From LeverNews.com — Lever Time is the flagship podcast from the investigative news outlet The Lever. Hosted by award-winning journalist, Oscar-nominated writer, and Bernie Sanders' 2020 speechwriter David Sirota, Lever Time features exclusive reporting from The Lever’s newsroom, high-profile guest interviews, and expert analysis from the sharpest minds in media and politics.
Arjun Singh 0:03
Arjun from the levers, reader supported newsroom, this is lever time. I'm Arjun Singh Donald Trump likes to call himself the tariff man, and in the last two weeks, he's lived up to the name since his first term, Trump has been obsessed with American trade, and his tool of choice is the tariff these taxes imposed on imported goods were once the primary source of income for the federal government, but for the last half century, free trade has been the name of the game. But what's been the cost of free trade? Its advocates say it brings down prices, but does it also cost American jobs? That's Donald Trump's view, and it's one that's becoming more popular with people across both parties. Today on lever time, we're going to talk about Trump's tariffs and the strategy behind them. I'll sit down with Brad Setzer, an expert in trade, to unpack what Trump's master plan with these tariffs are and whether Trump's policy of choice is really as powerful as he thinks it is. You music. According to the American Constitution, the ability to levy tariffs belongs to Congress. But from the 1930s through 70s, trade acts were signed into law that empowered the executive branch to control tariffs. These measures were actually part of a long post war trend of lowering tariffs, reserving power to protect American industry from unfair and unbalanced trade. Here's President John F Kennedy, for example, talking about the trade expansion act of 1962
John F. Kennedy 1:31
increased exports and imports will benefit our ports, steamship lines and airlines as they handle an increased amount of trade. Lowering of our tariffs will provide an increased flow of goods for our American consumers. Our industries will be stimulated by increased export opportunities and by Freer competition with the industries of other nations. In
Arjun Singh 1:50
his first term, President Trump made ample use of tariffs, so much so that he instigated a trade war with China when he slapped attacks on imported goods from them.
Donald Trump 2:00
The word that I want to use is reciprocal. When they charge 25% for a car to go in, and we charge 2% for their car to come into the United States, that's not good.
Arjun Singh 2:15
And in return, China implemented their own tariffs on soybeans. But Trump loves tariffs. To him, they're the answer to America's economic woes. The logic being that implementing tariffs will, in theory, stimulate the domestic economy by making American made products cheaper in comparison to imported goods. The higher
Donald Trump 2:35
the tariff, the more likely it is that the company will come into the United States and build a factory in the United States so it doesn't have to pay the tariff.
Arjun Singh 2:44
But though he may say differently, Trump can't just implement tariffs. Whenever he wants to levy tariffs, under the trade acts, you need to wait 30 to 60 days for an investigation and comment period. So to get around this, the Trump administration declared an emergency the President
Karoline Leavitt 3:01
will be implementing tomorrow a 25% tariffs on Mexico, 25% tariffs on Canada, and a 10% tariff on China for the illegal fentanyl that they have sourced and allowed to distribute into our country, which has killed 10s of Millions of Americans. The
Brad Setser 3:20
legal basis was the President's emergency authorities. Now that authority has been used for sanctions. It hasn't been used for tariffs up until now,
Arjun Singh 3:29
that was Brad Setzer. He worked on resolving trade disputes as a senior advisor to the United States Trade Representative from 2021 to 2022 before that, he served as the Deputy Assistant Secretary for International Economic Analysis in the US Treasury, analyzing everything from Europe's financial crisis to how to get Puerto Rico out of debt. Now, Brad is a senior fellow at the Council on Foreign Relations, and he has a blog called Follow the money, where he's been writing about China's export economy. Shortly after these tariffs were announced, the administration actually paused at the implementation of blanket tariffs towards Canada and Mexico, giving the countries about a month to negotiate changes. But this Monday, President Trump imposed a 25% tariff on all steel and aluminum imports in 2024 the US imported six point 56 million tons of steel from Canada more than any other country. Canadian Prime Minister Justin Trudeau called this entirely unjustified. I had known about tariffs as an economic tool, but Trump's recent tariffs seemed more like foreign policy and an effort to solve geopolitical rather than economic issues, so I called up Brad to ask him, What are tariffs and how are they supposed to be used?
Arjun Singh 4:49
My understanding is tariffs used to be very popular American policy at one point, right around the 1860s through the 1930s in that era, what was the tariff achieve? Leaving and why did it eventually fall out of fashion? Well, I mean,
Brad Setser 5:03
American history with tariffs and trade restrictions goes back even further. I mean, the American Revolution was, in a sense, over British putting a tax on imported tea so that we would pay our fair share of maintaining the British Empire, and we rebelled against essentially a tariff, because we was viewed as a tax on Americans, a tax on our our essential imports. We're still Brits, I guess then, if we thought tea was so important that era of history is one where a lot of government revenues around the world are collected at the border. The easiest place to collect tax often is when something's coming into a port. And so many countries were getting a lot of their government revenue from taxes on imports and essentially on trade. But it's easy. It is easy to tax, and that was in an era before we had an income tax so the government didn't do that much, and it got a lot of its revenue from taxing imports. Now there are big debates, because, you know, there's a if you're getting most of your revenue from taxes on imports, the question of how big government should be becomes a question of how much you should tariff trade, and as you tariff trade more, there's less trade. So it becomes a policy to promote domestic industry, and we were often using it to try to promote domestic industry in the United States, rather than relying on, at the time, British imports. For most of the era after World War Two, we've been in an era of generally low and falling tariffs, until pretty recently.
Arjun Singh 6:40
Can you explain the logic and rationale around that premise? Why have we been in a low tariff period for such a long time? Part of it
Brad Setser 6:47
was the perceived lessons of the era before World War Two, during the Great Depression, trade contracted, and restrictions on trade went up, and the international economic order collapsed, and the international economic order, in a sense, collapsed a bit before we had a war, a World War. And so there was a desire not to return to the world of the 1930s in any sense. And since the world of 1930s was an era of of protectionism and shrinking economies, there was a desire to have more trade. On top of that, the US emerged from World War Two is the world's unquestioned economic power, and we viewed trade as a way of strengthening our alliances with temporarily weakened democracies that were inside our sphere of influence. And during this period of time, we were bringing down trade barriers. Now it's mostly trade barriers among democracies, amongst friends and allies. And then over time, that system worked well enough that a decision was made, and this is very controversial decision, to bring countries that weren't allies and weren't democracies into this system of of relatively open trade, most famously bringing China into the system, which was the big debate, was that going too far, because China's got a different economic system, different political system, and it's become a very powerful economy without necessarily treating American trade fairly. So that's, that's, you know, you kind of get that big debate over time, but it started off as it emerged out of a, basically a post world war two consensus that we didn't want to go back to the 1930s that that trade amongst friends created opportunities for both parties to do what they do best, that we gain From trade. We gain from Exchange in the in this sort of natural sense. If you think about trade with Canada, if you're in Minnesota or if you're in Maine, wouldn't you want to trade with the people live 20 miles away, who are just across the border? Well, why? Why wouldn't you want to have that kind of economic exchange? Why would you favor, in a really big way, bringing a good in from Texas just because it's in the continental United States, rather than doing a bit of exchange across the border. You
Arjun Singh 9:07
know, it was interesting that you brought up Canada's example. And so the North American Free Trade Agreement that has taken on this prominence, I would say, in messaging, particularly for someone like Donald Trump. He referenced it a lot on the campaign trail. You know, this idea that NAFTA really impacted places that were dominant in manufacturing and automobile manufacturing, and that when NAFTA was implemented, these manufacturers closed up shop in the US, moved abroad, created a lot of economic pain that has now become economic resentment. Brad, just that as kind of a an idea. What do you make of that argument that because of NAFTA, American manufacturing went into a steep decline, and that has led to a degradation of worker wages.
Brad Setser 9:53
So let's step back because we actually had a free trade agreement with Canada. Caf. Yeah, well, before NAFTA. So the change with NAFTA was not a change with Canada. It was bringing Mexico into this free trade agreement. And so I think, you know, the free trade agreement with Canada on its own did not lead to these kinds of dislocations or displacement. The free trade agreement with Mexico did have a bigger impact on the auto industry. There has been some shift in final assembly towards Mexico, at the expense of Detroit, and at the expenses, actually, of some parts of Canada. We've also seen growth in other trade with Mexico. So Mexico, because Mexico is wealthier, Mexican airlines can buy more Boeings, Mexico used to be supplying us with a lot of oil. Now we're actually supplying Mexico with energy, largely gas. So patterns of trade did evolve after NAFTA, Mexico had much lower wages in the US. So a lot of workers felt, I think, to some degree accurately, that that there was pressure, downward pressure on their wages because of competition with Mexico. All that said, the economic impact of trade with Mexico, which was expanded with NAFTA, is actually pretty modest. Our trade relationship with Mexico is generally pretty balanced. Yes, we import autos and auto parts from Mexico, but we export a lot to Mexico, and over time, Mexico generally has run a pretty balanced overall trading relationship with the world. I think the concerns around NAFTA are real, but a bit overstated. If you're in an individual town in the Midwest where GM which GM has a factory, and GM closes that factory because they're choosing to make their new models in Mexico, rather than in your community, you absolutely feel an impact. But there are other communities where other companies are opening up new facilities, are expanding and investing. Boeing being one example, Boeing in South Carolina, making 780 sevens that Mexican airlines buy, because Mexico is now trading more with the world, and it can afford to fly further and fly more people. So, you know, it's there's a mix. I think the really negative shock actually came much more with trade from China. And I think that's what the the economic literature supports that thesis as well. Could you
Arjun Singh 12:19
explain that a little bit more Brett, because I also saw that when China enters the World Trade Organization, that's where you really see the nosedive in terms of American manufacturing. So tell us a little bit about that sort of political moment, and then, yeah, what has the literature said after the fact was the impact of China coming into the WTO? So
Brad Setser 12:38
you can look at just any graph showing us industrial production, manufacturing output. And if you look at the years after NAFTA, after the Free Trade Agreement Mexico, so the late 1990s those are actually really good years for US manufacturing. There are even years which are really good for auto manufacturing. They're some of the best years for auto manufacturing. When you see manufacturing output really stall, it stalls after China joins the WTO. And you know, you can argue that China joined the WTO shouldn't have changed that much, because China was already granted typically after an annual vote, de facto the same terms as WTO members. That was the most favored nation debate. It took a vote every year. It wasn't settled, but it was pretty it was sort of expected that China's most favored nation status basically gets the same trade terms as any other WTO country would be renewed. But when China joined the WTO it provided certainty. China lowered some of its own barriers, so it was easier to set up shop in China, and you saw, empirically, China's exports just explode. And I think the key thing with China, as opposed to Mexico, is that China's overall trade started to become very unbalanced. China exports way more than it imports, not just from the US, but from the world and China was not just expanding its exports at an incredible pace, 30% year over year, but its trade surplus was going up at the same time it wasn't importing the same amounts. So you see manufacturing globally closed down in parts of the US and parts of Europe and migrate to China, and you see those communities in the US that at the time, specialized in producing some of the same goods that China was then producing. You see very clear falls in employment, and you see workers, low wage workers, when they're laid off from a factory, compete with other low wage workers in that geographic area, and so you see bad labor market outcomes for every low wage worker in that area. There are obviously gains. You know, San Francisco, New York, weren't big manufacturing centers, big services sectors, apples making tons of money, making phones and iPads in China and. And so for information workers in San Francisco, you just see a fall in your your cost of living, your cost of manufactured goods, the stuff you buy, goes down. Same for workers on Wall Street in New York, but for workers in set places that made furniture or made appliances or did electronics assembly, you really do see bad labor market outcomes. And you see overall, US manufacturing output really stall. So I do think that that was a cost. It's a cost, in my view, not of trade, per se, but of unbalanced trade. And the big center of unbalanced trade has been China and some of its neighbors. Well, you know.
Arjun Singh 15:38
And to rectify that, the Trump administration on the first run, and actually in an odd moment of consensus, seemingly with the Biden administration, they saw value of some tariffs, particularly on materials from China to bolster the domestic aluminum the solar sector now taking that idea that the US is implementing a tariff to protect maybe grow an industry, what is the approach and the logic to that, and how long would these tariffs need to be in play before you really see a significant change the industry? And I ask because, you know, we saw Trump threaten Colombia with tariffs and immediately revoke that. How long would a tariff need to be in place to see reasonable gains in, say, the solar sector. Solar
Brad Setser 16:21
is bloody hard. We've had plenty of tariffs and had no meaning. You get a few assembly jobs putting the casing around an imported solar cell to make it into a panel. I mean, I think this is one of the lessons of Trump's first trade war. If you're serious, you can't just tariff China, because Chinese parts can go anywhere for final assembly. The notion that China just does final assembly of parts made elsewhere is 10, if not 20 years out of date. China now makes a lot of the key components, and their specialty is much more the components than the final assembly, which can kind of be done anywhere, particularly in Asia, and it's often done in lower wage countries than China. And so if you really are serious, you actually need pretty broad measures. And the tariffs sometimes has to be pretty high. And I would go a step further, because we had pretty high tariffs on steel, 25% they were global. They weren't just on China, and you haven't seen a lot of investment in American steel manufacturing. You often need incentives, like what we did with the chips act to incentivize companies give them basically a nice tax break for capital investment, for putting in place the machines to make chips, so that you have both the little bit of protection and an incentive to actually expand output in the US. But it's hard. Once you lose an industry, it's hard to get it
Arjun Singh 17:38
back. Yeah, I mean, and now we're here, two weeks into Trump's presidency, he's unleashing these tariffs on China, Canada and Mexico. He's threatening 25% tariffs, and the case of China, 10% on top of what's already there. But He's tying this to a goal of reducing the tide of immigration and drug trafficking regarding fentanyl. And to me, is sort of a layman that feels like the way that traditionally, a government would use something like a sanction, the idea of using a tariff to accomplish more of a geopolitical policy goal. Just Brad your thoughts on the wisdom of using that and is there critical differences between imposing a tariff versus a sanction? I guess basically asking using a tariff as an economic stick. Is there wisdom to that? Because is this is a tariff supposed to be used as a stick?
Brad Setser 18:25
Well, tariffs are generally used as sticks. They're definitely sticks, not carrots, but they're usually used for economic policy goals, not foreign policy goals, and they're usually used for pretty narrow purposes. As a layman, you are 100% right that we typically don't use tariffs in this way. We don't use them as a as a tool of coercion, as a tool of trying to force broad policy changes, not trade policy changes on our partners. So this is, is absolutely a new use of tariffs. We've we this is, this is, this is a Trump special. This is Donald Trump. He loves tariffs. He is the tariff man he campaigned. He said very clearly that he thought tariffs were underused and sanctions were overused. So he's he's implementing that would actually imposing enormous tariffs on Mexico stop the flow of drugs to the US. No, it probably make it worse. Why? Because it'd be a trigger a recession in Mexico. Desperate people are going to do whatever they can to make a living. It wouldn't stop the flow of drugs, but it would. It does impose cost on Mexico, and Trump's theory of the case, one assumes, is by threatening these enormous costs, it will become, obviously in Mexico's interest to do what he wants. Now the difficulty is, sometimes he hasn't articulated, in my view, what he actually wants, particularly vis a vis Canada, he's articulated at least three different goals. The stated goal, you know, fentanyl, which is, you know, devastating. But there's actually no, very little coming from Canada. It's not a big source of supply, balancing trade with Canada. Well, our trade with Canada. Is actually already pretty close to balance. We have a manufacturing surplus with Canada. We have, don't have a manufacturing surplus of many others in Brazil, but by far our best trading partner, big trading partner, is actually Canada. We have relatively balanced trade. Canada doesn't run a big surplus, a big deficit with the World Canada. So gives that gives us. They sell us their oil at a discount because they don't have good transportation options to the rest of the global market. So Canada is not really a trade problem, my view, but that Trump views it as a trade problem because of the oil and that's leading to a small deficit that he views as intolerable. And then at times, and you know, this is enormously unprecedented, and one might even say a bit mad, suggesting that the way the solution is for Canada to become the 51st state. You kind of think it's a joke, but he says it says it many times. So if that's the goal, this is a really a 19th or 18th or 17th century use of of tariffs for territorial expansion. Do I support this? No, I think the tariffs on Canada are an overreach. The tariffs on Mexico, there are real problems at the border with Mexico. There are big problems with the drug cartels. The tariffs aren't the solution. I'm not opposed to tariffs on China. I think there's a question about what we want to tariff from China. Do we just want to do across the board tariffs? Do we need to be more targeted and selective? But as a matter of principle, I think there is a much stronger conceptual case that trade with China, because China doesn't run a balanced trade position overall, because China is trying to coerce American firms to produce in China, doing the tech transfer. I think there's trying to catch up, trying to displace American firms from high tech sectors generally, not, uh, there are real, legitimate issues, in my view, is trying to basically knock your best exports out of their market. They want to make their own planes. They don't want to buy Boeing. They want to make their own chips. They don't want to buy us design chips. They've already displaced auto imports out of their market. They're flooding the global market and clean technologies using subsidized production. There are real issues there. And as I'm I think there is a case for a tough trade policy towards China, but I think that's a separate debate, to be honest, than whether we want tariffs on trade with Mexico Canada, and I think Europe is closer to Mexico and Canada than it is to China. So I think, you know, that's another thing that's coming up. Trump says so. But I think we have to learn how to differentiate. We need to think about tariffs as a tool that is best used, not as a general source of foreign policy leverage, but to deal with specific concerns about unfair trade with a specific set of partners, recognize the complexities of global trade. If you tariff China, Chinese goods can still come in through Vietnam parts. Chinese parts will still be there. You have to think hard about those questions, but you can think hard about those questions and not slap 25% tariffs on your closest neighbors, your allies and your best trading partners. After
Arjun Singh 23:04
the break, we'll hear about the immediate effects Trump's tariffs will have and what retaliation from China could look like. We'll be right back.
Arjun Singh 23:21
What do you think are the industries and the more immediate impacts we would see from these terrorists? Would it do anything to bolster the microchip industry? For example? I know there's been reporting that sort of fast fashion imports from China may be impacted, but you know, for the economy now that these things might come into place, what are the more immediate effects that consumers and companies might see? Let's,
Brad Setser 23:45
let's look at fast fashion, because I think that's a good example. You know, the 10% tariff is not going to change the basic economics of producing fashion, doing the sewing that's going to stay in low wage economies. We're too rich to do our own sewing, unless you know you have a specialized tailor and you need something really fancy. That's not going to change. We're not going to see Textile and Apparel jobs come back to the US. We're just going to face higher prices. So consumers are just going to have to spend a bit more. You're going to pay a bit more for your fast fashion. Now, I do think that those tariffs are justified because fast fashion was coming in through the de minimis loophole. That loophole always felt wrong to me. If we're going to put a 10% tariff on clothes from China, we should put a 10% tariff on all clothes from China, the clothes that come in in a container ship, that go on sale in a physical store, should have the same tariff as the clothes that are flown in by shine and shipped direct to the consumer that never show up in a store. Both are mechanisms of providing people with the opportunity to shop for clothes, and essentially it's the same process. We shouldn't favor air freight over sea freight. Yeah, it should be the same. So for me, it's a question of of treating all forms of trade equally. And if that tariffs zero, because we don't want to penalize Americans for shopping abroad, that tariffs zero? If that tariffs 10, because we want to create a little bit of friction. Want to encourage, if there's a 10% tariff on China, but not on Mexico, would encourage Mexican or Central American garment production. That's also a reasonable choice, but it should be the same. The places where it gets more complicated are like something like chips. And chips is a really hard case. The difficulty with chips is we don't actually tend to import chips, per se, we import some, but we would tend to import phones. We tend to import computers. We tend to import goods that are made with chips. So if you just put a tariff on a chip, you can still import a laptop that is made of chips. You can still import a phone that's made of chips. It doesn't actually do that much. So if you really want to make America's chip industry great again, you can't just do it with tariffs on chips. You have to do tariffs on all electronics. That's a big step that would raise costs for everyone. The approach the Biden administration took was a little different with Republican support. In this case, the chips act tries to get chips production back in the US by making it cheaper to produce chips in the US, by giving a tax break for investment and basically mirroring some of the tax breaks and subsidies that Taiwan and China have provided over time. So there are a range of ways to make American chip production stronger. I do think that's an important goal. I think we know it's a strategic industry. Is one of the most advanced industries on this planet, and the fact that we in the United States have outsourced the cutting edge of technology, human technological achievement, to Taiwan and Korea and possibly, though not yet, China, that should worry us. We should want to be at the frontier. I think that, you know, I think there's a difference between garment production and making advanced semiconductors that are the the pinnacle of current engineering achievement. So I do think we need a policy there, but I don't think you can get there with just tariffs, and you have to have a more balanced policy
Arjun Singh 27:16
on part of the road to get there is now instigating and provoking, particularly China. They've said that they're willing to implement retaliatory tariffs. They did it one time before against Trump on soybeans, in this sort of back and forth, just looking at it as a tit for tat game of chicken between the US and China. You take Trump's argument, we can leverage the American market against China, if you're really talking about leveraging the power of markets against each other, does either country really have an upper hand against each other? It feels like a very Pyrrhic war, in ways for the US and China to try and see which one can outmaneuver each other with opening or closing access to their country,
Brad Setser 27:58
China does have scope to retaliate. The soybean example, that's one good example. In general, the more balanced your trade is, the more opportunities there is for retaliation. And China's trade isn't fully balanced. So I think we may be, in that sense, I'm not fully on the side that there's no no party has the upper hand. On the other hand, we have points where we actually benefit from sales to China. Soybeans, I'm less enamored with the oil stuff oil exports, because you can sell oil anywhere. You don't really need to sell it to China. Oil is oil we can sell to Japan as well as to China. But soybeans, beef, Boeing's where China did retaliate. And the hard part with China, and just just a recognition of reality is, you know, in order to block imports, because we're not a state run economy, we actually need to put in place tariffs, or a policy. China has the great capacity to retaliate without even doing any tariffs. Guess who buys Boeing's? China State airlines, their CEOs are all appointed by the Communist Party, because that's how China works. They take orders from Beijing. If Beijing says, Don't buy Boeings, you're not going to buy Boeings. China's soybean imports actually go through a couple two big oil seed importing companies, food importing companies that are big, state owned conglomerates. So they China can retaliate by just telling the state companies to stop bringing soybeans in. It's not a full free market. You need permission, and it runs through these state distribution companies. So China can retaliate with tariffs. They can retaliate without tariffs, frankly, and that's what makes dealing with China a bit difficult. They have so many tools of retaliation. I think Trump's by putting a, you know, it's it doesn't make sense economically to tariff Canada at higher rate than China. That that that actually favors China because your tariff, if you've done the tariffs on Canada and Mexico, you're penalizing trade with your. Neighbors. And the biggest competitor to Mexico, in some ways, is China. So you're with 10 on China and 25 on Mexico, you would have encouraged production to move to China, particularly we, you know, it's weird, but we have high tariffs on desktops and no tariffs on laptops. And so desktops were coming from Mexico. You put the 25% tariff on Mexico, we're going to buy Chinese laptops. Just kind of predictable stuff.
Arjun Singh 30:22
I'm just curious, Brad, do you have any associates or people you've talked to who work within the US Trade Office? Have they explained like a rationale or sort of what did they say is the end game and goal of this strategy? This is adjunct curiosity.
Brad Setser 30:36
Look, the answer is yes. I did briefly work at USTR in the first year of the first year of the Biden administration. I certainly know people at USTR. I know people on Trump's trade team right now, trade policy is not being made by USTR. It's being made by the White House. It's made by the President, and people don't understand, frankly, what he's trying to achieve when you're doing these kind of tariffs. Two weeks into an administration, before you have a confirmed Commerce Secretary, and before you have a confirmed USTR, you're not going to have a whole of government coherent approach. And I think we've seen that over time, Trump's team will have to figure out what they're actually trying to negotiate for, and part of that will be for Trump himself to figure out what his goals are, particularly for Canada, but also for Mexico and China.
Arjun Singh 31:21
Well, Brad, thank you so much for taking the time to talk to us. I have a feeling this won't be the last time we reach out to you, but it's great to have you on the show
Brad Setser 31:28
today. My pleasure. Happy to chat.
Arjun Singh 31:36
Thanks for listening to another episode of lever time. This episode was produced by Ariella Markowitz, with editing support from Joel Warner and Lucy Dean Stockton. Our theme music was composed by Nick Campbell. We'll be back later this week with another episode of lever. Time you.
Transcribed by https://otter.ai