and the renminbi and possibly other Asian currencies, then what will the U.S. offer in return is to lower tariffs again. But the Trump administration also wants to use tariffs as a source of revenue to close some of the U.S.’s budget deficit and to pay for the tax bill that you just mentioned.
So, these things cannot all be true at the same time. If you genuinely wanted to solve America’s twin deficit problem, it helps that Europe is providing more demand. It helps that the euro has revalued it a bit already in part because investors are a bit freaked out by U.S. risk and in part because they don’t see growth prospects in the U.S. as positively as they used to.
But the big question remains whether the Asian countries will actually move the way that Germany has moved. And so, far, I haven’t really seen that. Actually, a lot of their currencies are at very low levels, the yen, the Taiwanese dollar, and certainly the renminbi.
And so, the hope would be that if Europe and the U.S. and possibly Japan work together to put pressure on China to finally revalue its currency and to increase its extremely low consumption rate, that that would work. But it’s hard to imagine that in the Trumpist world of tensions across the board, the Europeans and the Americans and the Japanese would come up with that kind of concerted pressure where they shield their demand a little bit from Chinese supply to put pressure on China to rebalance. I don’t see it for now. I think that’s the big question hanging over the global economy.
TEDDY DOWNEY: Can I just follow-up there? Do you think that we are in a new era when it comes to how investors view U.S. debt? There is this huge freak out over the tax bill. Usually, the U.S. can just spend willy‑nilly and we’re the reserve currency. We can keep our interest rates low if we want. No one ever freaks out. So, the biggest economy in the world, yada, yada, yada.
But has Trump really ushered us into a new era where investors and foreign governments are, maybe I don’t want to, maybe they’re not the same type of trade partner. Maybe I don’t want to own all these bonds. Maybe I’m like a little less excited about this. Or are we just going to ultimately go back to where we were before? I’m curious to get your thoughts on that.
SANDER TORDOIR: Yeah, it’s a good question. I think it was Helene Ray or somebody else who recently made this point that it is important to distinguish between the dollar as a reserve currency, as the kind of safe asset of final choice, and the dollar’s exchange rate. And we’ve seen a lot of movement on the latter, whether the former, the U.S.’s exorbitant privilege, the ability to borrow up the wazoo as it pleases, whether that’s really under pressure is a different question.
I think the reason that I expected basically the euro to appreciate against the dollar on the tariff announcement, which is contradictory to economic theory, was because I expected the tariffs to be so poorly designed, that (a)‑they would harm U.S. policy credibility and (b) they would harm U.S. growth more than the rest of the world in relative terms. Which is exactly how it went because the U.S. decided to wage trade war against everybody at the same time with a very poorly designed set of tariff policies.
And so, what happened is that investors, I think, got less optimistic about relative growth in the U.S. versus, let’s say, Europe, where there was already a bit of narratively, at least optimism about Europe finally doing some of its reforms and finally doing some of the investment and industrial policy we were just discussing. So, all that put together, it actually meant that the euro appreciated quite a lot against the dollar.
Now, does that mean the dollar’s status as king dollar in the global financial system is over? No, I don’t really think so. Are investors more nervous about it? Yes, because U.S. yields are very attractive, but U.S. risk on growth, on policymaking stability, on rule of law, and frankly, on fiscal sustainability are now much more in the forefront.
So, I think what happens, and what will continue to happen, is that investors will diversify as much as they can basically away from the U.S. and towards other safe assets. That doesn’t mean the U.S.’s, or the U.S.’s dollar share of global reserves, which is around 60, will go to 10 overnight. Would it maybe go from 60 to 50 over the next decade or 15 years or kind of longer timeframe? Yeah, maybe.
And that in part actually depends on European policy. Because China does not have a free convertibility of its currency. It has capital controls. It is not a viable rival. The renminbi is not a viable rival to the dollar as long as China doesn’t change its capital markets policies, which it seems unlikely to do, which leaves only the Europeans.
And what were the European constraints? What were the constraints on the euro? Multifold, but one was an actual lack of issuance, right? So, there’s just not enough European high quality debt, the same way that there are treasuries in the markets. Germany is going to issue a little more. Maybe the Europeans will do a little bit more euro bonds, maybe not.
Is it going to be a sea change? No. Is it going to be a marginal improvement for global investors on the European side? Yeah, probably. And there may be a bit more growth given the defense push, and especially if it’s done well. And so, I think that’s sort of my baseline expectation is that you see marginally some move away from the dollar, some hedging. And the clearest indication of that is the gold price, which has gone through a very strong bull market, I think, as reserve managers and investors around the world are taking out a little bit of insurance against U.S. risk.
TEDDY DOWNEY: I’ve got one quick follow-up question, Beth, and then you can have the rest. You mentioned rule of law. How important is U.S. abiding by the rule of law and also being a democracy? I’m curious to get your sense of those two things and being important in terms of being a reserve currency. It’s sort of a little hidden in the background. It’s like part of the conversation, but not a lot of people talk about it.
But you mentioned rule of law. I just want to put those two issues—because obviously, we have erosion of both of those things to some extent recently. And what’s the perspective of that internationally and to you intellectually in terms of how important that is in the reserve currency conversation?
SANDER TORDOIR: Yeah, I find this is a hard one, right? Because it’s hard to quantify, let’s say, the importance of those elements. I would say rule of law is clearly much more important for an investor than democracy per se. Maybe that sounds cynical. But what matters for investors is their ability to recoup their investment and to potentially litigate and get a fair day in court if they need to. There are some countries around the world, like Singapore, that aren’t really true democracies, but they have a pretty stable legal system. And they kind of fulfill those criteria probably by and large for most investors.
So, where is the U.S. headed? My understanding is, so far, the Trump administration has lost the majority of its court cases. So, in terms of overreach, it seems like the American legal system is holding up. But clearly, there are concerns about it. I think the most interesting kind of jitter that was when there was real pressure on the Federal Reserve’s independence a few weeks ago. And you really saw kind of immediate sell-off in equity markets. You saw some dollar decline, euro appreciation.
So, I do think in those moments—obviously, financial markets are processing a thousand different input variables at the same time—but in those moments, you see that it matters. And the more the U.S. erodes that, I think the more investors will be diversifying, if not running for the exit. But they will have the TINA problem that there is no viable alternative. Again, China is not an alternative. Russia certainly isn’t an alternative. India is too small still.
So, that leaves Europe. And I think that’s what we’re seeing this year is there are a lot of investors that are reallocating some capital from American markets to European markets because they see it as more safe. And one of the things narratively that you hear is that the policy stability and rule of law seems a bit more stable on the European side, even if there are also real challenges in Hungary and other countries in Europe.
TEDDY DOWNEY: Yeah, I think it’s super interesting. Obviously, to some extent, rule of law and democracy can be kind of intertwined. You’re more likely to get your stuff taken away willy-nilly by an autocrat than you are by a sort of a democratic system, or at least our democratic system, which has historically had a lot of checks and balances, which are also obviously being eroded to some degree. So, I am interested to see how that plays out. But Beth, I’ve dominated the last three questions. Take the final few minutes here for your questions, sorry.
BETH BALTZAN: No, that’s great. It’s so interesting. And maybe to try to tie these two conversations together and the way tariffs might or might not fit in with this larger effort to rebalance. So, the tariffs are put on ostensibly because we’re going to boost American manufacturing. Also, because there’s a concern over these bilateral deficits and a desire to increase demand in these other countries.
Then you layer in the idea of tariff reductions. And I struggle to see how that fits in with the overall effort. Because if the tariffs are meant to adjust for all these problems, and then you significantly lower them again—and I’m not suggesting we should have done the tariffs in the first place. But just trying to follow the thread of the logic here where you’ve got these disparate parts of the administration advocating for different things, it seems to me that reducing those tariffs all over again is not going to solve your deficit problem. The U.S. has not been a major exporter for a long time. I think the World Bank data goes back to the 70s, started off as 5 percent, peaked in the aftermath of the financial crisis as 13 percent. How do we think about tariffs in a larger context? Or is it like most other things we’re struggling with right now, which is it’s a jumble of conflicts?
SANDER TORDOIR: I don’t think that tariffs are an everything burger or a fix for everything. What is ironic is that tariffs are supposed to increase the dollar exchange rate, but in fact what we saw was the exact opposite happening. So, in that sense, tariffs were an everything burger. The Trump administration reached its objective of lowering the U.S. dollar exchange rate, even though that wasn’t supposed to happen.
But joke aside, there is a role for strategic sectoral tariffs. I think in a world in which China and other parts of Asia continue to be a demand black hole for the global economy and in which the U.S. has indicated its preference—I think rightly—for wanting to rebalance on the knowledge that it cannot run trade and fiscal deficits in perpetuity, the question is how do you get the Asian countries to adjust. Let’s take China specifically because it’s big. How do you get them to do the rebalancing that Beijing has refused to do? The country continues to funnel their excess savings into expanding manufacturing capacity across sectors—in steel and shipbuilding—but in cars where they have capacity to meet 60 percent of the global car market and they’ve only started “to export”.
It’s across the board, this export-led, beggar-thy-neighbor policy that China has pursued is the other side of the American deficit. And so, my hope is that over time Europe and some of the U.S.’s traditional allies—who face the same problem, maybe with a delay, but they face the same problem—would actually coordinate their tariffs with the U.S. and other partners. Look at Brazil, look at Turkey, look at Indonesia. All these countries have put various degrees of trade restrictions on China because China is overproducing beyond its demand in so many different sectors and these countries want to retain or build up their own industry. And then there is a role for tariffs, right? Because tariffs are a safeguards on an unfair trade practice.
I now struggle to use this word because the Trump administration throws unfair at everything. But fundamentally, there is a policy case for tariffs in sectors that are strategic, where you have a huge employment interest in infant industries, in future industries where you’re trying to catch up.
And so, that’s not going away. And, in fact, the Europeans may have to put some safeguards and tariffs on China quite soon as China diverts some of its or exports that were headed for the U.S. to the European markets. Now some of that may be textiles or cheap toys or things that aren’t strategic and the Europeans send a thank you note for the depressed prices to Beijing. But in other sectors like cars or machine building its different. Or actually the next frontier is aviation, where both the U.S. and Europe have huge interests with Boeing and Airbus and the whole supply chain around it. Just to give you a sense, Airbus and wider aircraft exports for Europe are $100 billion a year [mostly headed to the rest of the world]. It’s a huge, super important industry.
So, the next frontier for China’s industrial policy coupled again with weak domestic demand is the aircraft sector. If we see a similar thing there that we’ve seen in shipbuilding, steel, now in cars, then in aircraft, I just don’t think that’s an acceptable outcome for the Europeans and they will react.
And so, the question is then what’s going to be the narrative around tariffs after the misguided reciprocal adventure? What world do we go back into? Do we go back into the world of naive free trades with a China and a bunch of Asian countries that pursue too much of a beggar-thy-neighbor policy? Or do we go into some sort of synthesis world? If you think of the German philosopher Hegel with the thesis/anti-thesis synthesis, maybe the thesis was the free trade, the anti-thesis was Trump’s reciprocal tariffs, and we come up with some new world. And I’m curious to see what that would look like.
TEDDY DOWNEY: Beth, have we got one last question?
BETH BALTZAN: No, I think we can end on the Hegelian dialectic within the Trump administration.
TEDDY DOWNEY: Yeah, I like that a lot. I think you’ve given us a lot to chew on, Sander. I always love hearing from you, hearing your perspective. It’s like you’re the only economist I’ve met, I mean, who actually does homework and learns stuff and has insight into markets. That’s as much a compliment to you for finding some intellectual angle in a field that seems sort of empty at this point. But I always learn so much talking to you, and this is so fun for me. And it’s been great to meet you and get to know you. And Beth, thanks for making that connection. But we look forward to having this conversation. And hopefully, we can do it in person next time you’re in the U.S., in D.C. And Beth and I will make sure to connect with you when we’re in Europe as well. So, thank you so much for doing this
SANDER TORDOIR: Great. Thanks so much for the kind words, and thanks for having me. Always a pleasure.
TEDDY DOWNEY: Yeah, and thanks, everyone, for joining the call. This concludes the call. Bye-bye.
