Speaker 1: I'm Stephen Carroll, and this is Here's Why, where we
Speaker 1: take one news story and explain it in just a
Speaker 1: few minutes with our experts here at Bloomberg. Not so
Speaker 1: long ago, the conventional wisdom was that more free trade
Speaker 1: was better for everyone. Here's a Nobel laureate, Milton Friedman
Speaker 1: in the nineteen eighties.
Speaker 2: You know, let's suppose three of us are out in
Speaker 2: a boat in the ocean, and one of the fellows
Speaker 2: in there takes out a gun and shoots holes in
Speaker 2: the bottom of the boat. Is it the sensible thing
Speaker 2: for the others of us to do to take out
Speaker 2: our guns and shoot more holes in the bottom of
Speaker 2: the boat. That's kind of a silly notion, isn't it.
Speaker 2: But yet that is exactly the notion of protection and retaliation.
Speaker 1: But in recent years, politicians like Donald Trump have sought
Speaker 1: to turn that once widely held view on its head.
Speaker 3: We're doing things for this country that should have been
Speaker 3: done for many, many years. We've had this abuse by
Speaker 3: many other countries and groups of countries that were put
Speaker 3: together in order to take advantage of the United States,
Speaker 3: and we don't want that to happen. We're not going
Speaker 3: to let that happen. It's probably one of the reasons
Speaker 3: I was elected, maybe one of the main reasons.
Speaker 1: At the time, many thought those policies would be a
Speaker 1: one off. But now Joe Biden's doubling down, adding to
Speaker 1: duties on sectors that China wants to dominate.
Speaker 4: Only not competing our companies is cheating.
Speaker 2: And we've seen dammy chair in America.
Speaker 1: So here's why trade tariffs are back in vogue and
Speaker 1: Bloomberg's trades are. Brendan Murray is here to explain high Brendan. Now,
Speaker 1: tariffs aren't new in global trade, but how much were
Speaker 1: they used before this US China trade war started Undernald Trump.
Speaker 5: Tariffs globally have been going down since the end of
Speaker 5: World War Two, when countries decided that it's better to
Speaker 5: a trade with each other than to fight each other.
Speaker 5: That came to a crescendo in the nineteen nineties when
Speaker 5: things like the NAFTA agreement in North America came about
Speaker 5: and the WTO was created. The World Trade Organization a
Speaker 5: place where the rules could be codified and enforced. Now
Speaker 5: fast forward another five years in China joined the WTO,
Speaker 5: and a lot of people thought a lot of Western
Speaker 5: officials thought that China would play by these rules and
Speaker 5: become a more integrated economy into the rest of the world.
Speaker 5: Bill Clinton gave a well known speech back in March
Speaker 5: of two thousand.
Speaker 4: Many Americans have looked to China to see either of
Speaker 4: the world's next great capitalist tiger and an enormous mother
Speaker 4: load of economic opportunity for American companies and American workers,
Speaker 4: are the world's last great communist dragon and next great
Speaker 4: threat to freedom and security.
Speaker 5: A lot of US officials, and particularly the past two
Speaker 5: US administrations, would say we've gotten the communist drag in
Speaker 5: version of that scenario, the one that controls its economy
Speaker 5: in ways that you heard President Biden say amounts to cheating.
Speaker 5: So you've seen the past two US administrations use tariffs
Speaker 5: as this blunt instrument to try to balance the scales,
Speaker 5: as it were, against American industry.
Speaker 1: So how can countries like the US, though, raise tariffs
Speaker 1: if such increases violate the rules of the World Trade Organization.
Speaker 5: Well, for the EU, they haven't really deployed widespread tariffs.
Speaker 5: Brussels is bound and would say that they are bound
Speaker 5: by WTO rules. The WTO is an institution that believes
Speaker 5: tariffs should stay low and not ever be raised. In
Speaker 5: the US, the authority to levy tariffs has for a
Speaker 5: long time been granted the authority of Congress. That has
Speaker 5: drifted more toward the executive branch to the White House
Speaker 5: in ways that the president and President Trump did so
Speaker 5: in a big way, and President Biden has followed through
Speaker 5: and kept those tariffs. To use legal methods to raise
Speaker 5: tariffs on countries that it believes are cheating or there's
Speaker 5: some threat to national security, another exemption where the president
Speaker 5: can impose tariffs on countries in the case of steel
Speaker 5: and aluminum especially.
Speaker 1: Are the US tarfs working? Are they reducing imports from China?
Speaker 5: Well, there has been some pain on the Chinese economy
Speaker 5: for sure. China as a share of US imports has
Speaker 5: fallen from the top source of US imports to number three,
Speaker 5: and the overall trading partner China ranks number three, behind
Speaker 5: Mexico and Canada, so China's share is definitely going down.
Speaker 5: But there's some debate about and some data that needs
Speaker 5: to be analyzed here about whether some of that trade
Speaker 5: is just going through Vietnam or through Mexico through Chinese
Speaker 5: affiliates and that that direct trade might be going down,
Speaker 5: but this diverted trade is actually where we're seeing it go.
Speaker 5: The other issue is that the US trade deficit. Donald
Speaker 5: Trump would say, look, this is the biggest example of
Speaker 5: the unfairness in the global trading system. Is the US
Speaker 5: trade deficit. Well, it hasn't gone down at all. In fact,
Speaker 5: it's gone up. In the past three years. The US
Speaker 5: goods trade balance on an annual basis has topped a
Speaker 5: trillion dollars for the past three years. That's up from
Speaker 5: about eight hundred billion before Trump took office.
Speaker 1: Brandon, I love a fun fact. What on earth is
Speaker 1: a chicken tax? And what's that got to do with anything?
Speaker 5: So it doesn't have anything to do with chickens, at
Speaker 5: least not the feathery kind. So the chicken tax dates
Speaker 5: back sixty years. In the early sixties, Germany and France
Speaker 5: wanted to put tariffs on American chicken exports. Well, this
Speaker 5: turned into just a mini trade war, and the US
Speaker 5: put tariffs on a number of things, including pickup trucks,
Speaker 5: another all American sort of product. So as time's gone
Speaker 5: on all those other tariffs other than the one on
Speaker 5: pickup truck imports have gone away, but to this day,
Speaker 5: at twenty five percent tariff on pickup trucks has been
Speaker 5: imposed on foreign producers. So this is the reason why
Speaker 5: you don't see Volvo pickup trucks or Porsche pickup trucks
Speaker 5: driving around on American streets. These are protected to this day.
Speaker 5: And it's the point is once tariffs get imposed and
Speaker 5: then there are economic interests that depend on them, they're
Speaker 5: very hard politically to remove. So the chicken tax, as
Speaker 5: it's called to this day, is one of those examples
Speaker 5: that economists would cite that say, look, you know, tariffs
Speaker 5: can have an influence, but they tend to be kind
Speaker 5: of difficult to get rid of.
Speaker 1: Brandon, This is exactly why we need you to explain
Speaker 1: these sort of things to us. This is, you know,
Speaker 1: a debate that's been focused very much around the US
Speaker 1: and China. But how does Europe fit into this, because
Speaker 1: it's relevant to this part of the world as well.
Speaker 5: Right, So the US's response has been characterized as preemptive,
Speaker 5: trying to get in front of some industries, the green
Speaker 5: energy industries, electric vehicles, and so on, before China becomes
Speaker 5: the dominant player in these industries. If it's not already.
Speaker 5: So this is the preemptive approach from the American side.
Speaker 5: The European side has been called more reactionary. The European
Speaker 5: Union is investigating Chinese made electric vehicles right now. That
Speaker 5: decision is going to be announced and in the next
Speaker 5: several weeks or maybe a month or two, and we
Speaker 5: could see tariffs on electric vehicles made in China coming
Speaker 5: into the EU, so similar to what the US has done.
Speaker 5: So Europe is a bit behind the curve. But as
Speaker 5: one European official said recently, look, you know it's taken
Speaker 5: a couple of decades, but we realize that we're quote
Speaker 5: unquote getting played by China.
Speaker 1: Knowing that you have been played, of course, teaches you
Speaker 1: that you need to watch out to be much more observant.
Speaker 1: We've talked about the present, we've talked about the past.
Speaker 1: What's the future, then what's the next frontier in the
Speaker 1: global tariff base?
Speaker 5: So the tariffs that we've talked about apply to goods
Speaker 5: and services. The kinds of services that we've been used
Speaker 5: to over the years. Those are real estate services or
Speaker 5: consulting services, the kinds of transactions that go across borders
Speaker 5: face to face. The new frontier in the trade world
Speaker 5: is e commerce and what's called digital trade. That's anything
Speaker 5: that's transacted digitally. Say a concert ticket that you buy
Speaker 5: in the US and it gets emailed to you. Well,
Speaker 5: it doesn't cross through any port, it doesn't go through
Speaker 5: any airport, and there's no custom duty on that. So
Speaker 5: digital transactions, there are no rules for the global Internet
Speaker 5: when it comes to taxing these sort of commerce. So
Speaker 5: there's a big debate at the WTO about what to
Speaker 5: do about this. Some countries like Indonesia or South Africa
Speaker 5: want to put tariffs on e commerce transactions as a
Speaker 5: way to collect revenue and as a way to protect
Speaker 5: their domestic technology companies. The US has a dominant role
Speaker 5: in data flows and e commerce, with the big tech
Speaker 5: companies based in the US. Europeans are also concerned. So
Speaker 5: there's no telling which direction this is going to go in,
Speaker 5: but people are increasingly concerned that we're headed toward a
Speaker 5: more balkanized kind of global Internet, which means you know,
Speaker 5: one day you might be downloading a book on your
Speaker 5: vacation in Bali and you know it'll come with ten
Speaker 5: percent tariff on it.
Speaker 1: And just briefly, Brandon, we've talked about the WTO quite
Speaker 1: a bit in this as well. How useful is the
Speaker 1: WTO in the today in the tomorrow world of policing
Speaker 1: these trade tariffs.
Speaker 5: Well, the WTO is going through a sort of existential
Speaker 5: problem right now. No one is really playing by the
Speaker 5: WTO rules. Its appeals function is not working, so the
Speaker 5: rules of global trade and the enforcer of those rules
Speaker 5: isn't really operating. So it's a big question where the
Speaker 5: WTO goes from here. Former President Trump has talked about
Speaker 5: quitting the WTO.
Speaker 3: The World Trade Organization. As you know, I've had a
Speaker 3: dispute running with them for quite a while because our
Speaker 3: country hasn't been treated fairly. China's viewer as a developing nation,
Speaker 3: India's viewed as a developing nation. We're not viewed as
Speaker 3: a developing nation. As far as I'm concerned. We're developing
Speaker 3: nation too.
Speaker 5: The WTO has a really big challenge to become relevant
Speaker 5: again in an environment where countries are just increasingly going protectionist.
Speaker 1: Brenton Murray Bloomberg's Trade Zara, thank you so much for
Speaker 1: bringing us that explanation of the debate over tariff's past,
Speaker 1: present and future, and for more explanations like this from
Speaker 1: our team of twenty seven hundred journalists and analysts around
Speaker 1: the world. Search for quick take on the Bloomberg website
Speaker 1: or the Bloomberg Business app. I'm Stephen Carroll, and this
Speaker 1: is here's why. I'll be back next week with more.
Speaker 1: Thanks for listening.