On this episode, Watson School Dean and economist John Friedman talks with economist Sebnem Kalemli Ozcan about how U.S. economic policy in the last year has changed the American economy, how those changes have rippled throughout the global economic and financial system, and what it means for America’s place in a rapidly evolving international order.

Sebnem Kalemli Ozcan is a professor of economics at Brown and the director of the Global Linkages Lab, a collaborative research hub dedicated to deepening our understanding of globalization. Starting in July, she'll also be serving as the director of the Watson School’s Rhodes Center for International Economics and Finance.

John Friedman is Vascellaro Family Dean of the Watson School, and Briger Family Distinguished Professor of Economics and International and Public Affairs

Watch this episode of Trending Globally on YouTube.

[MUSIC PLAYING]

JOHN FRIEDMAN: From the Watson School of International and Public Affairs at Brown University, this is Trending Globally. I'm John Friedman, the dean here at the Watson School and your guest host for this episode. I'm delighted to have with me Professor Sebnem Kalemli-Ozcan. Sebnem is the Schreiber Family Professor of Economics at Brown. She directs the Global Linkages Lab, and starting in July, she'll also be serving as the director of the Watson School's Rhodes Center for International Economics and Finance.

In this conversation, we're going to explore how changes over the last year in US economic policy are affecting the broader global economy and how it's calling into question some of the core features of the international economic and financial system that we've lived with for the last 50 years or more. Sebnem Kalemli-Ozcan, thank you so much for coming on the show.

SEBNEM KALEMLI-OZCAN: Thank you so much for having me, John.

JOHN FRIEDMAN: So to start, I want to take us back a year or so when the first new tariffs of Trump's second term came into effect. It may be hard to put ourselves back in those days, but it was just 25% on a set of goods from Mexico and Canada.

But since then, we've seen the announcement of big tariffs on Liberation Day, a walk back, a series of tariffs and trade deals and exemptions across many settings. And now, just a week ago, as of the time when we're talking, a Supreme Court decision invalidating many of the broadest tariffs. So you've looked in the data. You've studied this. What's been the effect of all of these sharp changes to tariffs on the economy, both here in the US and around the world?

SEBNEM KALEMLI-OZCAN: Thank you so much for asking this question. This is really, really complex. Let me start from, what is a tariff? I mean, a tariff is a tax on consumption and production. By its design, it wants you to consume, John Friedman, less of, say, Chinese goods, if it is put on China, and more of US goods.

But it's also a supply shock. So it's a simultaneous demand and supply shock, which makes it a tax on consumption and production. On the supply side, it makes all the inputs we buy from foreigners, for production, such as steel, aluminum chips, semiconductors, more expensive

Now, by its design, when it is increasing the prices of these foreign inputs, it shifts demand to US goods. It's also increasing overall price of US goods. Why? Because US goods are becoming more scarce, more valuable. So the US prices are going to go up. So in that sense, it's a tax on consumption of John and Sebnem, and it's a tax on production for Amazon, Google, and also the manufacturing sector.

At the same time, it also acts as a financial shock. Because it does change depending on if it is transitory or permanent, or how the financial investors perceive it, being transferred or permanent. This is very important in the context you just described because of this on and off nature. It also impacts portfolios and financial allocation, not only in the US, but globally. But overall, it is a stagflationary impulse, meaning it supposed to increase prices, increase inflation, and reduce employment and output.

JOHN FRIEDMAN: Those are the ways in which it's percolating through the US economy, through the global economy. I'd say that on the one hand, these are policies that we've never seen before in the US, at least not for many decades. But on the other hand, it's maybe a bit surprising that they aren't having more effect.

Inflation. It hasn't fallen back down to 2% but it hasn't really gotten that much higher either. We've seen imports actually increase over the past year in Twenty Twenty-Five relative to Twenty Twenty-Four. And so why don't you think these tariffs are having more of an immediate impact on some of these statistics, some of these aspects of the economy?

SEBNEM KALEMLI-OZCAN: OK, so this question again, why the effects are small so far compared to what the economists predict? Are the economists wrong? First, economists are not wrong. But why the effects are small so far, of course, is an important thing that we need to understand and explain.

Let me start with inflation because that's the first short-run immediate impact you should see. So why we didn't see that. So I just came back from skiing, so I'm going to give you a skiing downhill analogy. Also, we just watched the Olympics, right? So you're just skiing full speed down. That's inflation coming down from Twenty Twenty-Two because of the very tight monetary policy of the Fed.

So think like inflation is exactly like that. You're skiing down and somebody just bumps you, right? You just slow down. But then you get up and then you keep skiing down. So this is a little bit like the case with inflation. Inflation was on a downward path. Tariff just created this bump, right? So it slowed down on that downward path, but it continues.

But overall, of course, you can say, well, why don't we see an effect like inflation not only just stalled but started going up? There are several reasons for that. And in general, why we didn't see a big distraction from tariffs, as was predicting early on, first and foremost is what you also said. They are small, right?

Remember the numbers from the Liberation Day. We saw numbers like 50%, right? We saw numbers 30%. I mean, everything basically was over 25%. So we are nowhere those numbers today. And if anything, right now we are talking-- I mean, there are different estimates, but right now we are talking something between 10 and 15, even before the Supreme Court ruling that they are not that high.

Why? Because, A) administration walked back many of them. B) the USMCA compliance played a big role. I mean, a lot of this, especially the really damaging ones that is working through supply chains and should have an inflationary impact, was about Canada and Mexico. And, of course, the companies who used to not bother to file their paperwork for USMCA compliance, that's exploded, right? So that's your all exempt from that.

C) administration did several other exemptions because, say, particular groups lobbying. And D) there's a lot of use of inventories and front loading imports, which goes back to trade deficit didn't decrease but increased issue. And also, I think, very, very important, which is something we learned from our work, is the networks.

Our work shows that if you calculate tariffs in a standard open economy framework, open economic model, versus one with networks, global networks, and global networks is not just supply chain, it is the trade network, production network, and financial networks, then you are actually going to get a much more muted response on inflation. Why? Because it takes long to travel through all that very complex interdependence of the nodes. So these, I'm going to put as the main reason on the inflation side.

JOHN FRIEDMAN: So suppose that we were to take today's tariff policies' 10-12, something like that, percent average effective rate. Suppose that we were just to have that steady going forward, no changes at least through the end of the administration, if not beyond.

Help us think through what type of effects are we likely to see over time as this fully washes through these networks. What part of the smaller immediate impact just comes-- because it's only been less than a year. And what part of it comes-- because at the end of the day, this just might not be as large as some people were fearing, even eventually.

SEBNEM KALEMLI-OZCAN: You go back to the fact that it's a stagflationary impulse. I mean, even in the long run, it is something that lowers productivity. I mean, it is something that lowers welfare. I mean, this is a long-run impact of tariffs. So if we go from now on, something with 10%, 15%, 13%, I mean, impact is probably going to be smaller than the estimate. But still, I mean, we were at 2%. I mean, still are going from 2% to 13%, right? Still, there's going to be a long-run lower productivity, lower employment impact.

JOHN FRIEDMAN: Let's just help try to benchmark this. So again, suppose a 10 percentage point increase from 2% to 12%. In terms of long-term impact on the level of earnings and employment in the US, what's a reasonable magnitude for people to have in their heads about what things might look like if we held this policy steady 5, 10 years from now?

SEBNEM KALEMLI-OZCAN: So our estimate is something to the sense of 0.5 percentage point addition to inflation and 1% drop in output. And overall, around 1 million or 1.5 lost jobs in the long run.

JOHN FRIEDMAN: And so even though I think people's expectations of this became anchored on some of the political arguments around how this was going to be a catastrophe in the end of the world-- and, of course, that's probably not the case, but let's just take your 1% hit to output. If the average household in the US is earning something like $80,000, $100,000-- 1% is like $800 or $1,000 a year per household. That's not the end of the world, but that's--

SEBNEM KALEMLI-OZCAN: Not small.

JOHN FRIEDMAN: That's not small. That's meaningful.

SEBNEM KALEMLI-OZCAN: I fully agree.

JOHN FRIEDMAN: Now, this conversation and these magnitudes have really been focused around a new higher level of tariffs. But as you already mentioned, it's not just the tariffs have been higher. They've been a lot less predictable. And whether that's changes in administration policy over time, exemptions, legal rulings, new trade deals, tariffs have really fluctuated around quite a bit. And help us think through how this uncertainty, beyond just the higher level, is going to affect the economy differently.

SEBNEM KALEMLI-OZCAN: This is super important. I mean, it is not only implementing a bad economic policy, it is more like nobody knows what the policy will be. So it's this uncertainty around the policy. So this type of uncertainty, I think, is the single most important reason behind the dollar's depreciation in that week of April 2, after the Liberation Day announcement.

Why? Because exchange rate is a forward-looking financial variable. Think exchange rate like a stock price. So that means, exactly like a stock price, is going to be impacted by the news and by, of course, the future expectation of the currency traders, financiers, investors, and all that.

So what happened-- you can compare to United States itself. Twenty Eighteen, the first Trump administration. We put a 25% tariff on China and the dollar appreciated 6%. Exactly as expected. Because when you put a normal, predictable tariff of such and such amount, again, you're bringing demand to your country. Everything is more valuable here so your exchange rate is appreciating.

But here there is this other shock. Not just the news itself is, but just the not predictable nature of it, the uncertain nature of it. Like nobody knows what is coming in the future. So this hedging your bets type of behavior is the culprit behind that behind that dollar depreciation.

JOHN FRIEDMAN: So you've laid out a series of economic problems that we've seen in the US, that we expect to see more of in the US and around the world, from these higher tariffs. But for the sake of our discussion, I want to make sure we give an argument around why tariffs might be something we want to consider, a kind of a full and fair hearing. And I think the strongest argument for tariffs looks back at the impact that increased trade and lower tariffs have had on the US and its economy and society over the past 20 or 30 years.

So in what's now a very well-studied episode, China normalized its trading relations and really stabilized at a lower tariff base around the year Two Thousand. And that caused what many have referred to as the China shock for US manufacturing. So it was a very large decline in employment. About a third of US manufacturing jobs went away in the 10 years following this.

But as David Autor and many others have shown, this trade shock was not just something that caused a reduction in employment. It was something that led to a really broad set of problems in society. And this was especially the case in communities that were particularly affected by the China shock. Oftentimes in the Rust Belt across the Midwest.

So there was a deterioration in family formation, literally fewer people getting married, fewer kids growing up in two parent households. There are higher mortality rates, especially coming from so-called deaths of despair, often linked to opioid overdoses. More political polarization.

So if trade and the effects on the US economy have caused these sorts of social harms, why shouldn't we limit trade in some way similarly to how we limit pollution or smoking or many other things that we think are individual activities that have these types of negative social consequences?

SEBNEM KALEMLI-OZCAN: Let me be very frank here. I think this debate is really now gone to a point that is very unproductive and frankly, not correct, in my view. It is true that all these things happen. But I don't think we have causal evidence on this.

Let me explain. You integrate. The world is becoming a more integrated place. Of course, this old frame as a China shock because China is this big, big, big country getting into this world space and start producing, competing, and all that. So more integration means more competition. And that means every country is going to suffer from this, as long as your domestic producers cannot compete.

Now, there are, of course, an argument that, well, China did this unfairly. They subsidize it, like heavy industrial policies. I totally agree. I mean, other countries did it before too, right? I mean, emerging markets did it. It is not new that a country that's tried an export-led growth strategy is playing unfairly.

But that's why we had WTO. So it was the job of WTO, like, OK, say like these are the rules of this game. If you want to be part of a globally integrated world in trade and finance and you want a globally compete, you play with the rules. Now, if WTO failed in that, that's another conversation. And it might be the case.

But coming back and then say China shock is to blame, everything, is, I think, really, really a false way of putting it. Because let's not forget, I mean, that same process lift billions out of poverty. It is the single most important development in the last 30 years in terms of large countries' poverty lines.

Now, what should we have done? Let's say WTO should have dealt with China. They didn't. US maybe done things differently. Maybe US should have done industrial policies way earlier. Fine, we can debate that. But in terms of all these jobs lost, the deaths of despair, I mean, there, I think-- again, it comes back to that, if somehow there is this competitor in the world scene that is really, really hard for your own domestic companies to be cost competitive with those others, then you help them.

So again, I don't want to throw, immediately, this welfare state argument here, but there are now a lot of work really compares a very, very similar firm in Ohio, Michigan to a very, very similar firm in Finland, Norway, Netherlands suffered from the China shock. People lost their jobs, firms shut down. But how those states re-educate that workforce, help them to get through so they don't get into this hole of deaths of despair and all that-- so there are things I think US government could have done. Because we should be thinking, what could we have done to make our companies competitive in the world scene?

JOHN FRIEDMAN: So to put it another way, whether it's China or not, we used to make a lot of furniture in North Carolina. And that furniture, some of it's made in China, some of it's made in other parts of Asia and South America, other parts of the world.

And what you're saying is that, look, yes, losing the furniture industry is going to have this effect. But if that's the way the world is going, standing in front of the tide of history is going to be hard. And we should work to help the companies evolve and help people find new jobs. But trying to shut down the process of integration and globalization may not be the right policy approach.

SEBNEM KALEMLI-OZCAN: Or do better furniture and compete.

JOHN FRIEDMAN: So I want to move on now to talk about another issue which has been really prominent in your work. And that's the trade networks and the supply chains. And I really think of it as understanding the details of what globalization means. The world really, I think, started to pay attention to this a lot during the pandemic, where our toilet paper came from suddenly became a household topic.

But the attention has only increased since then. And whether it's about European reliance on Russia for energy, or US reliance on certain parts of Asia for chips. How should we think differently about globalization once you take this network, supply chain perspective as opposed to just thinking of the world as a freely trading, other part of the world where you're not really paying attention to these details?

SEBNEM KALEMLI-OZCAN: Indeed. So we have been working a lot on this since, actually, the pandemic. So basically, we think the networks as three-layered networks, production networks, finance networks, and trade networks, right? As long as you have global interdependence, this is going to be something that you can be vulnerable, like toilet paper or the chips. Or it is something that can smooth the shocks, because somehow you got hit by this shock, you cannot find it, and then the other buy from the other country.

Now, here, what we realized during this work is-- a couple things very important. First is how much monopoly power the other countries have on those goods, how rare it is. So rare earths and chips will be a very good example here. So there will be these goods or inputs that your country uses. You don't have a high import share, but it is used in many, many sectors, or it is used in something that goes into many, many sectors. What we call global linkages.

So that is an important vulnerability, which is why we want resilient supply chains. But it can also be an important leverage point for the other country. So take your example, the whole Ukraine war, European dependence on Russian oil. Oil is of course-- you can buy from other places. So that's different than chips or rare earths. But you are, again, very dependent on Russia and now you want to reduce that.

So we learned that-- well, how quickly you can substitute. I mean, that was amazing, what Germans did. So originally, it told it's going to take several years for Germany to build these platforms for LNG so that the US natural gas can go, I mean, it was bought for oil and gas, to Europe.

But then we look at the timeline. It's unbelievable. It took them like 15 months or something. So then people realize, OK, so maybe substitutability and complementarity of these inputs that we depend on, this interdependent, is real time varying. And it depends a lot of other things, how quickly you do this investment and all that. So I think that's an important insight now impacting the way we think about things. And this is a central role in our work.

JOHN FRIEDMAN: So the example you just gave around oil and Germany, that's an example of something where they were able to substitute relatively quickly. And it sounds like that's a combination of two things. One, there were other supplies hypothetically available, especially from the US, which has become the largest energy producer in the world over the past 10 years, but also that from a practical perspective, they were actually able to build the terminals in that year.

So help me think about, what are some examples on the other side? What are things where we are dependent? And whether that's the US or other countries, what are parts of the global economy that have these choke points, call them, where maybe it's not easy to substitute away because there are not other supplies, because it takes a long time to build the infrastructure required to take advantage of those supplies?

SEBNEM KALEMLI-OZCAN: So that would be the rare earths. And then that's a very, very good example where-- I mean, again, it is-- they are not rare. They are everywhere. But extracting them is toxic. And that's why now and then China dominates this industry. And that's also the reason how it becomes now a weapon. This, now, weaponizing global interdependence part. If you look at all these tariff saga in the last year, the only country really basically retaliated is China, because they have this leverage to do rare earths.

Now, realizing this, we, of course, started our own industrial policies because that's the way to weaken this. I mean, to do this-- I mean, Germany example was a very quick investment. But something like this, of course, is not going to happen. And you need the raw material from elsewhere. You then also don't have the processing, production, all that.

That's why the previous administration, Biden administration, did the CHIPS and Science Act, which is really about this semiconductors. I mean, again, now the research start coming out. I have been reading about this, and it seems like the impact so far is very dismal. The original estimate is those are going to double the whole semiconductor production in the US.

JOHN FRIEDMAN: Is the investment from the CHIPS Act.

SEBNEM KALEMLI-OZCAN: Exactly, investment from CHIPS Act, which is, of course, going to bring private sector investment. But then even the original estimate is a decade, right? It's going to take a decade. We look at now, several years down, there doesn't seem to be that much effect in terms of the production capacity.

People look at employment effects. And that's also very, very dismal. I read estimates around 30,000, 40,000 jobs. Actually, half of it foreign workers, because part of this policy is for national security, but also it is to increase domestic employment, manufacturing renaissance.

I mean, it might work at the end, but these things are going to work much slower, going again to this time dimension. So it's not just money. it's not just the money and investment that you need to do, which is what, of course, industrial policy will speed up. You need many, many things. You need the skill, know how the raw materials still in the domain of an adversary country.

So I think that's what we are trying to understand in our work. This other countries having monopoly power on the raw materials and maybe some processing, some part of the production, and United States try to bring that production to United States. But that means you need to bring a lot of different parts of it. Basically, you have to bring most of the supply chain to.

JOHN FRIEDMAN: Yeah, you can't--

SEBNEM KALEMLI-OZCAN: Exactly.

JOHN FRIEDMAN: --you can't have the chip fab.

SEBNEM KALEMLI-OZCAN: Exactly.

JOHN FRIEDMAN: The inputs are all coming from the same place at the end of the day.

SEBNEM KALEMLI-OZCAN: And this goes back to your previous question. And tariff is not the right policy to do that. Definitely not right. I mean, tariff is actually exactly the opposite policy to achieve these things. Yeah.

JOHN FRIEDMAN: So you mentioned these two different motivations for the CHIPS and Science Act, right? One, to support domestic employment. And I think I agree with you there. That if you just look at the number of people you need to work, for instance, in a chip fab, it's just a tiny number of people, compared with the massive billions of dollars of investment that you need in order to build all the machines. And so that probably can't be really the rationale.

But the other one on national security, I think that's something where it's not just that chips are important in a particular way. It feels that this is a real change in how we think about national security relative to the previous era of great power competition.

And this is very important to the Watson School because it was founded originally as a center to think about great power competition in the Nineteen Eighties between the US and the Soviet Union. And in that era, there was essentially no trade between the Western bloc and the Soviet bloc. So those discussions, that literature was really entirely a military and political one. China and the United States are enormously economically integrated.

So how can we take this network-focused framework that you've been telling us about, where you have three different layers, the input layer, the final good trade layer, the financial layer, how can we use that to help understand more about where the security risks come, both from the perspective of the United States, but also where are the security risks and those choke points more generally in the world?

SEBNEM KALEMLI-OZCAN: So this is something we really want to understand better. Because it's exactly as you said, this very complex web of global interdependence can be a good thing and can be a bad thing. From the national security perspective, obviously, what you want to understand is, what are the tools I can use for economic statecraft, right?

OK, if China is weaponizing this global interdependence through having monopoly power on this rare earths, well, I can weaponize the global interdependence through my power on the dollar, which is what the US did, of course. I mean, that's the whole point of the sanctions and preventing Russia to access the SWIFT system and all that.

OK, but if you think about it again, that example, they are not working. I mean, to that extent. I mean, maybe financial part work a little bit, but not quite. Russia can still access global finance, and trade part didn't work. It is harder to make it work for any country. They're kind of hegemonic power, which in the US-China thing, China lay railroads, and then this trading power, and in the US case, this financial power. I think it's much harder to make it work in this complex, interdependent global system.

JOHN FRIEDMAN: Much harder to make weaponized economic policy work.

SEBNEM KALEMLI-OZCAN: Exactly, which is going back to your original question, so how do I think about it? I need to think about it with this complexity. I mean, national security means, OK, so I'm going to think about risk and I'm going to think about the tools that I can use as leverage, because that's going to help me also to deal with the adversary.

And I think that's really where we need more research. We are working on that, but-- other people also working on that. There is now a whole geoeconomics group at the National Bureau of Economic Research, many people in Europe working on this, but I think it is really, really a complex and challenging problem. Because you need to be thinking not only in US-China terms, but a global world. Given the economic relationships, given the trade and financial linkages, how this is going to evolve, how this complex layer of global interdependence is going to evolve.

But I think it is much more complicated than there are two hegemons and they are fighting for technological dominance, China and the US in the world, and everybody is going to use their leverage and then try to minimize the risk. I think it is much more complex than that.

JOHN FRIEDMAN: It seems that we all face the choice of, in this ever more interconnected world, do we, out of security, revert to making sure that all of the essential systems are locally, domestically based? So that's the US needs to produce chips in rare earths, and China needs to have renminbi denominated payment systems so that nobody's sensitive to anybody else. That seems like a very-- maybe necessary but a very inefficient world.

And I wonder whether there's another option, which is that we lean into that interconnectivity, where we say, yes, we're just going to accept the fact that everyone has some chokehold over some aspect of someone else's economy, and it becomes almost an economic version of the famous Cold War security doctrine of mutually assured destruction, where counterintuitively, the fact that both the US and the Soviet Union possessed enough nuclear weapons to destroy each other 10 times over made it much less likely that we would actually need to use those by keeping people back from the brink.

Now, economic weaponization doesn't have that 0 to 1 million miles an hour of nuclear weapons, but is there a way to set up the global system to lean into that interdependence, as opposed to where we currently seem to be going, which is to be leaning away from the interdependence?

SEBNEM KALEMLI-OZCAN: Yes, I fully agree. I mean, so this is, again, going to this unipolar, bipolar, and multipolar world. Which one is the most stable? Which one, from an economic sense, will prevent the Armageddon that we thought with the nuclear war? And again, it's not clear. I don't think it's a bipolar thing. I don't think, OK, let's make US happy, China happy. Not clear. I mean, we don't have any evidence or any robust theoretical framework of that.

I mean, it is definitely not many, many polars, multiple. That's very, very inefficient. So what is the right number there, 3, 4, to the extent that it is very hard to change things, but also it is not going to create this economic war? So this is yet to be seen. That seems where the world is also trying to go. I mean, economic research is definitely going in that direction. Try to understand where is this stability is going to come from without going this totally inefficient space.

And I think that's also what is going on the political sphere. I mean, following Mark Carney's speech, I think a lot of these economic deals-- now countries are thinking Europe, Global South. I think India is a very, very important role here. So that's, I think, now this new phase, this whole new globalization is going to be shaped. And these are very exciting and challenging things. I would love to work on all of them.

JOHN FRIEDMAN: Well, so let's talk about those broader set of questions. You mentioned Canadian Prime Minister Mark Carney's speech, where last month at the World Economic Forum in Davos, he described the world as facing a rupture where great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited. So he's calling out exactly that new approach to international integration.

And I wonder, to what extent is this just tough talk? And, of course, when you're on the receiving end of it, you want to sound tough. But to what extent are we really heading into a different place, where I'd say, the last 50 years, maybe the last 80 years since World War II, we've had the United States really as the unchallenged financial global leader?

And that has both, I think, led to a lot of gains in terms of ease of doing business around the world, but also something which has benefited the United States tremendously. What Valery Giscard d'Estaing once called the exorbitant privilege. So are we really moving into a new era? And if so, what does that look like? What is the organization of the financial system and the global trading network look like if we really are moving away from this long era of US hegemony?

SEBNEM KALEMLI-OZCAN: Yes, I mean, as you know, it is hard to predict what is the new thing.

JOHN FRIEDMAN: Prediction is difficult, especially when it comes to the future.

SEBNEM KALEMLI-OZCAN: And especially for economists. As you know, we are inherently bad in predicting. OK, so let's go back to Carney's speech. Is it tough talk? I do think it was a great speech. I mean, from a political perspective, super nice, inspiring, and all that. But from an economic perspective, it is a little bit like tough talk, because it is easier said than done, right?

Changing the existing interdependence is hard. It is, first, requires an understanding of how complex it is. I mean, we cannot even know how to apply all the tariffs and how to now get them back because it's so complicated. And this is just like one policy. So in that sense, doing many, many different policies, try to change it in a short period of time where certain countries, just because now they are bullied by the United States, coming together. I think it is not that easy.

In terms of the US hegemony and the dollar's role, it is even harder. Now, exorbitant privilege is really, as put in 60s, and there's a lot of work on this, it is really about the borrowing cost of the US. I mean, sometimes people define it differently, but it is like US can borrow a lot from the rest of the world at a very cheap cost. That is the simplest definition of that, which is true.

So now this eroding of this, because US does need to borrow from the rest of the world, that means now the rest of the world is going to say, hey, if you want to borrow in dollars, now have to pay us much higher. The loss of that privilege, that is going to take, I think, a lot more really, really bad policies.

I mean, again, tariff is a bad policy, but it's not a catastrophically bad policy. So now we are talking about default on US debt. Financial repression, capital controls. I think these type of things really needed to really erode that, as long as US space is set.

And this goes back to this issue where, can US afford to pay its debt, or is US sleepwalking to a balance of payments crisis? Again, the answer is no. I mean, yes, the US has a lot of liabilities, a lot of debt in dollars, but US also have a lot of dollar assets and your assets and tons of other assets across the world. So US can pledge those assets and US can keep paying its debt.

So in that sense, neither kind of a balance of payment crisis, a US crisis where the US is in a position that cannot pay its debt to the rest of the world, or the rest of the world is asking a higher cost, higher interest rate from the US to borrow. I don't see them that likely in the short term. Again, it requires some bigger mess up on the US side for those things to happen, I think.

But that doesn't mean the dollar will not weaken, the dollar does not depreciate. We talk about that. Still, if you keep doing bad economic policies, if you have a lot of policy uncertainty, you are going to create this environment where your currency is going to get weaker. But that can happen without US losing its reserve currency status, hegemonic power.

And also let me tell you, if that happens, say there's so much more mess up in terms of bad policies, we go to financial repression and capital controls type of policies, then we are not talking just about US losing its place and hegemonic power in the world system, international monetary and financial system. We are also talking about economic serious collapse and recession in the United States. And this is going to affect, of course, the rest of the world. So it is bad, bad for everyone.

JOHN FRIEDMAN: Well, this has been an amazing conversation. Thank you so much for coming on. At the end here. I just want to give you a chance to talk a little bit about what's in store, as this next year comes, at the Rhodes Center here at the Watson School. So you'll be taking over as the director of the Rhodes Center in July. Tell us what types of activities you're most excited about pursuing at the Center, and what opportunities for students, for faculty, for other community members, there will to be a part of it.

SEBNEM KALEMLI-OZCAN: I'm super excited. Looking forward to take on this new role, and I think we will do great things and events, conferences, podcasts, workshops. But first and foremost, all these things are coming around learning and teaching, as I think should be the fundamental role of any center in any university. So we are open to anyone and everyone to collaborate within Watson and outside with other departments in University. So super, super exciting times.

JOHN FRIEDMAN: And I think your work at the Global Linkages Lab and more generally, I think, at the Rhodes Center, it seems like it's going to have the opportunities for, especially, students who are interested in this type of work, to be able to be part of some of this analytic process of the research, of trying to answer some of these questions. And give us a sense. What's one particular project that you're looking forward to learning a lot more about in your work over the next 12 months?

SEBNEM KALEMLI-OZCAN: Yes. No, this is exactly, first and foremost, I mean, your question, understanding where globalization is going. Yes, maybe we are not that good at predicting, but maybe we can now do better. Global Linkages Lab is going to be integrated into Rhodes Center. And hopefully by using very granular data, real time data, we can be at the forefront in following, in real time, how globalization is evolving, how supply chains, financing of supply chains, all these three layer networks' evolving.

How can we be ahead of risks, vulnerabilities to economic national security, and how also we can be providing insights for the rest of the world. Going back to your last question, if the US exorbitant privilege is going to disappear or not. I mean, we, of course, think a lot is from the US side, but there is also this other side, not just in terms of China, but Europe. Why Europe is not rising this equation? What is going on in Europe?

I mean, so I think it requires-- if you are going to go to a more multipolar world, maybe not that many, but three or four, we also have to understand what is going on elsewhere in the world. And I think-- not just China, but I think Europe and Global South is going to be central to that understanding and to understand how globalization is going to evolve in globalization 2.0.

[MUSIC PLAYING]

JOHN FRIEDMAN: Well, Sebnem Kalemli-Ozcan, thank you so much for this wonderful conversation today.

SEBNEM KALEMLI-OZCAN: Thank you so much.

DAN RICHARDS: This episode was produced by me, Dan Richards, with assistance from Juliana Merullo. Our theme music is by Henry Bloomfield, with additional music by the Blue Dot Sessions. If you enjoyed this episode, be sure to leave us a rating and review on Apple, Spotify, or wherever you listen to podcasts.

And if you haven't subscribed to Trending Globally, please do that too. If you have any questions or comments or ideas for guests or topics for the show, send us an email at trendingglobal@brown.edu. Again, that's all one word trendingglobally@brown.edu. We'll be back in two weeks with another episode of Trending Globally. Thanks.

[MUSIC PLAYING]