Update on the Ninety-Day Pause: Tariffs and U.S. Trade Policy

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Panelists discuss the latest announcements from the Trump administration on tariffs and trade agreement negotiations, the likelihood of extended pauses on tariffs for specific countries, and how businesses and the market are navigating trade policy uncertainties. CVETKOVA: Thank you, Alexis. Welcome, everyone, to today’s on-the-record Council on Foreign Relations virtual meeting on U.S. trade policy and tariffs. My name is Dima Cvetkova. I work for Moody’s Corporation. And I have the great pleasure of moderating this session. We have an excellent panel of experts joining us today who will help us disentangle the trade signal from the noise. We have with us Jennifer Hillman from Georgetown University Law Center and the Center for Inclusive Trade and Development; Inu Manak, a CFR fellow for trade policy; and Francisco Sanchez, partner with Holland & Knight, and a former undersecretary of commerce for international trade with the Obama administration. Jennifer, I know you need to head out a little bit early, so let’s get started. So we have now reached the end of the ninety-day pause on the liberation day tariffs enacted to—which were enacted to allow for trade negotiations between the U.S. and trading partners. However, the deadline for the tariffs and the trade negotiations has moved to first of August, with only two framework trade deals put in place—one with the U.K., and one with Vietnam. So my first questions to the panelists are, what was actually achieved during the first ninety days? What should we expect on the U.S. front over the next few weeks or even next months? And does uncertainty around trade negotiations bring more concessions to the U.S.? Francisco, would you like to start? SANCHEZ: Yes. Thank you, Dima. It’s a pleasure to be with you, and with Inu and Jennifer. Thanks to the Council for inviting me. I think it would be good to start with what is the underlying goals—what are the underlying goals that President Trump and his administration are trying to achieve, and then see what he has achieved. Clearly, one objective is just as a negotiation strategy. You might describe President Trump’s strategy is one of sticks and no carrots. And so he’s trying to make it necessary, if you will, to have people come to the—countries come to the table. That’s one. Two, President Trump, long before he was ever in politics, was feeling that American business is unfairly treated by other countries in the world. So he’s seeking to find more fairness for American business. Third, he’s trying to bring back manufacturing to the United States. And, fourth, to raise revenue. And finally, fifth, he’s looking for cooperation on non-tariff barriers that a lot of countries engage in. I would say at this point the success, if you measure it against those five goals, is rather limited. As you correctly point out, there two agreements—framework agreements. The details haven’t been worked out. When he made that announcement back in April, some members of his administration said there’d be ninety deals in ninety days. I think it’s going to be difficult. One, USTR is a rather small agency. They don’t have the resources they need to do a lot of deals. That’s number one. And, number two, negotiating trade deals is hard. India, for example, started negotiations with us in February, and here it is now nearly the middle of July and we still don’t have a deal. So I think it’s going to be slow moving. There’ll probably be some deals done before the August deadline, but I don’t think there’ll be a lot. CVETKOVA: Thank you, Francisco. And I’m going to turn over to Inu. I remember reading one of the articles she published. And she was talking about the average time it takes to sign a trade deal, which has nothing to do with the ninety days we have now. So, Inu, what is your take on what we should expect by the first of August and beyond that? MANAK: Yeah. I mean negotiating trade agreements is very hard. It takes, usually, 917 days to negotiate a trade deal. So that is definitely not that ninety-day deadline that President Trump was hoping to conclude a ton of deals in. So I’m not surprised that we only have basically 1.5 deals that we know of, right? So the U.K. deal, the text is out. We’ve seen what’s in it. The Vietnam deal, we’ve heard a little bit about what might be in it, but we have seen no text. And it seems like there’s still a bit of ironing of the details going on. So what have we seen so far? If we look at the deals and the structure of what the administration seems to be negotiating, it looks to be about five different aspects that they’re trying to nail down. First is really trying to get tariff reductions where they can, because tariffs are a big part of President Trump’s trade strategy. Second is to have some sort of cooperation on non-tariff barriers. They haven’t really defined what they are, but said if you look at the national trade estimate report it’s all in there. So that’s where countries can actually take a look. The third item that they’re looking at is digital trade provisions, trying to figure out how to get countries on board to U.S. approaches to digital trade. The fourth item has been some sort of cooperation on economic security. This is kind of vaguely defined, and it varies by country, but it means a little bit more investment screening, perhaps a little bit more monitoring of supply chains to ensure there’s not transshipment of goods from China, and other aspects of economic security measures that they may want to undertake. And then the last part are commercial considerations sort of broadly defined. This includes things like encouraging investment in the United States to help boost the manufacturing base and also purchase agreements as well, like ethanol, which the U.K. actually signed up for. So if you kind of look at the U.K. agreement in particular—so that’s the one that we have. It’s five pages. So it’s a quick read. But it reads more like a term sheet than a trade agreement. So folks who are used to reading trade agreements, it’s a little puzzling to see it because you’re, like, what are you trying to do here? It’s a deal that resolves some trade irritants. It’s mostly a framework for future negotiations on a range of issues, but doesn’t really resolve all those issues right now. And, importantly, what it does is sets the stage for negotiation on future Section 232 national security tariffs that may come in place, but doesn’t guarantee that the U.K. is going to get any carveouts there. So it basically leaves open a negotiation that’s going to happen over and over again over the coming years. And it’s not clear where the landing point is going to be. And Vietnam has a very similar structure in its agreement as well. So I imagine we’re going to see more of these come through slowly in the next couple of weeks, but what we’re seeing is really rough contour of what every single country is going to be negotiating. CVETKOVA: So this is going to actually continue a lot longer, you know, after this sort of framework—basic framework is signed. Negotiations will continue for a lot longer. Jennifer, over to you. The same questions with a little bit—from a different angle. We just talked about—before we started the meeting—about the average tariff rates for the U.S., and all the reasoning behind the tariffs. Could you please comment on that? HILLMAN: Yeah. I mean, clearly, you know, one of the things that has been, if you will, achieved, is a significant raising of taxes on Americans. You know, again, so if these tariffs that the president has now announced, you know, through July 7—including, again, the Vietnam trade framework agreement, the U.K. agreement, and, you know, the announcements of these new rates on fourteen more countries. If those go into effect, we will end up with an average U.S. tariff in the United States—average tariff, again, so plenty of them that would be higher than that—of 17.6 percent, which is the highest rate that we’ve seen on our tariffs since 1934. And, again, we have to remember, at their core, you know, that tariffs are taxes, you know, on American consumers. Because it is the importer in the United States that’s paying that tax. And therefore, we have to remember that these are very regressive taxes, meaning low- and moderate-income people are the ones that bear by far the largest brunt of these taxes. Because it is low- and moderate-income people that are spending 30 or 40 percent of their income buying the kinds of goods—you know, shoes, and clothing, and all kinds of the goods that are the subjects of these tariffs. Again, they’re spending 40 percent of their income. High-income people are spending less than 10 percent of their income, you know, purchasing these goods that are subject to the tariffs. So whatever else they’re doing, they are raising taxes very substantially on Americans. Which, again, feeds into one of the goals here being, you know, to raise revenue. Again, but it is raising revenue heavily on the backs of those Americans that are being taxed. CVETKOVA: Great. Thank you for that. And it’s a great segue to my next question, which is, you know, the U.S. administration announced the trade deals as the best deals for American people and American workers. And this is back to you, Francsico. How is the trade agenda impacting American households, building on what Jennifer said, and businesses? And what could be some important positive and negative outcomes of the trade negotiations? SANCHEZ: Well, it will undoubtably impact a number of sectors more significantly than others—electronics, automotive, retail, construction materials, certain foods. We’re likely to see that go up. As Jennifer said, this is essentially a tax. And so you’re likely to see costs go up. On jobs, it’s interesting. If you take steel, for example, he’s—President Trump has increased tariffs on steel and aluminum. The steel industry has approximately 90,000 millworkers. And if you take their industry as a whole, they probably employ upwards to about 280,000 people in total. That includes office workers, salespeople, everybody. If you put tariffs on steel, then you’re likely to see more production, so their employee numbers may go up because there’ll be more demand for American steel. But compare that to automotive. The automotive industry in the United States has about four million employees. If the cost of inputs for the automotive industry goes up, there’s a chance that that sector will see a drop in sales and you could actually see a drop in the number of employees in the automotive sector that would dwarf any increase in the steel industry. Worse than that, I’d say, would be construction. We have about eleven million people that work in construction. It’s a sector that’s very dependent on steel. So you’ll see potentially a major reduction in the number of employees in the construction space that also would dwarf any increase. So while there’d be a benefit in the steel industry, you could see other sectors, like construction and the automobile manufacturing, actually go down. CVETKOVA: Inu and Jennifer, would you like to add anything to what Francsico was saying. MANAK: Go ahead, Jennifer. HILLMAN: I mean—I mean, to some degree I think you’re already seeing a little bit of this. If you look, for example, at the price of steel in the United States compared to the price of steel elsewhere in the world, you know, again—I, you know, recently looked at the numbers; the price for a hot rolled sheet of steel in the United States is over $900 a ton, whereas the world average price is $400 a ton. The average price in Europe, around $600 a ton. So if every manufacturer in the United States that needs to purchase steel to use it to make a product out of it is spending almost twice as much as any of their competitors are for that basic component, you know, the concern is what it does to long-term competitiveness. You know, and then you turn to things like construction. You know, again, in addition to the tariffs on steel and aluminum, and now these across-the-board tariffs—these so-called reciprocal tariffs on these, you know, fourteen-plus countries that are above the 10 percent that’s been added onto everybody in the world—and, again, you start to see it. And then you look at what is likely coming, which is a number of these section—so-called Section 232 national security tariffs. So, again, we have to remember that there are investigations pending right now today on semiconductors, on pharmaceuticals, on copper, on timber and lumber—again, heavily involved in construction—on critical minerals and derivative products, on medium and heavy-duty trucks and parts, and on commercial aircraft and jet engines. So if, again, we were to result in even more tariffs on all of those sectors on top of all of these others, you can see what a significant impact it could have in a number of these key sectors of our economy. CVETKOVA: So can I follow up on that actually? We were talking about we were talking about legal challenges, and there is a lot of talk about legal challenges to these tariffs. So, as a legal expert, can I ask you, do you think that legal challenges can derail the U.S. trade agenda? HILLMAN: I certainly think that there’s a very good chance that the legal challenges will at least temporarily derail the tariffs that have been imposed under the International Economic Emergency Powers Act, or IEEPA. Again, and that is all of these 10 percent across the board tariffs, and all of the tariffs that we’ve just described that are the ones under the U.K. agreement, the Vietnam agreement, and, again, the new tariffs that were announced last night against these fourteen countries—all of the so-called reciprocal tariffs. Those were all imposed under IEEPA, as were the tariffs on Canada and Mexico. Remember, we’ve got a 25 percent tariff on Canada and Mexico, and, again, 20 percent more on China as a result of IEEPA tariffs, subject to this so-called fentanyl crisis—this emergency on fentanyl. So all of those tariffs, which pretty much means everything except the existing tariffs on steel and aluminum and cars, are subject to this IEEPA challenge. And it is a big challenge. Two courts have already ruled that the president’s tariffs under IEEPA are illegal, unlawful. Why? Because, again, the Congress is given the power by the Constitution to impose tariffs. Again, Article One Section Eight of the Constitution is very clear. It is the Congress and the Congress alone that has the power to impose tariffs. So the president can only impose tariffs if the Congress has handed over authority from the Congress to the president. And so the question before the courts is, did the Congress hand over this authority in this IEEPA statute? And the courts have found, and many are arguing, that the answer to that question is no. Again, partly because, again, it has to—the words that the president is relying on is that IEEPA gives the president the power to regulate importation and exportation. And so then the question becomes, does “regulate importation or exportation” mean tariff? And the argument is, no, it does not, because in every other law in which the Congress delegates that power to impose a tariff, it uses the word “duty” or “tariff.” And it puts in procedural requirements. It puts in timing requirements. It puts in notice and comment requirements. It puts in limits on the amount of the tariffs that can be imposed. None of those exist in IEEPA. So, again, there’s a big challenge as to whether or not IEEPA provides the president with tariff authority at all. And, again, at least one court has already ruled to say, no, it doesn’t. And then the second aspect of IEEPA is you can only impose these tariffs if you have declared there to be a national emergency, which is—which, again, is defined in the law as an unusual and extraordinary event having its genesis outside of the United States. So the second big argument to all of these reciprocal tariffs is how can you say that a trade deficit is an unusual and extraordinary event when the United States has been running a trade deficit every single year for fifty consecutive years? The deficit is not particularly high compared to our GDP, you know, in this year. So how is this an unusual and extraordinary threat if it’s something that’s been happening for fifty years? And similarly, the argument on the fentanyl tariffs is, you know, what is putting a tariff on, you know, teddy bears, or T-shirts, or anything, else have to do with fentanyl? There has to be a connection between the emergency that’s been declared and the action that’s been taken, tariffs. So across all of those fronts, there are these very serious challenges pending to the tariffs. These challenges are currently pending before two different appeals courts, again, because the courts have already ruled, no, you can’t use IEEPA for tariffs. The appeals are pending. I’m assuming that by early fall we will have decisions by these appeals courts as to whether or not they believe that IEEPA provides tariffs authority or not. And then presumably, from there going, you know, again to the Supreme Court, I would assume sometime, you know, again, in the winter we will have some court—sort of a ruling from the United States Supreme Court. CVETKOVA: Thank you. I want to go back to the trade deals. I want to make sure that we talk about the U.S.—potential U.S.-China trade deal. And Inu, I want to turn to you and ask you, if there is a U.S.-China trade deal—I mean, I do remember the first Trump administration the Phase One and Phase Two agreements, and what happened with that. If reached, this U.S.-China trade deal, what shape or form do you think it is going to take? Or are we just going to see a prolonged trade conflict instead of the trade deal? MANAK: Thank you, Dima. You know, I think it’s going to be very difficult to do something very comprehensive with China, because comprehensive deals take time. And it takes a principled approach with really clear targets that you’re trying to achieve. And the administration’s trade policy has basically been erratic. It’s been erratic because they’ve been trying to get quick deals, but a quick deal with China won’t bring about the systemic change that’s needed to address some of the concerns that were brought up in the original Section 301 report on unfair trade practices with China under the first Trump administration. Now, if we look at what happened during the first Trump administration, we had the Phase One deal on January 15, 2020, signed. It included various commitments, mainly focused on purchase commitments, including agricultural products, industrial products, natural resources, and services. Now, if we look at how that did, Chad Bown from the Peterson Institute found that China actually only purchased 58 percent of the total U.S. goods and services exports over 2020-2021 that it had committed to buy. And it bought none of the additional $200 billion of U.S. exports committed under the deal. So the Phase One deal not only did not live up to the purchase commitments, but it also failed to systemically change some of the concerns he had about China in terms of unfair trade practices, including whether or not it was violating IP rights and it was using forced technology transfer. All these things were left unaddressed. Now, if we are to deal with that, one of the things we need to be doing is to work with our trading partners, who we’re now raising tariffs against, to find a way to actually work together to have common rules around how we deal with China. And at the moment, what we’re doing is actually pushing a lot of our trading partners closer to China by closing off our own market and threatening all these tariffs over and over again. So I think that at the end of the day if we actually are to have some significant reforms and a comprehensive deal, we kind of need to step back and take some time, right? We can’t have this general framework that we keep modifying every other month where it comes to no real strong commitments at the end of the day, and we have no dispute settlement mechanism that we can use to enforce it. So China Phase One deal has no dispute settlement mechanism. And if you look at the text of the U.K. deal, I don’t see one there either. And, in fact, it says it’s a nonbinding deal. So how can we actually achieve concrete results if the agreements are nonbinding? So I think there is a big question here about what we can actually achieve and huge limitations in just the structure of the negotiations themselves. CVETKOVA: That’s great. And I and it brings me to the next question, actually. It leads on to, are we actually seeing the U.S. on the way to withdrawing from leadership from the global trading system? And if the three of you can think of five years from now what the trade landscape is going to look like, how do you visit it? Francisco, would you like to start? SANCHEZ: Well, the short answer is, yes. We are retreating from being the global leader in promoting free trade, in being against protectionism, if you will. Going from being against protectionism to being the leader in protectionism, in many ways. You know, hard to predict what’ll happen in five years, but there’s no question that what’s happening here will largely—(off mic, technical difficulties)—the other countries, when they negotiate with some of their trading partners that aren’t the United States. So I do see a retreat from globalism, a retreat from free trade. And time will only tell how far we go. I’m very concerned that probably our biggest economic adversary—not probably—our biggest economic adversary is China. And yet, of the fourteen countries that were mentioned yesterday, many of them are in Asia where we should be strengthening those ties and not creating tensions. I’m talking about Japan, South Korea, Thailand, Malaysia, Indonesia, Cambodia. So it creates tension where we should be creating cooperation to go after the most challenging economic problems we have, which I believe is China. Inu mentioned intellectual property, theft, forced transfer of technology. Those are the issues we need to be focusing on. And they’re hard. So I don’t believe on critical issues we’ll see those be resolved soon. To the extent we have a deal with China before the end of the year, I believe there’ll be, perhaps at best, some short-term advantages, but not long-term. HILLMAN: For what it’s worth, I’d only add that, you know what you—a couple of things. One is, you know, there is a huge risk to the whole world if we, in essence, fragment the global trading system into two big blocs—a kind of, you know, pro-U.S. bloc and a pro-China bloc. The WTO and the IMF and the World Bank, you know, recently published a study that said if we just do that—just that fragmentation alone, with no other changes happening in the rest of the economy, we’re looking at a 7 percent reduction in global GDP, and even more of a reduction for many of the developing and least-developed countries. So, again, a huge risk of fragmentation. And the other thing to watch China doing in response—you know, again, you have to be really clear about what did China do the last time the United States engaged in this trade war, is to some degree the same thing they’re doing right now. Which is, to the extent that they raised tariffs on U.S. products they lowered them on goods from everywhere else. China is immediately sort of doubling down and going to all of its Asian neighbors and saying, you know, we are a reliable trading partner. The United States is not. You should do more of your trade, you know, in and around and with the United—with China. China is trying to become, itself, much more, again, the hub of all of this trade, you know, within Asia. So I do think we need to be really worried about it. You know, and as Francisco said, I mean, many, countries share our concerns over what China is doing on intellectual property theft, on over producing, overcapacity, flooding the rest of the world with all of this excess capacity in goods that’s driving down prices for everybody in the world. A lot of countries share that. But they cannot get on board with the United States in fighting it if the United States is going to turn around and put tariffs on them. And, again, the tariffs come on and off and on and off. So, you know, that I think is the real risk, is that we’re going to fragment the world and we’re going to put countries in this very tough position about whether or not they want to side with China or whether they want to side with the United States. They don’t want to side. They want to trade with everybody. And yet, you know, we may be pushing them to have to make a decision. SANCHEZ: And, Dima, if I may add one more thing, is that the tough approach, or the no carrots a lot of sticks approach doesn’t work well when your counterparty has its own set of tools to fight back with. One that the Chinese have used, I think very effectively, is holding back export licenses on rare earths, something that’s very important to a lot of American industries. So it isn’t as though China doesn’t hold any cards. They hold quite a few. I would also point out that China is prepared to have its population be ready for economic difficulties, rather than to just simply cave in to something that President Trump may want. So I think no matter how you look at it, the negotiation with China on issues of real importance to us are going to be very, very difficult and probably a long time in coming. CVETKOVA: Thank you, Francisco. And, Inu, before I turn to you with the same question, I just want to mention for the audience that we’ll be opening the Q&A session in just a moment. So if you do have a question, please raise your hand now to join the queue. So, Inu, over to you. MANAK: All right. Thank you. You know, just to add one big picture point to that. When I’m looking at sort of U.S. engagement and global trade leadership, I would say we haven’t been a leader in the global trading system for eight years. And we never kind of stepped back into the role of leadership once we stepped out of it in the first Trump administration. You know, when Trump first entered office, he effectively ignored the global trade rules. And then Biden came in. And he largely followed suit. Most of what Trump did in his first term was maintained in the Biden years. There was a window of opportunity early on in the Biden administration to reverse course, but the prevailing view in the administration was in support of greater protectionism. And they kept betting on protectionism and to keep it in place to avoid losing support among working-class voters, who, in the end, voted them out anyways. So I think that strategy did not work. And it showed to be something that actually was not something that folks were responding to. And here, Trump’s come back and said, well, you kept these in place, obviously they’re popular, and so let’s just ratchet them up. And so what we’re seeing today is taking that tariff policy to even greater extremes. And we don’t really have any counterweight to that anymore. And so I think there’s a bit of a scramble internally within the United States to see, like, where Democrats stand on these issues today. And there’s a lot of soul searching going on to figure out where they do stand on it. So I think we’re going to see a lot of that play out in the next couple of years, as we have members of Congress respond to the pain that their constituents are surely going to feel as some of these tariffs actually take effect. And I think what we’re starting to see, in fact, in looking forward in the next couple of years, is the fact if maintain these tariffs and, as Jennifer said, you have additional tariffs coming on 232—if you pile on tariff after tariff, the U.S. is going to become an increasingly closed market. And when 50 percent of what we import are intermediate products, that means those who are going to be hit most are going to be small and mid-sized businesses. And they are going to suffer. We’re going to have less consumption and less growth. We already have low growth projections. And we’re going to see that other countries are going to look elsewhere for arrangements in which to trade. The CPTPP, which the U.S. withdrew from, is becoming one of those frameworks, and others may try to bolster the WTO and other arrangements in order to find ways to trade on a rules-based way. The EU has said that they want to do that. So we’ll see more diversification from our trading partners, less coming here. And it’s going to make the United States a less safe bet for investments over time if we have a really unstable trade landscape. So a lot of uncertainty. It’s hard to see where it’s going to land. CVETKOVA: Thank you, Inu. And, actually, mentioning the WTO, Jennifer, I’ll turn over to you, with your experience and your background. What are the urgent—what are the urgent things we need to—the WTO needs to change in a certain way? What are the urgent changes that have to be made, when it comes to the WTO? HILLMAN: Well, obviously, you know, the big concern at the WTO is here you have, you know, arguably, the two largest trading partners in the world—China and the United States—basically engaging in, effectively, a trade war outside the bounds of the WTO, which, again, doesn’t suggest the—you know, that the WTO is playing this highly relevant role. You know, again, because every single one of these tariffs—whether they’re under 232 or under IEEPA—are a violation of the United States’ commitments under the WTO. I mean, we promised when we joined the WTO, again, and when we helped create the WTO, that we would not charge tariffs in excess of the rates that we bound our tariffs at, and that we would not charge tariffs that differentiated between this country versus that country. We would not discriminate with respect to our tariffs. And, obviously, all of these tariffs are discriminatory. So, again, most of the other countries look at the United States and basically say, it’s the United States that is the major problem at the WTO, not China. That it’s the United States that’s not playing by the rules, not China. And, again, that is not in our long-term interest. So what does the WTO need to do? I mean, to me, I think, A, the WTO has got to do everything that it can to try to urge all of the other countries in the world to maintain their tariff commitments. And if they must retaliate against the United States, or must do things on the tariff front, to try to stay within those rules of what are their bound rates, what are their MFN commitments, to try to adhere as closely as they can to the rules. The second one is obviously the dispute settlement system. The United States has, again, destroyed the dispute settlement system by blocking any appointments to the appellate body. A number of countries have come up with this alternative, what is referred to as a Multi-Party Interim Arrangement on Arbitration for Appeals, MPIA. Again, every country has the option of joining that MPIA. And, again, using the rules of the WTO to try to stay as close as possible to a rules-based system. And, obviously, the WTO has got to do a lot of changing on its own. It’s clear that over the life of the WTO it has become way too hard for the WTO to update its rule book. Again, it lives under a rule called consensus where, again, nothing gets agreed upon unless everybody agrees. And it’s become just way too easy for countries to just raise a flag and block a consensus. So the WTO has got to engage in a lot of thinking about how to make decisions better, how to end up with agreements that at least the majority of or a clear plurilateral group of countries can support, so the rest of the world can move ahead even if there are some countries that are not ready to move ahead. They’ve got to update the way in which they go about rule making. And, to me, they’ve got to keep doing and do more of what they do do well, which is to provide, you know, again, a forum for everybody to talk. And, more importantly, transparency. Again, you know, you can go—you can find out everybody’s tariff rates, sanitary measures, phytosanitary measures, technical barriers to trade. They’re all notified to the WTO. So they are—the WTO is a tremendous resource for countries. And, again, they need to do all of that, and to continue to do it well, while they are figuring out how to fix their dispute settlement system and how to fix the sort of negotiating arm of the WTO. CVETKOVA: Thank you, Jennifer. And I want to turn to Francisco with a different question. You’ve helped companies navigate this very difficult trade landscape. We laid it out there. We talked in the past a lot, and you continue to talk about supply chain resilience. So how are companies actually navigating this space? SANCHEZ: A lot of them very difficultly. When you establish supply chains it takes time. And particularly when you’re doing supply chain resiliency, you’re trying to find multiple supply chains to make sure you have backups. But this is—this isn’t something that you turn on a dime. And so it’s very disruptive. It’s something that’s on every company’s mind that relies particularly on international supply chains, and very challenging. I might add, this is not exactly on point to your question, but going back to one of the original purposes of this trade strategy is to attract manufacturing back to the United States. Japan currently is our number-one—or, number one or number two depending on what source you look at, source of foreign direct investment. And 41 percent of that foreign direct investment goes into manufacturing. This is kind of hard to understand. If that’s our goal, it seems like one of our important trading partners that we’ve just slapped—or threatened to slap 25 percent tariffs if we don’t reach a deal by August one, how that is a great motivator to somebody who seems to be doing what they want. And to answer—going back to your question, that foreign direct investment will be harder for companies to make the decision to invest here if their supply chains are harder to put together, whether it’s an American company or whether it’s this foreign direct investment that’s coming from Japan and other countries. So I’d say it’s been a big challenge. And because of the economic uncertainty that we’re seeing in the execution of this trade policy, I believe that that difficulty is going to remain for some time. CVETKOVA: Thank you, Francisco. And at this stage, I can see that we have a question from the audience. I want to turn to this question. Let me just remind the audience that this meeting is on the record. Alexis, can we have the question please? OPERATOR: (Gives queuing instructions.) We will take the first question from Mara Lee. Q: Hi. This is Mara Lee. I’m a reporter with International Trade Today. And if you will forgive me, I’m going to squeeze in two questions. One question is about this question of transshipment in the Vietnam framework. Robert Lighthizer has talked about transshipment in a way that doesn’t mean transshipment, that just means a certain amount of Chinese content in a good. And so I wanted to get y’all’s thoughts about how—what the U.S. might get other countries to agree to in terms of will it be more like a rule of origin, that if you have, you know, 60 percent of the value is Chinese it doesn’t count? My other question is sort of this game of chicken, in the sense that Japan and South Korea really don’t seem to be able to accept a world that the 25 percent auto tariffs don’t go away. And we don’t seem to be willing to have them go away. So will Trump have to back down in the end because the market will discipline him? Someone said there isn’t any more guardrails, but he did back down in April because of a huge stock market drop. You know, the market’s not going to care about 40 percent on Cambodia or 25 percent on Kazakhstan, but they may care about 25 percent on some of our very largest sources of imports. HILLMAN: So I can—I can start first with the transshipment question. Just to say, unfortunately, we don’t know. I mean, what the agreement—what little we know says that the tariffs on everything from Vietnam is 20 percent, unless it has been transshipped in which case it’s 40 percent. Now, again, normally transshipment is considered something illegal if you basically are, in essence, slapping a label on something that says “made in Vietnam” when it was, in fact, made in somewhere else. I mean, that is normally what we think of as transshipment. And so obviously if that’s what you’re doing, you know, that is illegal, and, you know, it should carry a higher tariff. But if what they really mean is that you’re simply using components from everyone else, that is not what we normally understand transshipment to be. I mean, normally we live with—again, the 20 percent tariff on Vietnam ought to be on anything that is considered made in Vietnam. How do we know if it’s made in Vietnam? It’s whether it meets the existing today rules of origin that apply to Vietnam, and many other countries. And that rule is generally wherever it—wherever that article is last substantially transformed into a new and different article of commerce, or underwent, you know, a tariff shift where it becomes a new item under the tariff schedule. If that work occurred in Vietnam, that good should be considered made in Vietnam for purposes of customs, and should be subject to the 20 percent tariffs. So we simply don’t know whether they’re going to come up with some kind of a different definition of what is meant by transshipment in this. And the only other thing I will say is those kind of negotiations, over rules of origin and changing rules of origin to require more work to be done in Vietnam in order to qualify for that 20 percent tariff, are not easy to negotiate. Because the way in which every different product is made is different, and therefore you have to really struggle to figure out how are you defining the rules of origin within any given product? I mean, you saw this really clearly in the auto rules of origin with respect to the USMCA, the U.S., Mexico, Canada agreement, where that was a large negotiation to try to just figure out how to change those rules of origin, adding in requirements on where the steel was melted and poured, and a lot of other things. So the answer is—on the transshipment—I think we really don’t know what they mean or what they’re getting at by that, and won’t until we see actual terms of an agreement. SANCHEZ: Well, I’ll take a shot at the second question. I’m not terribly good at making predictions. In fact, I’ve made predictions that have been wrong in the past. But I’m going to take a shot at it. I don’t believe that the 25 percent tariff that President Trump announced will stick with Japan and South Korea, in part precisely because of what your question implies, is the increased cost to the American consumer would be substantial. I think it is—as we mentioned at the beginning of this program, one of President Trump’s goals is to get leverage in negotiations. And I do believe that that number is more about leverage than locking into that tariff rate. CVETKOVA: Thank you very much. Do we have—do we have other questions at the moment? OPERATOR: No other questions at the moment. CVETKOVA: No further questions at the moment. So I have another question for the panelists. And I sort of want to know, when you think about the U.S. trade policy is there an aspect of it, at least one thing you can mention, that has been either overlooked or, on the flip side, anything that has been overemphasized? And why? Inu, would you like to chime in? MANAK: Yeah. No, thank you. I mean, I think the thing that’s often being overlooked is the fact that we need imports in order to do the things that we do here. You know, if you have to have a vibrant manufacturing base, we need to import components. And so I think what the administration is focusing on is really just not going to be achieved. You know, they say they want to increase manufacturing and exports. Well, you can’t do that without imports, right? And so I think this is one side of it that we need to talk a little bit more about to understand the tradeoffs of imposing tariffs in all these various sectors, right? Because, as Francisco mentioned early on, you know, if you impose a tariff, say, maybe you’re going to show some sort of increase in manufacturing output, maybe in some protected sectors, right? But you’re going to lose it elsewhere. And so we have to have a broader conversation about where is it that we think we should be investing all this trade protection? And is it worth it in the end for the job losses and the reduced output we’re going to create in other sectors? And so I think that’s a broader conversation that’s not being had right now. We’re focusing so much on manufacturing, when manufacturing has been doing quite well. We have tremendous amounts of manufacturing productivity output. We have a good amount of employment in our manufacturing industry. We could do more. We could have more automation, which we’re actually quite behind in compared to other countries. If you look at the number of robots that China has in its manufacturing facilities compared to us, we are really, really low in that number. So we need to do more here in investments. But it’s not tariffs that’s going to get us to that point. And so we have to have that question of, like, what is the goal here, and how do we actually go ahead and achieve it? And how do we do it where we’re basically strangling ourselves by limiting our options for what we can actually purchase abroad? SANCHEZ: Dima, I think another premise of President Trump’s trade policy that needs to be scrutinized is the definition of America being unfairly treated. Trade deficits have been used to define whether there’s unfair treatment between the United States and a particular country. But, as Inu pointed out, one of the reasons that we import things is to make things, right? Our supply chains are international, and we need—we need products from across the board. Another reason that we import things is because we’re the wealthiest country in the world. And so defining an unfair trade relationship just based on the deficit, it just—it doesn’t make sense. There may be unfairness going on, but to measure it based on our trade deficit seems, to me, like a poor measure. HILLMAN: I’d only add two additional ones, in terms of what are we missing? I mean, obviously, to me—and it was sort of implicit in some of what Inu was saying—is, you know, manufacturing of goods is about eight or 9 percent of the GDP of the United States, if you don’t count agriculture. So what are we missing? We’re missing the ninety percent rest of the U.S. economy, which is largely in services. And this is where the United States, again, has a trade advantage. This is where we really do have, you know, the ability to outcompete a lot of other countries. And all of this time that we’re spending talking about tariffs and talking about manufacturing, as important as that is, means that we are not focused on what do we need to do to remain highly competitive on the services side. And the second piece of it, to me, that we’re really not appreciating, I don’t think, is the cost of chaos and uncertainty. And why has that chaos and uncertainty come into our trading system? And here’s where, again, I do think it goes back to some of the basis for the legal questions, because it used to be that Congress set trade policy. And so for an act to go through Congress, whether it was a free trade agreement, or whether it was trade promotion authority, or whether it was the tariff schedules that were included within the Uruguay Round agreements—once the Congress voted on that trade policy, it stayed that way for a fairly significant amount of time. And, yes, you could add tariffs as a result of anti-dumping, countervailing duty, safeguards, you know, other actions. But fundamentally, there wasn’t these huge pendulum swings. And now that we’re deciding to make all tariff action and trade policy by the executive branch, again, you’re seeing this big swing away from where—you know, again, away from a stable trade policy, in a way that I think is really hard not just for our trading partners, but for everybody in the supply chain to deal with the fact that they literally do not know what the tariffs are. They don’t know when they’re going to be applied. And that they could change at a moment’s notice for any reason. And that they’re not—they’re not related to something that you can at least predict what’s going to happen. There’s no predicting here. And I think we’re underestimating what a drag on the U.S. economy that level of chaos is creating. CVETKOVA: I would like to end this conversation on a positive note. (Laughs.) So I’m going to ask you a final question before I conclude the meeting. Is there any positive outcome that you believe could come out of this trade policy and trade negotiations? HILLMAN: I’m going to go first, only because, I’m sorry, that I do have to leave a little bit early. So I apologize to my fellow panelists that this is—you know, I’ve got to walk out the door. For me, the positive that could really come from this is if we’re starting to have really, you know, again, helpful conversations with our trading partners about many of the things that that Inu mentioned at the beginning are part of, potentially, the U.K. negotiation. You know, again, things like cooperation on non-tariff barriers, digital trade provisions, cooperation on economic security and, again, maybe cooperation on what to do broadly about China. If these negotiations do that, and we don’t take this only attitude of we have to win and you have to lose in order for it to be a good trade negotiation, if we can focus on those other things, then, to me, particularly on the digital trade agenda where there are no international rules and we desperately need them—you know, if out of all of this chaos could come a better sense of where we’re headed on digital trade, to me, that would be—that would be a big win, and is not out of the realm of the possible. So I hope that’s leaving you, at least from my end, on a bit of a happy note. CVETKOVA: Thank you very much, Jennifer. Thank you. (Laughs.) Inu, digital trade. I hear—(laughs)—would you like to chime in? (Laughs.) MANAK: Yeah, absolutely. Now, I think there is a real opportunity, actually. So there is all this leverage that’s been created from the tariffs that have been put in place. Countries want to negotiate with the United States. So we should use that enthusiasm to actually get something done, right? You know, forget the deadline. And deadlines don’t really matter. I think that’s been pretty clear this year, that the deadlines can move. And that’s OK. Trade negotiations take a long time. And we should take the time to do it right. And on digital trade is something where the United States has long been a champion of creating global rules, but we dropped the ball on that a couple of years ago. And now is our chance to make sure that we can have global rules on digital trade that reflect U.S. interest. There have been negotiations ongoing at the World Trade Organization for several years. Last year, they got very far along, to the point where they actually have what’s called a stabilized text. That just means there’s lots of stuff that’s pretty much agreed to, and there’s a few things that aren’t agreed. I think for the United States, it would make a lot of sense to go into those negotiations and say, hey, look, maybe we need to change some things here, and expand a little bit what we’re doing, and include some provisions in there that are a little bit more stringent for China, in particular, to address some of the concerns over data localization, for instance, that have been a major sticking point in negotiation. So I think there’s a real opportunity for that. But also just generally, on the WTO reform front, we could do a lot. We can address the problem of developing country status in the WTO, which is self-declared. You are a developing country if you say you are. That’s something that’s been a major sticking point for a very long time. We could address the unfairness of subsidies and overcapacity by having a broader conversation about that. And if we don’t do it there, we can do it within a smaller grouping of countries that are actually also concerned about it. We had discussions under Robert Lighthizer between the EU, Japan, and the United States on overcapacity and subsidies reform. We should rebuild those discussions again and try to find a way to have some common ground there, because if we work together and we leverage our allies to make sure we can actually get these changes, I think there’s a real chance that we can have some positive structural reform at the end of all of this. CVETKOVA: Thank you. And Francisco. SANCHEZ: I’m probably in very strong agreement with the comments that Inu made and Jennifer made. I do believe there’s an opportunity here to focus on non-tariff barriers, which are often more problematic than the tariffs themselves. Anytime you start a conversation there’s hope. There’s hope that you can have something good happen. And I think in the non-tariff barrier space we could see some movement. And that would be a very positive thing. Jennifer mentioned more cooperation among the countries that are concerned about China as an economic threat, particularly in some of the unfair practices that they engage in. And, again, just starting the conversation with countries, even though these conversations have been testy in many cases, could lead to cooperation to something that really is going to be critical for our future. And then finally, not so much on the trade front but geopolitically, it’s possible that we begin to get closer to India, for example, which is going to be an important country for the United States to build a relationship with, not just economically, but geopolitically. And the same in the Asia region. Although we’ve had very difficult, it seems, conversations with Japan and Korea and others, geopolitically it’s in our interest to be closer and to work together. And I’m hoping, from this chaotic beginning, we can see an improved relationship that that that goes to our geopolitical interests as well. CVETKOVA: Thank you very much. With that, I would like to conclude the meeting by thanking the speakers for a very lively and engaging discussion, the audience for joining us, and the Council on Foreign Relations for organizing this event. Thank you. SANCHEZ: Thank you. MANAK: Thank you. (END)

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