International Economic Policy

 Brad W. Setser, CFR’s Whitney Shepardson senior fellow, leads the conversation on the influence of tariffs on global trade and the price of U.S. goods, and what to expect from the second Trump administration’s economic policies. A question-and-answer session follow his opening remarks. TRANSCRIPT FASKIANOS: Welcome to the Council on Foreign Relations State and Local Officials Webinar. I am Irina Faskianos, vice president for the the National Program and Outreach here at CFR. CFR is an independent, non-partisan membership organization, think tank, and publisher focused on U.S. foreign policy. We are also the publisher of Foreign Affairs magazine. As always, CFR takes no institutional positions on elected officials, political candidates, or matters of policy. Through our State and Local Officials Initiative, CFR serves as a resource on international issues affecting the priorities and agendas of state and local governments by providing analysis on a wide range of policy topics. We’re delighted to have over 650 participants confirmed for today’s discussion from fifty-two states and U.S. territories. We appreciate your taking the time to be with us for this discussion. And I want to just remind you all that the webinar is on the record, the video and transcript will be posted on our website after the fact, at CFR.org. We are pleased to have Brad Setser with us to discuss the future of tariffs, trade, and U.S. economic policy. Brad Setser is the Whitney Shepardson senior fellow here at CFR. His expertise includes global trade and capital flows, financial crisis analysis, and the debt economy. From 2021 to 2022, he served as senior advisor to the United States Trade Representative. Prior to that, he was deputy assistant secretary for international economic analysis at the U.S. Treasury, from 2011 to 2015. He is the coauthor of the book, Bailouts or Bail-Ins?: Responding to Financial Crises in Emerging Economies. And he authors the blog on CFR.org entitled Follow the Money. So I hope you all sign up to receive those posts. So, Brad, thanks very much for being with us today for this conversation on the future of tariffs and global trade. We’ll have a conversation between us and then we’ll open it up to all of you for your comments, both written and raised hands. So maybe you could begin by giving us an overview of the purpose tariffs serve in trade and economic statecraft. SETSER: Well, I think you can argue that tariffs serve three broad purposes. The first purpose is to introduce a bit of friction. I mean a tariff is a tax imposed at the border that anyone who wants to import a good has to pay. And so it tends to raise the price of imports. So one use of tariffs is to protect a particular U.S. industry from foreign competition—be it all foreign competition or be it unfair foreign competition. So that's kind of the classic protective or insulating role of tariffs. The U.S. tariffs that were put on against steel, imported steel, when there was an excess of global supply of steel several years ago would be a good example. Another use of tariffs, which has sort of gone out of favor but President-elect Trump has alluded to quite often recently, is simply to raise revenue. Tariff is a tax. Taxes raise revenue. And so you could use the revenue generated by a broad across-the-board tariff to either close the fiscal deficit or offset other tax increases. That use of tariffs is not—has not been common in the postwar period, but that was probably the original use of tariffs back in the 1700s, 1800s, 1900s. Countries that didn’t have income taxes and had limited capacity to collect sales tax could control a port. And if you could control a port, you could put tariffs on goods coming through that port. The third use of tariffs is to provide leverage in a negotiation. Now, that leverage can be leverage that’s intended to open up other countries’ markets. That’s been the classic use. So if you think of a free trade agreement, it is an agreement whereby the U.S. would lower its normal baseline tariffs. In another country, a partner would also lower its tariffs so that there would be no tariffs on trade between those two countries. So you could generate leverage by negotiating over the terms through which you bring your tariffs down. President Trump, in his first term, revived the older idea of threatening to raise tariffs and saying that we’re going to raise tariffs, whether because you’re acting unfairly or because we don’t like the outcome of trade. And if you don’t make changes, we will go to higher and higher levels of tariffs. So that’s tariffs for leverage. Classically, tariffs have been used as leverage for trade goals, for commercial goals. A good example would be the Section 301 case against China that President Trump brought in his first term, which was resolved, at least partially, by a commitment by China to buy a lot more U.S. goods. So the threat of tariffs was used to extract commitments from your counterparty. Those different—and I guess I should add that, at least conceptually, you could use tariffs in the way we use sanctions. Sanctions are used not to generate economic or commercial outcomes but as leverage to pursue broader, more political goals. And you could, at least in principle—although it's an unusual use of tariffs—use tariffs to try to pursue those broader political goals. It is worth noting that these different goals are a bit in tension. If you want the tariffs to be protective, you may want a very high level of a tariff. A very high level of a tariff, though, doesn't generate any revenue. If there is no trade, there's no revenue. If you want the trade tariffs as a source of revenue, you can’t have many exclusions. You can’t tailor the tariff very much, because every exclusion loses significant amounts of revenue. The bigger—an initial exclusion becomes a big exclusion over time, because everyone reroutes trade to take advantage of that. So if you’re going to use tariffs as a source of revenue, they’re very—it’s very hard to actually use them also as a source of negotiating leverage. So in some sense, you have to choose between those different objectives. But they are all objectives that, at least in principle, can be pursued with a threat of tariffs. FASKIANOS: So what tariffs are currently in place on U.S. imports? Are they effective? And what do you see shifting come 2025? SETSER: Well, I concede that I do not have the capacity to read the mind of the President-elect. And I thought I had a reasonably good read on what he might be doing, but I certainly didn’t expect the first big tariff threats to be directed primarily against Canada. So I think a little bit of humility is required. So if you just look at the standard tariffs that the U.S. applies, MFN tariffs, or permanent trading relations tariffs, those tariffs average about 2 percent across all goods. The tariffs on China that were introduced in President Trump’s first term on average created a 15 percent additional tariff on trade with China. China was about 20 percent of U.S. trade. So that would have been about a three percentage point increase in the tariff level in overall terms. However, when you raise tariffs on one country, like China, and not on others, trade tends to reroute around those higher tariffs. So you didn’t actually see an increase in the overall effective tariff to 5 (percent). It’s probably more like 3 or 4 percent. Most of the trade that we still have with China is in those subcategories of trade that were left out of the tariffs in Trump’s first term, most significantly iPhones. You know, there’s another way of looking at tariffs. You can sort of say, if you divide trade into industrial goods and agricultural goods, agricultural goods generally have a certain amount of friction, a certain amount of tariffs, a certain amount of non-tariff barriers. So there’s generally not fully open trade. But for industrial goods, the norm is actually very open trade. Over half of all U.S. industrial trade is at a zero tariff, even if you don’t have a free trade agreement, and another quarter is at a very low tariff, not a prohibitive tariff. So if you look at it on a product category, we have significant tariffs in part around autos, 2 ½ percent for a normal car, but 25 percent for a light truck or a heavy SUV. We have significant tariffs around steel and aluminum and some metals. We have significant tariffs around some categories of clothing, apparel, where you can get around that tariff if you are in a free trade agreement with the U.S. and use U.S. yarn and fiber and fabric. And obviously, there are still important limits on certain parts of agricultural trade. But electronics, pharmaceuticals, a whole range of goods essentially are un-tariffed, even without a formal free trade agreement. I think, you know, President Trump has generally suggested if you listen to his campaign pledge, two broad types of changes. One is that he wants to raise tariffs on trade with China. He already raised tariffs on trade in China in his first term, raising them—you know, there were different tariff lists, one at 25 (percent), one at 7 ½ (percent), one at zero (percent). They averaged out to be at about a fifteen percentage-point increase in tariffs. There have been two possible evolutions suggested. One is to withdraw permanent trading relation status with China, which would raise the average tariff to somewhere between 40 and 45 percent. And then President-elect Trump has suggested possibly going to a 60 percent tariff on all Chinese goods. Now, he’s also suggested, and certainly, advisors have suggested, that this is a threat for negotiating purposes. It’s going to be a source of leverage. We may not end up with that high a level of tariff across the board on China. But that was certainly one big focus. The other big focus was the across-the-board tariff, 10 percent, sometimes it's been suggested a 20 percent tariff, on everything. That would be intended as a source of revenue, to allow a lower income tax. That takes—if you're going to use it to reduce income tax, that would have to be part of a budget package. And that would be a different use. It would be more of a revenue-raising use and less of a negotiating leverage use. And then finally, in the past couple of weeks, he's—President-elect Trump has threatened 25 percent tariffs on Canada and Mexico over immigration, over fentanyl, sometimes to needle "Governor" Trudeau, to use President Trump's phrase, and suggest that Canada might want to think about becoming the 51st state. I don’t think that’s a serious threat, but it is a somewhat unexpected threat. FASKIANOS: Mmm hmm. And it did—it did mean that Trudeau did go down to Mar-a-Lago to see President-elect Trump. So I think it probably did elicit a response. So the tariffs, what does it mean for the consumer? There’s been a lot of talk about the—what it will mean for the average American for these tariffs that President-elect Trump is talking about. SETSER: So, as I alluded to at the start, a tariff is a tax on imports. And that tax is paid, in the first instance, by the importer. Whoever is picking up the good at the port has to show they've paid the tax before they can take delivery of the goods. There's a debate about whether the exporter, knowing that the importer has to pay the tax, will adjust their prices down in a sort of share some of the burden of the higher tariff. The empirical evidence from the first round of tariffs on China was that that effect was very modest, that there was very limited falls in the price of goods imported from China. And so, thus, the importer more or less had to pay—you know, had to pay the tariff. And so a 20 percent tariff would lead to basically a 19 percent increase in the cost the importer—the total cost the importer faced on that good. There’s a second question, which is if the importer is a retailing company or a company that’s using the import as a good and as an input into its production, how much is passed on to the final consumer? And there have been different studies that come—sometimes find almost complete passthrough, and sometimes find that a significant share of the increase in cost is absorbed by the company that does the importer, not the final consumer. But I think—and then, you know, conceptually goods that compete with the tariffed good should also go up in price. So you could have a broader increase in price than just the increase in price on the good that faces the tariff. All that put together, I think it is generally reasonable to assume that if you raise tariffs on 10 percent of U.S. consumption, roughly imported goods by 10 percent, you’re probably going to have a 1 percent increase in the price level. And you’re probably going to get close to a 1 percent increase in federal government revenue. It gets more complicated if you push the tariffs up higher, and then you kind of—you force companies to find alternatives to just paying the tariff. But for modest tariffs, I think the simple linear math is generally pretty close to right. So a 10 percent across-the-board tariff is actually a pretty big—a pretty big increase in aggregate prices. FASKIANOS: And will that contribute to, you know, the inflation going—inflation going up? SETSER: I think that is a more complicated question. And it gets to how one defines inflation. Generally, economists think of inflation as an ongoing series of increases in the price level. So not just a one-off change. So if oil goes from fifty to a hundred, I think most people in—who are not economists, would say that’s very inflationary. And an economist would say, well, that’s just a jump in the price level. If it stays flat at a hundred, that’s not going to be any further increase in inflation. And the complexity comes from the fact that if the government is collecting a lot of tax revenue from the tariffs and that is reducing the deficit, that is taking money out of consumers’ pockets and they have less money to spend on other goods. So the aggregate impact of the increase in the tariff on inflation depends quite significantly on whether you offset that with other tax cuts. So my view is that you should view a tariff that is not offset with other tax cuts as a one-off increase in the cost of living, not as inflationary. And you should view—there’s some small inflationary effects from less efficient production. There’s some disinflationary effects because consumers have less money to spend on other goods. But basically, it’s just a—you feel poorer because you’re paying more for the same goods. If you offset with tax cuts, or if the Federal Reserve tries to offset with looser monetary policy, then you certainly run in the risk of what would be normally called inflation, ongoing increases in price levels. FASKIANOS: Great. So we’re going to go to the group for their questions, comments. We already have one written question, and I’ll look at the raised hands. So I’ll take the first written question from State Representative David Michel, from Stamford, Connecticut: Is this no tariffs not due to the allowance of quotas under President Biden that enables U.S. operations to buy steel, for example, to the limits where we are filling the gap between what we produce and what we need? And is anything going to change with European steel? SETSER: So with respect to Europe, Japan, Korea, and others, there were exclusions granted as part of a negotiated arrangement for imports of steel. So the overall tariff from the Section 232 trade action is 25 percent. But for defined quantities from specific countries there were tariff rate quotas, which let a certain amount of steel come in, typically the amount of steel that was imported historically from that country, without paying the tariff. This was meant to—well, it was not meant—it was part of a deal whereby Europe and others didn’t retaliate against the U.S. tariffs, which were imposed on them. They didn't accept, as a matter of principle, that the U.S. should have imposed the tariffs because they were done under a national security claim. And Europe says, you know, and Canada, we're your allies. We're not a national security threat. So as a sort of settlement, the Europeans and others were given tariff rate quotas up to a certain point. That agreement expires in the spring of 2025, so next year. If it expires, the tariff rate quota would go away. And then Europe would be free to impose its retaliatory tariffs on a range of U.S. goods, I think including whiskey. I forget exactly. I would hope that that agreement is extended. The Europeans would like it to be more flexible over time. They think that the—because the tariff rate quotas are for narrow products and for an individual country, in aggregate Europe hasn’t been able to get as much access to the U.S. steel market as expected. And so they would like it to be more liberal. The steel industry, I think, thinks that the regime for Mexico, in particular, but maybe Mexico and Canada, which is a separate deal, was too expansive, didn’t impose enough restrictions. And there was a general hope that we could move towards something that did more to support clean and green steel, less coal-based, blast furnace-based steel. More innovation and hydrogen-reduction steel. That doesn’t feel like it’s going to go anywhere under a Trump administration. So I actually don’t know the answer. My gut is, because, you know, unless you’re going to be very aggressive right off the bat and want to pick at an old scab, I would think it would make sense to find some agreement to extend the current arrangement. But if you want to initiate a more hostile negotiating environment with Europe, if you want to go after the Europeans, this deal does expire in the first part of next year. FASKIANOS: Thank you. I’m going to go next to Patty Alley, who’s a councilmember in South Kingstown, Rhode Island. You’re unmuted, so go ahead. OK, I think we’re having some technical difficulties. You’re muted again. OK, I’m sorry. Maybe you could type your question and we’ll take it in written, because we’re not hearing you. I’ll go next to Paul Brierley, with the Arizona Department of Agriculture, I believe. Q: Yeah, that’s correct. Paul Brierley with Arizona Department of Agriculture. It's been kind of my perception, anyway, that often when we impose tariffs on a country, they impose counter-tariffs on agricultural imports coming from our country to theirs. Could you just speak to that, what might happen there? SETSER: Well, it's more than your perception. That is, in general, how countries respond, particularly China, because China imports a lot of agricultural goods from the U.S. Why is that? Well, we're an agricultural exporter. And then also some of the agricultural states have significant senators. So when Mitch McConnell was the Senate majority leader, Kentucky Bourbon was on every tariff list imaginable. You know, it was just a way of putting on the Senate. When Paul Ryan was the speaker of the House, you would see a lot of retaliation against Wisconsin cheese and Harley-Davidson. You know, countries tend to go after prominent products from states that have significant leadership positions in the House and the Senate, to try to put reverse pressure back on the United States. With respect to China, and since President-elect Trump has threatened additional tariffs on China, China almost always retaliates against U.S. agriculture. Why? Well, in some sense it is easier for China to find alternative sources of agricultural supply than it is for China to find alternative sources of semiconductors, or aircraft, although they’re not buying very many aircraft right now. If you put tariffs on U.S. aircraft, and only the U.S. and the EU can supply large commercial aircraft—at least, you know, the Chinese C919 is only available in limited quantities—you’re effectively handing the market over to the European Union, to Airbus, and you’re giving up any negotiating leverage your airlines would have over the price of aircraft, because they have to buy from Airbus. With agriculture, there are multiple suppliers to begin with. So you can put tariffs on the U.S. And if it's tariffs on, say, pork, you can get pork from the EU, from Denmark, from Spain. You can get pork from Ukraine. You can get pork from Brazil. You can find multiple sources of global supply. And so, therefore, it tends to be an attractive way, if you're China and you feel like you want to retaliate, to put a little pressure, impose a bit of pain back on the U.S. And then there are also products, frankly, where there are luxury goods in China. And so it's pretty easy to zero them out of the market altogether. Beef, for example. I mean, China does not need to import U.S. beef. Beef is not a significant part of the consumption basket inside China. It's a luxury good, consumed at restaurants. Lobster, same sort of thing. So you can hit those kinds of sectors. And then there are, like, you know, little, small components of agricultural trade, like distillers dried grains which are sort of the residual from the production of ethanol which can be used as an animal feed. The Chinese have hit that often in the past. The Chinese is like going after chicken feet, which is going after Arkansas chicken paws. It's one of my favorites. And those tariffs are kind of fun because you can almost always see how the U.S. gets around them. You know, China puts tariffs on chicken paws and, guess what? U.S. exports of chicken paws to Hong Kong go up by almost as much as U.S. exports to China go down. So it's pretty clear that they get shipped to Hong Kong and probably taken out of one bag and put in another bag. And no one pays too much attention. But these are—it’s a classic play. And the U.S. exports 20-30 billion (dollars) a year of agricultural goods to China. Mostly soybeans. Soybeans, you can get them from Brazil. You can get them from Argentina. The last time around China zeroed out purchases of soybeans, which is a big, big component of agricultural trade, for one harvest season. And that forced U.S. beans to sell at a discount on the global market. And I think if we’re in a tariff war with China again, those kinds of retaliatory measures are 100 percent likely again. FASKIANOS: Thank you. I’m going to take a written question from Riley Anderson, who’s the deputy legislative director for New York Assemblyman Patrick Burke: Hypothetically if you were an elected official for a border district of Canada or Mexico, what would you say to your constituents about the issue? SETSER: Look, I think I would say, we benefit from a stable trading relationship with the United States. We have a challenge now because the U.S. has elected a president who doesn't always see the virtue or benefits of a stable trading relationship, even inside North America. I would say, we need to be prepared to be pragmatic. And where the U.S. has some important, realistic, legitimate concerns about the nature of trade, we should be willing and open to renegotiating parts of the U.S., Mexico, and Canada Free Trade Agreement. Call it USMCA, call it NAFTA two, it's up for renegotiation next year. We should be open to the possibility that there are beneficial to changes. In Mexico's case, Mexico is importing an awful lot of cars from China. One-third of Mexican auto demand is coming from China now, is being met by Chinese production. If the U.S. asked Mexico to raise the tariffs on imports of cars from China to match U.S. tariffs on Chinese cars, if I were Mexico, I would consider that right? The USMCA was built on the notion that it's a market where U.S. production meets Mexican demand, Mexican production meets U.S. demand, and there's an element of reciprocity. If Mexican demand is being met so heavily by China, and that's freeing up Mexican cars to be shipped north, that, to me, changes the nature of the agreement. And it's, arguably, to Mexico's interest to have more of Mexican demand to be met with cars that are made in Mexico, or cars that are made in the U.S. with Mexican parts. So be open to some changes when those changes make sense. But also be prepared, if you are—feel like the U.S. is making unreasonable demands, that you’re going to have to be prepared to take retaliatory actions and show that you can’t be bullied. And so I think there’s going to be a tough balance. And, frankly, it could be somewhat painful, for all parties, if President Trump goes forward with 25 percent tariffs with some of our closest trading partners, who have production chains that are very integrated into our own. FASKIANOS: Thank you. I’m going to go next, a raised hand from Stephanie Agee, who’s vice president and chief admin officer for international trade in Virginia. Q: Hi. Oh, excuse me. Can you hear me, OK? FASKIANOS: We can, Stephanie. Thank you. Q: Thank you. First of all, thank you all so much for hosting this. I really appreciate your time and your analysis here. Question for you. So if you were advising the president-elect, and we wanted to focus on—you rightly mentioned that there’s a number of reasons to use tariffs. If we wanted to focus on it being a source of leverage, focusing on that purpose behind them, would you advise that there are alternatives? That there are other ways to provide pressure and leverage, especially on a country like China where we’re very interested in sort of changing their trading practices and, you know, bringing them more into the way of doing things that we’re more familiar with in the U.S.? Are there—are there alternatives? Are there things that should really be much more strongly considered that are being ignored right now in favor of tariffs? SETSER: I guess a couple of thoughts and reactions. I think there probably aren't a lot of other tools of leverage vis-à-vis China. You could say, for example, that export controls are a tool of leverage. But in general, if you're doing an export control, the export control is a good that you think would—you know, where you want to keep China from having access to that good because you think if China had access to that good it would be detrimental to your national security or economic security. We don't let China buy the components to make a stealth plane. We don't let China buy the propellers for a nuclear submarine. We don't let China buy a Black Hawk helicopter. And we currently don't let China buy cutting-edge equipment to manufacture semiconductors or certain very high-performing semiconductor chips. China would love to negotiate a reduction in those export controls. So that would be one mechanism, one source of leverage that you could look to use. But, you know, in general, unless you think the export control was applied incorrectly and the good is not of national security interest, you wouldn't want to negotiate over in that field. China would like to do more investment in the U.S. Certainly they would—you know, I guess you can debate how much President Xi actually cares about it. But in principle, they would like to not be forced to divest, or their company ByteDance would like to not be forced to divest from TikTok. So you could, in some cases, negotiate over the terms of new investment or modulating requirements for divestiture. Again, you'd have to come to the conclusion that you're willing—that you don't think TikTok poses the kind of risk that has been postulated, and so therefore this is an appropriate field of negotiation. In general, I think around economic issues, the most obvious field for negotiations is, in fact, tariffs. Then you have to deal—ask, are there tariffs that you’re willing to reduce as well as tariffs that you’re willing to increase? Are there tariffs that you are willing to not increase if China makes certain policy changes? What’s the realm of negotiation? And I think there is a very, very fundamental question there. Which is, how realistic is it to get enormously significant changes in China’s way of doing business through any tool of economic leverage? China is a very big country. China managed the 15 percent increase in U.S. tariffs relatively well. China is exporting more, in aggregate—not more to the U.S., but more in aggregate—about a trillion dollars more, so a lot more in aggregate, now than it was five years ago. So there's no real evidence that, in the face of tariff threats, China is going to change the way it does business. In some sense, Xi has doubled down on China's model. And he's very committed to a model of state-led industrial and technological catch up. And so to me, it's a little hard to see where the realm of negotiation is. Xi wants to make his own semiconductors. He wants to make his own aircraft. He wants to be technologically independent. He wants Chinese electric vehicles to be the global standard. He wants Chinese electric vehicle production to meet global demand. So I'm not sure that there's—at this point, there's a realistic deal. So at least in my view, this is what I would have advised a President Harris and what I would advise a President Trump if he were to ask, is that you really need to set the tariffs on China in a way that reflects what you—what the kind of trade you want to do with China should look like. So it’s less about changing China, and more about insulating your economy from certain Chinese industrial policies that would otherwise cause you difficulties. So you want to protect electric vehicle production in the U.S. from China, because China has built up, through state support, through initially a very protected market, a big lead in electric vehicles. And you don’t want that to wipe out your own electric vehicle industry. You don’t want Tesla to meet U.S. demand just from Shanghai. So you would want to think about how you structure trade to achieve your goal, which is an electric vehicle industry in the U.S. You would want to structure trade in such a way that you don't have excessive dependence on China for certain critical materials. But you might be more open to continuing trade in toys, apparel, and bicycles. And China might remain open to trade in agriculture. So the way I would think of it is less we're going to be able to change China because I don't think you can China, and more how you want—how you want to trade with an unchanged China that is pursuing some pretty aggressive industrial policies. That's my view. I mean, it's obviously a huge source of contention and debate. FASKIANOS: I’ll take the next written question from Drew Combs, who is the executive director of the North Dakota Trade Office: If you could—I’m trying to get back to it—explain or elaborate on how the USMCA will come into play or change under President-elect Trump. SETSER: Well, that’s a very interesting question. The USMCA is already in force. It is an agreement that President Trump signed. It was negotiated by Bob Lighthizer when he was President Trump’s trade representative. And it establishes generally tariff-free trade among the countries of North America. And companies have invested and set up supply chains based on that assumption. That includes setting up auto supply chains that cross the border. Often, you know, a part will be made first stage in Mexico, second stage in the United States, third stage in Mexico, put it into an engine in the United States, and then put into a light truck in Mexico. So things cross the border lots of times. So that is, in a sense, the law of the land. If you want to change that, you either have to renegotiate USMCA—and there is a process inside the agreement that sets up a review and a renegotiation for next year. But you could pull that forward. And so in that context, you could propose changes to the USMCA agreement. One which I alluded to earlier is because it’s a free trade agreement, it’s not a customs union, the members of USMCA, Mexico, Canada, and the U.S., have different tariffs on the same good towards third parties. So Mexico has a much lower tariff on Chinese-made cars than either the U.S. or Canada. And so, hence, Mexico imports a lot more Chinese-made cars. So you might ask Mexico, in the context of a renegotiation, to adjust its tariff towards Chinese-made cars to reflect the higher tariffs now in place in the U.S. and in Canada. I’m sure Mexico would have some ask of the U.S. as well. One of the features of USMCA, unlike other free trade agreements, is that there is a—for the auto sector, there's a high wage content requirement, in addition to North American content requirement. So in order to qualify for zero tariff auto trade, as opposed to the 2 ½ percent tariff on a normal car and the 25 percent, which is much more significant, the tariff on a light truck, the car has to, or light truck, has to have a defined amount of North American content. And in addition to having a defined amount of North American content, it has to have a defined amount of content made by workers who have a wage above a certain level. I don't have it memorized. And that was more or less meant to be a—has to have a certain amount of U.S. and Canadian content, or—and this is what the Mexicans insisted on—we want to eventually have wages like the U.S. and Canada. So if wages in Mexico are high enough, we want to qualify for that high wage content component. I think one of the big issues going forward is going to be that the 25—the 2 ½ percent tariff isn't that high. And so some companies may not be interested in meeting these requirements just to get rid of that 2 ½ percent tariff. They may want to make in Mexico cars with a lot more Chinese content. And they can do so. I mean, it's a tariff on a car. If you can bring in the parts and you pay the 2 ½ percent tariff, it's fine. There's no further requirements. You're not required to meet the USMCA content requirement unless you want to get rid of that 2 ½ percent tariff. So I think there's going to be a set of issues that will be very legitimately part of the negotiation. On top of that, President Trump has made a series of threats that go outside the four corners of USMCA. There is nothing in USMCA that says that it is appropriate for the U.S. to threaten 25 percent tariffs on Mexico if Mexico doesn’t do a better job of controlling the border and helping stop immigration into the U.S., or helping stop fentanyl into the U.S. Nor actually is there any obvious component of U.S. trade law that would allow that. You would probably have to do that under the sanctions authority or IEEPA, if you can do it at all. And so that’s a threat that is outside the scope of a normal trade agreement. And that’s where I think, if President Trump goes forward with some of those kinds of threats, which are on top of and outside of USMCA, you’re effectively tearing USMCA up. And so I think that’s when it becomes a bit delicate and potentially risky. FASKIANOS: Thanks. I’m going to go next to Lanette Frazier from Arkansas. If you can state your affiliation, that’d be great. Q: Can you hear me? FASKIANOS: We can. Q: OK. Thank you so much. First of all, I want to say thank you Mr.—I’m Lanette Frazier. I’m a city councilmember here in Pine Bluff, Arkansas. And this is my first term. And so, Mr. Brad, thank you for breaking down the three ways that tariffs are used. That helped me a lot. My question might be simple to a lot, but I—since I'm on a local level. With the tariffs that President-elect Trump is suggesting or threatening he might do, how will those—how will the tariffs impact small and mid-size enterprises differently than large corporations? Because mostly here we have small or mid-size. We have few large corporations. And are there any tools or resources that are available to help businesses to navigate any changes that might come down the line? SETSER: You know, I think you should contact your local congressman or -woman for any tools or resources. That's not really my specialty. I think we can think of a lot of different ways different kinds of small businesses can be impacted. Some small businesses rely on imports for the goods that they sell, some retail businesses. And so then it really depends on are you relying on an imported good from China or not. Are there going to be tariffs on Mexico or not? Is it going to be a 10 percent across-the-board tariff—which, you know, may not be great, but you can probably afford, whereas a 60 percent tariff on a bestselling item from China may really put you at a disadvantage? So that would be the most obvious effect. Some small businesses may be exporters and may face some of the impacts of retaliation. We don't think of small farmers as small businesses, but you can think of farmers as independent businesses that produce a commodity. And that commodity, if it's hit by a tariff, they may lose some markets. The price of their goods may go down. And that can impact the local economy. And so for some places like Arkansas or Kansas, where I'm from, that effect can be significant. And then, even if you're not directly affected, if there's, say, a 10 percent tariff on everything, and the price of every imported good—so, all the stuff you buy at Walmart goes up by 10 percent, people are going to be spending more on some of those goods. You know, people are still going to buy toys, and, I don’t know, plastic hoses, because you want to spray people in the summer because that’s a nice thing to do. And therefore, you’re going to have less money in your pocket and less money to spend in small businesses that don’t actually use imports and that don’t rely on exports. I think in general, small businesses tend to be more one step removed. You know, unless you’re importing goods for sale you may not be directly affected. But there’s going to be a lot of, I would think, indirect effects. And then if a small business is a supplier to a big business, well, some will benefit, possibly, because they can take business away from an importer. But others may be hurt. If you’re supplying an exporter that’s hit by retaliation, you know you’re going to see trouble. So I think it’s hard to generalize about the impact on small business. And a lot of the impacts will be the impacts that are felt by the entire economy, not just by—directly by a small business. Q: Thanks so much. FASKIANOS: Thank you. I’m going to a written question from David Briel, who’s Pennsylvania deputy secretary of international business development: How would you advise we, from the state government, assist companies who present clear evidence of damage the specific tariff creates, and one that impedes company expansion and increased employment here in Pennsylvania to get tariff exclusions from the USTR? SETSER: Well—the first question is whether there are going to be tariff exclusions, to be honest. There may be, there may not be. Tariff exclusions are not a requirement. There have been exclusion processes in the past, but they are—there is no guarantee that there'll be a new exclusion process. And certainly, if you're going to do a 10 percent across-the-board tariff as a tool for raising revenue, you actually can't grant very many exclusions. Maybe you can do an exclusion for imports of petroleum and crude oil, but you really can't do anything else because every exclusion grows over time. You know, we don't give too many exclusions to people who pay income tax because if you give too many exclusions on people who pay income tax you won't have any income tax revenue. So if you're going to use this as a pay-for, as a source of revenue, I wouldn't expect there to be very many exclusions. You would want the people to just cough up the money because the goal is to raise revenue. If you want to get a fundamental change in the U.S. relationship with China, you might be willing to offer exclusions for a limited period of time, which is what Lighthizer did. But you would want people to have, at the end of that period of time, a plan whereby they will not be reliant on China. You want them to use this period of reprieve to adjust and find alternative suppliers. So one of the criteria in the initial round of exclusions was a plan. You needed to show that it was going to be painful in the short run to not get access to an input from China, but that you have a plan in the long run where you were going to find alternative suppliers. And Lighthizer's general view was that you know, those exclusions shouldn't be renewed. They were given to you to allow you to find—have time to find alternatives. So that'd be one approach. And, you know, your best strategy for getting to an exclusion was to show, on one level, pain and, on another level, a plan. And I think that in general is the standard advice. But the key on all this is actually whether there's an exclusion process, what are the legal criteria that are laid out for the exclusion. USTR, if they are running the exclusion, or Commerce, if it's a Commerce authority, have to be sensitive to charges of favoritism. And so there has to be some kind of criteria and process for evaluating which exclusions are granted and which ones are denied. So looking at those criteria, and then to the extent the criteria are established, fitting the—you know, the basics, fitting the argument to the criteria that have been set out in the most compelling way, is how you get an exclusion. But I am not at all convinced there's going to be that many exclusions from some of these tariffs. FASKIANOS: Thank you. I’m going to go next to Chris Himes, who has his hand up, from the township manager of New Garden Township in Pennsylvania. Q: Representing a flood of Pennsylvanian-type questions here. But I represent a township. It serves as one of the largest epicenters of mushroom production in the United States coming from Pennsylvania. So with that, obviously, a tariff type policy where it’s—no doubt, it’s inordinately skewed to coming from China. It’s, like, over 90 percent. So with that, it would be very interesting when there’s such, like, a strong production coming from one entity to the other how tariffs would influence that. It’s funny too, because Canada is actually up in the top five as well, which doesn’t really help out. But then if you take that decision from a policy, and you were to combine that with a mass deportation type of policy, which would impact a lot of the mushroom production capabilities, I would just be very curious about how they would exist in concert with each other. SETSER: I guess all I’ll say is that I’m very curious as well. I mean, you have offsetting shocks. So the protection, the higher tariffs on Chinese mushrooms, should be an incentive for more domestic production of mushrooms. But I guess mushrooms are pretty labor intensive, and so therefore a reduction in the supply of low-wage labor in the U.S. would work against you. It’s an empirical question, as far as I’m concerned, and I don’t know the answer. FASKIANOS: I’m going to try to do a roundup of three questions that are focused on the impact of President Trump-elect’s plan on specific industries: Steven Foutes from Missouri about the impact on travel, tourism; Mayor Maldonado from Nogales, Arizona about why we would—there would be tariffs on Mexico on fresh produce, fruits and vegetables; and John Boyd about the ban on crude oil from Russia. And I think he’s coming in from Washington city—Kent, Washington city. So, can you just talk about those specific industries? SETSER: Well, crude from Russia is sort of a separate case because that is less of a trade policy and more of a sanction or a punitive policy. We didn't—you know, there's not enormous amounts of crude that never came from Russia. I think we got some fuel oil for a while, but crude is a relatively fungible commodity. You know, yes, there are refiners that are optimized around certain grades, and it can be complicated and difficult to make adjustments, but at the end of the day oil is oil, and you can generally find alternative sources of supply. So I think my sense is that we've adapted relatively well to the tariffs. And I think there may be a blocking sanction as well, a block, on payments for Russian crude. And that, to me, is just—you know, it's a byproduct of a decision that we wanted to put pressure on Russia. And it's a relatively low-cost way for the U.S. to put a bit of pressure on Russia because there are alternative sources of supply for crude. The big issue around Russia, of course, is that while we have limited our imports of Russian crude, and we've tried to make it hard for tankers to ship Russian crude unless Russian crude is sold at a discount, most Russian crude goes to China and to India, and they have a different view. So the issue around Russia is really how to—or, whether to, and then how, to further reduce Russia's overall oil revenues as a source of pressure to get them into a settlement. And then, I guess, if you ask if there's a settlement would that change? I think with President Trump one never knows. But personally, I think it's pretty unlikely, just because I don't think Russia thinks of the U.S. as a critical long-run market for its crude, given our own strong domestic oil industry. So, travel is probably not going to be directly affected. Travel will probably be indirectly affected, because tariffs tend to lead to changes in exchange rates. So, when you put a tariff on, say, China, China tends to let its currency depreciate. If you put a tariff on Europe, it hurts Europe's economy. The European Central Bank would likely lower interest rates and the euro would go down. And so, when the euro goes down more Americans go to Europe for vacation and fewer Europeans come to the U.S. for a vacation. So, travel may not be directly impacted by any of these tariff threats. Again, if you do stuff that is more around the nature of tightening the border, making the border tougher, making it harder to get into the U.S., that does have an impact. I don't think of that as trade policy. I think of that as a border enforcement policy. That certainly has an impact. I mean, I don't know. I've been traveling back and forth a little with Europe and, like, the European passport control, where you just show up and they take your photo automatically, and you get in and out in five minutes, it's a noticeable difference between getting into the U.S. when you have to go through the Newark or Dulles Airport lines, which can take you an hour. I mean, it is an impediment to coming to the U.S., I think. But the biggest effect, classic effect, would be through the exchange rate and how the exchange rate changes incentives for tourism. Food, produce, fruit, you know, the avocado question. Do we really want to pay more for avocados from Mexico? Personally, I don’t. So I’d be very happy if there were an exclusion for avocados and other fresh produce from Mexico. There are some categories of fresh produce from Mexico which competes with California and Florida production. So then it becomes a choice, a very direct choice, between consumers who benefit from more choice and lower price from having access to Mexican produce and domestic producers who tend to be a little higher cost who run the risk of losing out if there aren’t some frictions, tariffs, limits on Mexican exports to the U.S. I think it is a—becomes an interesting question if we’re doing something that’s fairly across the board. Do you have exclusions for—I don’t think you can have many—in an across-the-board, 10 percent tariff, I don’t think you can have many exclusions for a country, because if you do an exclusion for autos from Mexico, everyone will want to make their autos for the U.S. in Mexico. It becomes an ever-growing workaround for the tariffs. But I do think you can grant exclusions for well-defined products. So crude oil for Canada and for Mexico, since we can bring it in and refine it. Conceivably, some specialized, you know, avocados or something else, where—coffee, you could imagine that being subject to an exclusion. But these are choices that become important when you’re doing something that is an across-the-board tariff. Remember, if the across-the-board tariff’s goal is to raise revenue, you want to have the biggest possible base of revenue. And that means raising the price of things we import, even if there aren’t alternative sources. It’s just a way of—you know, it’s like a sales tax. And, you know, on a sales tax, you generally—you want to apply it pretty broadly. FASKIANOS: All right. I’m going to defy Council rules and go over just with this final question, which I think is the perfect one to end on, from Joan Lee, from the Louisiana mayor’s office. I think I got that right: How important do you think will subnational diplomacy be? Or will it play any role in leveraging against the effects of tariffs or some of the consequential economic actions by this incoming administration? And my apologies, it’s the office of the Los Angeles Mayor. So my apologies on that. So this is the final question, Brad. A big one. SETSER: Yeah. Look, I don't know. Why don't I know? President-elect Trump won a mandate. He won a mandate. He campaigned very clearly on tariffs. No one can say that they will be surprised by Trump's tariffs. We saw tariffs under his first administration. He says, I think tariffs are the most beautiful word in the English language, that they need a public relations agency. And he tends to suggest tariffs in contexts where no one had thought of using tariffs before, the whole 51st state with Canada thing and Canadian immigration, or tariffs on Brazil because Brazil hasn’t shot down these ideas for a BRICS currency, which are going nowhere. But that was sort of—that’s not a normal use of tariffs. He really does seem personally to believe in tariffs. And since the president has been delegated a certain amount of authority by Congress, that authority—you know, whether it’s the 232 authority to impose tariffs if that product is a national security threat, the Section 301 authority to impose tariffs after an investigation if a country is imposing—has unfair policies towards the U.S., unfair, burdensome policies towards U.S. commerce. So it’s an economic authority. Potentially the authority under the International Emergency Economic Powers Act, which is the sanctions authority, if there’s a national security threat. Defined a little differently than the Section 232 national security authority, to put on sanctions. And those sanctions could potentially be structured as tariffs. There’s authority in the event of a balance of payments emergency to put it on, for 150 days, an across-the-board, 15 percent tariff. These are authorities that are vested in the president. They've already—authority that's already been granted by Congress to the presidency. So in the first instance, neither Congress nor subnational governments have any control, other than lobbying, and pressuring public. It is the authority the president has. And it's up to the president to decide how to use it. Over time, if a president overuses this delegated authority, Congress—not necessarily subnational governments—can pull that back. And so I think a lot of the impact that subnational governments will have will come if there is some kind of consensus that President Trump has overused the delegation of authority, the tariffing authority, that rests with the president. And then I think sub-nationals, through representatives, senators, so forth and so on—because the legal authority to impose tariffs resides not at the state level. It resides at the federal level. And it is an authority of the Congress. And so the president only has this authority because Congress has, under existing law, delegated some of its intrinsic power to the presidency. So I don't know that there's a direct role for subnational governments. I think there's a big indirect role because I think elected representatives like talking to other elected representatives. And those who represent California, Louisiana, or Pennsylvania in Congress will take cues from what they hear from their constituents. But right now, for the first year, at least my judgment is, it’s going to be very much a game driven by how far President Trump wants to take and use the various authorities that have, over time, already been granted to the president. And then I think the second act will be if he overdoes that, how much Congress and the public want to pull back some of that authority. That's my guess. FASKIANOS: Brad Setser, thank you very much for your analysis today. We really appreciate it. And to all of you for your questions and comments. I’m sorry we could not get to them, but we will obviously be following this closely. I think this is at the top of the agenda. You can sign up for Brad’s blog, Follow the Money. And I also encourage you to sign up for our RealEcon newsletter. This is the CFR initiative reimagining American economic leadership that’s headed up by Matt Goodman. So, we are—we are doing a lot of work in this area, and would love to have your input. As always, we invite 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 U.S. You can email us suggestions for future webinars. You can email us at [email protected]. We look forward to your feedback and to your continued participation. Thank you for all you’re doing in your communities. And we wish you a happy holiday. And we will reconvene in 2025. So, thank you all. Thanks, Brad. SETSER: Sure. END