The USMCA, Tariffs, and the US Trade War

David Beckworth: Our guest today is Dan Griswold. Dan is a research fellow and co-director of the Trade and Immigration Project at the Mercatus Center. He is a nationally recognized expert on trade and immigration policy and is a previous guest on Macro Musings. Dan joins us today to get us up to speed on the latest developments in issues on the ever-expanding US trade war with the rest of the world. Dan, welcome back to the show. 

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Dan Griswold: Hi David. 

Beckworth: Great to have you on, and man does this trade war seem to be growing. There’s so much going on. I'm glad to have you here. We're going to try to air this show as soon as we can because things happen so fast in your area here of trade that this can quickly become obsolete. I want to read an introduction by Felix Salmon, and he had a newsletter. He touched on this war, and it's kind of a broad picture, but it kind of paints the backdrop of how broad the war is becoming, and then I want you to comment on it. It speaks to the escalation. So this is what he says, and we may not agree with everything he says. This is how he frames it. 

Beckworth: He goes, "The US is in the middle of full-blown trade war with China, our largest source of imports. There's broad bipartisan consensus that even if the Trump administration’s tactics are misguided, China achieved its dominant trade positions unscrupulously being selective as to which international trade norms it would accept. America's largest backup source of imports is Mexico, a member in good standing of NAFTA since inception. A natural part of any US trade war with China would normally consist of encouraging American companies to source their products through Mexico as a backup to China. The White House is in a hurry to ratify the USMCA, which is the successor agreement to NAFTA. In six months, the US could find itself fighting another big trade battle, this time with the EU and Japan, and just over a month, US plans to end India's preferential trade privileges. Trump also wanted to impose tariffs on Australia." 

Beckworth: So what I've just painted there was a picture of multiple fronts in a war. What this author goes on to say is, "This is like the worst possible time to start another trade war with one of our best allies, Mexico." 

Griswold: Yeah, I'd agree with that. There's never a good time to start a trade war. Just a little background to use the war metaphor. The first shot was fired, I'd argue, in January of 2018, so 2018. 2017 was a quiet year for trade. The Trump administration was working on tax reform and other things. In January of 2018, the administration imposed duties on imported washing machines and solar panels under a section of the trade law called Section 201. I would argue we didn't need those tariffs, but they were relatively small, and there's some lessons to be learned from there. 

Griswold: Then in March of 2018, the Trump administration imposed duties on imported steel. They first started with certain countries and then threatened to expand them to our major trading partners in June of that year. If you remember, Gary Cohen, who used to be the president's chief economic advisor, he resigned over those steel tariffs. He was the last, I would say, sane voice on trade in the White House. Once he left, tariff man was unleashed. The duties on steel went up to the full 25 percent in June on most of our steel imports, including from Mexico and Canada. 

Griswold: Then we started actions against China that summer, first, 25 percent duties on 50 billion of imports from China based on these complaints against China's economic policies. I'd quibble with your opening quote there from that writer. I think China has largely achieved its position because of market reforms and comparative advantage in a lot of sectors. Then the China actions just continued to escalate, right? Into the fall, it expanded. The Chinese retaliated predictably, and then the president said, "Well, we're going to put tariffs on $200 billion worth of Chinese imports. First 10 percent in the fall. They've recently gone up to the full 25 percent. So basically, we have 25 percent duties on $250 billion of imports from China. The president has threatened to put a 25 percent tariff on the rest of the 300 billion or so we import from China, and now we're getting close to up to date. 

Griswold: The one piece of good news in all this, David, is that the president decided to draw back and eliminate the tariffs on imported steel from Canada and Mexico. One, there's absolutely no national security issue there, but he also needed to set a good tone for the US-Mexico-Canada agreement, which is the NAFTA replacement or upgrading that the president’s negotiated. Two weeks later after we had this kind of breakthrough with Canada, Mexico, the president announces by how else, by Tweet that he's going to start imposing these escalating tariffs on Mexico, not over any trade issue, but over immigration at the border. 

Griswold: So that kind of brings us where we're at. You're right. There's other issues looming in the future. There's threat against Australia. The president in a few months is going to decide whether to impose duties on imported cars as, get this, a national security threat. Importing a Mercedes Benz or a Lexus from Japan is somehow a threat to national security. So it could get worse before it gets better. But we're in a pretty bad spot right now. We're in a spot we haven't been for decades in terms of tariffs here in the United States. 

Beckworth: Yeah. One thing that strikes me about this is how much support he's received. We'll talk in a little bit about how he has gotten some pushback on Mexico from Republican senators, Ted Cruz, for example, in Texas. But in general, he's received a lot of support from his party, which is surprising to me. If you go back and look at Ronald Reagan and look at Republicans in the past, they were very different about trade. This has probably been the most surprising change I've seen. I consider myself right of center, very sympathetic to... I love Ronald Reagan, I'll confess. I like Ronald Reagan and his views on trade. 

Griswold: Me too. He's looking better all the time. 

Beckworth: Yeah. It's just I'm shocked how far we've come from Ronald Reagan to Donald Trump when it comes to views on trade. 

Griswold: Yes. Well, it's complicated. First, China. China is a very unsympathetic foreign character, right? Their government is oppressive of the people. They do violate a lot of norms of international commerce. I would basically agree that we have some real issues with China having to do with intellectual property, how they treat foreign investment, and then of course, the whole geo strategic thing about the South China Sea and Taiwan. We've got some real issues with China. They are not a friend the way Mexico and Canada and Europe and Japan are. But tariffs are not the right approach there, and so that's where I would diverge from a lot of the China hawks on how we go about best remedying that, and happy to talk about that in a moment. But then, of course, politics. Republicans are hesitant to challenge their leader, their man in the White House. 

Griswold: That's been disappointing, one, on economic grounds. You're right, Republicans, they used to be the protectionist party. Back in the days of Herbert Hoover, they became the more pro-free trade party in recent decades led by Reagan and others. So Republicans should oppose the tariffs on economic grounds, but then you get the politics mixed in. They're just hesitant to challenge their leader. One other good reason to challenge the president on tariffs is constitutional grounds. Congress should be protective of its turf. Article 1, section 8 of the constitution is very clear. It is Congress and Congress alone that has the authority to regulate commerce with foreign nations and to impose duties on imports. Congress has given presidents limited authority over that. This president has rammed through those limits with a high-speed truck and totally abused the trade law. 

Beckworth: It's an awful crash scene he leaves behind here, big mess in his wake. We've had Doug Irwin on the show, great economic historian, trade historian. One of the interesting things I learned from him and his book that we talked about is how both parties used to support trade. One of the big motivations was foreign policy, we were fighting communism, it was west versus the east. It all kind of comes to an end when the Berlin Wall falls and communism collapsed, and soon after that you see the Democrats start to be more critical of trade policy, so like getting NAFTA passed. Republicans were still free trade. Democrats begin to question it, although it was Bill Clinton that actually helped finally push it through. But you see the cracks emerge I guess after that period, and now we're seeing even more cracks emerge in kind of the last few free trade politicians out there. 

Griswold: Yeah, David, I agree with that. There were cracks showing in the '70s, I think the movement of organized labor used to tentatively support trade liberalization back in Eisenhower and Kennedy and Johnson years. They started to become more skeptical in the '70s and the '80s, and of course, they are a key constituency of the Democratic Party. So you started to see some of this break. Yes, it accelerated in the '90s. 40 percent of House Democrats voted for NAFTA. So that was a bipartisan agreement. But you're right. It became more partisan. The irony today is president Trump of course has scrambled that, hasn't he? He's the protectionist in chief and a Republican. What you're seeing in terms of public support is actually the public support for free trade is at something of a high, but the composition has changed. 

Griswold: Rank and file, Republicans are becoming more skeptical of trade. They think what Trump is saying, there's something wrong with it. There must be something to that. Democrats are swinging more in favor of trade. So the politics of trade have become more complicated than ever. 

Beckworth: More disappointing than ever. But any event... We need to move on and talk about some of the actual more recent developments. Let's talk about China. We've touched on it already. You've mentioned that there's an additional 300 billion that could have additional tariffs, and it takes us close to or over 500 billion if it were to be passed. 

Griswold: Virtually every good that we import from China could be subject to a 25 percent tariff by later this year. Yeah. The administration, the US trade representative, Robert Lighthizer, he's a longtime China hawk. They produced a section 301 report on China, which had a lot of good factual information in it. It cataloged the various ways that Chinese actors violate intellectual property. China restricts foreign investment in China. So kind of the indictment had a lot of truth to it. Where I think the administration has gotten off track is when they tend to exaggerate the impact, they minimize the gains that we enjoy from trade with China, and they are substantial for tens of millions of Americans, and they've exaggerated the costs. Then of course, the response of these escalating tariffs are all out of proportion to anything China has done. I've said it before, and I'll say it again, the Trump administration's tariffs are doing more damage to the US economy than anything China has done. 

Beckworth: Yeah. So there's also effects happening in China that we may not like, not just costs to the US economy, but cost to how China's being operated, who it interacts with. I was reading the Wall Street Journal today, how Chinese and Russian officials are now getting closer together because of all the trade noise and confusion that we're creating. I don't think that was an intended consequence, but that's something that we're getting. Also, we lose the moral authority when we start playing like this, and it allows China to be more random and capricious in how it deals with trade issues. 

Griswold: Yes. Free traders like me will argue on economic grounds that trade is the right thing to do. But I think there's also a historical argument that trade has a moderating influence. We talked about the turn to free trade in the postwar era to bring the Western countries closer together, and that's been true. You don't want to oversell that though. Expanding trade relations don't guarantee necessarily better relations between countries or more liberal policies internally. We're seeing that in China. It is the dynamics of the Chinese one-party state and president Xi, they've tended to move away from reform. I think the president's tariff war is pushing China in exactly the wrong direction. It's kind of put them in a corner. It's aroused nationalism in China, and you're seeing China's starting to push back, both retaliation. They're threatening to withhold exports of certain key minerals called rare earths, and it's making it harder for us to work with China on mutual issues of security, and that's why we may be pushing them closer to Russia and making it harder to work with them on these other issues. 

Beckworth: Yeah. I was just reading in another article on Bloomberg recently about how Boeing has a huge mega deal with China, where it's working on a big, big deal with China. For over $442 million ticket price, they're going to sell a bunch of their big 777 planes to an airliner over there. This sale is going to be contingent upon how this trade war ends up. So that's a lot of jobs in the US. I mean, you mentioned it affects us in terms of our economy, but how they interact with us is going to get more hostile if we're not careful. 

Griswold: Well, that's right. It just points out that trade is a two-way street. President Trump's chief trade advisor, Peter Navarro, who's not a trade economist, doesn't know much about trade, and he gives the president all the wrong advice. He said earlier this year that no country would retaliate against the United States because our market's too lucrative. That turned out to be exactly wrong. Mexico and Canada retaliated on the steel tariffs. China has retaliated. China is our number one source of imports to the United States. I don't see anything wrong with that. We get useful products that make our lives better every day. But they're a major export. They're the third largest export market for US exports. You mentioned Boeing. We actually sell them a lot of cars, all sorts of industrial components, the machinery… 

Beckworth: To farmers, right? 

Griswold: The farmers. Up until recently, China was close to being our major market for us farm exports, $20 billion or more a year, poultry, pork, soybeans, all sorts of things, that's in jeopardy. An interesting thing, China has a large bilateral trade surplus, so we have a lot more imports to target than China does in the tariff war, but we have a large surplus in services trade with China. Have you noticed the other day China is warning its citizens not to travel to the United States? They're saying because of gun violence and things like that. When a Chinese tourist come to the United States, that is an American services export. When Chinese students come to the United States and go to US institutions, we're getting dollars back from China. The president should be happy with that. He seems oblivious to it. 

Griswold: The one other area where we're vulnerable, David, is on foreign investment. US companies sell far more goods and services in China through their affiliates than we export to China. It's something like $350 billion of US-branded goods and services sold in China through majority owned affiliates in China, and that sends back over $30 billion in net income profits to the United States more than US companies earn in, say, Japan and Canada and other major trading partners. So we're vulnerable on a number of fronts, and we're just starting to see the damage from this trade war. 

Beckworth: We'll come to the cost in a bit. There's been some estimates actually made of this trade war. I want to hold off for a little bit. I just want to also remind our listeners two things. One, China right now is no longer accused of currency manipulation, right? Maybe a decade ago you could say that, it's not true now. Also, there was a different way to approach China. So China does have real issues. We all acknowledge that. There's the ones you mentioned. The most maybe safe and comprehensive approach would have been the Trans-Pacific Partnership. 

Griswold: Yeah. That would have been one approach. So yeah, just very, very quickly. My view on China is we have real problems. Intellectual property theft is the biggest problem. Theft is theft. That does cost US companies either lost sales or royalties that they should collect. But first, let's put that in a little bit of perspective. Middle income countries, from India to Brazil around the world, have a problem enforcing intellectual property. They don't have great incentives to do that necessarily. The US Chamber of Commerce rates the 50 major economies in the world in terms of their treatment of intellectual property. China comes in at about the middle of the pack. In fact, there are 25th out of 50 nations. They actually have a better record on intellectual property than some of our major trading partners, like Brazil. China is one of the major payers to the United States in royalties for use of intellectual property. It's over $8 billion. They rank as one of the top three or four payers. 

Griswold: That number's gone up dramatically in recent years. So just to put that in perspective and also the US International Trade Commission did a study of Chinese intellectual property in 2011, and they estimated us companies were losing about $48 billion in sales. That's a significant number, although it comes in at about one percent of the total sales of IP intensive companies that do business in China. So put it in perspective. Then the question is what do you do about it? I think we are better off going directly after the bad actors in China who are violating intellectual property. We've done that. We've brought sanctions. We brought cases through the Justice Department. That goes right after the bad actors, disincentivizes them to abuse the law, and it minimizes the collateral damage. 

Griswold: Huawei, the technology company, I don't the charges against them, what weight they have. But at least, there we are going after the company that is allegedly responsible for the abuses rather than saying China's violating intellectual property rights, therefore tens of millions of American consumers are going to pay more the next time they go to a big box retailer. There is no connection there. Foreign investment in China, they do have restrictions, although there, again, they've moved into liberalizing way. The charge there, David, is that if you have a joint venture with a Chinese company, they can force the US partner to transfer their technology to the Chinese partner who will eventually use that technology on their own to set up their own shop and then compete against the US company. That happens. 

Griswold: Although our sales in China continued to grow, I don't think we're losing sales overall. China's gotten more liberalized. The share of foreign companies that have to join joint ventures has been dropping significantly. It used to be the large majority. Now, it's well below a half. 70 or 80 percent of investment in China is now a wholly foreign-owned, and you don't have the technology transfer, and they're continuing to liberalize in the automobile sector, in the financial sector. 

Griswold: So let's use the tools available. You mentioned rejoining the Trans-Pacific Partnership, which sets higher American style standards in that part of the world. We should be a part of that, bringing specific actions through legal channels. We should bring more cases in the World Trade Organization. We brought over 20 cases against China over the years. According to a study by our friends at the Cato Institute, the Chinese have moved in a market direction virtually every time. Maybe not completely, but they've taken action and moved in the right direction. We should be filing more cases in the WTO. Instead, this administration is strangling the dispute settlement mechanism in the WTO by vetoing the appointment of new appellate judges. So let's use all those tools available and back away. I'd like us to immediately repeal all the tariffs we've imposed against China. They're self-damaging. They haven't borne any fruit. We seem to be further away from an agreement than ever, and I think it would set a more positive tone in our relations with China. 

Beckworth: Okay. Those are all great suggestions. Just real briefly, we had a guest on in a previous episode, Mike Bird from the Wall Street Journal. We talked a little bit about China's threat of dumping its treasuries, and he didn't find it very, very credible threat. What is your take on that? 

Griswold: Yeah. David, I think you're more of an expert in this area than I am, but no, I don't take it as a real credible threat either. China owns I think about... It still owns about a trillion dollars worth of treasuries. They haven't been a big net buyer in recent years. They've got a trillion in assets locked up. They don't have an incentive to depreciate the value of those assets. They're an attractive, safe, liquid investment for them. I just don't see them doing that. 

Beckworth: Okay. Well, let's move on to Mexico, and let's talk about this new tariff that he's imposed, five percent. What do we know about the origins of this? What happened that caused him to do it? It was announced via Twitter, so it wasn't done through official channels. So what do we know? 

Griswold: Yes. So the president has threatened to impose a five percent duty on all imports from Mexico starting on Monday, June 10^th, if they don't sort out the problems at the border. He's basically telling Mexico, "You need to stop the flow of illegal immigration into the United States." Most of that doesn't come from Mexico. It comes from Central America. They travel through Mexico and then try to enter the US through our border. He said that's going to go up to 10 percent on July 1st, 15 percent on August 1st through to October 1st, where it'll be 25 percent. That seems to be the president's favorite tariff, the 25 percent tariff. 

Beckworth: Now, this is a novel approach for handling immigration issues. Is that right? 

Griswold: Completely novel. Yes. You remember he declared a national emergency at the border, and that was to get more funding for his wall. The president has cited a US law, let me see if I get this right. It's the International Emergency Economic Powers Act of 1977. That was an act by Congress that consolidated a lot of other emergency laws and tried to give more definition and really constrain the president's range of activity. It's a complete abuse of that law. That law has been used a number of times, but in virtually every case, it's been to freeze the assets of a hostile rogue regime. Think Iran after the hostages were taken in '79 and Iraq leading up to the war and things like that. I've been told by experts that it's never been used up until now to impose tariffs. It's never been used against a friendly regime like Mexico, and it's never been used for something like immigration. 

Griswold: David, I don't think it's much more complicated than the president was probably watching CNN or Fox and getting frustrated about the rising number of illegal apprehensions at the border. Of course, he can't blame his own policies. He's not getting much cooperation from Congress, so he's blaming Mexico, and he reaches for his favorite tool, the tariff to bring Mexico to the table to get them to do something about it. It's such a bad policy on so many levels. We're actually even finally seeing Congress getting aroused to protect its turf. It's quite possible, maybe not probable that Congress will pass a disapproval resolution that would nullify the president's tariffs and maybe even muster a veto-proof majority, which they would have to do to make that go into effect. 

Beckworth: What's really surprising is that it's a blunt tool for completely different objective. I mean, you can argue and debate about the best approach to China, but at least with China, you're fighting trade with trade tools, right? Tariffs, because we think China's not being fair with trade. But here you're fighting immigration issue with trade tools. So it just seems to be very inconsistent. The other thing that I've heard you say, and others say is that this also could backfire. If you start punishing Mexico, what that does is it could harm the economy down there, which creates an incentive for more immigrants to come into the US, the very thing he's trying to fight. 

Griswold: Yes. No, I use the word irony a lot when I talk about this administration's trade policy, and here's yet another irony. Yes. Mexico is vulnerable. Something like 80 percent of their exports go to the United States. So if we start imposing significant tariffs on it, it's going to hurt us. It's also going to hurt Mexico. Yes, if their factories start closing down and unemployment rises in Mexico, where are some of those workers going to look for a safety valve? They're going to want to come north to the United States where the economy is performing relatively better. Mexican migration has actually been a net negative over the last decade. More Mexicans going home because the economy has been relatively stable. There have been these relatively well-paying manufacturing jobs in Mexico, which was part of the intention of NAFTA to make the Mexican economy more healthy so that fewer Mexicans would want to immigrate to the United States illegally or otherwise. So it's just yet another reason why the president's threat of tariffs against Mexico are a terrible policy option. 

Beckworth: Tell us also about the number of times a product might cross the border, this whole idea of global supply chains. 

Griswold: Well, in looking at the reasons why tariffs against Mexico are a bad idea, one is the consumer impact, higher prices for fruits and vegetables and consumer electronics and automobiles. But the second is you're exactly right, the effect on integrated supply chains. What NAFTA has done, why NAFTA made so much sense on so many levels is it created an integrated North American manufacturing platform nowhere more important than the automobile industry. The US has a healthy automobile industry. It's different from what it was 30 years ago. But it's a healthier, more competitive industry. We're exporting more cars, more than 2 million vehicles exported from the United States each year. That's a record number. We've never exported that many vehicles, and it's because of this integrated supply chain. We do the higher end stuff here. Mexico does a lot of the lower end stuff for the lower value vehicles. 

Griswold: To your point, David, in that integrated supply chain, I've been told that automobile parts can cross the border seven or eight times in the course of production. The zero tariffs make all the difference there, right? Because it's virtually frictionless. Well, if you impose a five or 10 or 25 percent duty on a part every time it enters to the United States, and if supply chains are set up, that part's going to enter the United States and leave seven or make four round trips in the course of production. You're not talking a 25 percent tariff. You're talking a 100 percent tariff, which of course means you won't have that. The White House says, "Well, just make it all in the United States." Well, you can't reconfigure billions of dollars of investment in automobile factories overnight. Instead of coming back to the United States, it's quite likely they'll just source them from somewhere else and pay the 2.5 percent tariff, the MFN tariff that you pay on automobile and parts imports to the United States. 

Griswold: So it's going to put not only higher prices for American consumers, but it's going to put US production and jobs immediately at risk. 

Beckworth: Yes. So it doesn't make a lot of sense. Even with I think this being made clear, the president still said he's not bluffing, but I think Senator Cruz is one example, he's in Texas. He's very much aware of this interdependency, and he knows it would harm jobs in Texas, so he's not very happy about it, and maybe others will push back as well. But I wanted just to share some numbers with you and some listeners, kind of website from American University, where it looks at automobiles specific makes and how much is made in Mexico, what percent is made in Canada. I also want to look up what are the best selling cars in the US, which maybe that's not a good sample. Maybe you want to look at the ones that are exported too. 

Beckworth: But the top-selling vehicle in the US is the Ford F-150s, 250, 350, those pickup trucks of Ford. 15 percent of them are made in Mexico. 15 percent, nontrivial amount, and then only 65 percent of it is made in the US or Canada. If you go down the list, number two was a Chevy Silverado. 44 percent of that is made in Mexico, 46 percent made in the US. I mean, at the high end, this is going to an extreme, this car isn't in the top seller list, but the Ford Fiesta, 70 percent of that is made in Mexico, 10 percent in the US. The Chevy Equinox, 40 percent in the Mexico, 45 percent in the US, in Canada. So this all speaks to this point. It's a North American manufacturing system, not a US versus Mexico system. 

Griswold: Yes. So those are great numbers. You notice the pattern, under the higher the value of the vehicle, the big SUV and the pickup trucks, the more value in the United States. So as you'd expect from trade, we've held on to the higher end production, the lower value, lower margin of vehicles, the Chevy Cruze, the Ford Fiesta, those tend to be made in Mexico. Of course, David, I don't know if those numbers include services or not, but we retain the design, the engineering, and then of course, you make money off the marketing and the dealerships and all that. So it's been great. The kind of a handy figure I've come across is that the typical import from Mexico contains about 40 percent US value. That's across automobiles, manufacturing, and that sort of stuff. So when we slap duties on imports from Mexico, we're tariffing our own stuff as well. 

Beckworth: Right. So we're talking about potential job losses in the United States. What's even more remarkable about this as it's happening in the context of the administration trying to pass a USMCA or NAFTA 2.0. So on one hand of the administration is like, let's get this passed, let's push it through Congress. The other hand's like, let's start a trade war with Mexico. So it seems like one hand's not talking to the other. So tell us about what's going on with USMCA right now. 

Griswold: Yes. So the US-Mexico-Canada agreement is the revision of the North American Free Trade Agreement that the Trump administration's negotiated with Canada and Mexico. David, it has pluses and minuses. The pluses of USMCA, NAFTA was a negotiated 25 years ago before we had the internet, and the world's changed a lot since then. So USMCA has chapters on enhanced intellectual property protection, digital trade, de Minimis, which is the minimum amount that goods can come in and not pay duties. That's very important to a small and medium-size enterprises and digital commerce and a number of other features that were sort of a natural upgrade. I mean, one of the ironies is a lot of this was in the Trans-Pacific Partnership, which included Canada and Mexico. That was a kind of NAFTA 2.0, but anyway, another irony there. 

Griswold: So good thing. Of course, just the uncertainty that would be taken away because the president's threatened to withdraw from NAFTA, which I think would be a huge blunder for a lot of the reasons we've talked about. On the downside, USMCA has a sunset clause, which after 16 years, it would have to be renewed by the party. So yet a little bit more uncertainty. The biggest downside of USMCA is that our US trade representative, Lighthizer negotiated much tighter rules of origin. So if you make a vehicle within NAFTA, within North America, for it to qualify for duty-free treatment, it has to have 75 percent of its content come from the three NAFTA countries rather than 62.5 under the old agreement. 

Griswold: A novel provision was 40 to 45 percent of that content has to be made by labor that earned $16 or more an hour. The typical wage in Mexico is $4 an hour. In other words, no Mexicans need apply to make that 40 to 45 percent. So if you tighten the rules of origin, you make it harder to qualify for duty-free treatment. It doesn't undo the benefit of the agreement, but it retreats somewhat and takes back. So USMCA, it's kind of a plus and minus. There've been studies of it. The USITC said it would be a modest net economic positive largely because of the reduction in economic uncertainty having to do with the digital trade provisions. The IMF looked at it and said that the auto rules of origin provisions would have a negative effect, which would offset a lot of the positive effects. So it came close to zero effect. So those are the economics of USMCA. 

Griswold: The politics of it, Republicans are very much for it. Democrats remain skeptical. There was momentum building for USMCA only two or three weeks ago when, as I mentioned earlier, the Trump administration eliminated the duties on steel imports from Mexico and Canada. That was a major irritant, and they had imposed retaliatory duties on a lot of us farm products. So you had a key members of Congress, like the Senate Finance Committee chairman, Chuck Grassley from Iowa who basically said, "You're not going to get USMCA until you get rid of those steel tariffs so that we can have free trade and agriculture with Canada and Mexico." The administration did that. Then two weeks later or whatever, the president announces that he's going to impose duties against Mexico. Mexico has been a grown-up about it so far. They've tried to negotiate, but we could be right back to having retaliatory duties on pork and dairy from the Midwest. 

Griswold: So USMCA, its prospects were always going to be challenging, but I think the chances of it getting past this summer really a key date before the August recess, and then, believe it or not, the presidential politics sort of kicks in after that, that window is closing rapidly, and the president's tariffs against Mexico maybe are going to shut that window entirely. 

Beckworth: So if we don't get the USMCA, does NAFTA continue to operate? 

Griswold: Yes, it does. There should be no confusion about it. NAFTA is the status quo. The president could turn around and say, "Well, if you're not going to pass USMCA, we're going to get rid of NAFTA." I think there would be tremendous pressure on the president not to do that from the business community, from Congress, but with this president, who knows? 

Beckworth: Well, the good news, I guess, then is we're not blowing up NAFTA. It's just that the new version of NAFTA may not pass. So we still have the integrated markets and all that. 

Griswold: Correct. And there's things that need to be modernized from NAFTA, but NAFTA as it is, I will defend for the rest of the day that NAFTA was a good thing and has served our country well. 

Beckworth: Yeah. One of the key themes I hear you saying is just the uncertainty. It's one thing if you want to have a conversation about whether countries being fair or not, but you want to do it in a predictable, systematic way. When businesses make long-term big investments, billions of dollars in factory plants, and on a whim, the president says, yes, no, yes, no, yes, no, and does it on Twitter, it's hard to plan. It's hard to spend money, and therefore, there's fewer jobs, fewer wealth creation. So that's troubling. I guess the uncertainty has been created. 

Griswold: You're exactly right. I mean, tariffs have a quantifiable negative impact on the economy, but uncertainty also has an impact. We published a study a couple of years ago by Professor Bob Kroll from the University of California, which showed that uncertainty reduces trade and reduces economic activity. But here we have a president who not only likes tariffs, but it's part of his operating method to create a lot of uncertainty and then use that in his art of the deal to get people to the table and then come to a better deal. But of course, that uncertainty has a real business cost. 

Beckworth: Yeah. Well, let's talk about the economic impact of all the tariffs since 2018. What do we know? Any study has been done that estimated what the costs are, who's bearing the costs? 

Griswold: Yeah. Glad you asked that. Yeah. As we discussed, the trade war really kicked off, and it is a trade war, I think by any definition, really kicked off in January of 2018. So 2018, we had kind of a real-world experiment. We've had postwar decades of declining trade barriers, and I'd argue that served our nation well. 2018 we took a significant turn back. It just so happens the National Bureau of Economic Research economists and economists from the New York Fed did a comprehensive study that was published by NBER a month or two ago looking at the president's tariff wars in 2018 and attempting to quantify using general equilibrium models, the effect of those tariffs. David, just to give you a scope, when that study was published, they counted $283 billion in imports to the United States that had come under tariffs ranging from 10 to 50 percent because of the president's tariff actions on appliances, steel, imports from China. That covered about 12 percent of us imports. 

Griswold: The retaliation covered a 121 billion of US exports. That's about 16 percent of our exports. The study came to a couple of I think headline kind of conclusions. One, they determined that the cost of the tariffs that the US had imposed on imports, that cost fell almost entirely on US consumers. Yes, it hurt Chinese companies in lost sales in that. But the cost increases got passed on almost entirely to the United States. Just a little quote from the study, "Close to all of the costs of the 2018 US tariffs has been borne so far by US consumers and importers. Who's paying those billions of dollars in tariff that the president brags that he's bringing into the treasury? It's you and me and tens of millions of Americans going about their business every day. 

Griswold: The other determination, David, was it has a net negative effect on the US, it's forced supply chains to be reconfigured. It's forced us to move to less efficient ways of producing things. They calculate the monthly cost is about $1.4 billion. That's roughly the cost of one of these bomb cyclones that has hit the Midwest. So our own government is sending a bomb cyclone to the heartland once a month based on the president's tariff war. Those numbers fell a little bit when the president lifted the tariffs against Canadian and Mexican steel, but they're ready to go up if he follows through on his action against Mexico. 

Beckworth: Those are remarkable numbers. I've heard someone else say that this is effectively a tax hike on consumers, a large one. If you were to go through with the Mexico tariffs, if you were to do the additional 25 percent on the remaining 300 billion, this would be one of the largest tax hikes that US citizens have seen in a long time. 

Griswold: Yes. There's been some analysis comparing it to the tax cuts of the 2017 bill and saying that the president's actually taking back a big share of it. So I did a little analysis on my blog site a few weeks ago when a trade report came out. So far, the president's tariffs over the last 12 months have raised about $20 billion in additional tariff revenue. We were raising a pretty steady $30 to $32 billion a year in tariff revenue. Over the last 12 months, it's 54 billion, so an extra 22 billion. If all these tariffs on China kick in, if the tariffs on Mexico kick in and they stay in place over a sustained period, we could be talking $100 billion in additional federal revenue. To put that in perspective, the federal government collects $3.5 trillion a year. So, so far, it's been less than one percent of revenue. 

Griswold: Federal spending last year went up 300 billion. So it isn't even keeping up. It isn't reducing the deficit. Then the final thing I'll say about tariff revenue, besides the damage it does the economy, David, that is one of the most regressive taxes that the US government imposes. American consumers pay those tariffs, but low-income households pay a higher percentage of that. Why? Because they spend a higher share of their income on consumption. And these are basically consumption taxes aimed at imports. Poor households spend a higher share of their income on the more tradable goods that are subject to tariffs, right? Food, clothing, footwear, think. The China tariffs so far had been weighted towards more industrial supplies. But if the president follows through and tariffs the other 300 billion or so of what we buy from China, that's going to go directly at consumer products. Who's going to pay that? Think of the typical American family walking into a big box retailer. 

Griswold: Their prices are going to go up. Walmart and others have said they'll have no choice but to raise prices. Those tend to be more Trump voters. How many times have I used the word irony in our discussion? So another irony are the president's tariff policies that they are striking hardest at Trump voters and red state America. 

Beckworth: The coastal elites will miss much of this, but people who shop at Walmart will bear the brunt of it. That is very ironic. I want to give another example, some of the costs that may be borne by this. This is an example, is anecdotal, so it's not like systematic evidence, but it's a story in the New York Times about a bike shop. This bike shop, they sell 4 to 500 bright orange two-wheelers a year. What they have found... They design it, as you mentioned, it is the design. They get the customers, they market it, but then they send their production over to China. What they've found is that they're increasingly more expensive to get the bikes out of China, and it's harming their business. There were small boutique bike store in State of Washington. 

Beckworth: So this little business is having a hard time making ends meet. I mean, they potentially lay people off. So small businesses are being harmed as well when it comes to this trade war. 

Griswold: Yes. You see those kinds of stories in the news media day after day. It isn't just Fortune 500 companies. It's small American producers and retailers that are paying these higher prices. That bike shop story is a great example. The owners of the bike shop are... Well, first off, it shows that the prices do get passed through to the ultimate importer here in the United States. Then they face a choice. Did they pass the cost onto their customers and maybe lose sales? Do they have to eat it in terms of less return on their capital? It's just hurting Americans across the board. 

Beckworth: All right. Well, in the time we have left, I want to maybe kind of circle around and think about what this means in terms of understanding Trump's view of trade and tariffs. We could have had this conversation a year ago in best case scenario, argue that Trump was doing this because he really did care about trade. He's using it to make trade free or fair, but can we reach that same conclusion now? 

Griswold: Yeah. I think that is harder and harder to argue that the president has some grand strategy that he's employing to get us to free trade, get people to the table so we can get tariffs down. Once a year or so, the president will say we need to have zero tariffs and free investment and all that. Between those pronouncements, there's 100 tweets where he says, tariffs are good number. Remember he said, trade wars are good and easy to win. 

Beckworth: Easy to win. 

Griswold: He says that tariffs are building a stronger economy. The president likes tariffs. His thinking is rooted, I wouldn't even say in the 1930s. It's rooted in the 1600s, pre-Adam Smith, where trade is a zero sum game, and we only win by making the other country lose, and the scorecard is the trade balance. That's just a fundamental misunderstanding. It doesn't appreciate the value of imports. He doesn't understand that we also trade and services. We also trade in assets. So the US trade deficit overall is offset by a surplus in investment income, the Chinese buying treasury bonds, Japanese building, and the Germans building automobile plants here in the United States. So David, I think the silver lining of the president's trade policies is it has given us a fascinating real-world experiment. I think what us economist types have been saying over the years have proven to be largely true. Trade is a win-win. Trade wars are a lose-lose, and we're seeing it every day in the business pages. 

Beckworth: Yeah. It's hard to argue he's not a protectionist at his core. His heart beats protectionism based on everything we've seen as opposed to he really wants to be free trade, just has his way of doing it. There's been a lot written about this, that he may have cut his teeth in this thinking based on his real estate deals. I mean, we've talked about this in hallway conversations that maybe the way he views the world is, my gain is your loss, or your gain is my loss. For him, the pie is fixed. If he gets a bigger slice, I get a smaller slice, vice versa, as opposed to we would say trade makes that pie grow bigger. I think one of the important task of economists is just to make that point. We call that comparative advantage. Specialize in what you do best, and everyone's better off. 

Beckworth: We have it everywhere in our lives, right? At home, we have a couple of acres, has to be mowed a lot during the summertime. I can do a much better job than my kids can do, but it takes a long time to do it, right? 

Griswold: Yes. 

Beckworth: I let them do that, and I can focus on my work, which earns us money. I mean, their home is a much better place when we labor specialize, and that's everywhere at work, between countries, between firms. It's very basic principle. David Ricardo, you mentioned, that period he's from, it's just something that hasn't been communicated effectively to many people, including our president. 

Griswold: Yeah, I agree, David. Trade is mutually beneficial. That's why trade occurs. It's millions of mutually beneficial transactions, and the president just doesn't grasp that on a very basic level. I mean, in the president's mind, when we buy an import from China, that's China stealing money from us. It's as though you come out of the grocery store with your cart bulging with goods, and you grumble that the grocery store just stole $150. It doesn't buy anything from you. Well, you've got these great products, and the money circulates around and comes back. So it's a teachable moment. I think we shouldn't be too hard on ourselves, David, as a kind of economic education profession. Gallup has asked attitudes towards trade over the years, and support for trade at something of a relative high. I think a majority of our fellow Americans grasp at an intuitive level if not down to a theoretical level that trade is good. 

Griswold: It's good that we can bring in fresh fruit and vegetables from Mexico and have more competition in what kind of cars we buy and be able to buy shirts for $10 or $5 from Bangladesh or wherever and use that money to take our spouse out to eat that night. So trade is good. Finally, isn't this a lesson that ideas have consequences? The president, unfortunately, has some bad ideas that he's had for 30 years. This is an area where he's been consistent. If you look at Donald Trump's clips talking about trade 30 years ago, the target then was Japan. But it's eerily similar. Japan's taking advantage of us. We have a trade deficit. They're ripping us off. We need to have a 20percent tariff. Now, it's just China. But bad ideas have bad consequences, and unfortunately, we're seeing that working itself out right now. 

Beckworth: Yeah. So it will be interesting to see what happens in this next presidential election. So I mean, he's already set the stage for a more protectionist, inward-looking approach to the world. The thing that also concerns many is just not what's happening now, but what's happening in the future. All these institutions and global supply chains, institutions like the WTO, you mentioned, things that are breaking down because of what we're doing today. Then on top of that, we have this presidential election, and there'll be president Trump running against a number of Democratic candidates who on many of these issues may agree with him and willing to push the envelope even farther. So I worry that we may be pushing more and more away. Even though you say most Americans do support trade as the polls indicate, my concern is where we're getting awfully close to a precipice where maybe there'll be some real and lasting damage to global trade. 

Griswold: Yeah, I agree with you, David. It's a pivotal moment for the Republican Party. Is President Trump going to redefine them as a populist party, a nativist party that is skeptical of trade and hostile to immigration? That's a big question. Then for our friends among the Democrats, are they going to in effect mirror what Trump has done and try to double down on it? Bernie Sanders is as much a protectionist as the president, or are they going to sound a more centrist, traditional, bipartisan approach on trade, which Joe Biden has sounded like he's going to do? So- 

Beckworth: That's true. So there are different types of Democrats. I shouldn't put them all in one. 

Griswold: Correct. There's divisions within both parties. There's a core of 25 or 30 Democrats in the House that consistently vote for trade. I almost hate to admit this in my line of work, but trade is typically not a pivotal issue in presidential politics. It gets talked about, but I think the issues in 2020 are going to be different than trade, but it's still going to be telling which direction the two parties go as a duke it out. We know where the president stands. Is the Democratic nominee going to stake out a more trade-friendly position or try to outdo the president in terms of protectionism? 

Beckworth: Well, just one example. So Senator Elizabeth Warren just recently announced a new, very ambitious economic program as part of her platform running for president. One of the items on that list was to manage our currency in a way to offset currency manipulations elsewhere in the world. So that's very much a trade-focused concern. I know she's invoking what... Advocacy is a very systematic rules-based approach, but still, it's a step in that direction towards more intervention in our currency and trade, which to me, again, it's a symptom that we're moving maybe on the margin a little bit away from where we've been with free trade. 

Beckworth: We've been very gung ho about trade on this show. I acknowledge all the concerns. Globalization has been really rapid. There's been a lot of losers as well as winners, and maybe we do need to do more about those folks, but it is concerning that we're moving I think incrementally away from what we had. 

Griswold: Yeah. It is concerning, in that, the dynamics in both parties, their bases tend to be pulling the candidates in a more populist interventionist direction, and that should worry us in a broad front, including on trade policy. 

Beckworth: Okay. With that, our time is up. Our guests has been Dan Griswold. Dan, thank you for coming back on the show. 

Griswold: Glad to be here, David. 

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. While you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.