Business Data Lab Podcast
The Case of Incoherent Tariffs
Feat. Chad Bown
SUMMARY KEYWORDS
Trade policy, tariffs, US-Canada relations, globalization, economic security, supply chains, automotive sector, inflation, trade agreements, economic cooperation, trade disruptions, trade diversification, economic impact, trade barriers, trade policy objectives.
SPEAKERS
Marwa Abdou, Chad Bown
Chad Bown 00:00
So there is going to be the question that all policymakers are going to face here, not just in Canada, but in all countries around the world, is, if the United States is serious about doing this, and they're not providing an off ramp, they're not providing if you do this, this is how we will remove the tariffs, then countries will have to evaluate for themselves whether the retaliation is actually worth it.
Marwa Abdou 00:23
Welcome to the business data lab podcast Canada's economy explained. I'm your host, Marwa Abdu, and that was none other than Chad Bowen, one of the world's leading experts on international trade policy. I was fortunate to sit down with him when he joined us as the keynote at our inaugural conference the case for Canada, which took place in Ottawa at the end of March. If you aren't familiar with Chad's research, a lot of it focuses on the motivation behind why countries trade and that fine line, that nexus of cooperation and dispute, pretty timely stuff. In fact, his research as a PhD student focused on some of the industries, steel manufacturing, that we're incidentally fighting about today. And yet, since his graduate studies, the United States enjoyed a relatively quiet period of at least two decades in terms of retaliatory and active trade policy. That all changed in 2016 I wonder what happened. And at that time, there was a lot of chatter about us entering a disruptive era of trade, some going as far as calling it deglobalization. Sort of feels like child's play compared to what we're dealing with today. Huh? I couldn't think of anyone better to have this conversation with Chad is the Reginald Jones, senior fellow at the Peterson Institute for International Economics based in Washington, DC, where he focuses on trade agreements, economic security and the impact of tariffs. He recently served as chief economist at the US Department of State under the Biden Harris administration and earlier as senior economist for international trade and investment on President Obama's Council of Economic Advisers, a prolific writer. Chad is the author of the book self enforcing trade developing countries and WTO dispute settlement. He is also the CO creator and host of the trade talks podcast, which I'm a big fan. Of His writing has appeared in The New York Times, the Wall Street Journal, the Financial Times, and most recently, he co wrote a Foreign Affairs article titled The incoherent case for tariffs with Douglas Irwin, where they argue that tariffs may sometimes target legitimate concerns, but they are rarely the most effective tool and often cause more damage than good. So that's exactly where we started the conversation. Of course, as always, we'll link all the important content in the show notes. Hope you'll enjoy listening to this one as much as I did recording it. Until next time.
If we are to learn from history, this America first might makes right stance. What do you think that means for the world that we're embarking on ahead, and how would you say it's going to impact our relationship Canada and the US his relationship going forward?
Chad Bown 03:22
Those are huge, huge questions. Let me try to unpack some of them, but I'm going to warn you, probably not going to provide a fully satisfactory answer to the whole thing, at least to start. So I agree with you entirely this has been, you know, the last 25 years or so have been a pretty globally impressive period for the United States, engagement with with the world, a lot of other countries, trade liberalizing in certain ways, oftentimes not bilaterally with the United States, but just opening up more generally. And I think the United States was, you know, was a big part of that. And the US Canada relationship, of course, dates back to the 1980s right? We've been free trade partners for a very, very long time now, and all of that kind of stuff had happened and been successful, despite some pretty big shocks to the global system, right? If you think back to 2001 we had 911 right? In the United States was really, really worried at that moment in time about not trade, but, you know, just its openness with the world and the fear of terrorism, right? The sort of existential threat. And then we had the global financial crisis in 2008 2009 and then we had the first Trump administration. And yeah, the first Trump administration, there were tariffs on steel and aluminum that we had to deal with. We had to renegotiate the NAFTA agreement between the US, Canada and Mexico. And the Trump administration put a lot of tariffs on China. But all that being said, you know, globalization really didn't end, and then we had sorry and forgotten, then we had the pandemic, right, and this massive global health crisis, and still, globalization didn't end. It's kind of kept chugging along despite the fact that there's been a lot of challenges. And so the question for today is, why are we were today? Maybe. Maybe, maybe we'll make it through this, this moment as well, and maybe we will. But I do think there's a number of challenges that the Trump administration is put putting forward this time around, which might make things a little bit different, right? And that's it's probably worth us trying to sort through. You know, what some of those challenges are?
Marwa Abdou 05:19
One of the things that you try to keep in mind is that we exist in a world that, for better or worse, is incredibly inter dependent. In the case of Canada, in the US, you are talking about decades of intricately integrated supply chains that have been knit together, I would say, intentionally and for a lot of good reasons. Decoupling that is not going to be easy, nor is it going to be something that can happen overnight, given that three quarters of the US and Canada's trade is made up of intermediate goods, you know, be it parts and components that flow across the border. How disruptive I mean, for somebody who doesn't understand or doesn't have a background in trade or economics, how disruptive when you talk about a 25% tariffs, how huge is that? And you know, with retaliation looming, particularly on the Canadian side, and businesses squeezed, if you were, you know, on the US, on the on the Canada team, and you were trying to advise some Canadian policy makers in terms of what to do, given what you know, what would you say is important in terms of insulating ourselves from these shocks.
Chad Bown 06:41
So to your first question, the potential impact of some of these tariffs could be incredibly disruptive for the exact reason you said so, if you think about the automotive sector, for example, the end of the day, you or I go out and we buy a car, but the engine of that car has things that go into it, which it's those things have other things that go into it, and those things that go into the things that go into the engine, that goes into the car, may cross the border multiple times. And what's being proposed here is that every time it would cross the border, it would be subject to a 25% tax on the on the whole thing, right? And a lot of these industries aren't operating at profit margins that can kind of sustain that, right? There's increase in costs adding a national 25 or 50% or 75% or 100 100% doubling the cost of the thing, right? They're not all the big, giant multinationals. A lot of these are smaller suppliers that feed that feed these inputs into the bigger companies. And so what happens if all of a sudden, their costs have doubled or tripled, and they don't have the profit margins to be able to withstand it? They're not big enough, maybe they don't have the financial reserves to be able to withstand it. How quickly does this begin to shut some of those companies down, how quickly does it begin to cause them to have to lay off workers? Right? The analog or the kind of, maybe the most recent experience was not about tariffs for a sector like automobiles, but I think back to the pandemic. When the pandemic hit, the basic response of everybody was we got locked at home, yeah, and the automakers saw that, and they said, oh gosh, nobody's moving around anymore. We don't need to be making as many cars, right? So they said, Well, if we're not making as many cars, we don't need as many inputs. That includes semiconductors. We don't need as many semiconductors before. So they pulled their orders of semiconductors. Then basically, when the travel restrictions got removed a month or two later, the car company said, Okay, we want to start producing cars again. We need semiconductors. They went back to the semiconductor companies and said, We need chips. Those companies said, we've had so much demand from our chips, from everybody that's staying at home and needs the chips for laptops or video game consoles or we don't have any chips to give you, car makers and the car makers, because they couldn't find one chip, had to stop production, had to furlough workers, right? And so that wasn't tariffs. That was just missing one part.
Had a big, big negative impact on on workers in the industry for a period of time. So these can be incredibly disruptive, and we've never seen anything of like what's being proposed actually implemented. So we'll have to see what, what, what the reaction is by the industry, but it could be incredibly disruptive. Now, to your question for policy makers, what should policy makers in Canada do? That's a tricky one, right? Because the initial gut reaction is to meet, you know, force with force, to say, well, we're going to stand up, and if you're going to impose tariffs, then we're going to impose tariffs. But the reality is, as an economist, tariffs also cause self harm, right? They're costly to me. I'm shooting myself in the foot a little bit. I may be shooting you in the in the foot too, but I'm hurting myself. And so there is going to be the question that all policymakers are going to face here, not just in Canada, but in all countries around. The world is, if the United States is serious about doing this, and they're not providing an off ramp, they're not providing if you do this, this is how we will remove the tariffs, then countries will have to evaluate for themselves whether the retaliation is actually worth it, or is the retaliation just going to impose such additional costs on me, and they might not benefit me at all, because the United States Trump administration might not be willing to do something for me that they decide. Maybe it's just not worth it for me to actually undertake the retaliation. So we'll see. I don't know. This is where we're still waiting to understand better what the underlying objectives are of the Trump administration, and if there are things out there that policymakers here in Ottawa or elsewhere in the world might offer to them to get them to dial back some of the tariffs, right, maybe that's one way to go. But if that's not going to be the case, then the question of, I think, do I retaliate or not, becomes a becomes a very different one.
Marwa Abdou 10:57
You know, one of the things that I think about that is perhaps often missed or maybe understated in this conversation, is the role of technology. So much of the globalization and automation that took place in the 90s onwards and that led to offshoring and outsourcing caused these broad based disruptions, particularly in the industries that we're seeing some of these tariffs apply to, or the industries that are targeted. In a recent interview, Richard Baldwin said that this automation undermined the household incomes of people who work with their hands and turbo charged the productivity of those who work with their minds. This, of course, led to this great divergence in income inequality. We just published data today at the business data lab that showed that the US cities that are located in states won by Trump would be most hurt by Canadian the tariffs that are levied on Canada. The US, it seems, from a very objective standpoint, hasn't really centered workers and left them behind in the malaise, I would say, since the Clinton era, whether you're a Democrat or a Republican, what are your thoughts on that?
Chad Bown 12:25
So to tie that into the question of how that relates to what the Trump administration is doing today, I mean, I think the President, in the way he talks about, and has historically talked about, the US economy and his views on trade is very much through this nostalgic lens of the way the United States used to be in, say, the 1950s where a middle class job was working on an assembly line and making physical things right. And so there's a sense there that, well, if we could just, we want to go back to that. That was a happier time, and it would be great. And the way to fix it is to just get more manufacturing here in the United States, because with that, manufacturing would come a lot of those jobs back, right? And I think the challenge is with technology. That's really unlikely to be the case for multiple reasons the United States and I think Canada a little bit too, as industrialized, high income countries, their workers are relatively expensive. So even if you erect trade barriers, right, which say to the American public, because of tariffs, you're not going to be able to buy imported versions of these goods. You're going to buy the versions of them that we make here in the United States? Yeah, Americans like stuff. We will need televisions. We will need t shirts. It's possible they may be manufactured in the United States, but they're gonna be a lot more expensive, and companies are gonna try to figure out how to make them, you know, with as low a cost as possible. And oftentimes that's not gonna be with workers. It's gonna be with technology. It's gonna be with robots and automation. Robots and automation, right? And so, yeah, you may get the manufacturing of the goods that comes back, but it may not be with the jobs and the workers that you want. And if so, if that's what your underlying target is, right? We're really worried about workers that I don't think tariffs are necessarily the right policy to help you achieve that objective, so
Marwa Abdou 14:22
much of that the reasoning behind these tariffs, as you mentioned, has been the protection of American workers and industries. We've seen this play out before during the first term. Recent estimates by the Peterson Institute, by your colleague, Kimberly Clausing, suggests that 25% tariffs on Canada and Mexico, and 10% added tariffs on China would increase the cost for the average American family by about 1200 US dollars. That's with the carve out of Canadian energy at a lower 10% rate. Then, when you factor in the percentage increase on China and include the increase in prices of competitive goods, you get a number that's closer to $2,000 that's not an insignificant cost in this day and age, on an American family, on a on people. What are the key economic lessons that the Trump administration should have learned from the first term and the first round of tariffs that they perhaps didn't and do you think that the we're going to see greater and more longer lasting harms to economy, to the US economy and the Canadian economy, especially if you factor in those growth impacts.
Chad Bown 15:45
The way I think about it is workers are they have kind of a two fold interest. It's it's their jobs and their wages and their income, but it's also the prices they have to buy, the prices they have to pay for the things that they want to buy, to be happy, to make their families happy, and all of the potential gains that even if you could bring back this manufacturing that would allow additional jobs and for certain types of workers, which is, again, is up in the air, because a lot of these things, maybe it's technology and robots that makes the things, and not necessarily workers, if it's significantly at higher costs, as thank you for pointing out that that work that Kim clossing has done, and I agree it's fantastic, that kind of erodes the reason why you did it in the first place, right? And so I think that's a real, real big concern. It's not just the jobs, but it's also, you know, how much more you're going to have to pay as a consumer to be able to support having those jobs here in the United States or in Canada or anywhere that might have those kinds of those kinds of tariff barriers in place. So again, it kind of goes to the question of, there's a balance here, right, right? And I think what we're interested in trying to figure out this time around is whether the tariffs that the Trump administration will be imposed have imposed so far. And you know, they've announced many, many tariffs, so it's hard to keep track of them all, but some of the ones that they've imposed are much more consumer facing than the tariffs they imposed the first time around. The first time around, it was things like steel and aluminum inputs. A lot of the tariffs on China were on intermediate inputs, things that can ultimately feed into higher prices for consumer goods, but that have to make their way through a supply chain. Companies buy the things they then, you know, put that into their machines, and they used to make something and eventually they'll charge a markup to consumers, but some of it will come out of their profits, and it might be a couple of months before they pass. It's much harder for consumers to observe.
Well, these tariffs that have already been imposed on China, for example, 20 percentage points in the first seven weeks of the administration, are now on iPhones and video games and toys, things that were exempted the first time around. Maybe consumers are going to notice those if he actually goes forward and imposes the tariffs, as he announced he was going to do yesterday, on imported cars, vehicles, whether they're from Canada or whether they're from Europe or Japan or Korea, right? That's a finished thing. Consumers are going to see that quicker than they did in the first administration. So, and now we're much more sensitive in the United States, and I think here in Canada as well, to inflation, the experience that we saw, you know, during during the pandemic, the energy shocks coming out of the Russia, Ukraine conflict, have made us all a bit more sensitive to to inflationary concerns. If inflation starts to come back because of these, these tariffs, I think it's a different political environment as well. So anyway, a lot of different things with these rounds of tariffs for, I think, the administration to keep track of.
Marwa Abdou 18:57
So one of the things that Canada has talked about for a very long time is kind of diversifying its trade portfolio, but we remain incredibly dependent on the US in terms of our trade. At the pace that we're seeing things unfold, it's happening so much faster than our ability to actually implement policies that are going to be able to protect us in a way. What are some practical steps that you think Canada can take that are realistic in terms of diversifying without harming existing ties to the US even further?
Chad Bown 19:38
So first, let me say it is really, hard for Canada to be able to diversify for a number of fundamental economic underlying reasons, and the first is just geographical proximity. So one of the kind of laws of economics and international trade is it's just really easy. We. See this as a ubiquitous outcome everywhere in the world, all else equal, for you to trade with countries that are right next door, right? So the fact that we're right here, right? It just makes it really, really easy to trade with the United States. And given that the United States is such a large market, it makes it really attractive for Canadian companies that are trying to achieve scale that are trying to get bigger. They're trying to lower their costs, if they can just sell more somewhere else. To look at the United States as an attractive place to go, and then once you start to look at other places, now they're more expensive, they're farther away.
There's maybe language issues, cultural barriers, lots of things like that. The other thing, I guess, is to think about what Canada is good at, right, and what it has that the rest of the world wants. Especially Canada has tremendous natural resources and commodities, whether it's in the agricultural sector or the energy sector, but a lot of that to get that instead of going to the United States over inland routes say, if you want to get it to Asia or to Europe, right, you need new infrastructure to be able to pull it off. And infrastructure requires the government getting involved, and those are multi year projects, and those are expensive, and those require governments taking resources out of this bucket, which maybe is for health or education or something else, and putting it toward the future of trade. So they're going to require long term decisions and long term commitments by policy makers, in addition to companies and industry, to make those kinds of things happen. And it's just not something that you can do overnight. Again, I'll go back to the challenges that you know, the United States, Canada, and collectively, our partners and allies, when I was in government, were were working on together not that long ago. And it was a similar issue, trying to diversify away from China. It's really hard. You know, when China is such a big market and has, you know, a dominant pole for a lot of industries, it's really it could be costly to take the steps necessary to find alternatives out there, so it requires a very deliberative effort, and is not something probably that is just going to happen overnight.
Marwa Abdou 22:13
I want to go back to where we started the conversation, as a student. So much of I think reading your work and following your career, what motivates you is looking at these lines of cooperation and disruptions and the motivation behind them, and how you can get countries to fixate on the gains rather than the losses in order to drive cooperation. If Chad the student, was looking at this moment in time which we can all collectively agree, there is an understanding, and it feels almost surreal that we are witnessing a historical moment in time. You know, I personally think that this is going to be a period of time that is going to inspire a lot of research, as devastating as it will also be on so many lives, and it will have real, real, palpable effects. What would you what would Chad the student be thinking about as he's kind of taking a front row seat with with what you had studied about what's unfolding.
Chad Bown 23:26
So first is, is worry and and that's that's an obvious one, because the current US administration says a lot of worrying things. And I'm not going to deny that from somebody who is interested in the question of trying to get countries to achieve as much cooperation as is sustainable, right. And the reason why to do that is, I mean, maybe I am sort of a kumbaya kind of guy, but I also, as an economist, think that there's huge efficiency gains to figuring out how we cannot impose policies that, what we call, you know, impose negative externalities on each other. If I agree to not do this and you agree to not do something else, we're both better off because we're both not imposing costs on each other. There's benefits to cooperation that are more than just, you know, the like, Let's hug a tree kind of thing, right? There's actual economic benefits there that it's, you know, in our in our both best interest, if we can just kind of figure out how to do it. The challenge I have, I think, with the current administration, is there's a lot of things that they're saying in potentially doing that are antithetical to that absolutely, but also it's not clear where they're heading us and and so I think there is the there's so many missed opportunities for cooperation that, you know, that's one of the things that I I am very worried about. That being said, even in the absence of this administration, there are fundamental challenges that I see for the United States and its trade relationship with other countries that have to be. Addressed, and this was going to be a moment of change, regardless of who the US president was going to be, and I think that's something that we can't we can't forget, right? So as a student, where does that leave me? Well, there's going to be a lot of research to help understand what drove us to this point, obviously, but then what happens from here and helping us make sense of it all? My hope is that, if history is any guide, this may be a period of extreme disruption, fair, but even after the first Trump administration, there was a well, what are the lessons learned from that, and how can we do better in the future? You know, I think the United States really took it upon itself and the Biden administration. And this was not me. I came into the Biden administration, you know, well, after all of this had taken place, but was, how do we repair the relationships that had gotten lost during that first administration. But how do we also, at the same time, have frank conversations with countries so that they better understand what the real underlying issues are, that are that make Washington so worried at the moment, there may be a moment for us to do that again in the future. Politicians come and they go in. In our democracies, we get the chance to vote them out if we disagree with their policies or we disagree with their their performance. So that's what gives me hope. So long as we retain democracy, and again, I know that's under challenge as well, we can remain potentially optimistic and see that, you know, we can make the world a better place at some point again in the future, and learn from the mistakes that we've made in the past. I
Marwa Abdou 26:49
think I speak for everybody. The words that you shared just now, I think allow us to to take some comfort in knowing that there is a silver lining that we are going to make it through some some way, somehow, I wanted to give you the floor to share, perhaps any words from somebody who is living in Washington right now and seeing things unfold, and is also equally keeping tabs on the news. What would you say to folks in Canada who are listening?
Chad Bown 27:28
I would say that time that I've been able to spend in Canada, I've learned a lot, and I appreciate that. I would also say that it's not as if Washington is at a moment right now where there's a well understood master plan in place that you're just not understanding. I think Washington is at a place, at the moment, where it's still a bit confusing to all of us what the underlying objectives of this particular administration are, especially when it comes to trade policy, because they, again, they have mentioned using trade policy to achieve many, many different objectives, many of which are inconsistent with each other. So which, which is the one that they really have in mind? We still don't know. And so if Canadians are wondering what's going on, you're not alone. There's a lot of folks in Washington that are, that are wondering that as well. But the other thing is, for Canadians to realize that you do still have a lot of fans in Washington and in the United States, and especially for your knowledge about economics and about international trade. The thing that impresses me most when I show up every time here in Canada is the humility that I feel because I feel like the least knowledgeable person in the room when it comes to international trade. So thank you, Canada.
Outro 28:45
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