Reporting on Tariffs
Brad W. Setser, Whitney Shepardson senior fellow at CFR, discusses the recent tariffs imposed on goods from Canada, China, and Mexico and implications for American consumers. The host of the webinar is Carla Anne Robbins, senior fellow at CFR and former deputy editorial page editor at the New York Times.
TRANSCRIPT
FASKIANOS: Thank you very much. Welcome to the Council on Foreign Relations Local Journalists Webinar. I’m Irina Faskianos, vice president for the National Program and Outreach here at CFR.
CFR is an independent and nonpartisan membership organization, think tank, educator, and publisher focused on U.S. foreign policy. CFR is also the publisher of Foreign Affairs magazine. And, as always, CFR takes no institutional positions on matters of policy.
This webinar is part of CFR’s Local Journalists Initiative, created to help you draw connections between the local issues you cover and national and international dynamics. Our programming puts you in touch with CFR resources and expertise on international issues and provides a forum for sharing best practices. We’re delighted to have over a hundred participants from thirty United States and U.S. territories with us today. Thank you for taking the time to be with us. As a reminder, this webinar is on the record. The video and transcript will be posted on our website after the fact, at CFR.org/localjournalists. And we will also send out the link to the video and transcript.
We’re pleased to have Brad Setser and host Carla Anne Robbins with us today to talk about reporting on tariffs. I’ve shared their bios with you, so I’ll just give you a few highlights. Brad Setser is the Whitney Shepardson senior fellow here at CFR. His expertise includes global trade and capital flows, financial vulnerability analysis, and sovereign debt restructuring. Previously, Dr. Setser served as a senior advisor to the United States Trade Representative. He’s also author of CFR’s blog, Follow the Money. Carla Anne Robbins is a senior fellow at CFR. She also serves as faculty director of the Master of International Affairs Program and clinical professor of national security studies at Baruch College’s Marxe School of Public and International Affairs. Previously, she was deputy editorial page editor at the New York Times and chief diplomatic correspondent at the Wall Street Journal.
So thank you both for being with us. Carla is going to have a conversation first with Brad and then we’re going to turn to all of you for your questions and comments. So you can either put them in the chat or you can raise your hand. And we’d actually prefer for you to raise your hand so we can hear your voice. So with that, Carla, let me turn it over to you.
ROBBINS: Irina, thank you so much. And thanks, Brad, for doing this. And thanks to everybody for being here. I would say that there would have been a time in my life when I would have been amazed that people would have shown up for a conversation on tariffs, but this is obviously a hugely hot topic right now. And one that is shaping our local communities, shaping our national economy, and shaping our global economy. And it’s a complex topic, although in many ways it’s a very simple topic. I go into my students right now and I say: What are tariffs? And they all go, it’s a tax on us. So I think they get it. I’m not sure the American public gets it. And I think we have a challenge to explain it.
So let’s start with the basics. There have been so many threats, and some reprieves, I really feel like we need a scorecard to start out, Brad, if you wouldn’t mind. Who has President Trump already imposed tariffs on? And what comes next? Because it seems like there’s a lot of deadlines in the beginning of the month to come, but there’s several that are already in place already, right?
SETSER: Yeah. I mean, I think there are, broadly, three big tariffs that are kind of in place. The first—and this is all part of the same tariff action, or under the same legal theory—but there was a so-called International Emergency Economic Powers Act, which is IEEPA, which is traditionally used for sanctions. Never been used for tariffs before. But there was an emergency declaration around fentanyl. And that designation was the basis for threatening and imposing tariffs on China, in the first instance. China now has a 20 percent tariff. Not because of bad Chinese trade practices, at least not in principle, but because of China’s failure to do enough to halt the production of fentanyl in China, the production of precursor chemicals in China.
And then, as part of that same action, the IEEPA determination, tariffs were threatened and withdrawn, and—or, partially withdrawn—on both Canada and Mexico. There was a parallel determination, emergency declaration, around migration. So it’s all kind of part of one action. And sort of confusingly, the 25 percent tariffs were threatened on Canada and Mexico, and then those tariffs have actually gone forward but only for that portion of trade with Canada and Mexico that is not compliant with the U.S., Mexico, Canada Free Trade Agreement, the USMCA. And that’s a small fraction of total trade. It’s a bigger fraction than you might think because some companies and just—and industries hadn’t bothered to certify that they were USMCA compliant. For a lot of categories global tariffs are zero and USMCA tariffs are zero, so there was no particular advantage until now to certifying USMCA compliance. But there are some tariffs on Canada and Mexico, as a result of that action, in place now. But the bulk were deferred.
And then there are tariffs on steel and aluminum that were expanded, in a sense. And the tariff on aluminum was raised from 10 to 25 percent, pursuant to a trade action that Trump—President Trump initiated in his first term, a national security Section 232 action. And so the exemptions that have been granted for many trading partners, both under Trump and under Biden, were repealed. So the tariff rate quotas went away. It just became a flat 25 percent tariff on steel. The tariff on aluminum went up from 10 to 25 percent, and exceptions and exclusions were taken away. And then the definition of what constitutes the products under the tariff was expanded, to include products made heavily with steel or products made heavily with aluminum. So a meaningful expansion. Particularly significant for Canada, because the bulk of U.S. aluminum imports come from Canada. They don’t come from China. So going from 10 to 25 (percent) matters.
And then there’s a whole slew of potential tariffs that are stacked up for April 2. So April 2 sort of has become the big new deadline, deliverance day, something—I mean, I guess it’s tariff day. There are at least three separate tariffs that could converge on April 2. So the first is that the broader tariffs on Canada and Mexico, under the fentanyl and migration emergency, were pushed back for a month. But unless there’s another decision to push them back further, they come into full force on April 2. Separately, the president has talked about sectoral tariffs in autos, in pharmaceuticals, in semiconductors and electronics. Those sectoral tariffs, at a minimum, the president could announce new Section 232 national security investigations into those sectors.
And just, you know, a bracket: IEEPA, the sanctions authority, is essentially a national emergency or often a national security tool. It is one national security path to tariffs. It is a very expansive law. It historically has been used for sanctions, but it gives the president the ability to regulate commerce. And there’s an open question about whether regulating commerce extends to imposing taxes on commerce, which may or may not be litigated. We’ll see. And then separately, there is a very clear authority to raise tariffs on an industry, if that industry is judged to be critical to national security. If the U.S. production is judged important to national security. And that authority was used with the steel and aluminum tariffs, and it could be used for other sectors.
That authority doesn’t allow you to move as quickly as the sanctions authority, as IEEPA. So what you would at minimum be able to do is put out a report saying that there’s a national security threat to the U.S. industry in those sectors. And perhaps there’s a theory of the case that lets you immediately impose tariffs, although traditionally after the investigation there would be a period where there’s a so-called notice and comment, where people would put forward their arguments about the specifics. And so you kind of have the IEEPA tariffs on Mexico and Canada. You have sectoral tariffs on autos, pharmaceuticals, and electronics. That alone would be big.
And then on top of that, there’s discussion of introducing reciprocal tariffs, which is the new Trump concept. Reciprocal tariffs could just be if someone else has a tariff on our exports, we will put an equal tariff on imports of the same product. Now you can ask, why would we want to do that? I mean, in some countries, you know, they may have a very high tariff on a good that the U.S. doesn’t export much of, and we may be importing a lot and have a low tariff. And so it may just amount to a tax on us because it’s not something we actually export. But it would be an enormous change. Just doing that alone would be an enormous change, because current trade law is based on the broad principle that we have one tariff for most countries for a given product, all autos face a 2 ½ percent tariff, with the exception of those countries for which we have a negotiated free trade agreement, where the tariff comes down to zero.
But the basic idea is that in order to determine the tariff you don’t need to know the country of origin, you just need to know the product. And then actually for many products in the industrial space—electronics, pharmaceuticals—the tariff is zero. So it doesn’t really matter where it comes from. But the idea, so-called most favored nation status—which is basically if you’re a member of the WTO and you make product A, you will be tariffed at the same rate absent a free trade agreement. That rate is uniform for the U.S., but it will not necessarily be the same rate the U.S. faces when it exports. U.S. car exports to Japan have zero tariffs. We have 2 ½ (percent) on Japan. U.S. car exports to Europe have a 10 percent tariff. We have 2 ½ (percent) on Europe, and then 25 percent for light trucks. So it’s not symmetric.
So one on proposal would just be to make it symmetric. But the proposal the Trump administration has put forward is partially to make it symmetric, but also to potentially introduce tariffs in response to other countries’ national consumption taxes, value-added taxes—things which are not traditionally thought of as discriminatory tariffs on the part of the country imposing them because they’re uniform. The VAT applies, or a consumption tax applies equally to imports and domestic production. But the Trump administration has argued these are impediments to U.S. exports. We’re going to respond with tariffs to limit access to our own markets, and then also to non-tariff barriers, and potentially undervalued currencies.
As a result, the reciprocal tariff that is going to put in—that is supposedly going to be put forward on April 2 wouldn’t actually match other countries’ tariffs. It would probably be a lot higher in many cases. So that’s the last component. Now, because all of these actions are being undertaken using presidential authority—
ROBBINS: And, I’m sorry, Brad, agricultural products also.
SETSER: What do you mean?
ROBBINS: Aren’t there tariffs coming on agricultural products as well?
SETSER: Sure, but in agriculture we already have tariffs, and most of the world also already has tariffs. And so—and then we have tariff rate quotas. So, you know, you can—so there’s a bigger question here, which is will the reciprocal tariff be one tariff per country across all their products, independent of their levels of protection? So—
ROBBINS: I just raise it because the White House is also talking about—they haven’t said what—but they also talked about how they might come up with a different rate for agricultural products, but it’s—
SETSER: You know, look, I mean, you could do whatever you want. And agricultural tariffs facing our exports are generally a lot higher than industrial tariffs facing our exports. And to be fair, ask the Mexicans, we also protect—or ask Brazil—we protect our agricultural sector, different sectors, much more than we protect our industrial sector. Our sugar sector is very protected. We have some protections around vegetables. So the norm, I would say, in industrial goods is zero or low tariffs. The norm in agricultural goods is not zero or no tariffs.
The norm is some restrictions and what are called tariff rate quotas, which limit—allow some goods to come in, and then any exports above the quota faces a tariff. So ag gets real complex. So you could have two tariffs, one for industrial one for ag for a country. And those tariffs, both on ag and on industrial goods, won’t necessarily match other countries’ tariffs, because we’re introducing these other policies. Particularly the value added tax, because in Europe that’s around 20 percent, and Europe’s tariffs are generally pretty low. So that would be a big—a big difference.
Last point is just that all these things are being done under presidential authority. They’re not being done—or delegated authority, because Congress has passed various laws that allow this. But they are not being done through an act of Congress. There’s no—all these deadlines are self-created, self-imposed. They can always be changed. And that is a big part of the dynamic. The administration is insisting that they’re serious about April 2, and I think they are, but there’s nothing that requires them to act on April 2.
ROBBINS: So President Trump imposed tariffs in his first term, a lot focused on China, and campaigned on the notion that he got China to pay us billions and billions of dollars. And, obviously, it was a tax on—a tax on Americans consumers. What was the impact on the U.S. economy? And can we learn anything from that? Or was it so much smaller than what he’s talking about now that there’s not a lesson to be learned from the experience of the first term?
SETSER: So the China case started off as tariffs on fifty billion (dollars) of U.S. imports from China. Total imports were about 500 billion (dollars), ballpark, let’s say 3 percent of U.S. GDP. So not nothing, but initially you’re only putting tariffs on a fraction of that trade. And 25 percent on fifty billion (dollars) works out to being a pretty small number—$12 ½ billion dollars. Our economy back then was 23-24 trillion (dollars). Now it’s 30 trillion (dollars). It’s a drop in the bucket. You don’t really feel it. That expanded first to be in tariffs on 250 billion (dollars) from China, and then 370 billion (dollars) on China. And the last tranche was at 7 ½ (percent) not 25 (percent). So, you know, the average increase in tariffs was about 15 percent, but it was divided. You know, there’s just—you know, ironically, phones, which were just basically coming from—they were Apple’s contract manufacturers in China, didn’t have any tariff. A lot of consumer goods got a 7 ½ percent tariff, and a lot of industrial goods got a 25 percent tariff.
What you see—and, like, if you do the sum total of the just pay it costs of these tariffs, it was about a third of a percentage point of U.S. GDP. The full tariffs that were threatened at the beginning of March on China, on Canada, on Mexico, would have been a percentage point of GDP. So three times bigger. The tariffs on China were imposed in waves. They weren’t all imposed at once. So you never really had a discrete shock. You had a series of small shocks. What in general happened is—and then China, of course, retaliated. And that, we’ll—I’ll discuss both the impact on imports and the impact on exports. The impact on imports was that China’s currency did depreciate a bit, which arguably softens the blow. But when you look at the price at the border, it didn’t change that much. So in general, prices on imports from China didn’t fall that much.
And so if there was a 25 percent tariff, the net increase in costs that the importer faces, you know, maybe the price fell from 100 to 99, but then you had a 25 percent tariff, so you’re paying 124, so there’s a 24 percent rather than a 25 percent increase in prices. But it’s still mostly being felt by the importer. The exporter didn’t lower prices enough to absorb a meaningful fraction of it. Just an empirical question. And empirically there wasn’t a fall in prices. The importer who has to pay the tariff, it’s a tax paid by the American importer, they had to pay it. And then there’s some research that suggests that a lot of the cost was absorbed by the importer, and that many companies absorb the cost internally, and much less was passed on to final consumer prices.
So you didn’t really see a big impact on inflation. You also saw other countries in Asia, their currencies went down when China’s currency went down. So the price of imports from other countries went down, which helped limit the impact on inflation. You did see a fall in imports of those products that were tariffed. Pretty big. You know, if a ten—if you put a 25 percent tariff on, over time trade in that go to probably have fallen by about 50 percent. So big. And then you see a really big shift in imports, because it’s actually pretty easy to get around a direct tariff. You ship the disassembled parts to Vietnam. You do assembly in Vietnam. It comes in tariff free. So you see a big increase in imports from Southeast Asia, from Taiwan, from Korea. A lot of people say Mexico too, but I actually don’t see it in the data. I think Mexico is a different dynamic. That’s one place where I differ a little from the consensus.
So you see a rerouting of trade, very clearly. You don’t see an overall fall in trade. On China’s side, because they’ve devalued their currency, because of some of the other changes in China’s economy, overall exports actually go up. There’s no big hit to China’s economy. Their export growth actually accelerates. China’s exporting a trillion dollars more to the world now than it was then. It has a bigger trade surplus. So it didn’t dent China’s economy because of some of the offsetting actions. And then China imposed its own tariffs. In some cases, China makes its tariffs more effective because China’s still, in some ways, a state-run economy.
So who does the U.S. sell soybeans to? It actually technically exports soybeans to China’s state oil, seed, and grain trading company, COFCO. And COFCO stopped buying U.S. beans. There was—formally, there was a 25 percent tariff, but zero sales. Who buys Boeing airplanes? Well, mostly the three state-owned airlines. They stopped placing new orders. So there were tariffs and then there was a sort of boycott. And so you see U.S. exports to China fall, as you would expect. And then there was a peace deal at the end, phase one, where the U.S. kept most of its tariffs, China dropped most of its tariffs, and China promised to buy more U.S. goods. The last part didn’t materialize, but it kind of got lost a little bit because there was something called the pandemic, which kind of overwhelmed everything.
I actually don’t think—I mean, there’s some lessons to be learned from this, but I don’t think it’s a good guide. Why? Because it was a trade war directed at China. It was never a trade war against everyone. People knew that you could avoid the tariff by going to Vietnam, or by going to Mexico, or by going to Taiwan. There was no expectation that the tariffs would be applied universally. The action was also a lot smaller. You know, just the threatened tariffs on March were three times as big. April could be bigger. U.S. economy was in a little bit of a different place. Inflation was lower then so it was easier to absorb the small increase in costs. And the tariffs were phased in very slowly.
And they were—it wasn’t done entirely in a predictable way, but it was done using standard trade law, Section 301, where the U.S. government had to lay out its case, propose a remedy, take comment. So no one was ever completely surprised. Now, I think there’s a lot more uncertainty. So it’s bigger. It’s broader. And there’s a lot more uncertainty about what the U.S. actually is going to do.
ROBBINS: So I want to—we’re already getting questions, so I want to turn to the group. I do want to ask one question, I think, that will apply to the whole group, which, I think, is a how-do-I-do-this question. Which is, I assume that the impacts, if they do go ahead with this, even with just—with Canada, Mexico, are going to vary by region, and are going to vary by sector. So say I want to write a story about my state and the potential impact of a specific tariff, either those imposed by the U.S. or potentially retaliatory tariff. You know, how do I identify this? How do I narrow it down?
You know, the business or the sector that’s likely to take the biggest hit in my locality or state? Where do I find data about that? You know, do I—can I look at what happened the last time around? You know, if I’m sitting in Michigan, you know, obviously, it’s the auto industry. But say I’m sitting—I just read a really short piece from a local CBS TV station, TV—and said, we’re going to take a big hit for Mexico because we do so much trade. But say I’m sitting in Ohio, or say I’m sitting in Nebraska. How do I find that out? How do I figure out which tariffs are most likely to hit which industries, so that I can start writing stories to warn people about what’s potentially coming down the road?
SETSER: Well, give local businesses a call. And if they’re going to be impacted, they’ll probably tell you. There is a good data source, which is that there’s—the Census Bureau, which publishes the raw trade data, has a state by state trade webpage interface. So you can click on your state and find the state’s biggest trading partners, the countries and then also the sectors. Now, it doesn’t tell you, you know, say it’s Michigan, it will tell you that Michigan’s biggest exports are to Canada. OK. Or maybe—you know, maybe it’s not, but I’m making it up. But suppose it is. It’s logical. It doesn’t tell you what Michigan is exporting to Canada. But it will also tell you that Michigan’s biggest export, which is certainly true, is cars. So you have to extrapolate a bit between the two, using that data set. It doesn’t tell you precisely what, but, you know, in most cases, guess what? The state of Washington’s biggest export is aircraft, and the biggest export market historically has been China. And it’s changed a bit now. So I think you can often put one and one together and safely assume two. And then you can kind of see the same thing on the import side.
You can also look at the aggregate trade data, which won’t have state by state but will have much more sectoral specificity. And you can find what the U.S. imports in general from Mexico and what the U.S. exports, in general to Mexico, and to Canada. You know, in general the U.S. imports autos and auto parts from Mexico. That’s our biggest import. In general, the U.S. imports oil from Canada. That’s our biggest import. We also import a lot of aluminum from Canada. Well import a lot of potash, or potash, I’m not sure how it’s pronounced, but a very important fertilizer which the farmers have already complained about. And then, you know, we export corn to Mexico. We import avocados. We import fresh vegetables. We import berries. I think in general there’s no shortage of information about the composition of trade with Canada and Mexico. They’re two of our biggest trading partners. And I think your intuition generally gives you a pretty good sense.
ROBBINS: Great. So we’re going to turn—we have—already have two questions in the Q&A. Theo Greenly, would you like to voice your question, or should I read it for you? Well, since I don’t hear, maybe Theo—
SETSER: He’s on—good.
Q: Can you hear me now?
SETSER: Yep.
ROBBINS: Yeah, great.
Q: So I work in Unalaska, Alaska, which is in the middle of the Bering Sea. It’s the home to the international port of Dutch Harbor, which is the number-one fishing port in the United States in terms of volume—not value, but volume. For thirty years we are the home of the Alaska pollock fishery, which is the number one most widely eaten fish in the world. And that’s because it goes around the world. It’s the fish of McDonald’s filet-of-fish sandwiches, fish sticks, imitation crab meat, stuff like that. So my question is—I kind of have two questions. One is, directly how tariffs—these tariffs, you know, could affect the fishing industry directly, and how the previous, you know, first Trump administration tariffs, you know, affected fishing. Which I know is, you know, more of a specialized question and is available online.
But then my second question is, sort of the shipping industry really is, as far as a local employer, just about as big as the fishing sector itself. You know, we have CMA, CGM, Matson, Maersk, all of these international shipping. And so how might—obviously, there’s the hit that those—that the shipping industry is going—that would, you know, ostensibly feel if our exports of seafood dropped. But then secondarily things like, say, tariff on steel or other products that are used for the shipping industry, you know, resources for refrigeration, things like that, that are used within the shipping industry, how those effects may combine. You know, are those monitor—are those—would those be measured differently, if the shipping industry gets hit because of decrease in seafood exports would that be measured separately from the—like, how do we quantify that? So, yeah, and just kind of generally how these two overlapping sectors may be affected.
SETSER: Well, good questions. If memory serves—and, like, I should probably refresh my memory, the Alaskan pollock industry was actually hit pretty hard by the China trade war. If memory serves, some of the processing of the pollock was actually done in China, and then it was initially going to China to, like, be fileted and turned into a filet of fish—
Q: Right, but locally we do primary processing—you know, heading and gutting it kind of thing. And then it’s sent to China for secondary processing, breading it, fileting it, packaging it. And then it’s sent—and then it’s, you know, sent back for distribution.
SETSER: So, you know, the tariffs kind of made that way more expensive. I think there was some exceptions than done at the bequest of the fishing industry. But that’s kind of one of those complexities. You wouldn’t know that the U.S. was both exporting and importing pollock, but we were. And so it was—it was a casualty and a point of negotiation in the first trade war. And then there’s the added effect of, you know, setting aside the selling it to China to bring it back as a breaded frozen product, there was some Chinese demand. So I think it was hit. And, you know, one of the general rules about trade wars is that countries tend to retaliate against high-end consumer goods and high-end agricultural goods, because they’re relatively good targets. You know, your consumer can usually find fish from somewhere else in the world, and it has a high profile impact on the U.S.
So, you know, the Chinese in any trade war will tend to go after lobsters from Maine, Florida oranges, Kentucky bourbon, Montana beef, maybe less so Alaska pollock, because it was this two-way trade, but these are always targets. And they’re going to—you know, these kinds of targets are very, very attractive. It’s harder to tariff soybeans because a lot of countries use the soybeans as an input into pork production, or an input into chicken production. But, you know, China did it. They found alternative soybean suppliers.
But what you tend to see are tariffs on final good exports where they’re sort of—they’re not consumer staples, where they’re sort of more luxury or optional purchases—lobsters, restaurants, eating out, not your day-to-day meal. And so there are always that kind of casualties in the trade war. And, you know, I would think—I don’t know how China—I don’t think China’s retaliated on fish yet. I think they—but I haven’t followed that yet. But, you know, we do have the 20 percent tariffs on China. And China has responded, as one would expect, with agricultural retaliation, certainly hitting beef and pork, and lobsters.
On the shipping industry, there is separate data on shipping. It’s in the services data. It’s not done state by state. But you can track aggregate shipping volumes. And, yeah, if there’s a fall in trade volume, you’re going to have an impact on shipping. In the first trade war, you didn’t see that big of an impact because, as I mentioned, a lot of goods were rerouted through Vietnam, which actually meant more shipping not less. Instead of going direct from China to the ports of L.A. and Long Beach, the parts would go to Vietnam and then the ships would go from Vietnam to the U.S. So there was not a big impact.
And then, you know, there’s some loss of exports, but, you know, if you’re not selling soybeans to China, you may be selling soybeans to Egypt, I don’t know where. You know, you’re going to fill markets that were formally filled by Brazil. So you don’t always see a one-to-one correlation between the loss of trade with the casualty in the trade war and a fall in trade volume and a fall in shipping. And in some cases, you see an increase in shipping volume. I mean, the irony on this is, like, look at—look at how Russia cutting off the flow of natural gas to Europe ended up increasing demand for LNG transport. Why? Because pipelined gas, obviously, goes through a pipeline. It’s not shipped. LNG goes through ships. So you have this shift in the composition of trade that meant that gas was traveling further and was more expensive, and there was more need for shipping.
Why do I mention this? If we end up doing something which I would say is kind of stupid, like tariffing Canada and Mexico but not tariffing Japan or Korea, the net effect is going to be an increase in demand for auto shipments across the Pacific. Now you got tariffs on Canada and Mexico. Those cars drive across the border. And ships are needed for more long-distance transfer. If, on the other hand, we put tariffs on everything, and maybe we do some carve outs eventually for auto parts inside the USMCA trade agreement, you might see less demand for shipping because there’s going to be fewer imports from Japan and Korea and Germany, and more domestic production at higher price points.
So you don’t really know until you know the full trade action. And I think that’s what’s a little frustrating to many about Trump’s proposals is, you know, we’re two weeks away from possibly the biggest increase in tariffs ever and we don’t know who’s going to be hit or how. So it’s very hard to make forecasts. But you can track that.
ROBBINS: So thank you for that.
Brielle Bredsten, do you want to ask your question? And Brielle is the business and healthcare industry reporter for the Duluth News Tribune.
Q: Hi. We’re out of Minnesota.
SETSER: I can hear the Minnesota in your accent.
Q: Oh, well, thanks. (Laughter.) What—
SETSER: I’m from Kansas, so I’m aware of Midwestern accents.
Q: All right, yeah. But you guys don’t get the snow, so. (Laughs.)
What misinformation regarding the tariffs are you observing in the media and among elected officials? Because I know that there’s a lot of, you know, posts being made on social media by our local senators and representatives kind of, you know, calling out in opposition of the tariffs. And a lot of the other webinars that I’m on are saying that the retaliation is kind of targeted more at, like, the red states, or things like that. It almost seems, you know, like this is kind of another tactic to cause more divide between the two major parties in the U.S., and kind of each of them utilizing their relations with other nations to further support their cause.
Like, for example, I was in on a marketing call recently about how the tariffs are impacting the tourism from Canada. And one of the speakers had mentioned that a representative from California had reached out to her and encouraged Canadians to boycott her state to make a point to President Trump about what he was doing was, you know, obviously not in their favor. So I think that, you know, how—what misinformation regarding tariffs are you observing in the media that people might be using to further their agendas?
SETSER: Maybe I’ll start with something that I don’t think is misinformation, which is that countries are retaliating in ways that will hit red states harder. Partially, that’s what I—because of what I mentioned earlier. People like to retaliate against high-end agricultural exports—beef, pork. Very standard retaliatory targets. And those, because of the way our country’s geography and politics works, are predominantly produced in red states. So that’s just kind of inadvertent targeting towards red states. But it is—it is real. And the agricultural exports are an important export outside North America. And they’re an attractive target for retaliation in trade wars, if they’re not a—if it’s not a bean or a grain.
Then other countries are picking tariff lists that are going to target prominent members of Congress, and their districts. So if you’re the majority leader, or if your state is the home of the majority leader, one of the joys of being the majority leader is that every country, when they try to come up with retaliatory tariffs, they’re going to go after products from your state. So when McConnell was the majority leader, Kentucky bourbon hit every retaliatory list. And so if you’re from the—I don’t—if you’re from the Dakotas—I know Minnesota is not, you know, but next door—the Dakotas are going to get hit just because people are going to after things from Thune’s state.
Just the way things work. Louisiana shrimp are going to be targeted left and right. You know, it’s just—that is the nature. And of course, because President Trump’s from some combination of New York and Florida, but Florida is a more obvious candidate for his home now, there’s going to be some targeting directed at Florida. That is standard. When Democrats were in charge of the Congress, you would find similar targeting because you want—the theory is, you want to make sure that whoever is most influential has local constituents who care. So I think that’s real.
And I think it is also real that, you know, Canadians are very upset about the fifty-first state argument. They are very upset that they’ve been accused of being bad trade actors. And I’ll get to that, whether that’s misinformation or true information. And they are responding. And, look, some of that responding is going to go after blue states. Like, Canada sells alcohol through provincial boards. You know, the stores are run provincially. But if you’re going to retaliate against wine, you’re going to hit blue states because that mostly comes from California and Oregon. You know, it’s just the way things work. Bourbon is going to come more from red states. But Canada is upset.
And Canada—I think you don’t need people in the U.S. to discourage Canadians from coming. Canadians are feeling like they’ve been unfairly targeted. I actually think it is—I don’t like “misinformation,” because we should have a debate about what is true and what is not true. But I think Canadians feel, and I think they’re right, that they’ve been mislabeled as a bad trading partner. Canada actually has very low tariffs on U.S. industrial exports. And we actually run a big manufacturing trade surplus with Canada. That doesn’t mean everything Canada does on trade is OK, there aren’t problems. Wisconsin, obviously, is worried about dairy and Canada’s dairy boards. There’s a concern about lumber and timber, and how Canada prices lumber harvested on public lands relative to the price of U.S. lumber, which mostly comes from private lands.
But those are small trade problems. And on agricultural stuff sometimes you see these very high numbers for how much Canadian tariffs are, which is true but only if you exceed the tariff rate quota. And we’re not exceeding the tariff rate quota. So right now, there isn’t that tariff being applied on U.S. exports. So amongst our trading partners, I would argue, objectively, Canada is our most balanced major trading partner. We have a manufacturing surplus. We have a surplus, when you exclude oil. And Canadian oil is sold to us at a discount.
So I think—OK, set aside dairy, set aside lumber, timber, these known trade issues. Canada is not obviously our worst trading partner. So personally, I find the argument, that I sometimes see, that Canada is a horrible trading partner with these huge tariffs on the U.S. a bit misleading. The U.S. has a free trade agreement negotiated by President Trump, signed by Prime Minister Trudeau that is in force called the USMCA. And in general, with the exception of some agricultural goods, we have very open trade with Canada and very balanced trade with Canada.
The other typical misinformation is about who pays the tariffs. The tariffs are paid by U.S. importers to get their goods released from customs. What is economically a debate is whether exporters lower their price in order to share some of the burden. And that’s an empirical question. Empirically, on the tariffs for China—which may or may not be a good guide going forward—the fall in the exporter price wasn’t big enough to offset the payment of the tariff tax. So I think that you should—the correct way of characterizing it is a tax paid by the importer, but which has implications for the exporter which may lead them to modify their price. And then you look empirically at what happened. You can look empirically about whether the tax increase, which is paid by the importer, was passed on to the end consumer. These are empirical questions. People do fancy econometrics. And we can come up with answers. But the actual tax is paid by the—by the importer. And I think that’s accurate.
ROBBINS: And I think, Brielle, for your question also about the politics of this, I don’t think you need a politician in California to tell countries to put pressure on John Thune—(laughter)—or to put to put pressure on Mike Johnson. That’s the nature—they’re savvy. I mean, they actually pay, you know, Washington lobbyists to tell them what to do. That’s a natural—and if the Democrats were controlling the Senate and the House and President Biden, who actually continued Trump’s—you know, some of Trump’s tariffs, that’s the nature of it. If you want to sway American politics you don’t need a politician in California to tell you to punish red states. That’s just the nature of politics, and also the nature of what we export.
So what frightens me—
SETSER: So I’ll give you another example, which is—
ROBBINS: What frightens me about this is the interpretation that somehow this is being fueled by malign political influences. This is the nature of politics and the nature of trade wars.
SETSER: And, speaking of that, you know, when I was at USTR one of the things we did was develop tariff lists on France, and on Spain, and on Italy, and on the U.K. to retaliate, to respond to their digital services taxes. And we tariffed luxury goods from France—so perfumes, jewelry, handbags. For Italy, we hit shoes and handbags. I mean, it’s—sort of, there’s a standard playbook.
ROBBINS: You follow the money, the name of your—the name of your blog. So we’ve just put into the chat two things, a link to the CFR Trade and Tariff Hub information, but also Olivia had asked for the Census site that Brad mentioned. And I looked that up. And so you can find the foreign trade statistics, state by state, on Census.gov. And I put that link—well, luckily, our wonderful people put the link, I just sent it to them. So you can have access to that as well.
So we have a question from Macon Atkinson, who’s a politics reporter for, I assume, that’s the St Louis—it’s the Post and Courier. Macon, do you want to ask the question?
Q: Sure, Hey. I am based in South Carolina, actually.
ROBBINS: Sorry.
Q: I’m passing along a question from our business reporter who couldn’t be here. Actually, two questions. First, how could retaliatory tariffs on red states, like South Carolina, where I am, impact people’s small businesses, you know, their lives and profits? Secondly, BMW has a plant here. They’re projecting they’re going to take a $1.1 billion hit in this year’s earnings due to tariffs. Obviously, we’re going to see auto industry affected. You know, will automaking lose jobs due to higher costs?
SETSER: Look, for small businesses, my personal view—and, you know, there’s some—I think I’m right, but maybe some—there’s some arguments to the contrary. Most small businesses are much more importers than exporters. And so I would think the main impact on most small businesses will be if you’re relying on a foreign supplier for some of the goods that you’re selling, those prices will go up. If you have a specific export, then that also could be hit by retaliation. In the Carolinas—the Carolinas produce a lot of pork. And pork is going to be a likely retaliatory target. It’s already a retaliatory target on the China tariffs.
For BMW, I think it’s going to be kind of interesting. But to jump to the bottom line, if the tariffs push up the price of all cars there will be less demand for cars, particularly if people think that there’s some probability that the tariffs will come off in a year. So you could very easily see job losses in the auto industry. That’s a standard outcome of any model because the domestic price of a car goes up, total demand for cars goes up—or, goes down, and that could lead to job losses. Now there’s an offsetting effect potentially, because if there’s a high tariff on imports and you have a domestic producer, the domestic producer may see demand shift to domestically made cars because their price may go up by less. Still will probably go up, because your competitors prices have gone up, but it may go up by less. And that could lead to an increase in production.
Now the complexity is that—this doesn’t apply to South Carolina and BMW—but for most North American producers the bulk of their parts are coming from inside North America, but there’s going to be a lot of parts coming from Mexico and Canada in a standard car made in North America by GM, or Ford, or, for that matter, by Toyota, or Nissan. They’re all very integrated often in North America. And so they’re going to see a big increase in their costs too. So you’re going to see higher costs that will make it harder, in some cases, for domestic producers to gain market share from imports from outside North America.
BMW has a relatively high European content in their U.S. production. So BMW is going to see a pretty big increase in its production costs in the U.S. from the tariff. And that could lead to, you know, BMW has to raise prices, and there’s less demand for BMWs, and some job loss. It’s very, very possible. There’s an offsetting potential impact, which is that BMW also imports a decent number of cars from Germany. So typically SUVs are made in South Carolina and sedans are made in Germany. And so those sedans, some of those, it’s possible that BMW will decide to try to make some more sedans in the U.S. to reduce its vulnerability to tariffs. So you could see some positive effects.
If Europe retaliates against U.S. auto exports to Europe—which, you know, puts—you know, we put a 25 percent tariff, Europe puts a 25 percent tariff, BMW is going to be hit on both sides because BMW exports SUVs from South Carolina back to Europe. And those would face the retaliatory tariffs. And BMW might decide that it needs to make SUVs not in South Carolina, but back in Germany. So you could—you know, it’s going to be a long, complex process. The only certainty is in the short run BMWs costs are going to go up, and in the near term, as long as the tariffs are on and broadly applied, the cost of all cars is going to go up. So I think it is—most modeling actually suggests that the tariffs would lead to a reduction in auto employment for that reason.
ROBBINS: So if you’re going to buy a car, buy it right now, is what you’re saying, before the prices go up. (Laughs.) So it’s very hard for business planning, I would think, for anybody, because nobody really knows what’s going on.
SETSER: And that’s the key issue, right, is that all these things take a lot of investment and a lot of time. And until BMW knows for sure that these tariff changes are permanent, they’re unlikely to make that investment. So, I mean, I think this is a real challenge because we don’t know what is going to be just temporary and negotiated away, what’s going to be a pure—what’s going to be basically permanent and stick.
ROBBINS: And that, in good part, I think, is because we don’t really know what—if you had a normal you go to the WTO, and you have a complaint, and you say, you’re doing X, and if not, you know, we’re going to put a tariff on—but we don’t really know what they’re asking for, because they’ve given seven different explanations for why they want tariffs. So it makes it much harder for—to predict what the outcome of this is. And is it—which makes it infinitely harder for business planning, as well as for strategic considerations here. The whole thing is very confusing for everybody.
Wesley Muller has his hand up. And Wesley Muller is the staff writer at the Louisiana Illuminati, which is a truly fabulous name for a news organization.
Q: (Laughs.) Thank you. It’s actually the Illuminator.
SETSER: Oh, OK, good. We’re the Illuminati. You know, we’re the—
ROBBINS: Really? I was told it was the Illuminati. I want—I just really wanted—I was just absolutely, utterly fascinated by the—and a little frightened, but. (Laughter.) The Illuminator.
SETERS: Illuminator is good.
ROBBINS: I wanted it to be the Illuminati. I was just going to say, are you a Dan Brown publication? (Laughter.)
Q: Yeah, now that you said that I’m like, man, it really is a better name.
ROBBINS: Well, it is Louisiana, after all. OK. So what’s your question? (Laughs.)
Q: Yeah. Brad, you had mentioned Louisiana shrimp. And right now the shrimpers down here are just being decimated by foreign imports. I’m not sure—now, when I speak to them, they they’re all in favor of some sort of tariff on foreign seafood, because it would help them. I don’t know if a reciprocal tariff in other countries would necessarily impact them. I just don’t know how much Louisiana shrimp is already being imported. Maybe you have those figures, or you know where to find them. That would be helpful. You know, but it’s really the—I don’t think the foreign actors are the ones decimating the local shrimp industry, as much as it is our own local restaurants who are decimating it by purchasing foreign shrimp. And, you know, the customers are just not wise to it. So just—I don’t know if you have numbers on exports, or where I could find them. That would be very helpful.
SETSER: And we have five minutes, so I’m going to—I’m going to—sorry, go on. Yes. Wes, go on.
Q: If Louisiana shrimp isn’t, like, a big target, what about LNG, natural gas?
SETSER: Yeah. Frankly, LNG is probably your better—so, look, LNG is going to be a complex one, right, because Europe doesn’t—you know, in the same way we didn’t want to do 25 percent tariffs on Canadian oil, because we didn’t want oil prices and go up by 25 percent, Europe may not want to put a 25 percent tariff on U.S. LNG, which is one of their biggest imports, because of the increase in prices of gas, and why that would—the impact that would have on consumers and households. But it’s going to be a good question because if Europe wants to retaliate, and we do across the board, across the board retaliation would imply hitting LNG.
The broader breakdown in relations between the U.S. and Europe, the notion that we may not be a reliable supplier, could impact future investment because investment in LNG, some people want to have a little bit that they can sell on the spot market, but you need a big anchor buyer to justify the big capital investment. So people typically want a long term offtake to get a loan to build the LNG. So it could impact future demand. And we just don’t know whether there’s going to be a deal with China that’s, like, phase one reenvisioned, which would have some Chinese commitment to buy LNG, that might anchor future LNG expansion.
You’re probably—now that you mentioned it, you’re right. There’s a lot of shrimp imports, mostly from Southeast Asia. A true reciprocal tariff isn’t going to be high enough to make Vietnamese or Thai shrimp expensive. And, frankly, what you described to me makes me think maybe we need something a little bit like the European system, which we usually criticize. But in Europe they have a system, if something’s going to be sold as Louisiana shrimp it actually has to come from Louisiana. You can’t mislabel. And maybe we should be moving to some kind of that—system like that, where Louisiana shrimp is guaranteed to be from Louisiana, and it commands a premium price.
But you’re right. The tariffs—you know, remember Red Lobster was half owned by—or owned by a Thai company, and was getting all of its shrimp from Thailand. And that was just a lovely—a lovely story. But, you know, I think Louisiana shrimp is a complex one because trade is complex, and there are imports and exports.
ROBBINS: So we are not going to be able to get to all of our questions, which is a testimony to how great this is. So I’m going to give you one minute to answer this question from Olivia Evans, who is in Kentucky for the Courier-Journal.
Which is, she’s out reporting about bourbon. She knows about the tariffs from the EU and what Canada. What else should she know about? Should she be looking for China? Who else is going to go after Kentucky bourbon?
SETSER: Everyone. I mean, there’s no reason not to put—you know, if we’re going to tariff everyone, everyone’s going to tariff bourbon. There’s no reason to exempt it. So, yeah, I’m sorry to not give any hope, but no hope.
ROBBINS: So drink up now. Or maybe not, because it’s all going to be—
SETSER: I mean, prices should come down for Americans. I mean—
ROBBINS: They should come down. We could stockpile because—stockpile, because if they ever come off the prices will go back up again.
I just want to thank Brad. This has been a great conversation. And we have lots more information on our website. And we will send things out to you, and links. And I’m going to turn it back over to Irina. It’s been a fabulous conversation. And thank you for that, Brad.
FASKIANOS: Totally agree. Thank you, both Carla Anne Robbins and Brad Setser. And, again, sorry we couldn’t get your questions. We will send the link to the transcript, the video, and the resources that were cited. So never fear, we did drop them in the chat. We also hope you will follow Brad, his work on his blog, Follow the Money. It’s on CFR.org. You can sign up for there, go to our Trade Hub. And you can follow—are you both on X still?
ROBBINS: Not that I noticed. I think I’m still there, but I’m just—I’m just sort of not—I’m a reader not a poster anymore. I’ve just got—
FASKIANOS: OK. Brad, are you still posting on X?
SETSER: I am, yeah.
FASKIANOS: OK. So you can follow Brad at @Brad_Setser. And we encourage you to visit CFR.org, ForeignAffairs.com, and ThinkGlobalHealth.org for the latest developments and analysis on international trends and how they’re affecting the United States. Please send suggestions for future webinars. Email us at localjournalists@CFR.org. Or if you want to be connected with any of our experts we’re happy to make that available to you as well. So thank you all for joining us. We really appreciate it.
ROBBINS: And you can—you can—you can follow me on X at @Robbins_Carla, only because it shows you all the places that I’m actually quacking. (Laughs.) So, out there quacking. So thank you, Irina, for that.
FASKIANOS: Great. Thank you both.
ROBBINS: Bye.
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