Geopolitics podcast episodes

208. The Economic Impact of Tariffs

Episode Description:

Trade policies have always been a critical aspect of global economies and recent developments in US. Tariffs have sparked market volatility and discussions around the impact on inflation. The latest tariff announcements by President Trump have sent ripples through the market, affecting various sectors, and raising questions about their long-term impact. But what exactly are these new tariffs and how will they influence US companies, global supply chains and the broader market?

Joining Oscar to unpack these developments is Glenn Purves Global head of Macro in the BlackRock Investment Institute and Catherine Kress, Head of geopolitical research and Strategy at BlackRock.

Written disclosures in each podcast platform and each episode description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

In the UK and Non-European Economic Area countries, this is authorised and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the Financial Markets.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

<<THEME MUSIC>>

<<TRANSCRIPT>>

Oscar Pulido: Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Trade policies have always been a critical aspect of global economies and recent developments in US. Tariffs have sparked market volatility and discussions around the impact on inflation. The latest tariff announcements by President Trump have sent ripples through the market, affecting various sectors, and raising questions about their long-term impact. But what exactly are these new tariffs and how will they influence US companies, global supply chains and the broader market?

Here to help me understand these developments is Glenn Purves Global head of Macro in the BlackRock Investment Institute and Catherine Kress, head of geopolitical research and Strategy at BlackRock.

Together we'll delve into the rationale behind the recent tariff decisions, their potential macroeconomic impact and the implications for investors. We'll also discuss the investment opportunities and risks associated with these tariffs, the influence of geopolitical tensions and key takeaways for investors looking to navigate the evolving trade landscape.

Catherine and Glenn. Thank you so much for joining us on The Bid.

Catherine Kress: It's great to be back.

Glenn Purves: Thanks for having us.

Oscar Pulido: So, we're here to talk about US trade policy and the last few days there's been a lot of announcements around tariffs, that the US announced.

Some have been implemented, some have been delayed. We've also seen other countries retaliating against the US because of some of these announcements. So, Catherine, maybe I could go to you, help us make sense of all the events that have taken place over the last few days and are you watching for next?

Catherine Kress: Thanks Oscar. So certainly, a lot has happened. In the last few days, we saw some of the first truly significant steps taken by the Trump administration on trade. So, if we rewind on Saturday, February 1st, President Trump announced that the US would soon be implementing 25% tariffs on all goods from Mexico, all goods from Canada, with the exception of Canadian energy resources, which would face a 10% tariff, as well as 10% tariffs on all Chinese imports. And on China the important thing to note is that the 10% rate would come on top of any existing tariffs in place. President Trump announced the tariffs by Executive Order, and the orders detailed actually a number of other measures that the administration would take, including one, escalating the tariffs further in the event of retaliation by Canada, Mexico, or China. And two, closing this so-called 'de minimis trade channel' that essentially waives tariffs on small packages valued at $800 or less. This is especially significant for China, given Chinese shipments account for a large portion of de minimis imports into the United States.

In announcing the tariffs, President Trump claimed executive authorities provided by the International Emergency Economic Powers Act- or IEEPA. IEEPA gives presidents sweeping economic powers during a national emergency, which allows them to bypass most regulatory checks and move quickly in taking action. In this case, the executive orders cite the flow of migrants and illegal fentanyl across the US national border as a national emergency.

Fast forward to Monday, two days after the tariffs were announced, one day before the tariffs were set to take effect, we learn that Mexico had reached an agreement with the US to delay the tariffs by 30 days. Mexico promised to bolster the National Guard presence along the border with an additional 10,000 troops. Later that afternoon, Canada reached a similar arrangement, promising to increase border security, appoint a fentanyl czar, and other steps.

So where are we now? As of today, the 10% additional tariffs on Chinese imports are in effect. China has announced a number of retaliatory steps, including tariffs on US coal, LNG, crude oil, agricultural machinery, and number of automobile categories. Those are set to take effect on February 10th. Export controls on critical minerals were also announced by China. Those are key to a number of advanced technologies. And finally, China has announced steps against a number of large US companies. As you look through these retaliatory steps, you can see they were carefully calibrated so as to allow for potential negotiations with the US, but they also show that China was prepared for the US to take these steps.

So, in terms of what I'm watching for next, I would highlight five things. One is whether the tariffs on Canada and Mexico do in fact go into effect on March 3rd as currently planned. President Trump noted that Secretary of State, Marco Rubio and Howard Lutnick, are prepared to begin negotiations with Mexico on an unspecified issue set. He also indicated that he would try to reach an economic deal with Canada in the coming month.

The second thing I'm watching though is if these negotiations fail, whether Canada and Mexico retaliate, and I'll be looking to see what retaliatory steps they take. Canada previously outlined detailed plans targeting politically sensitive goods in the us, whereas Mexico promised a range of tariff and non-tariff measures, so the back and forth there could escalate the conflict further.

Third, I'll be waiting to see whether President Trump and Chinese President Xi Jinping have a call in the coming days, as has been suggested they might do, they're able to reach some form of an agreement to roll back the 10% US tariffs on Chinese goods, as well as delay the imposition of the Chinese retaliatory steps. Reports suggest the US is looking for a so-called 'grand bargain' with China touching a range of economic issues.

Fourth, if the Chinese retaliatory steps do take effect on February 10th, we'll have to see if the US escalates further given that escalation clause in the executive orders. President Trump characterized the 10% tariffs on China as an opening salvo. He said that if we can't make a deal with China, then the tariffs will be very substantial, so we're watching that.

And then last, I'll be monitoring whether there are any legal challenges to Trump's executive orders, which could impact their ultimate implementation. Bottom line, it's a very volatile situation. It's moving quickly, a lot has happened. A lot could happen, so we're monitoring it closely.

Oscar Pulido: Catherine, there's definitely a lot to follow there. It feels like markets are looking at things like earnings, interest rates, GDP growth and now tariffs are major variable to consider. And so, Glenn, how did markets react to the news? On the one hand, learning a lot of new information this week, but on the other hand.

It's perhaps not a complete surprise; the threat of tariffs has been signaled by the US administration. So, what was the reaction and what does this mean for US companies who have complex global supply chains and that derive a lot of revenue from the US?

Glenn Purves: Thanks Oscar, I thought Catherine laid out the complexity and the uncertainty quite well. And in general, the markets moved intuitively on the initial tariff move. Equity markets were broadly down, the US short term yields were up, and US inflation expectations rose a bit. This suggests the markets are of the view that these tariffs would weigh on US growth likely push us inflation up and could prompt the Fed to respond.

You're right to highlight the complexity of the global supply chains, absolutely. And that's a critical driver of how US tariffs affect domestic companies. There are some companies that are pretty insulated. They don't depend on imported goods to produce their own output, and production itself is entirely within the US, but most prominent sectors have more complex production chains that straddle the borders.

Auto production is a great example of that where producers have tightly integrated supply chains across both Canada, Mexico, and alongside the US. Take a crankshaft or a car seat, for instance, before it makes it its way into final assembly in the car, those are instances where they crossed the borders multiple times before being finalized. And it's a good example of why we saw on a sectoral level the equities of US auto producers being particularly impacted compared to the rest of the market after the tariff announcement this weekend.

Oscar Pulido: Right, so markets were impacted generally a sort of negative reaction - certain sectors impacted more than others. What about the macroeconomic impact of these tariffs? Glenn, you mentioned that yields went higher. Is that a signal of the markets, interpretation of what this could mean for inflation? Maybe talk a little bit about what it means for the economy now.

Glenn Purves: Sure. And Catherine did mention many of the complexities and touched on some of the intent of the tariffs, but having a view on the intent of the tariffs to be able to answer that question is really important. And there seems to be a dual purpose at this point.

The destination seems to be a permanent and universal tariff as a tax. The fact that the new administration has ambitions to create an external revenue service seems to conclude that this'll be a permanent feature of US fiscal policy, and we think around 10% is probably the going spot for that tax.

And reasons are that, as Catherine mentioned, tariffs were levied on Chinese Imports at about 10%. And as well, it was proposed at 10% for Canadian oil coming into the US and the US is very reliant on a lot of that Canadian oil still.

En route to that destination, we're also seeing tariffs as a negotiating tool. 25% were proposed for Canada and Mexico, even Columbia, before all of it was paused. And in all three cases, the pauses came after committed actions by all three countries came to be. This distinction's important from a macro perspective because if it's just a 10% tariff and the rules are clear and it's widespread, the macro impact is more focused on the first order elements, and the key question is really how it's passed through to US producers and consumers in the form of inflation and it, but adjustments to supplier are bit faster in the world. It's broadly spread out, there's no real substitution for accessing supply and so it, it has an inflationary impact of course, and it's going to have a growth impact.

If there continues to be lingering uncertainty about higher tariffs at the 25% level, it would prompt more second order impacts and we think, changing some of the hard wiring of supply chains, more substantial investment and production changes at the firm level reconsideration of markets, of the markets the firms want to be in, and even more active policy and retaliation beyond just the tariffs. We've seen 'buy domestic' from other, other countries involved.

And because of these compounding second order effects, we think that the impact in particular on growth would be more magnified in that scenario. But in the end, from a macro standpoint, this all has to be netted out with the many macro enablers going on in the us regulatory reforms, energy competitiveness, IT investments, and even the upcoming tax package being considered for later this year.

Oscar Pulido: So, there is unquestionably an impact on the economy, but the more significant impacts could be if the tariffs go above that 10% level that you mentioned. If 25% tariffs become more the norm, then you really have a rewiring of global supply chains.

Catherine, I know you worked closely with Tom Donilon, who we spoke to recently at the World Economic Forum. And when we talked to him, he mentioned tariffs as part of the new US agenda. So, what should investors be mindful of in the coming months with regards to trade policy and should we expect more tariffs against more regions of the world?

Catherine Kress: So, as you and I have discussed and as you discussed with Tom, trade is a central focus for the new administration. President Trump sees trade, particularly tariffs as an all-purpose tool of economic and foreign policy.

He believes tariffs can address a range of issues. Glenn touched on this, including reducing US trade deficits, raising revenue for the country, negotiating with countries on matters of economic and national security, encouraging inbound investment to the US, sanctioning the non-use of the dollar. There's really a variety of uses in his mind.

President Trump has been very clear in his intent to levy tariffs on a range of countries and products to advance his goals. In fact, on his first day in office, Trump directed various agencies to investigate and, in some cases, make recommendations on tariffs and other actions to deal with persistent US trade deficits, unfair trade practices, and a host of security issues. Agencies are requested to report their findings by April 1st, so that's going to be a key signpost we're watching.

But ahead of that, there's a number of geographies and product sets that we can look to as potential targets. Those include Europe. President Trump has said that tariffs will definitely happen with the European Union indicating they're coming, quote 'pretty soon.' Trump has specifically called out US trade deficits in auto and agricultural products with Europe, I'd expect these areas at a minimum to be targeted. Europe has been preparing its response for some time, so the back-and-forth year is going to be important to watch.

Second are the BRICS, the expanding group of emerging market countries that includes Brazil, Russia, India, China, and South Africa. Trump has threatened a hundred percent tariffs on BRICS countries if they move to create a new currency or back any other currency to replace the dollar. Dollar diversification has been a big theme for many countries outside the West as governments look to protect their economies against broader volatility and potential sanctions.

Third, beyond these geographies, Trump has threatened tariffs on specific products like semiconductors, oil and gas, pharmaceuticals, steel, aluminum, copper. The exact timing of these tariffs is uncertain, but I wouldn't be surprised if we saw some announcements before the end of the month.

Last, I'm watching for the ways in which trade frictions might escalate further with China. One element of the President's executive order on trade was a specific request that agencies review China trade policy and other unfair economic practices by China. This could result in new investigations and tariffs. And additionally in the US Congress, lawmakers have introduced bipartisan bicameral legislation to revoke China's permanent normal trade relations status. Revoking this designation would subject Chinese imports to significantly higher tariffs. So those are the areas I'm watching right now.

Oscar Pulido: Catherine, when we've had you on in the past, we've talked about the mega forces and specifically the one around geopolitical fragmentation, which talks about how old trade alliances are changing, supply chains are being rewired.

Talk to us a little bit more about how these developments around US trade policy are playing into geopolitical tensions more broadly, specifically things like US China strategic competition, which you started to touch on.

Catherine Kress: Sure. So, our view, even before the latest developments, was that geopolitical risk had increased substantially over the last half decade. Part of that, as you noted, is that the world has grown more protectionist in the wake of the pandemic, Russia's invasion of Ukraine, the reaction to China's exporting of its excess industrial capacity and other shocks. Global protectionism has increased. Countries and companies are leveraging a range of tools to bolster their resilience, protect their national interests, and globalization is rewiring as a result.

Now, there's an increasing number of trade restrictive measures in place across the world today. The World Trade Organization has reported on that. The latest actions by the US mark a sharp escalation in this trend, and they will accelerate the rewiring of globalization that you and I discussed. When it comes to US China competition specifically, we see tensions as poised to increase across a range of dimensions including trade, technology, defense, and more.

So, on trade, there's going to be this early period of tension over tariffs, as we've discussed. We could see some sort of agreement come out of that, but we're going to look to the findings of that trade policy review in early April for a signal as to any further actions the US may take against China.

In the technology space, the US and China are engaged in an epic zero-sum competition to seize the commanding heights of advanced technologies. The new administration has emphasized AI leadership as key for US economic and national security. We see a continued focus on tariffs and export controls among other policy steps to further that goal and advance the AI infrastructure build-out in the US.

And then last in the military domain tensions in the South China sea are high, conflict over Taiwan remains a risk. Additionally, the Trump administration is seeking to pressure China to bring Russia to the table for a potential peace deal in Ukraine.

Across each of these areas, President Trump's advisors have strong views, but the ultimate decision of whether to escalate or not will come down to President Trump. So, we'll have to listen to his words very carefully, as well as watch for any leader-to-leader dialogue with President Xi. These are going to be important signals for the relationship going forward.

Oscar Pulido: And so, Glenn, we've been very focused, talking about short term, developments as it relates to US trade policy and tariffs. but if we zoom out a little bit and we think about the longer-term landscape here, what should investors be thinking about both in terms of the risks and the opportunities?

Glenn Purves: Thanks Oscar and I think it is important to zoom out at this point. And there is a bigger macro backdrop here, and you've discussed it in past Bid podcasts, as I've heard. And before these tariffs came along, the world was already shaped by supply side factors, big structural changes in production. And you mentioned it, we call them mega forces, and because of elevated levels of deficits and debt We're already facing a bit of a tug of war between things that may boost growth and things that may be a source of inflation and with more limited fiscal and monetary policy maneuverability to course correct, this gets amplified.

So, when we're thinking about the mega forces and, Catherine, how she walked through the geopolitical fragmentation just now, lumping these tariffs into that just again, amplifies the importance of that mega force for, identifying the path forward. And our central view is that it'll dampen growth and place higher pressures on inflation. How much, and whether this continues, becomes a stagnationary shock, I think depends on how long it continues to create uncertainty and in particular, I would focus on that negotiating tool aspect of it.

But there are still many other things to consider, in terms of what are market friendly developments going on, and two in particular to note, AI, the raise of AI and the three phases that we set out Build out, adoption and transformation. Adoption feels much closer now with all the investments in the news we've been seeing in breakthroughs. The second is energy transition, the easing of energy regulations and the mission to set out to reduce energy costs. If competitiveness can come down that can be a good thing and a tailwind for growth.

Oscar Pulido: Right. So, your point is that despite the short-term headlines, there are still some longer-term structural trends that investors should be paying attention to, that present investment opportunities.

And what we've heard from investors is that they're not making many substantial changes in their portfolios right now. There's still a preference for equities but we're also hearing that investors are looking for new ways to diversify, maybe looking for other asset classes beyond just things like bonds, for example, to diversify their portfolio. So, it's definitely a very fluid situation and, we're going to learn a lot in the next couple of weeks, as you've mentioned, a couple of deadlines that will come up, in early March that we have to keep a close eye on.

Glenn and Catherine, thanks for, enlightening us on US trade policy and tariffs more broadly. And thank you for doing it here on The Bid.

Catherine Kress: Thanks for having us.

Glenn Purves: Thanks Oscar.

Oscar Pulido: Thanks for listening to this episode of the Bid. Next week, be sure to tune in when we talk to Jeff Rosenberg about the recent conundrum in bond markets and why short-term interest rates and long-term interest rates are moving in different directions. Subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Spoken disclosures at end of each episode:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

In the UK and Non-European Economic Area countries, this is authorised and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the Financial Markets.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

MKTGSH0225U/M-4221413

The Bid 'A Macro and Geopolitical Outlook – Live from Davos'

Episode Description:

In a special episode recorded from Davos, host Oscar Pulido is joined by Philipp Hildebrand, Vice Chairman of BlackRock, and Tom Donilon, Chairman of the BlackRock Investment Institute, to discuss the latest insights on the macroeconomic and geopolitical outlook for 2025. Philipp and Tom will provide their expert analysis on how these dynamics are shaping the global economic environment and what it means for investors and policymakers, offering listeners a behind-the-scenes perspective from Davos. 

Written disclosures in each podcast platform and each episode description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

In the UK and Non-European Economic Area countries, this is authorised and regulated by the Financial Conduct Authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the Financial Markets.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

<<THEME MUSIC>>

<<TRANSCRIPT>>

Oscar: Welcome to the Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today we're bringing you a special episode recorded live from the World Economic Forum in Davos, Switzerland. We're diving into the macroeconomic and geopolitical outlook for 2025, what it means for investors and policy makers. Joining me are Philipp Hildebrand, Vice Chairman of BlackRock, and Tom Donilon, Chairman of the BlackRock Investment Institute. Philipp will help us focus on the macroeconomic outlook, particularly in Europe, while Tom will unpack the broader geopolitical landscape, highlighting some of the key dynamics that will impact the world economy in 2025.

Philipp and Tom, thank you so much for joining us on The Bid.

Philipp: Great to be here, Oscar.

Tom: Thank you, Oscar. It's good to be here with Philipp.

Oscar: We're in Davos, Switzerland. We're here at the site of the World Economic Forum. this is an annual event that has occurred in Davos for over 50 years. So, Philip, I know you've been coming to this event for many years, and for people who are not familiar with Davos and the Forum, what would you tell them about the significance of this event and how has it evolved over the years?

Philipp: Yeah, so it's actually been going on for many decades. 1971 is the origin. It was called something else, it was called the European Management Symposium, and the idea at the time was to bring in the kind of Harvard Business School and other business schools, insights on, on how to conduct businesses effectively to Europe.

So, the original idea of Professor Schwab was to bring in these American management theories that were emerging at the time in the sixties and seventies and expose Europe to it, which is why it was called European Management Symposium was very small. Many of the meetings were on the ski pistes. Even when I started coming in the eighties, many of the meetings were kind of up on the mountains actually, and people came in ski boots and would then ski.

So it was a lot less corporate than it is today. And then in the eighties, it kind of shifted to becoming much more of a global political economy, politics, geopolitics, economics, context and, has remained, it has become a very important gathering place, and a kind of networking exchanging of information platform. For many years. In many ways it was unique. Today you certainly have some competing platforms in the world, but it has remained, I think, an unusual and very special platform and very valuable for Switzerland.

Oscar: It's fascinating to hear how it's evolved over many decades. And you mentioned the meetings used to be in the mountains because in fact, Davos is the highest city in all of Europe from an elevation perspective. So, we are surrounded by, by mountains and it's a fascinating picture as people are walking through the streets. You've been busy in conversations this week. what are you hearing? What has the mood been like? what are some of the impressions that you're taking away?

Philipp: I think there's three big themes, The biggest one is, the implications of the new administration. So, I think there was an intense focus on what does it mean for the world? How does it change the structure of the global economy, the inflation outlook, et cetera.

The second theme, not surprisingly, since there are a lot of Europeans here, we are in Europe, is the question of how does Europe respond to this? What are the implications of it? Can Europe rise to this occasion? And if so, how? Including the geopolitical context of the Ukraine War, of course.

And then I would say the third big theme is the extraordinary developments around AI First of all, what does it mean? Fascinating discussions here on the implications on cancer research on research generally, how much research has advanced as a result of ai? But, of course, also how it will impact the global economy, how it will impact growth. What, does it mean for capital markets? how does it impact investments that are going to be made on a vast scale, for data centers, for the energy that will be needed to fuel the data centers that are needed in order to produce the AI. To me, those were kind of the three broad themes that dominated most discussions

Oscar: And you may not have done this intentionally, but some of the themes you're mentioning are some of the mega forces that we talk about on the podcast. Tom, you're the chairman of the BlackRock Investment Institute, I'd love to get your thoughts what've been your impressions and, and your takeaways?

Tom: I'll say a couple things. Number one is, a kind of reflection of the continued relative advantage of the United States. In terms of its economic position, it's a geopolitical position. Also, as Philipp was alluding to its position on technology, as a leader, across the value chain, particularly in AI and other technology as well, but especially AI.

Second, is a lot of anticipation here about what the new administration means for the global economy, for global geopolitics. We were here as President Trump was being inaugurated, and he issued, of course, on his first a couple of days in office, a blizzard of announcements and executive actions and steps that the government is going to take, bring about some fundamental change. And of course, it's natural that there be a lot of discussion here about what does that mean for regions in the world, global economy, different countries in the world.

On technology, I agree. You see these various technologies evolve and their importance of the world at Davos. You can see, and you can almost judge by the storefronts right as you go down the promenade here. And obviously artificial intelligence is now front and center in all its dimensions, as Philipp was saying. The core technology, the models, the hardware, but also very importantly, the infrastructure on which it's going to be built.

One dynamic that wasn't here in full, is the US-China or the Western-China dynamic. That wasn't really a big point of discussion. But that obviously remains the most important strategic dynamic in the world. And there wasn't a lot of presence here from, from China. There wasn't really a way to talk to the Chinese about where they are in their development on artificial intelligence. Because of course one of the principle competitions geopolitically in the world right now is the geopolitical competition around technology between the United States and China.

Philipp: I think Tom, this is partly a problem that the forum has, or a challenge. And of course it reflects in a sense globalization, the fact that we are in a fragmented world. And if you look at the membership here of the people attending or the composition. It has become less global, there's no question about it.

As we live in this fragmented world, in some ways you could argue you actually need more places that can bring all the parts together again, and this is one of the questions the forum will have to really ask itself, can it play that role to, in a sense, be the reconvene in a world that is less globalized than it used to be?

Oscar: And Tom, you have a ton of experience, in your career understanding geopolitics at a broad level. You've both touched on the fact that it was a busy week in the world, not just 'cause of the forum, but because of the inauguration of a new administration in the US. Tom, what is that geopolitical backdrop that the new US administration is stepping into?

Tom: It's a very different world President Trump comes into in his second term. Very different than the world he left. Across a number of dimensions. Philipp, I think it accurately said, the principle dimension is fragmentation in the world. there has been increase in fragmentation and instability in the world since President Trump's last time in office. Building out blocs, if you will, of countries that are increasingly facing off against each other across a number of dimensions.

You also see a significant decrease in the coordination and cooperation among the important powers in the world. And I think that's an increasingly difficult problem in the world, and one that's changed over the last really the half decade or so. We're also, as I said, in the midst of a really increasing, important and deep and epic, if you will, competition on technology, between the United States and China. A competition over trying to seize the commanding heights, the leadership of key technologies, especially artificial intelligence, which is seen as being really important for the future, both in military applications, but also very importantly, an economic application.

That competition I think is really front and center. The world's a lot more protectionist. We haven't entered into an age of full on deglobalization, that's not true, but globalization has been significantly changed and we do see significant changes in terms of protectionism, mercantilism around the world.

And we'll have to see US policy, again, going forward here with respect to what does. What does an America First foreign policy mean in terms of international economic relationships? So, we'll see a lot of that. It's a world, and we saw this in 2024 especially, this great, year of elections, where half the world went to vote. I think there were over 70 elections on a national level, in the world in 2024. And incumbents really were badly battered, and that's a result of a lot of dynamics in the world, including inflation, including coming out of the covid crisis, but also this kind of geopolitical tensions as well. There are two hot regional wars underway today that weren't underway in 2020, in Ukraine, and in the Middle East. So, it's a very different world today, that President Trump will face than the world he left.

Oscar: So, there's a lot going on around the world, there’s a lot of change. Maybe if I could switch gears and we could talk about the economy. Philipp, when you think about the economic outlook for 2025, what are you keeping an eye on here in this year ahead?

Philipp: To me, the most important thing is to think about how these forces that we've talked about and a few others, are foundationally changing the structure of the economy. I think we need to shift from, a perspective which would've been the traditional way you think about an economy over the last few decades, including when I was in central banking. You think about cyclical upswings, cyclical downswings, how you stabilize things through policy, whether it's monetary or fiscal, and in that paradigm, you lived in a world where you had these cyclical fluctuations and around it you try to optimize policy to create, the best possible output, best possible employment while preserving price stability.

It seems to me that we're now in a much more profound transformation of the world economy. We have a deep structural aging dynamic that's weighing on the economy, which has profound implications on the available labor force. We have this technology revolution or what's being called here, the 'intelligence revolution' in a sense, is the next step in a sequence. And some people would argue perhaps the most significant, step in the sequence of technological revolutions that we've had over centuries, that this is sort of the ultimate step into the age of intelligence.

We have the very unusual geopolitical landscape that Tom just described. And you have, of course, the transformation around the energy system linked, to innovation, but also to climate change.

And you take all these things together and I, it suggests to me that this is not about just cyclical fluctuations. The question here is not whether we're going to be in an upswing or a downswing, whether interest rates go up a bit or down. This is about what do these forces do to the structure of the economy?

And when I take them on balance, these are mostly what we call an economics supply shocks in a sense that constrain the production capacity, it makes it less efficient when you have to operate in a fragmented world. And so on balance, what these forces tell me is that we're moving to a world where we're going to have sticky inflation. Central banks will struggle to get inflation, to the target. We'll have higher rates as a result in a world with very high debt stock- that's a very important piece of it- we've never really had this, this extremely high debt stock across the world. In a world, where you have higher interest rates, higher inflation on average that creates fragility around debt, sustainability, volatility in financial markets, and simply more uncertainty.

And I do believe, although it's always a risky thing to say this time is different, but it does seem to me this is, in my lifetime certainly, these are changes, that we haven't really seen like this in the context of, of how they impact the very structure of the economy as opposed to just impacting the cycle. Christine Lagarde today, or yesterday, I guess, referred to this being an existential moment, for Europe. I think you could argue that's true for almost any region.

Tom: Yeah, essentially in the context I think it is interesting 'cause there's also, in the context of. Again, as I said earlier, lack of coordination among a lot of the important global players. At the time of the great financial crisis, obviously in 2008, 2009, There was a truly global cooperation to address the challenges that, that the world faced. You won't have that today. I fear if we had, if we got to a crisis- that's the first point.

The second is, boy, the world's making a big bet on artificial intelligence. It is seen as I said earlier, as being profoundly important for national Advantage, and I'm sure it will be in military affairs. but also in economic affairs. And that really is, I think, Philipp, it's fair to say that's the big growth bet.

Philipp: Tom, Philipp has mentioned that where we are right now in the global economy, and it's important to see how countries are going to respond and not just in the short term, but they're thinking about how to. enact policies or think about, longer term time periods. coming back to, we have a new administration in the US like what do you think are going to be some of the core focuses for the administration?

Tom: Oscar, it's early days, we're only a few days into the Trump administration. I'd say a couple of things.

One is, it was as- in terms of intensity and numbers of actions - as intense as we've ever seen a president come in, frankly, in terms of, steps he's taken, announcements he's taken, I think his priorities are pretty clear. And a lot of them have been his priorities for a long time. I think he'll start with trade and economics. And this has been a focus of President Trump's really since the 1980s, and he's been very focused on the issue of tariffs, since the 1980s.

He was focused on it in his first term as president during the campaign, for president this time around, he talked about it a lot. And I think you'll see him move forward with respect to tariffs as an important tool of the United States economic policy. He didn't talk about it extensively as an inaugural address. He did put forth a kind of a broad executive order to study a range of potential economic steps, including tariffs in a lot of situations around the world. And indeed, even since the inaugural address, he's talked about implementing tariffs on a number of places, already with Canada Mexico and China, even most recently, Russia if president Putin doesn't bring the Russians to the table to discuss the war and a peace settlement in Ukraine.

And what I think it reflects is his view that tariffs are the most important tool he has in his foreign policy toolkit at this point. it's a tool. He sees as a tool of general application. And so, you see him talk about tariffs as a way to address the bilateral trade deficit that might exist between one country and another. It's a way to address, immigration issues, right?

I think the second is immigration. Again, it's been a long-time interest of President Trump's – a long-time issue that he's talked about again for decades. He's declared an emergency at the southern border in the United States and the border between the United States and Mexico. He has already taken a number of steps to try to reduce as much as possible of the flow of migrants between Mexico and the United States, and indeed from the rest of the world into the United States. So clearly trade/tariffs, immigration.

And then there are the two hot wars we've talked about in the world. And one in the Middle East, obviously, which now we're in a six-week ceasefire at the war in Gaza. And I think you'll see a strong effort there to try to extend that ceasefire. It's going to be a challenge to keep all that together; I think that'll be a focus. And the Ukraine situation, I think it'll be a focus as well of his administration. He promised during the campaign to bring it to a close quickly. Obviously, it'll be a challenge, and we're seeing some of the challenge now through his, his communication publicly, at least with president Putin in the last day or so.

And then I think China. It's the most important strategic relationship in the world. It's the most competitive. It's competitive across a whole range of dimensions. We'll have to see where that goes. I do expect there'll be some movement on tariffs as respect to China, but there's a whole range of other issues. He's put together a team who are pretty tough on China, in terms of policy.

But I think, you look at his record, you look at his longtime interests, you look at his track record in his first term, and you can predict some of the major areas, I think, which will be the focus of this foreign policy.

Oscar: We've talked a lot about the US, but we're in Europe, maybe we could come back to Europe for a second. And Philipp, actually last year you talked about there being a lot of elections. Germany, which is the largest economy in Europe, goes to vote next month. Now that's because, chancellor Schultz lost the vote of no confidence in December, and that's why Germans are voting next month for new leadership. Talk to us a little bit about the importance of that election.

Philipp: Well, it's incredibly important, but I'd say even more important is how Europe together responds to these challenges that Tom lays out, this is a very different world, than the traditional post World War II / Bretton Woods type of system that we all grew up in. This is now world with intense competition, confrontation in some cases, actual wars. There's an enormous amount at stake. There is the kind of the fight for the commanding heights of technology, which, people generally believe is going to, again, impact depending on where you end up in that fight is going to really potentially impact your growth path in a very dramatic way going forward.

So, it's an intensely competitive moment and Germany, Europe, broadly speaking is losing, I would argue the digital war. I'm deliberately using this kind of language because I think that is the urgency of the matter. It is losing the technology war more broadly. Europe is also losing the energy war it has really had to deal with this shock on the energy side as a result of the war. It has in some ways responded very well, better than many people would've predicted. there is no energy shortage problem this winter. There won't be one.

But, of course, the cost of energy continues to be significantly higher in some cases, three or four times that of the US. And that is a huge competitive disadvantage, particularly at a time when we're going to need an enormous amount of energy to fuel this intelligence age that I referred to earlier. And so how Europe responds to this pressure point, I think is as Christine said, she's essentially right, this is an existential question. And so, the German election is a big part of it, but it's by no means the only part.

I would say what you require is a forceful response on the competitive landscape. And so, to me, the real question is this shock big enough to create a kind of one of those moments of really reorientation of Europe and of stepping up and responding in a forceful way so that you can essentially catch up in this big gap that has opened. I think the magic triangle in a sense, will play out in this dynamic between technology, AI specifically, on the one hand, capital markets to fund it, you need deep capital markets to fund it. This is one of the great advantages that the US has in this competitive context. It has these extraordinary capital markets that are so flexible, so deep, so responsive, and then energy. You need energy. So, I think the kind of the holy trinity, almost as you think about a strategy to respond are these three things.

So the analogy I would put, and this is where I put the election in its proper context, in 1992, obviously the soviet Union had collapsed, chaos prevailed in Eastern Europe, and the European Union stepped up dramatically by way of the Maastricht treaty which was ratified in ‘93, but agreed to in ’92, as a way to respond to the collapse of the Soviet Union. This laid the foundation for the Euro and for the European Union as we know it today. That was an extraordinary moment in the history of Europe. And it was a paradigmatic shift in the history or a paradigmatic sort of leap in the history of European integration.

And so, to me the question is, are we seeing the beginning of something similar? Triggered this time, not by the collapse of the Soviet Union, but by a radical change, coming from the United States and a radical change in the overall geopolitical context that Tom explained. now the, the one, and here I end with the election.

And to me, one of the questions is, would this election, can this be the beginning of sort of creating a similar moment with ultimately a similar dynamic where you reestablish the leadership of the Franco-German alliance? I think the jury is out. Is this shock big enough in a sense to get Europe to be jolted and respond in a way that it did in the early nineties after the collapse of the Soviet Union.

Oscar: It's clear from listening to both of you we're at an inflection point for the global economy, whether that's what's happening in geopolitics, whether it's what's happening in technology. And so, if you're an investor, perhaps a final question to both of you, what's the key consideration that they need to think about in their portfolios this year?

Philipp: Well, I think right now it's pretty clear that there is tremendous optimism on the potential. This intelligence age revolution in the US in combination with the capital markets and cheap energy is fueling a lot of optimism in the US, that's pretty clear. And the question is, can Europe respond? I would say, overall they are going to be great opportunities in investing the US looks despite all the concerns, the world has continues to look like a very attractive place for the reasons we discussed, and I think overall you need to be prepared.

My guess is sort of steady correlations that have in the past been quite conducive to investing successfully is perhaps something that we should sort of move away from the assumption that we're going to have that, and instead expect the world to be volatile. Expect there to be tradeoffs the trade policy is a perfect example. You can do tariffs, of course you can if you're the United States, but it may lead to higher inflation. So, one needs to really think carefully what you want to do and what the implications are on policy or in macroeconomics.

Oscar: And Tom, what about you? Just for an investor who hears all this, what do you think about?

Tom: Yeah, a couple of things. I'd say, we've had obviously an elevated geopolitical risk now for a period of time. Yet the global economy has remained pretty resilient, agile. That's for a number of reasons. I think it has to do with continued growth in the United States. And even though there are challenges in China, its continued growth in China, the tragic conflicts in the Middle East has remained, at least from the global economic perspective, contained, we've had a relatively benign energy situation in the world and well supplied energy applied. We've had, the protectionist dynamic mitigated I think a bit by the role of connector countries who operate between the major, the major blocks. But so much is dependent going forward on these risks can be elevated but not striking out and harming the global economy, we'll be monitoring that. I think that's an important thing for us to monitor and understand. And so much is dependent on policy and geopolitics right now. And that's what we're going to do at the BlackRock Investment Institute.

Oscar: I know it's been a busy week for you guys, and it's been interesting, a lot of the themes that we've talked about on The Bid over many months, AI, the need to be selective in your portfolios and be nimble, the fact that inflation might be more persistent, it sounds like those were themes that you also heard about here at the forum. Philipp, I should have mentioned, you're actually in your home country?

Philipp: I am. I've skied these mountains for many, many years and hope that perhaps tomorrow I'll get a run in the morning. It's clearing up as we see it snowed a bit today and I think we're going to have a spectacular morning tomorrow.

Oscar: It's been nice to visit your home country and it's been great to hear your insights. Thank you for sharing them and especially thank you for sharing them on The Bid

Philipp: Thank you, Oscar, and I'm glad you enjoyed your time up here. Thank you, Tom. Great to be with you as always.

Tom: I think I'll pass on going up into the mountains!

Oscar: Thanks for listening to The Bid and joining us from Davos. If you've enjoyed this episode, check out our 2025 outlook where Jean Boivin discusses the macro view for the year ahead.

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