Trump Ignites Trade Wars with China, Backs Down on Canada, Mexico
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From KQED in San Francisco, I'm Alexis Madrigal. After decades of free markets and free trade, Donald Trump has brought a different attitude to the White House. He picked a trade fight with Mexico, Canada and China, threatening tariffs on all three countries over the weekend.

Trump postponed tariffs on Mexico and Canada, saying he extracted concessions from both countries. But the Wall Street Journal's editorial board called the episode, quote, the dumbest trade war in history. We'll try to break down the new landscape of global trade. It's all coming up next, right after this news.

Welcome to Forum. I'm Alexis Madrigal. It's been a dizzying week. There's so much to pay attention to, so much noise to filter, and so many situations to try to sort out. Today, we want to look at Donald Trump's use of tariffs, putting them in the context both of his first administration and more broadly in terms of our country's trade policy. We're joined this morning by Scott Horsley, economics reporter for NPR. Thanks for joining us, Scott.

Good to be with you. We're also joined by Shannon O'Neill, Senior Vice President with the Council for Foreign Relations, author of The Globalization Myth, Why Regions Matter, and Two Nations Indivisible, Mexico, the United States, and the Road Ahead. Welcome, Shannon. Thank you for having me. And we're joined by Kyle Handley, Associate Professor of Economics and Director of the Center for Commerce and Diplomacy in the School of Global Policy and Strategy at UC San Diego. Welcome, Kyle.

Thanks for having me. So, Scott, we've been in this tariff whiplash over the last couple of days. Can you just explain what happened over the weekend? You know, Trump announced tariffs on Mexico and Canada that changed by the end of Monday. Just talk to us about the facts of the case.

Sure. Well, we've seen this movie before during Trump's first term in the White House. He did impose a lot of tariffs. He also threatened a lot of tariffs that never went into effect. And we saw both pieces of that playbook play out over the weekend.

On Friday, we were told that the 25% tariffs on Canada and Mexican imports were going to take effect on February 1st, which would have been Saturday. We waited around all day Saturday for some sort of official confirmation. The president finally signed some executive orders around suppertime. But instead of taking effect on the 1st, the tariffs were set to take effect on Tuesday, which –

I thought it was kind of a signal at the time that there was an opening there for an 11th hour reprieve. And indeed, on Monday, we saw an 11th hour reprieve when it came to imports from our two biggest trading partners, Canada and Mexico. No such reprieve, though, when it came to China. And so 10% tariffs have gone into effect on imports from China on top of the previously existing tariffs on China. Yeah.

You know, Scott, I mean, putting huge tariffs on two of the United States' biggest trading partners seems like it would have a major effect on U.S. companies. I was expecting, after the tariffs were announced, to see some more movement in the markets on Monday morning when there hadn't been a reprieve yet. And yet the markets kind of shrugged off the tariffs. Why do you think that was?

Well, I wouldn't say they shrugged it off completely. We saw the Dow fall about 600 points, which is not nothing, and it's probably enough to get the attention of the president, who likes to look to the stock market as kind of a scoreboard for himself. But you're right, that was a relatively muted response to what the economic fallout would have been had we actually upended three decades of free trade on the North American continent. And I think that's because...

The markets, investors were all along kind of discounting the idea that this was really going to go into effect. I think they anticipated that there would be a pullback, and indeed there was, which is not to say that all this uncertainty is without cost. I mean, businesses are having to wrestle with will he or won't he impose these tariffs.

And we saw in some of the trade data, for example, that some manufacturers stockpiled goods in December in an effort to get ahead of the tariffs. Well, that, you know, that carries a cost. And even now, we've just seen a one month reprieve. There's no guarantee that these tariffs won't kick. These threatened tariffs won't kick in a month from now. You know, Shannon, what was the Trump justification for the tariffs across the board on Canada and Mexico?

Well, interestingly, he came in and it was actually not much about commerce or economics. It was about security and migration. So the main focus for all three of these countries, Mexico, Canada, and China, was to stop the flow of fentanyl into the United States, which has killed tens of thousands of Americans each year. But it was a focus on other foreign policy issues. We also saw some on migration, trying to stop the flow of migrants into the United States.

So what's interesting here is, yes, there are economic issues between the countries. And Trump in the past has talked a lot about trade deficits, of which many of these countries have with the United States. But this time around, the real focus and what was negotiated with Canada and Mexico for this 30-day reprieve was really about security, was about fentanyl. Shannon, what concordance does that really have with reality? Like how, what evidence is there that there's a substantial amount of fentanyl coming in through the Canadian border, for example?

The Canadian border, it's very little. So it was sort of an odd ask of the Trump administration for Canada and for threatening to put on such widespread tariffs on Canada. In Mexico, there is evidence that there's a significant amount of the

the fentanyl that's imported into the United States, a good amount comes in through Mexico. For China, a good amount of the precursors that go into making fentanyl, whether those come directly into the United States or whether they go to Mexico and then are made into this very deadly drug, illegal drug. There is some evidence there, but the Canadian case was a little bit of a red herring and that just isn't a big issue between the two countries. And what evidence do we have that

the concessions that were extracted during this process will have an effect on the flow of fentanyl into the United States. You know, what was extracted in some ways was symbolic or just business as usual. So Canada has promised to sort of beef up what they're doing in the border and to appoint a fentanyl czar, so someone who will really think about these issues and work together. But, you know, that one takes a while to stand up and really isn't the issue, as we've just discussed.

For Mexico, the Mexican president, Claudia Sheinbaum, has promised to have 10,000 National Guard troops at the border for security. But they're already there and they have been there for a good amount of time dealing with all kinds of security issues, including fentanyl. So it's not a real change in the way things are working. And, you know, more broadly,

There is some supply and demand here if we're talking about commerce in many ways. And in the illegal drug markets, if there's demand here in the United States, there's going to be supply from somewhere. Maybe it'll be domestic, maybe it'll be international. And we've seen longstanding challenges between the United States and Mexico and other nations for that matter in terms of stopping the flow of illegal drugs or other contraband and the like.

And putting 10,000 troops at the border is probably not going to get at the illegal supply chains, not getting at the intelligence to actually take down some of these organized criminal groups. If that's even the way to do it, yeah. If that's even the way to do it, yes.

Um, so Kyle, you know, fentanyl obviously killed a lot of people in the Bay area. Big issue for us. Let's just say that you're somebody who says like, you know, I'm just glad Trump did something, you know, I don't know what we got, how much more we got, but I'm glad I did something. Are there costs to using tariffs in this theatrical way? Like the brinksmanship of it? Yes, I definitely think there are. Um, I mean, the, the,

The problem is, one of the things you mentioned at the beginning of the show is that a lot of firms are having to put things in inventory and stockpile things and make all these contingency plans. There's lots of anecdotes over the weekend of late-night phone calls about how are we going to ship this stuff before the tariffs hit. And all of that activity, if we end up not imposing the tariffs at all or have a 30-day reprieve,

it's pretty much wasted time that didn't need to be spent. So that alone, I think, is a cost. And going forward, the brinksmanship where we're constantly, and when I say we are constantly, I mean, you know, the Trump administration is back to its old ways, threatening things, and then maybe following through, sometimes not, sometimes putting a new clock on,

basically creates a business environment that's full of uncertainty and has a planning cycle that's completely inconsistent with their schedule for planned capital expenditures. Who should we hire for people that we might want to retain for more than a year?

And those sort of things are very costly. And I think we'll have longer run implications for a manufacturing sector that looked like we got some pretty good news earlier this week about things were looking up. And now all this uncertainty is back on the table with major trading partners.

I mean, you know, it's difficult because, of course, there was a sort of nominal reason for doing this around fentanyl. But then there's also this sort of longtime obsession within the Trump administration and outside of it in some quarters about reducing the trade deficits that the United States has, particularly with China, but also, you know, with our other trading partners. Would these tariffs, had they gone into effect across the board, do you like how long would it take?

for that to affect some change? Or do you think they wouldn't have had that effect at all in reducing our trade deficit? So it's not obvious that they would reduce the trade deficit, just for starters.

And I don't think it would have happened immediately. But the reason that they might not have reduced the trade deficit at all is because a lot of the tariffs, in particular on Canada and Mexico, were going to hit things that are what economists call intermediate inputs or goods that we use to produce other goods. And if you increase costs to U.S. firms...

to build the things that they make. And there's plenty of U.S. firms that are some of the largest firms that are the biggest exporters.

that have the most employees and are very productive, suddenly facing a 25% increase in their costs for a part that they usually just get from Toronto and there's no problem. This would be like automakers, for example, just to make it real for people. Yeah, exactly. So this Detroit-Toronto corridor for Ford, Stellantis, and General Motors is incredibly important.

And so you can end up in a situation where you have reduced imports because you've made them more expensive, but the U.S. then becomes less competitive in export markets. And as a result, we might not see much change in the trade deficit. It could even get worse.

And then the other things about how long is it going to take before we see something, it really depends on the products. But there are a lot of fresh fruit, vegetables, and things like that that are imported from both Canada and Mexico. Those have a short shelf life, and people would start to see those prices go up in the grocery store, I think, very quickly. Yeah.

We're talking about both the perspective and actual Trump tariffs, their impact on the United States and around the world with Kyle Handley, associate professor of economics and director of the Center for Commerce and Diplomacy in the School of Global Policy and Strategy at UC San Diego. Shannon O'Neill, who's senior vice president at the Council for Foreign Relations and has written books about trade, in particular with Mexico.

We are also joined by Scott Horsley, economics reporter for NPR. We'd love to hear from you. How have the tariffs affected your business? Maybe you do import something that's an intermediate good from somewhere else you use to make your final product. We'd love to hear about that. You can give us a call. The number is 866-733-8663.

6786, that's 866-733-6786. You can email forum at kqed.org. Find us on Blue Sky, Instagram, et cetera. We're KQED Forum. We'll be back with more right after the break.

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You'll also hear from podcast icons like Radiolab's Jad Abumrad, Anna Sale from Death, Sex, and Money, and over 200 more storytellers. So come level up your own craft or connect with other audio creatives. Grab your tickets now at onairfest.com. Hi, I'm Bianca Taylor. I'm the host of KQED's daily news podcast, The Latest.

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Welcome back to Forum. I'm Alexis Madrigal. We're talking about prospective tariffs leveled by Donald Trump's administration on China, Canada, and Mexico. We're joined by Scott Horsley, economics reporter for NPR, the Council for Foreign Relations, Shannon O'Neill, and UC San Diego's Kyle Handley.

I wanted to ask you about sort of the underlying kind of material reality to some of these political changes. I mean, there was a time not so long ago when free trade was full Republican orthodoxy. And now it's not. Now there's it's a fault line within the party. Do you think that is a result of purely kind of like political change and rising nationalism in the U.S. or something? Or do you think there's an underlying material reality that's kind of driving that?

Well, there have been huge shifts in the U.S. economy and we see rising inequality. We see different, you know, access to resources and these sorts of things. And one thing we have seen and there's lots of great studies that have been done with this and even a recent one by some scholars who are known for what they call the China shock study.

type of papers. And basically what these say is that when you saw a flood of imports or you saw outsourcing, particularly to China, that there were communities that lost their jobs, that sort of lost the dynamic, economic dynamism. And it was very hard for people to switch industries, right? They used to be in manufacturing and it was very hard for them to switch into services or to go other places and find other kinds of jobs. So that there really was an effect

particularly in between, you know, 2001 and the decade afterward when China joined the WTO and we saw a real rise of China. And there's actually a recent kind of follow-up on that report that showed that some of the places that were hit by this, where you saw, you know, a plant close or, you know, factories shut down and the like, you

You've seen jobs come back to that particular city or town or area, but they're not the same jobs and they're not the same people. So the people who come into the labor market and you've seen it grow again are people who were not part of the labor market, right? They're young people who are now getting jobs. So there really has been these long-lasting effects and just the general feeling of instability, insecurity in the United States about your jobs if you were in that situation.

that, you know, particularly in manufacturing, like that's a real phenomenon for that. So that's for sure. What we don't parse out or sometimes I think gets lost in the overall conversation are sort of two things. One is that there's lots of other things that are happening in the, you know, in the global economy and in the U.S. economy. There's technology and automation and other things that doesn't really have anything to do with trade. So that's one side.

But the other side is that lots of the effects on workers were particularly because of China, with which the United States does not have a free trade agreement. They were not as much because of Mexico and Canada. And, you know, back to what Kyle was saying there where...

you know, factories here in the United States are able to stay open and be competitive, both in the United States and globally, because they are bringing in some inputs, you know, pieces or components or parts from their neighbors. And the free trade agreement allows them to build things that are, you know, better, but also cheaper so they can compete on global markets. And, you know, one thing I just add to Kyle's, you know, great comments about how, you know, if we do see these tariffs happen and what happens to the trade deficit is, you

Right. If U.S. factories are less competitive because they can't bring in a part that's more affordable. The other thing is Mexico and Canada are the number one export markets today for U.S. made goods. So if we put on tariffs, it's quite likely that Mexico and Canada would respond and put off tariffs as well. And so that would lower our sales abroad and the jobs that are tied to those exports, which are in the tunes of hundreds of billions of dollars that go out every year.

Let's bring in our first caller here. Let's bring in Ash in Pacifica. Welcome.

Hey, thanks for taking my call. I just think that the analysis by your esteemed guests is just giving too much air. This is not a rational actor. They're not doing this for the specifics of the arguments that they're trying to have on economics or anything rational whatsoever. They are just flooding the

the entire media with one controversy after another, nonsensical most of it. So we're just focusing on the minutiae of all of this, whereas there's a bigger game that they're playing around just trying to culturally shift attitudes and grab power and money. That's the entire thing. So I'll take my comment offline. Thank you. Appreciate that, Ash. Of course, we're...

Everyone's trying to balance this. Scott Horsley, I'm sure you're in the same spot. You know, how do we keep the big picture in mind, things that might be going on in Treasury, changes in the way that the executive power is being exercised or abused? I mean, how do you make sense of needing to cover what will happen to U.S. businesses in the minutia with this sort of like broader story of what the Trump administration is doing here in the first month?

Yeah, I mean, Trump is a reality show producer at heart. And I mean, I guess one cynical interpretation of this is that he was able to dominate the news cycle from Friday through Tuesday, even though at the end of it, most things wound up being more or less status quo. The 10 percent tariff on China, the exception to that. But, you know, there was lots of sound and fury over the weekend that kept Trump in the headlines, kept kept Trump in the news.

And in the end, it all didn't amount to very much at all. That said, the economic effect could have been strong. And so you can't ignore it altogether. But I think Ash makes a good point that we have to be careful about being played and try to keep our eye on the ball. One reason I think that tariffs are getting –

Closer scrutiny this time around from even people who would be nominally free traders is that a high priority for this administration and for their GOP allies in Congress is going to be to extend the 2017 tax cuts and maybe add some new tax cuts on top of that. And the government's going to need some –

some additional revenue to offset the multi-trillion dollar cost of those tax cut extensions. And so tariffs is one place they might look. And one thing to keep in mind about that is who's benefiting and who's losing because the cost of the tariffs, the cost of the taxes on imports would be disproportionately borne by people at the lower end of the income ladder and the benefits of extending the tax cuts would disproportionately flow to those at the top. So something to keep in mind.

Let's talk a little bit about the Chinese tariffs in part because these things did go go into effect Kyle bring you back in on this like

10%, right? We're also talking 10% on sort of wholesale prices basically, right? What do you make of that? Is 10% in this way enough to shift things? Do you think it's largely a political maneuver? What do you make of this?

So, yeah, I think it's definitely enough to shift things. In the previous Trump administration, we had tariffs coming in at 10 or 15 or 25 percent, and those were definitely enough to shift things. The firms that were importing those goods, they got hit by tariffs at the time. In the research that I've done, we looked at like, well,

based on how much you were importing in 2016 and 2017, before the tariffs went into place, if you tried to keep doing the same thing, how much would these tariffs cost? And the number we have from firm level micro data is it's about $1,300 per worker in the manufacturing sector. I mean, that's your cost of living adjustment. That's your Christmas bonus. That stuff is gone, right? Because you've got to adjust.

So you're either going to pay the tariff and it's going to be a nuisance. And maybe we, I don't know if 10% is a nuisance or not. I think for some of these manufacturing firms, that's their entire margin on certain things. Or they have to adjust. They've got to find a new supplier somewhere else that's not in China. And I think what a lot of them did during the previous Trump administration is they said, well,

you know we can try to set up operations in mexico and canada because we have a trade agreement there and we're not going to mess with that right but near shore is that what that was called yeah exactly near shoring friend shoring whatever buzzword you want to use uh but you know they had an international agreement you know usmca or its precursor which was the the nafta and that's

That's all out the window. And so, I mean, some of them probably feel like they've been played on this because they did try to nearshore things. They did try to find suppliers in the United States or at least in North America. And now they've got the threat of these other tariffs and new and higher tariffs on China. And so that's certainly...

That's certainly a big problem for a lot of these manufacturers. Well, and Shannon, the other thing, the earlier tariffs, and these ones seem likely to continue this, is it made other Asian countries not subject to the tariffs more competitive too? In particular, it looks like Vietnam has benefited a lot.

Yeah, we've definitely seen a movement in Vietnam, several other Southeast Asian countries. India has picked up some of the trade that moved out of China and went to India and then traded with the United States. So we've definitely seen Mexico is definitely one of the biggest winners over these last four or five years in terms of the movement of goods, but so too are several Southeast Asian nations as well. And just to add to Kyle's point,

You know, the 10 percent, you know, U.S. tariffs on China are important, one, because of the costs, it changes in the cost structures of things coming into the United States. But they're important, too, because China has already retaliated and is doing that as well or will come February 10th. And so they are putting some tariffs on energy, U.S. energy exports to China.

They're putting some limits on exports of particular minerals that they are important to U.S. supply chains and other things. And they've started or looks like going to be launching investigations into U.S. companies. So Google is on the docket for anti-monopoly behavior. They're beginning to do that investigation. And there's talk that they might investigate Apple. So you do see retaliation that will be costly for big U.S. exporters and others that are out there in the world. Yeah.

Let's get to some comments that have come in here. One question or one point Joel writes, Trump's words, whether or not followed by actions, greatly strengthen the strength and well-being of the U.S. Countries are free to develop their own agreements with each other. If Trump's MAGA wants isolation, other countries can assist in speeding the process forward.

His policy suggestion yesterday regarding Gaza may significantly weaken our relationship with OPEC. The world does not need to answer to Donald Trump. I wanted to ask you this, Shannon, which is, you know, as we think about how other countries around the U.S. respond to us, what do we see these actions doing? You know, obviously, the Trump administration sees them as a show of strength. Do you agree with that or the listener?

Well, I think the challenge with some of this sort of command and control way of approaching all kinds of countries, but particularly the countries that have long been allied with the United States, is we begin to be seen as sort of an unreliable ally.

And, you know, we have, for good or bad, we have a return of some great power competition, right? There's adversarial aspects out there with China, with Russia, with the United States, with Europe and the like. And as we look to see who we can work with around the world,

It's hard for countries that might throw their lot in with the United States if the United States then turns on them and puts tariffs on them or makes it harder to work. So I think the question here is, as you think about these long-term relationships, and if indeed we think national security, we need secure supply chains in lots of critical industries, things like semiconductors or pharmaceuticals, access to vaccines and medicines,

or to the technologies of the future, things like electric vehicle batteries and the like. If we think we need those and we want to make sure we have sources that are with allies, then we need to build these supply chains. We need to build that. And the basis for that often are these trading arrangements. And so if we're going to tear up those or make those much more difficult, some of these other national security priorities that we see in the U.S. may suffer.

You know, Scott, speaking of some of this effort to secure supply chains and kind of changes that are being made, there was a part of the Chinese tariffs, and it's a little bit unclear how it's being implemented, but there was this idea that this de minimis rule, which allowed Chinese companies to ship directly to American consumers, kind of skipping any kind of customs or trade

perspective tariffs for things under $800 was going to go away. Can you talk to us a little bit more about who used that form of kind of supply chain shipping strategy and what it might do?

Sure. And we should say that the de minimis rule or the de minimis carve out was was already under scrutiny from the Biden administration. They were making making arrangements to to close that loophole as well. And it has now been done as part of this this.

At least for Chinese goods, but not for other places, right? Yeah, as far as China is concerned, yeah. And the idea here was that if someone was sending a small dollar package from China to an individual in the U.S., it wouldn't have to go through the process of paying a tariff. But we had e-commerce companies in China sort of exploiting that loophole and sending –

you know, millions and millions and millions of dollars worth of goods into the United States in...

small packages to individual customers in a way that was probably not anticipated when the de minimis carve-out was designed. And so we've now had the Trump administration say those shipments, if they're coming from China, will be subject to tariffs. The challenge is going to be how do we assess it? It's not going, you know, these are individual packages not going through the

port of Long Beach or something like that. So where is the customs agent that's going to collect that charge? And for a hot minute there, we actually saw the postal service say they weren't going to deliver any packages from China to addresses in the U.S. They've now backtracked on that. They say they're going to work with the customs agents to figure out an efficient way to assess the tariff. But

So now if you're buying from a merchant in China and you're buying a sweater or a pack of razor blades or whatever it might be, you will be subject to the tariff just as if it had come through China.

on a container ship. Some for people to look out for. Another listener, Nick writes, please have your guest explain why Trump chooses tariffs over income taxes as a way to fund the federal government. Are tariffs really a regressive tax compared to income taxes? I think we covered that piece. But Kyle, I did want you to try and address how much funding tariffs would actually bring in. Like, what are we talking about magnitude wise?

So, there's not enough US imports at all to even cover much of the federal budget.

If you put very high tariffs on imports, like the imports should go down. And so you're kind of... Says the economist. Yeah, right. Yes, they will go down. And you can't just assume things are going to stay as they were. And so... It's kind of like when you put tobacco taxes on, you know, are you trying to discourage smoking or are you trying to raise money for some other government purpose or something? And you can kind of get caught on a...

Yeah, I mean, ideally, you want to put taxes on things that don't respond much to prices. So, you know, cigarette taxes actually work pretty well because people are addicted to cigarettes, so they'll keep buying them even if you put really high taxes on them. You know, they'll cut back a bit. But, you know, there's a lot of imported goods where people will just stop buying them because they're too expensive. And so the...

The amount of revenue that we could raise from tariffs and I don't have the numbers off the top of my head are Going to be not even close to filling some of the holes they would need to fill if they if they're gonna significantly cut

Income taxes or corporate tax rates. Yeah. I mean, if you think about it, we import $3 trillion worth of goods a year, give or take. If you slapped a 10% tax on the whole thing, even if you assumed that there was no erosion in imports, you're talking about $300 billion you might raise through tariffs. That's less than we're going to lose in revenue from extending the 2017 tax cuts. Mm-hmm.

Yes.

We're going to take more of your calls, more of your questions, more of your comments on what's happening in this world of trade. You can give us a call. The number is 866-733-6786. That's 866-733-6786. You can email forum at kqed.org. Again, super interested to hear people who've been personally affected or whose businesses have been affected by these changes or threatened changes. I'm Alexis Madrigal. Stay tuned for more right after the break.

Welcome back to Forum. Alexis Madrigal here, tucking tariffs with Scott Hordsley from NPR, Shannon O'Neill, Senior Vice President at the Council for Foreign Relations, and Kyle Handley, who's Assistant Professor of Economics at UC San Diego. Shannon, I want to start with you on what we can learn from Trump 1.0. Some tariffs did go into effect. What

What do we know about the long-term impacts? You know, we're now quite some years from when they were initially put in place. Mm-hmm.

I mean, we've learned a lot, I think, in that time. We saw tariffs specifically on China and pretty broad ones on a whole host of categories. We saw some on the European Union as well. Those with China were kept on in the Biden administration, so we've got sort of a long track record there. You know, I think one of the things we learned from putting on tariffs there is it accelerated, if didn't start, what I would say is sort of a once-in-a-generation trend

see change in global supply chains. So a real movement of the production as well as the sales of products worldwide.

Now, it didn't mean that China didn't stay the center of lots of manufacturing production, and indeed it still is there. But you saw especially China begin to search for other trade partners away from the United States. And the Chinese trade with the United States, and particularly Chinese imports, or Chinese exports into the United States, so that what we import from China is

that's gone down a significant amount, particularly as a percentage of overall U.S. imports. Indeed, China now sells more to Southeast Asia than it does to the United States or to Europe. So I do think the tariffs that were started under the Trump administration began some of this, you know,

sometimes people call it decoupling or de-risking or de-linking, but whatever the term is, you know, the movement away in terms of commerce between two of the largest economies in the world, between China and the United States. So we have seen long-term ramifications worldwide. And it's mean that other countries, like until recently, you know, the Mexicos or the Vietnams, the others were somewhat winners there because they had more access to, on more favorable terms, to the U.S. economy, which is still the biggest consuming economy in the world. Yeah.

You know, Kyle, if I look at a chart, you know, of the trade balance that we have with other countries, I mean, China still really sticks out at the top of the list, though, right? How should people be thinking about the kind of trade deficit that we have with China? Do you think it's unbalanced or bad for the United States? Do you think it's neutral? Do you think it's fine?

So I would say it's mostly neutral. We don't need to worry too much about what we call bilateral trade imbalances because all of us have bilateral trade imbalances with almost everything that we do.

If I go to McDonald's every morning and get an Egg McMuffin, I have a trade imbalance with McDonald's because they never buy any economic or educational services for me. And that's okay. I'm also slightly worried about you, Kyle, but it's fine. So I don't actually go to McDonald's every day. I just wanted to give that example. But nonetheless, so we do have a large trade deficit with China.

I mean, actually, in the US actually runs a large trade deficit just generally with with lots of countries. But the flip side of that is that, you know, you know, things have to balance out somewhere else. And what happens is that other countries are

invest in the United States. And sometimes it's through foreign direct investment. You have, you know, there are Japanese auto plants in the United States, there are Korean auto plants in the United States, there are German auto plants in the United States, there are Chinese factories in the U.S., right? And so, and they also buy, you know, U.S. stocks, they buy U.S. bonds and things like that. Mortgage-backed securities. Yeah, exactly, exactly. And so, the...

It could be problematic if we think that some of the trade deficit with China is artificial because they've subsidized certain industries and they have excess capacity. And I think they certainly do in some things, particularly in, say, steel. And in other cases where you might think that they have...

you know, run roughshod over some U.S. intellectual property, which they certainly have. But it's not clear that this is the correct way to fix it. And if you listen to what the Trump administration is saying, this isn't the stuff they're even bringing up. Now, maybe that's in the background somewhere with some of Trump's economic advisors, and they're like, well, how are we going to sell this to the people? Let's talk about fentanyl and migration instead. That may be. But I think that overall, you know,

Economists, we don't worry about these bilateral trade imbalances because it's fine if China has things that we want to buy and the US sells lots of other products around the world. The US is one of the top exporting countries in the world as well. But we don't have to sell everything like for like or one to one back to China. We sell it to other countries.

Shannon, one listener writes in to say, I don't understand the economics of trade surpluses and deficits. It seems to me that rich countries buy more stuff because they have more money. Poor countries buy little. If we get to the point where we're meeting Trump's goal of trade surplus, won't that mean we're a poor country?

Well, one way to reduce your trade deficit is to go into recession. That's true, right? If we buy, we don't have as much money at home to buy things, then, you know, we will stop buying as many things from abroad. So there is an element to that, for sure. You know, I mean, Kyle was just sort of talking about this and, you know, we don't.

When you think about bilateral relations between two countries, you know, sometimes countries have things that we want to buy from them, but they don't really want to buy the things that we sell. But other countries may want the things that we sell, right? We sell the United States is one of the global leaders in services. So lots of people want U.S., you know, educational acumen, you know, confidence.

Kyle's knowledge about economics. They want to be able to take his class either physically in person or perhaps online. And that is an export in the way we calculate these things around the world. Same thing with tourism, same things with all kinds of financial companies.

accounting firms, consulting firms, there's all kinds of things. NPR, if you're out there and there's, I know it's a nonprofit, but if you're out there, those things too are things that go across borders. So there's lots of things the United States does export out there and enriches both our lives here, but their abroad. But I think the real thing here on the trade deficit is

One of the ways to lower it is to stop buying things. And when that happens, it's really when the U.S. economy is shrinking more often than not. I mean, isn't there a role, though, for what we do to keep the dollar, quote unquote, strong? Right. And we have a financial system that wants that to be the case. But that also makes American exports less competitive around the world. Shannon, I'll send this one to you.

Yeah, that is true. So I think there's two things that are happening there. Yes, we keep it strong often because it's the reserve currency for the world and there's a lot of liquidity to it. But we have benefits there, right? If you go to other countries that don't have that luxury of having their currency be the currency that's easily traded. And, you know, one of the most volatile countries I would say here is, you know, Argentina.

Nobody's really buying the Argentine peso and using it as a store of value. And you see things like 200%, 300% inflation when they get into problem areas. And the United States, you've seen over the last couple of years us really worried when inflation got up to 5%, 6%, 7%. Imagine if it was over 200%.

So there's a huge benefit to that. It means that we can handle inflation. We can admit more debt than lots of other countries. We don't have to balance our payments quite as often. So there's a benefit there. But the counterpoint to this and almost the counterproductive side of tariffs, which we saw the first time around and we already just saw over the weekend with the threat of tariffs, is

You know, when you threaten tariffs, for instance, on Mexico and Canada, their currencies go down. They depreciate, which makes the dollar even stronger vis-a-vis our neighbors, because now they're exporting to the United States. What we're importing from Mexico and Canada will be a bit cheaper.

So, some of these moves, putting on tariffs and some of these punitive measures, will actually make the dollar stronger and make it even harder for U.S. exporters to go out there to the 8-plus billion potential customers that are out there in the world. Not just the higher prices on intermediate goods, which Kyle was talking about, where the parts that come into something made here in the United States will cost more for the makers here in the United States, but that stronger dollar will make it harder for them to sell to people all over the place. Yeah.

You know, Kyle, we're kind of batting around these ideas around tariffs and how they work and if they could work and what are the different components of them and the implementations. I want to make sure that we get to one key point, though, which is among economists who study these things, is there basically a consensus view that tariffs don't work? Yeah.

Yes, I think most economists will tell you tariffs don't work.

we can always write down some theoretical model with a bunch of assumptions where a tariff could be optimal in certain situations, but most of those assumptions don't hold in the real world and in practice. And it's essentially because what we typically observe is that

So when you put a tariff in place, the prices are going to go up, and that's going to make it more expensive for people to buy things. And they're going to be worse off to the benefit of perhaps some industry that's protected by that tariff. But the benefits to who's helped by the tariff are not enough to outweigh the losses. And then once we start talking about

retaliation by our trade partners, and once we start talking about all the other behind-the-scenes political contributions, and can I get an exception for this, or how about I can get a little protection for this instead, that also creates massive distortions and creates situations where there are favored industries and unfavored industries and consumers as well.

And most of that is a total loss. Might that be seen as a feature by some people in the administration rather than a bug, though? I think you may be correct about that. But that is the other reason why economists would not favor tariffs as a way to raise revenue for the federal government, because there's all these inefficiencies that creep in. If everybody is paying income taxes and we have tax brackets, and I'm well aware there's evasion

And there's fraud and things like that in the income tax as well. But it's much harder to work your way around, you know, purely through trying to get political favors and things like that.

Scott Horsley, I wanted to start spinning this forward a little bit. Obviously, in the first Trump administration, there were tariffs that were placed on Europe. That wasn't the first place the administration this time around went. But we can more or less expect that there will be some version of this that plays out with EU countries as well. Yeah.

We've already seen threats of tariffs on European countries. The president's talked a lot about doing that as early as the middle of this month. Now, whether those come to pass or it's another brinkmanship and concession and some sort of fig leaf that forestalls it remains to be seen. But no, I think President Trump is going to wield the tariff hammer, at least rhetorically, to countries all over the world, allies, adversaries, and everyone in between.

What do you think, Shana? I think that's right. I mean, I think he's found this as a hammer that works for lots of nails, whether they're economic nails or security or migration, the like. They're also something if you look back to not just Trump's first term, but you look back to the 1980s and early 90s.

you know, tariffs were always sort of part of his lexicon. He thought a lot about this as a very useful tool. And as you brought up, and of course, Kyle is right that it won't raise the revenue that you really need. I do think he sees it as a revenue source. You know, one thing I would just point out in the first Trump administration with the tariffs on China is, yes, it was a revenue source in some ways, right? The tariffs were coming in, but almost all of that money, almost 90, over 90% of that money was then used

given back or used to provide subsidies for farmers that were hurt because they had been exporting soybeans and other things to China, and those exports had dried up. So the actual revenue creation, whether it's $100 billion or $300 billion or all the calculations we were doing on the back of the envelope, there are a lot of sectors that are going to be hurt, and they might need help from the U.S. government because of the tariffs.

You know, one listener writes in to say, let's fantasize for a minute and imagine that by the next presidential election, Trump's tariffs and other nightmares have so angered voters, the elected Democrat or even an independent who tries to make things right with our allies.

What or how would the new president have to do to gain the trust of these allies and friends? Or is that just gone forever because these partners realize the voters can't be trusted? Kyle, I'll give you a kind of narrower version of that, which is, you know, the tariffs on China never sort of came off in this case. The ones on Europe did. So what are the, you know, let's assume we're, you know, we're not even a few weeks in. This listener is getting quite ahead of themselves. But what are the types of things that might

might that are going to stick for good and what things might be things that change.

Sure. So I think it's worthwhile to answer that question. I think it's worthwhile to look back at history. Prior to World War II, the United States raised tariffs to extremely high levels. There's a lot of people know the Smoot-Hawley tariff. So average tariffs were like 30% or more. There was lots of retaliation all over the world. And at the end of World War II, tariffs among most US allies and defeated adversaries at that time were quite high.

It took about 50 years for countries to multilaterally negotiate those tariffs back down to the levels that we're familiar with today. So once these things go up, it's like a ratchet.

It's very difficult to bring them down because there's going to be a vested interest behind those protective tariffs, industry by industry, product by product. Right. And so regardless of who, you know, ends up being president in four years, if we do increase tariffs quite a bit by the end of the Trump administration, and we've already seen this with the Biden administration, right.

They may stay in place for some time, and it will take a lot of time to rebuild credibility on the world stage and negotiate those tariffs back down. That's my prediction.

A couple listener comments here. One listener writes in to say, Americans like cheap goods. When you tell folks this shirt made in the USA is $30 and the same shirt made abroad is $8, they're going to buy the cheaper shirt. People talk the talk, but they don't walk the walk. And frankly, they can't afford to because of depressed

wages in this country. Another listener writes,

They got chaos. Daniela writes to say, "The guest mentioned that Trump's weekend news cycle resulted in a status quo. Mexico and Canada made considerable concessions to have the tariffs removed. Will someone please call a win a win?" And you know what? That may be all the ones we need to get to right now. Scott Horsley, very next thing you're going to look for in this realm?

Well, I guess we've all marked our calendars for a month from now to see if we have to go through this all over again with Mexico and Canada. But in the meantime, right, there's lots of other targets, the European Union and others. So it's a busy time for a trade reporter. Yeah, that's for sure.

We have been talking about the perspective and implemented tariffs of the second Trump administration in the context of our country's history with trade. We have been joined by Scott Horsley, economics reporter for NPR. Thanks so much for joining us, Scott. Great to be with you all.

We've been joined by Shannon O'Neill, who's senior vice president at the Council for Foreign Relations. She's the author of the books, The Globalization Myth, Why Regions Matter, and Two Nations Indivisible, Mexico, the United States, and The Road Ahead. Thank you so much for joining us, Shannon. It was my pleasure. Thank you.

We have also been joined by Kyle Handley, who's Associate Professor of Economics and Director of the Center for Commerce and Diplomacy that's in the School of Global Policy and Strategy at the University of California, San Diego. Thank you so much, Kyle. Great to be on. Thank you. Thanks to listeners for all your comments and your calls. I'm Alexis Madrigal. Stay tuned for another hour ahead with Mina Kim.

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