Media Briefing: Bracing for a Trade War

BEN CHANG: Welcome, everyone, to today’s Council on Foreign Relations briefing on tariffs and Bracing for a Trade War. My name is Ben Chang and I’m the vice president of Global Communications here at the Council.  

This briefing, as Sam said, will be on the record, and a recording will be posted online at the conclusion of the discussion. The Council seeks to inform U.S. engagement with the world and does so through these briefings as well as the up-to-date analysis and resources addressing the issues of the day posted across our channels, including CFR.org and ForeignAffairs.com. Please continue to turn to the Council as a resource as we navigate these issues going forward.   

And now, let me hand it over to Mike Froman, president of the Council on Foreign Relations.  

MICHAEL FROMAN: Thanks very much, Ben. And thank you all for joining us. As Ben said, we’ve gathered together a number of our fellows—Heidi Crebo-Rediker, Zoe Liu, Inu Manak, and Benn Steil—to talk about the recent developments and the announcement of tariffs against the U.S.’s top three trading partners, China, Mexico, and Canada. This is part of a much broader effort you’ll see on CFR.org, and ForeignAffairs.com. Lots of additional material on the trade-related issues that we encourage you to follow as well.   

Let me just say, on one hand, this should be no surprise that President Trump announced these tariffs. He’s signaled his desire to do so for some time. And we’ve seen already in the last several hours a movement on the issue. It raises a number of questions. One is, what is the purpose of the tariffs? Is it to rebalance the trading relationship and get rid of trade deficits, bilateral trade deficits, that the president has cited in each of those relationships? And if so, will they actually reorder supply chains, move production back to the United States? And what does that mean, in the case of USMCA, for the pact that President Trump negotiated during his first term? And what does it say about the value of that—of that agreement?   

Secondly, I think when one looks at tariffs one has to look at really three sets of costs. One is the direct costs imposed by tariffs. How much more expensive agricultural products that we import from Canada and Mexico might be, the impact of tariffs on the automobile supply chain and the auto parts that cross the border several times in the production of a final car of the big three and others. So that’s the direct cost. The second area of costs are the costs of retaliation. And certainly, Canada had announced already retaliatory measures. Mexico had announced that they were preparing them. China has in the past taken actions when tariffs were imposed. And those affect U.S. exports and production as well.   

And then the third category of costs are really the costs of imitation. What happens when other countries look to the U.S. and say, well, if the U.S. can apply tariffs in this sort of way why don’t we do the same, since we’re all under protectionist pressures here at home? And what are the implications for that for global growth as well? So lots of unanswered questions. I think for those who had expected a significant market reaction to perhaps being a disciplining force, at least the stock market has not demonstrated much of an impact in one day. But it’s, of course, too early to tell what the longer-term implications are.   

Let me turn it over now to Heidi Crebo-Rediker, who will moderate this discussion and bring in our various experts as well. Thank you for joining us. And look forward to staying in touch as this issue continues to evolve.  

HEIDI CREBO-REDIKER: Thank you so much, Mike. And thank you everybody for joining us today.   

It’s always a little daunting to follow a former USTR on trade issues, especially when he has a huge amount of knowledge, but we’re going to dig in today on exactly the issues that he raised. And then I would add a few more, particularly because we look at more broadly some of these issues from a macroeconomic, a commercial, a market, and a geopolitical perspective, and there can be and will likely be consequences in each of those areas.  

So again, no one should be surprised. Trump was very clear that tariffs were very high on the agenda and his primary choice of economic tools. He obviously is going after illegal border crossing and fentanyl right now, but he’s also mentioned onshoring manufacturing, raising revenues. And I think one of the big surprises is that Mexico was able to actually in the past few hours get a reprieve from the tariffs going into effect for one month in exchange for 10,000 border guards.   

So, you know, let me give you some background on the expertise that we are going to bring to bear today. We have Zoe Liu, who is the Maurice Greenberg senior fellow for China studies at the Council on Foreign Relations. She covers a wide range of topics, including international political economy. We have Inu Manak, who is CFR fellow for trade policy, and she focuses on U.S. trade policy and the law and politics of the World Trade Organization. And then we have Benn Steil, who is the senior fellow and director of international economics.  

So I’m going to actually turn to Inu first to basically frame the conversation. So what did Trump just do, and particularly given the fact that he used IEEPA—and I’d like you to just take a moment to explain what IEEPA is—what are the consequences for having taken that approach to implementing the first round of tariffs? And, you know, looking at the retaliation that we’ve seen threatened from Canada and from China, your best guess as to how this plays out.  

And, you know, heads up that this is a fast-moving story and we will try and make sure that if anything happens while we’re live with you right now—(laughter)—that we can try and address that in the Q&A, which will start in about—at about 4:30.  

Thank you, Inu.  

INU MANAK: Great. Thank you, Heidi. I have X open right now, following everything that’s happening, so I’ll let you know if I see anything, too. (Laughter.)  

So, briefly, you know, Trump invoked the International Emergency Economic Powers Act, otherwise known as IEEPA, to impose tariffs against Canada, Mexico, and China. IEEPA provides sweeping economic powers to the president during an emergency. Essentially the president can use these powers to deal with an unusual and extraordinary threat if he declares a national emergency with respect to that threat.  

So the threat he is responding to is outlined in a proclamation that he issued on the 20th of January, which declared a national emergency at the southern border. And he claimed that the southern border is overrun by cartels, criminal gangs, known terrorists, human traffickers, smugglers, unvetted military-age males from foreign adversaries, and illicit narcotics that harm Americans, including America (sic).  

Now, President Trump this weekend expanded that emergency to include China and Canada based on the claim that both countries are doing very little to stem the flow of fentanyl coming into the United States. So what did he do? As you said, he slapped twenty-five percent tariffs on imports from Mexico, which he has now paused; tariffs on most imports from Canada as well at twenty-five percent, with a ten percent tariff on imports of energy products from Canada; and then ten percent tariffs on China as well.   

So this is a really unprecedented action because IEEPA historically has not been used to impose tariffs on imports. It’s been used to impose an array of different types of sanctions such as curtailing exports, blocking foreign assets, and we have never seen it being used in this way.   

Now, its predecessor statute, the Trading with the Enemy Act, was used by President Nixon to levy a ten percent tariff on imports as leverage to get Japan and Germany to revalue their currencies. This was a temporary measure, and it was quickly lifted.   

Now, legal precedent suggests that President Trump’s use of IEEPA—and we can get into this later—is at the very least a major stretch of the statute, and at its worst simply unconstitutional.   

So I think this is setting off a really interesting first shot in his trade wars, where we are going to see some big implications not just for our trading partners, and for our own manufacturing, and our own competitiveness, but also just for the way that Congress and the president execute trade policy.  

I’ll leave it there and pass it back to you.   

CREBO-REDIKER: I have a lot more questions for you on sort of how this interacts with some of the investigations that he announced on January 20th that are sort of wide-ranging, cross-agency, looking at a variety of trade-related matters.   

But going to Zoe, I would love to hear your view in terms of China’s reaction because, obviously, during the campaign we heard the 60 percent across-the-board tariffs against China used consistently, and we saw today—we saw over the weekend it was 10 percent across the board.   

Now, that’s still significant but the reaction has been, I think, notable and you—there’s nobody better than you to talk about to both the reaction. But then feel free to kind of step out of the minute-to-minute headlines and look at the broader implications for U.S.-China and also sort of China’s role in the world.  

ZONGYUAN ZOE LIU: Yeah. Thank you very much, Heidi, for this question.   

You know, at least so far statement from the Chinese government and the spokesperson at the Chinese ministry of foreign affairs seems to be, I would have to say, very calm. They haven’t put out any major retaliatory measures, although the spokesperson of the ministry of foreign affairs did say that, while we condemn the United States for doing this and we may resort to retaliatory measures, they have not put out any specific measures.  

But I do see China this time is, perhaps, much more prepared and more experienced in handling trade wars, especially a trade war in an escalatory scenario and, first and foremost, perhaps at this time the Chinese government recognizes that China is no longer the only country or the only major economy being tariffed upon.   

And, in fact, you know, the fact that the Trump administration started with Mexico and Canada gives China the—sort of the argument to make to American allies saying that, you know, it used to be the case that you thought American strategic competitor is the only person—is the only major economy suffering from tariffs. But this time it turned out not to be the case.   

And also over the past five years the Chinese government has also established robust administrative, legislative, and regulatory frameworks that can provide legal grounds for the Chinese government, Chinese companies, and even Chinese individuals to implement counter measures against foreign economic coercion including tariffs and, perhaps, sanctions.   

And then, finally, I’ll just conclude by saying that this time the Chinese government could implement retaliatory tariffs and it could also use certain—a certain segment of nontariff measures as well as to use export controls, and on export controls I think this time the Chinese government may be more willing to impose export controls on strategic materials and critical minerals that are critical for U.S. high-tech industry, and a part of the reason is because they recognize that in the long run their comparative advantage in critical minerals may diminish, given that the U.S., Japan, EU has all been augmenting their critical mineral supply chain.   

So from that point of view, if anything is different this time I would say perhaps the Chinese government may be more willing to use export controls.   

I’ll stop there and happy to answer any questions, but hand it over to you, Heidi.  

CREBO-REDIKER: So both China and Canada in terms of what they’ve—what they could do, China—and I know you know quite a bit about this—could have a completely asymmetric response in terms of the export controls versus the tariffs that are being proposed.  

The Canadians are coming back with a list of specific, primarily Republican state-targeted, tariffs that—sort of where it would bite the U.S. the most.   

But I want to turn to Benn and see what this means from an economic perspective for the U.S., for Canada, for Mexico for their economies, and I think what we saw overnight ahead of U.S. open was that markets—you know, markets were looking, you know, pretty rattled by this in terms of effects in commodities, in specific sectors, auto sector. So talk a little bit about why we saw the fallout in certain areas. And then why did markets sort of find their way back to—I guess claw their way back to a more muted reaction today?  

BENN STEIL: Well, there are certain sectors, Heidi, that are going to be hit very, very hard by this trade action, particularly the trade action against Mexico and Canada. The auto sector is right up there, of course. And, you know, we saw that in stock futures trading over the weekend, enormous concern about those sectors.  

Now, as a number of us have already commented, this is extremely fast-moving. And the announcement of a suspension of tariffs for thirty days with Mexico signals two things which I think are quite interesting.  

First, the market reaction was very positive. The market did come back somewhat. I think they were relieved to see a bit of the old Donald Trump from the first administration; that is, the wheeler dealer, somebody who wanted to make a transaction. And it was quite interesting that his focus was not on economics, not on the trade deficit, but on national security, that the deal was premised on Mexico putting 10,000 more agents at the border.  

And I think this shift towards the national-security linkage with trade has been ongoing for quite a long period of time now. If you go back to 2019, for example, when the WTO dispute-settlement mechanism basically came to a standstill because President Trump stopped appointing and reappointing judges for the appellate body, we’ve seen that the WTO has been effectively on hold.  

And why did the United States do this? We’ve seen a massive escalation since 2019 in national-security notifications at the WTO. In other words, when we take protectionist actions, we are alerting our WTO partners that we are doing it for national-security reasons. And our position has always been that that is self-determining, that other member states of the WTO cannot challenge it. And given that there’s no longer a quorum at the appellate body of the dispute-settlement mechanism, there is no way to challenge any sort of protectionist action right now.  

So I think it’s also geopolitically significant that China said that they would lodge a complaint at the WTO, because China obviously knows that this will not achieve anything in terms of economics, but it will signal to the world that from—as China would like to message this, that the United States is moving away from multilateralism and globalization and that China is still committed to it.  

CREBO-REDIKER: So just before we get in deeper into the discussion, I mean, picking up on the national security as a pretext for using IEEPA and using it against Canada, one of our closest allies, one where you have—fentanyl is the primary target of this, and remedying the cross-border channels of actually importing fentanyl into the United States.  

Canada is really pretty—has a de minimis, you know, compared to Mexico, track record in terms of having fentanyl come through the borders. And it also—it’s a very hard argument to make that Canada is actually—Canada is presenting a national-security threat. So what can Canada actually do? Mexico clearly, you know, stepped up with the 10,000—the offer for 10,000 military personnel on the border. But, you know, what exactly—what should Canada’s next step be? Because it’s not going to become the 51st state.  

I’ll leave that open to anybody. Mike.  

FROMAN: Well, look, I think when there was a discussion of tariffs earlier, actually, the Trudeau government announced—I think it was $900 million of additional investment in border enforcements. But you’re right, the amount of fentanyl that has been seized on the Canadian border versus that which has been seized on the Mexican border is a drop in the bucket. And so this may reflect more other priorities or other interests of President Trump. He has said repeatedly that he thinks there’s an unfair relationship there, and that the Canadians would be better off as the 51st state. Very few people take that seriously, but there seems to be almost a punitive element to this action.   

And, interestingly, while it’s well known that President Trump and Prime Minister Trudeau never got along terribly well, this action against Canada, of course, is creating unity in Canada to stand up to the United States, including the Conservative candidate for prime minister who’s likely to be the next prime minister. So it’s just—it’s creating more difficulty going forward than perhaps—than is perhaps justified. I think all the countries around the world—when the president got—President Trump got elected, leaders from all around the world were asking themselves, what do we need to do to cut a deal with President Trump? And I think—I’m sure that conversation is happening in Canada as well.  

STEIL: Heidi, I’d just offer that observation that the rest of the world is also learning to use national security as a justification for erecting trade barriers. If you go back to 2019, there had been virtually no cases in the history of the GATT and the WTO of developing nations using national security notifications. Since 2019, such notifications from poorer countries have skyrocketed and, in fact, now represent 70 percent of the total. And if you look at some of these notifications, what are they for? Products like cocoa beans, alcoholic beverages, door frames. These are things that are clearly not related to national security. So this is a widespread phenomenon now, using national security as a pretext for protectionism.  

CREBO-REDIKER: So—  

LIU: Very quickly, Heidi.  

CREBO-REDIKER: Go ahead.  

LIU: On what Canada can do. Here, you know, I really don’t see Canada being the source of the material of fentanyl. But I do see that Canada or the Canadian real estate market and properties, especially properties in Vancouver, as well as the property—as well as the Canadian casinos, have been used by Chinese or transnational crime gangsters to launder money. And those money, oftentimes, is the other side of the fentanyl, or for that matter broadly speaking synthetic drug or narcotic trafficking. So perhaps, from that perspective, anti-money laundering is something that Canada can do. But that also requires collaboration. Not only sticks to target Canada, or for that matter China.  

CREBO-REDIKER: Zoe, that’s an excellent point. In terms of—I think, you know, one of the—one of the challenges is that this is—you know, this is—particularly looking at Canada and Mexico, this is one of the most highly integrated supply chains that exists across border in the world. And I think, you know, companies have been looking at the potential for tariffs to be implemented on Canada and Mexico ever since Trump announced his intention. Do you think that companies, particularly auto companies, will have put plan A, plan B, plan C into place in terms of redirecting their supply chains to sort of minimize the impact on their ability to sell into the United States?   

Because already anecdotally you’re hearing about Japanese and Korean and even European automakers looking at where they have no content coming out of Mexico and Canada to be able to ship without the 25 percent tariff into the U.S. So it’s almost counterproductive in terms of—in terms of actually achieving a particular—a particular goal. Do you think that those supply chains are going to be highly disrupted? And that, I guess, would assume that this is going to play out over a number of months, as opposed to something that we’ll resolve with Canada overnight, before the—before the tariffs are implemented.  

MANAK: And maybe I can jump in there, Heidi. I mean, I don’t think that firms have been planning for this because we had the USMCA, which Trump negotiated, called the best trade deal ever. And they assumed that signing the USMCA meant that they would have some predictability in the supply chains. And especially for autos. There was—that was a really difficult negotiation, where we actually increased the restrictions on rules of origin. We made it actually more difficult to make North American automobiles. So this is going to be an industry that is going to take a hit. There are union leaders who are talking about this taking an immediate hit once the tariffs go into place against Canada.   

Some analysts estimate that the price of a new car is going to go up by $3,000, not an ideal situation for Americans still feeling a pinch in their pocketbooks. And if you just think of the reality of the way trade actually functions in the automotive sector in North America, a part moves across the border about seven to eight times, right? If you look at the details of the executive order that Trump issued, he basically is not giving any space for a drawback provision. This means that every time a piece, a part, crosses the border, it faces that 25 percent tariff. So we’re not putting a 25 percent tariff on all of the different components. It’s a 25 percent tariff every single time something crosses a border. That’s going to add up really, really quickly. And I’m not quite sure he wants to go down that route.   

So maybe he doesn’t understand how the supply chains actually function. He’s about to find out. But I would hope that he would actually do something to address this pretty quickly and lift those tariffs on Canada. So I think that Canada is doing the right thing at this point by preparing retaliation against the United States. They’re being really good about targeting this at states that are going to have to speak up. And there’s nothing more they can do. And in fact, Trump even said: There’s nothing Canada can do to get out of it. So I don’t think Canada should be out there trying to rationalize whatever Trump is doing and giving him something for nothing. And I think that’s a big problem that we have to be really aware of, that we shouldn’t be asking our trading partners to make up some sort of solution for some fake emergency that Trump has created.   

STEIL: I would also add, Heidi, that to the extent that we have to relocate important elements of the supply chain in the United States, we’re making the U.S. economy a lot less efficient. The U.S. economy right now is running at pretty much full capacity—4.1 percent unemployment rate, solid growth in the range of 2 ½-2 ¾ percent. To the extent that we, on an emergency basis, have to start producing parts in the United States, we’re talking about taking resources from other businesses that are already here, a lot of which are doing yeoman’s work in terms of boosting American global competitiveness. We’re talking about major exporting firms which themselves rely on intermediate goods taken from abroad. So, you know, as a matter of pure economics, it’s really hard to paint this as being in any way good for the U.S. economy.   

CREBO-REDIKER: And, just to add, if you’re—if you are an auto OEM and you are looking to create a new supply chain in the United States, for example, the necessity of getting those individual parts through an approval process, to the extent that they that they generally have to go through in order to be included in a part in any given auto, takes a very, very long time. Just internal safety measures and approval processes. So this actually can take a lot longer than even just standing up a new facility or taking away from the production of other companies in the U.S.   

Last thing I want to touch on, commodities. And particularly the import and the reliance on Canadian oil. Canada obviously has, you know, limited alternatives in terms of exporting. But at the same time, we don’t import most of our oil from Saudi. It’s actually 60-plus percent from Canada. And the type of oil, sort of heavy crude, is really what the refiners in several parts of the U.S. actually rely on. And replacing that, and even considering replacing it, from a place like Venezuela, which produces a similar crude, is really just unrealistic in terms of the scale that Canada provides to the U.S. right now. So how should we be thinking about that? Obviously, it’s a 10 percent tariff and not 25 (percent). But what I’m hearing, you know, for states that depend on Canadian products, that the bills are already starting to go up. It’s going to be a complete passthrough in terms of the increase in price on propane and things. So does—has anybody been following specifically what this means for the oil markets?   

I’m looking at Benn.  

STEIL: It’s interesting that Trump has used lower tariffs on oil imports, acknowledging that tariffs do, in fact, lead to price increases for Americans. So despite the fact that he said there was no link between tariffs and inflation, the way he’s implemented the tariffs clearly indicates that he knows it does, that the two things are intimately related.   

I’d also point out the unprecedented situation that we’re in right now. We have no confirmed commerce secretary yet, no confirmed USTR. Who’s actually managing this process? You know, it really looks to be an initiative that was taken in a very impetuous basis without significant planning.   

One can assume that there’s quite a bit of concern behind the scenes among certain incoming officials. I would point out Rubio, Bessent, Lutnick, all of them will be involved in the Mexico negotiations, which does give me at least a little confidence that there will be voices calling for a return to normalcy more quickly than we might otherwise see.   

CREBO-REDIKER: So before we open it up to—sorry, Zoe. Go ahead.   

LIU: No, just I just wanted to very quickly add to that.   

I think a lot of this—the tariff on Canadian oil is interesting but I think it probably fits into the broader discussion of to what extent the United States should or should not export its own oil and, perhaps, natural gas or LNG to other countries as well.   

The idea is one piece of the—one piece of the moving part is that, well, if we tariff imported oil then probably we can save more. We can encourage more domestic production. And on the other hand, if we do not export more then we will have more domestic consumption available.  

But then on the other hand, there are also discussions saying that the United States should continue expand oil and the natural gas export to the rest of the world including, actually, China, and here I think just an interesting data point.  

I remember by 2023 the U.S. was the second largest LNG supplier to China and right now, despite last year—throughout the course of last year China’s import of U.S. oil declined by almost 40—almost 50 percent and, yet, this still makes China the six largest U.S. oil buyer.  

So I think there is a lot of moving parts in this energy dimension and—  

STEIL: We haven’t yet talked about conflict with the European Union but when that comes U.S. natural gas—liquid natural gas—is going to be front and center in the negotiations.  

CREBO-REDIKER: Absolutely.  

I was going to give Mike one quick—  

FROMAN: Yeah. I was just going to—just to respond to a couple things.   

One, in terms of Benn’s comment about division within the administration, I’m not sure how much weight I would put on that. It appears that the president this time worked to ensure that all those he appointed to senior positions would buy into his perspective on tariffs, and we saw both the Treasury secretary and the Commerce secretary articulate pro-tariff policies before and during their confirmations.   

The other thing I would say is—and this is something that we’ve been trying to emphasize here at the Council—that all trade policies have a cost in some form or another and there are tradeoffs, and I think to the president’s credit he noted yesterday or the day before that these tariffs would likely cause or could cause pain on the American public and then he said, well, maybe they’ll cause pain. But at least a recognition that, indeed, tariffs do cause pain to American consumers and other importers who rely on those inputs for their production.   

That will be an interesting debate. The question is how much more will Americans be willing to pay for agricultural products so it’s avocados from—or tomatoes from Mexico or other products from Canada.   

How much more, to Zoe’s point, will they be willing to pay for a car in order to support the president’s broader tariff-related policies, and that is a good debate worth having and it’ll be interesting to see how it plays out.   

CREBO-REDIKER: Well, one thing for sure is as the prices, particularly for propane, start going up in some rural areas in the north Midwest and northern New England, which is already starting to happen as it gets cold—(laughs)—and continues to be cold, I think that that’s going to—that’s going to bite pretty, pretty fast.  

So I am hoping I can hand it over to CFR and to the—not the moderator but to the person who’s going to be calling on all of your raised hands out there. So please, if you don’t have your hand raised and you have a question, please put your hand up, and look forward to continuing the conversation with the folks online.  

OPERATOR: Thank you so much, Heidi.  

(Gives queuing instructions.)  

We will take our first question from Jim Dingeman.  

Q: All right, thank you. Can you hear me?  

CREBO-REDIKER: Yes.  

Q: OK. Thank you for your comments.  

And this sort of follows up what Michael just said. Trump made a big deal about how he won the election based on fighting against inflation in the grocery stores. And now we have these policies implemented which are concretely going to result in the raising of prices in the grocery stores for the average American. So can you explain to me intellectually how they get this framework to essentially put into the domestic-politics debate immediately something that gives Democrats on a silver platter something they can use against him? I’m just wondering what your thoughts are about that, because it sort of is amazing to see this happen within two weeks. Thank you.  

CREBO-REDIKER: Who would like to take that on? It’s a pretty—it’s a political—it’s a political question. I mean, elections do have consequences. And he was very, very up front about the fact that he was tariff man. This was coming down the pike, and there were a lot of warnings that they were going to be inflationary. So I’m interested and happy to have any one of you take that on.  

FROMAN: Well, Heidi, I guess what I’d say is he was very clear during the election that he was tariff man. And he was also very clear that he was there, as the questioner said, to fight inflation. And the thoughts didn’t necessarily connect. And this action may connect the dots, that, in fact, tariffs do get paid by the American consumer. They do get passed on.  

If you take groceries or food, I believe we import about $75 billion a year of agricultural products from Mexico and Canada. Most grocery stores operate on a very narrow margin. And so it’s not the kind of business where the grocery store can eat the increased cost. They pass it on to the consumer. We’ve seen that when it comes to eggs due to bird flu and we’ve seen it on other products as well.  

And so in this case the consumer is—if the tariffs go into place and stay in place, they are likely to be felt by the consumer. And the consumer—then the question will be whether the consumer makes the connection between the action that the president announced and the prices that they’re paying at the cashier. And that’s always an open question whether they link it to that particular—to that particular action. But they’re going to have some hard questions to ask.  

STEIL: Heidi, the U.S. farmers are—  

CREBO-REDIKER: The other part of this is—  

STEIL: —also going to be very, very hard-hit by retaliation. We saw that during the first Trump administration. And as you know, President Trump, during the campaign, suggested that the tariff revenues that would be brought in would be so significant that they might even replace the U.S. federal income tax.  

Well, we can look back to the first Trump administration and ask what did happen to the tariff revenue. And in the case of tariffs on China from 2018 to 2020, we extracted $66 billion of tax revenue, tariff revenue. Of course, that was paid by U.S. importers, not by Chinese exporters—$66 billion of revenue.  

But President Trump authorized 61 billion (dollars) in payments to farmers to recompense them for the damage done by Chinese retaliation. So, in other words, 92 percent of the tariff revenue raised from China tariffs was handed over to farmers to make up for their losses from the Chinese retaliation. It’s not a revenue spinner either.  

CREBO-REDIKER: So just to—I mean, to add both to what Benn and Mike said, it’s also intermediate goods. So that hits—you know, large businesses can probably handle not passing through a hundred percent of that cost, additional tariff cost, to consumers, but you know, small businesses really can’t. They also operate on very small margins. And as they have all sorts of parts coming in, especially from China but also parts coming in from Mexico, I think, in particular, you’re going to have—you’re going to have some real challenges on the small-business side getting passthrough.  

Do we have a next question?  

OPERATOR: We will take our next question from Peter Passi.  

Q: Hi. Can you hear me?  

CREBO-REDIKER: Yes.  

Q: OK. Well, yeah. This is Peter Passi. I work for the Duluth News Tribune in Minnesota.  

And I would agree with you it’s kind of a headscratcher as to why Canada is getting tariffed to the extent that it is, you know, given if fentanyl and if immigration are the key drivers of this policy. I’m just wondering, do you think that this is our administration attempting to position itself for a renegotiation of the USMCA?  

And then I’m also curious about I read something just in passing that it was a possibility of Canada kind of upping the ante a bit on the oil front with perhaps curbing production or exports to the U.S. to kind of put additional pressure there. And up in—up in this part of the country, you know, we take a lot of that crude via pipeline and refineries up here. I mean, that could hit pretty quick.  

CREBO-REDIKER: And those refineries can’t take what the U.S. produces out of—out of—we do light sweet crude, and our crude is not—we can’t actually refine it in the ones that we refine Canadian crude.  

But can I hand it over to Inu in terms of is this—is this just one way to kind of snap the renegotiation of USMCA?  

MANAK: It may entirely be possible, but that would not be the correct way to use IEEPA. So if that’s the president’s goal, that has nothing to do with declaring a national emergency on the southern border with regard to fentanyl. So I think that we have to sort of separate out some of these things and, again, not rationalize every action of this administration because I think this was kind of quickly put together and, if you look at the executive orders, clearly not well thought through.  

So I think that what we’re likely to see is Canada respond quite strongly to all of this. And I think you’re absolutely right, Peter, that there are considerations of sort of export charges on oil and gas coming out of Canada, and I think they’re within their rights to do so. So we are likely to see the escalation of a trade war that comes through.  

But I think most importantly we should not forget that what the president has used is IEEPA, and it doesn’t quite make sense how you connect what he said is the threat to the use of tariffs. Last time I checked, fentanyl doesn’t have an HTS code. I don’t know how you can put tariffs on countries to try to negotiate some sort of solution here. And I think that what we have to be really careful about is the further expansion of all of these authorities over time. So the emergency is still there even if there’s a pause on tariffs on Mexico, even if we get a pause on tariffs on Canada; he can start that emergency up again and take any action he wants. So I think that we have to be really careful about the fact of just saying, oh, this is for this or that, or for everything in between. It has to be an action that reasonably is related to the threat that he has determined to be there. So right now there is no eminently reasonable relationship between the emergency that Trump declared and the actual action that he has taken, and that means that he should not be doing this and that Congress should be taking some action to stop him or the courts should. So I think this is something we should keep in mind with all of these discussions that are taking place.  

CREBO-REDIKER: Thank you, Inu.  

Can we have the next question, please?  

OPERATOR: We will take our next question from Gabrielle Gurley. Ms. Gurley, if you could unmute.  

Q: Gabrielle Gurley from the American Prospect.  

I’m wondering if you could talk a little bit about what the—some of the retaliatory measures against Republican states would be. Obviously, most of the farm states are Republican states, but are there other states and commodities that would be affected that might have some influence on Trump if, in fact, these problems—if, in fact, the tariffs in the case particularly of Canada go forward?  

STEIL: Whiskey and spirits is one area. I believe the Canadians import about $700 million worth a year, so it’s not insignificant.  

CREBO-REDIKER: So it included also—I mean, the list included 1,200-plus items in their first tranche. And it was oranges from Florida, and household appliances from South Carolina and Ohio, motorcycles, coffee. (Laughs.) Districts that vote—I think they very heavily targeted districts that voted for Trump. So it’s a pretty—it’s a pretty significant list. But it, again, is very targeted. There’s the—and I think—I think Ontario canceled its Starlink contract as well. (Laughs.)  

Did that—did that answer your question?  

OPERATOR: We will take our next question from Robert Chaney.  

Q: Hello. Thank you. This is Rob Chaney from the Montana Free Press and Mountain Journal in Montana.   

And I have two quick questions. One, what of the Canadian-focused tariffs might affect particularly the agricultural industry? Since that isn’t quite as fast moving as the auto industry is it going to be more of a seasonal, delayed impact? Or are there things you see coming at it fairly quickly? The second question is, we’re just south of Alberta and their tar sands oil production, which is a really different and unique part of the oil world. And I’m wondering if you have any thoughts about how this tariff situation might affect the Alberta oil economy in that sector. Thank you.  

CREBO-REDIKER: Who would like to take that question on—or, those two questions? Agriculture and Canadian oil sands.  

MANAK: I can jump in a bit on that, Heidi. I mean, I think on the on the ag front there’s going to be really targeted retaliation on specific products. As you mentioned, orange juice from Florida is one of them. Wine grape and spirits, and other products, a lot of tariffs going on there. We’re also going to see things on cocoa products, on sugar and sugar-containing products are the big part of the tariffs. And then also on a bunch of other products. If you look at the full list, it’s quite large. (Laughs.) I suggest looking at it online. Canada is planning to ratchet up the retaliation over time. So the first set is on $30 billion. And it can go up to $155 billion.   

And if you look at the full list it’s on every single ag product that you can possibly imagine. So all the different HTS lines of different turkey parts, different poultry, all sorts of dairy, meat, cheese, everything you can imagine, it’s there. So I think that Canada’s strategy is to do targeted retaliation, which is what you typically do in these sorts of scenarios, and then to ratchet it up. And I think they’ve mainly focused on certain red states. I know they have put tariffs on products coming from Ohio, from Pennsylvania, states that were important for Trump’s reelection. So I think there’s that strategy there.   

And in terms of the oil sands, I mean, I think this is something that Canada is going to have to think about really carefully going forward, as to where it’s going to diversify its production in the future. I mean, in the next four years, if it’s going to be like this, they’re not going to continue as is. So I think that there’s going to be some strong reflection. And in fact, I saw yesterday discussions coming up again about removing internal barriers to trade. Canada is one of those odd countries that has a trade agreement with itself, right? And they need to continue to remove barriers to trade. And this is maybe the right impetus for them to do so, and then to look for other partners where they can sell their products. So unfortunately for Canada, it’s going to be a big soul-searching exercise for them to figure out where else they can send their products outside of the United States.   

CREBO-REDIKER: They are—they are quite bound to the U.S. in terms of pipeline exports and where the refiners are. So this would be a major redirection and infrastructure buildout, to probably the Pacific, to be able to export to Asian markets. Do we have another question in the queue?   

OPERATOR: We will take our next question from Lyric Hughes Hale.  

Q: Yes. Hi. This is Lyric Hale with EconVue in Chicago.   

You know, while we were speaking Justin Trudeau folded, and so all the tariffs and what we’re talking about is off for another thirty days. (Laughs.) So just wanted to interject that first. But my question really stems from a statistic that Mike gave, which is this 75 billion (dollars) of agricultural products from Canada and Mexico. So, you know, divided by the population of the United States, 334 million, that comes out to about $225 a year. And so if you have 25 percent tariffs on that, what that would mean is an increase over the course of a year is $56 per person. So I don’t think—so if you measure that, and when you’re talking about the potential tariffs against farmers and so forth, I think on the other side of the ledger you have to look at the political side of it. It would—and the support for these measures for the Trump administration. And I don’t think this is painful enough for people to lose support for the actions that are taking place, is what I’m saying.  

STEIL: Heidi, we should probably factor in what the Federal Reserve is likely to do or not to do going forward, given the impacts we’ve been talking about. To the extent that these price rises are isolated on the specific goods that are being imported, they might be limited—say, on the order of 0.2 percent on inflation. But remember, the Federal Reserve is going to be very vigilant not wanting these price rises to spill over into the general price level. And what does that mean? That means that the Fed is likely to indefinitely halt its rate cuts, and possibly even consider raising rates sooner rather than later. So it could have a much broader impact than just the items that are being targeted for tariffs.   

CREBO-REDIKER: And it’s very hard to actually—if you’re trying to model out what the impact of inflation sort of a one-time hit versus a longer-term burn, what that retaliation is going to be. Because if you are looking at the EU coming next, it’s just very—in this uncertain environment surrounding tariff policy and retaliation—it’s very, very hard to calculate what that’s going to mean for rates. So you—Benn, you’re exactly right.   

And, of course—of course, Canada would resolve itself while we’re on our call. (Laughs.) But, please, Sam, do we have another question in the queue?   

OPERATOR: We’ll take our next question from Stephen Singer.  

Q: Hi there. Thank you.  

Is there any information that you might have about how tariffs—not now, of course, but maybe in thirty days—affect lumber products and forest products? Considering there’s a major problem with home construction, whether home builders are lobbying? And also related, I’ve been reading that industries are looking for carve-outs. But we’ve talked a lot about energy, but lumber and forest products are a big deal, particularly since there’s such a crisis in housing and not enough are being—not enough houses are being built. So I’m just wondering if you could talk a little about that.   

CREBO-REDIKER: Inu, do you want to take that on?  

MANAK: Yeah, I can. If the tariffs do go into place in thirty days now, then we are certainly going to see an impact there. I mean, Trump has said that, you know, we don’t need Canadian lumber. But we certainly do. Said we didn’t need, you know, Canadian steel and aluminum, but we certainly do. And we still have challenges with importing those products into the United States. So I think that there’s still going to be an effect that we’re going to feel at some point. Remember, we still have antidumping duties on Canadian lumber, which are in effect. So anything in addition that he puts on Canada is going to be on top of all of that. So I think that we’re certainly going to feel challenges in the housing market and across the board if he does threaten tariffs on other partners.   

And I’ll say this too. Like, it’s not just about actually imposing the tariff. It’s the threat of tariffs that actually moves markets too, that makes partners reconsider what they’re doing. And so we’re in for a lot of uncertainty if this is the way that he intends to do trade negotiations. So, I mean, for Europeans who are closely watching this right now, I can imagine they’re taking notes and trying to figure out what the best approach is, and trying to figure out whether or not that Canada’s approach or Mexico’s approach was the one that worked better, right? Looks like both of them did, to some extent. But we’re still in an ongoing state of uncertainty on when he’s going to turn on the faucet and turn it off. And so I think that for all producers, including lumber producers, this is going to be a very difficult four years to navigate.  

CREBO-REDIKER: I think Inu just captured a very broad statement that you can apply throughout what we’re going to see in tariff policy over the—over the coming year. So thank you. Thank you, Inu.  

Sorry, Benn, I interrupted you. Please.  

STEIL: I just wanted to point out that this is coming at the worst possible time in terms of the housing market, where we’re looking at historically high mortgage rates right now, hovering around 7 percent for thirty-year mortgages.  

We were just beginning to talk about the necessity of zoning reform under the Biden administration. Unfortunately, we didn’t make much progress there, but in order to encourage the building of new housing. And now raising the cost of constructing these new houses will only exacerbate the problem. So this could become a significant domestic crisis over the next few years.  

CREBO-REDIKER: The other is sort of the distorting effects that you have across the board, whether you’re talking about lumber or electronic components, is that you get companies frontload and they start buying as much as possible with the anticipation, and then that sort of throws—you know, going back to Benn’s flagging of how the Fed is going to have to interpret this, it makes reading the data even more noisy and more difficult to do if you have companies really, you know, just making large purchases in anticipation of having restrictions on their critical components come in.  

We have four more minutes, and I’d love to get a couple more questions in there.  

OPERATOR: We will take our next question from Andrea Fiano.  

Q: Yes, good afternoon. Andrea Fiano, Global Finance magazine.  

I would like to look at something a little bit—that hasn’t been brought up. I wonder, particularly on the agribusiness, if this potential tariffs at this point, with the thirty days’ delay, create new potential winners. Let me explain.  

In Latin America we have seen more and more exports coming from Chile and other countries—Peru—coming to the U.S. There has been a shift in what Mexico was exporting to the U.S. in terms of fruits and vegetables. I wonder if this move could create temporary new winners or anything of that nature in some of the products and areas that we discuss.  

And also, just one little thing. We were talking about lumber. I imagine the whole tragedy of Los Angeles reconstruction is an added issue there because the demand for lumber will be much higher very soon for that. Thank you.  

CREBO-REDIKER: Zoe, do you want to take that on? Just because I know you follow a lot of trade flows, and particularly in trading with China and trade with non-U.S. trade partners. So please take that on.  

LIU: Yeah. Thank you, Heidi.  

I think the first—the first impression to me is potentially in the auto sector for China, actually, in the sense that, you know, right now about—for most of the Mexican car exported to the United States are American brands. And China has—Chinese carmakers have been thinking about setting up plants in Mexico, but their plan has been not exporting to the U.S. market; instead, they wanted to ship it—service Mexican local market, but also to South—Latin America and South America in—South America in general.  

And then, on the other hand, you know, too, potential winners may not necessarily be terms of, like, winners in the context of trading with the United States, but perhaps winners in terms of substituting the part where either tariff on U.S. goods or the retaliatory between Mexico, U.S., and Canada, but the alternative suppliers. I think lessons from last time was that China switched from Boeing to Airbus; and China also substituted American beef to from—to Argentina; and also wine imports from America to Australia, Chile, and elsewhere. So I do see so-called winners, but not necessarily from the aggregate trade perspective but it’s more of destination subsidies—substitute point of view.  

CREBO-REDIKER: I think there are going to be a lot of opportunities that come of this. We’re looking very much at a U.S.-centric perspective right now because that is where the tariffs are coming from.  

Can I just in the last minute ask if Mike Froman wants to sum up with any final remarks to close us out today?  

FROMAN: I won’t try and sum up, only to say, as others have, that this is a rapidly changing dynamic situation, and I think we’ll try and stay on top of it, provide the best also longer-term analysis and capabilities that we’ve got here. But lots at issue here economically, strategically, diplomatically, and politically, and so much to—much to follow going forward. And thank you all for calling in and participating.  

CREBO-REDIKER: Thank you so much.  

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