Speaker 1: America is imposing tariffs on steel and aluminum in the
Speaker 1: name of national security. Allies and opponents alike are crying foul,
Speaker 1: talk of retaliation. Even a trade war is in the
Speaker 1: air by some reckonings, a trade conflict is already here.
Speaker 1: But if war has broken out, how will we know
Speaker 1: who's winning. If it hasn't broken out, how will we
Speaker 1: know when it does, if at all? Welcome to Benchmark,
Speaker 1: a show about the global economy. This week, we step
Speaker 1: back from the daily skirmishes to try to figure out
Speaker 1: what's really going on here and just as importantly, where
Speaker 1: we are headed. I'm Scott Landman, an economics editor with
Speaker 1: Bloomberg News in Washington, and I'm Daniel Moss, economics writer
Speaker 1: and editor at Bloomberg View in New York. Guiding us
Speaker 1: through thee she was Shannon O'Neil, a Latin American trade
Speaker 1: ex but at the Council on Foreign Relations who's also
Speaker 1: working on a book about the global supply chains. Riveting
Speaker 1: stuff and perfectly timed, Shannon, Welcome back to Benchmark. Thanks
Speaker 1: for having me so, Shannon. We'll get to steal an
Speaker 1: aluminum shortly, but first let's try to define the terrain
Speaker 1: what actually is a trade war other than a campaign slogan. Well,
Speaker 1: it definitely is that a campaign slogan. But I would
Speaker 1: say if we think about a trade war, UM, not
Speaker 1: to stretch this metaphor too far, but right now we're
Speaker 1: having skirmishes. We're having the Trump administration upset about particular products,
Speaker 1: about steel, about aluminum, and launching out not just at China,
Speaker 1: which is really the source of their ire, but at
Speaker 1: the overall world. UM. But that really is one particular skirmish,
Speaker 1: and we've seen these in the past, particularly over steel
Speaker 1: as well as other issues. If we would get to
Speaker 1: a trade war, which I don't see yet but we're
Speaker 1: getting closer to that is where you start seeing a
Speaker 1: tip for tattery, t allation from countries that may have
Speaker 1: nothing to do with the underlying original grievance. And see
Speaker 1: see other sectors, say agriculture, other sectors in the economy
Speaker 1: hit with retaliatory tariffs and then this back and forth.
Speaker 1: So that to me would be what we would see
Speaker 1: as a full grown trade war. So we'll get back
Speaker 1: to China a second. But when was the last time
Speaker 1: we were in a war? What happened? Who won? A
Speaker 1: lot of this is very fuzzy. The one that everybody
Speaker 1: goes back to is is back in the nineteen late twenties,
Speaker 1: early thirties with a Smoot Holly Act, And there we
Speaker 1: really did see a trade where we saw dozens of
Speaker 1: countries react to each other, throw up their trade barriers,
Speaker 1: tariffs and others, and the overall global economy take a
Speaker 1: sizeable hit because of it. That is the classic trade war.
Speaker 1: But we've seen skirmishes before. We've seen them in the
Speaker 1: nineteen eighties with the U S and the Japanese and others.
Speaker 1: We've seen them along the way. And what it does,
Speaker 1: what history seems to tell us, is that in the end,
Speaker 1: no one really wins. So when we're talking about today,
Speaker 1: you said we're still in kind of skirmish is at
Speaker 1: the moment? How will we know if we're in a
Speaker 1: full blown trade war as opposed to say just sponsoring
Speaker 1: some rebels with cash and some spare M sixteens. So
Speaker 1: one of the things I would say is I look
Speaker 1: back at the last seventy plus years, as we've actually
Speaker 1: had in this particular area in the trade arena, we've
Speaker 1: actually had some rules of the road. Um, we had
Speaker 1: it through gap than through the w t O, the
Speaker 1: World Trade Association organization. We have seen more and more
Speaker 1: countries join in and actually allow sort of a multilateral
Speaker 1: system to develop, also including free trade agreements among many
Speaker 1: different countries. So there has been many countries this idea
Speaker 1: that it is better to follow these overall rules multilateral rules.
Speaker 1: Sometimes you win, sometimes you lose in particular sectors, but
Speaker 1: the rules and the stability that provides has is beneficial
Speaker 1: overall to your economy as well as others. And so
Speaker 1: the issue today is do those rules stand. And we
Speaker 1: have had countries along the way who that have defected
Speaker 1: from these rules, that have not followed the rules, Ida
Speaker 1: being one of the the you know perpetrators here where
Speaker 1: they don't tend to follow those rules even as they've
Speaker 1: tried to join the World Trade Organization, the w t
Speaker 1: O and the like. And so the question here, I
Speaker 1: think is do those overall rules falter. That's when you
Speaker 1: get into a real trade war. And what I would
Speaker 1: be looking for is, as these steel and aluminum tariffs
Speaker 1: go forward, do the Europeans retaliate the way they have
Speaker 1: said that they'll go after agricultural products are products in
Speaker 1: particular districts of Mitch McConnell and Paul Ryan and others.
Speaker 1: And then does the Trump administration retaliate that he's threatened
Speaker 1: back that he'll put a tariff on cars. If you
Speaker 1: start seeing this tip for tap back and forth, I
Speaker 1: think that's where we really will see see a full
Speaker 1: blown escalation. So you mentioned Japan. It didn't seem like
Speaker 1: it at the time when people were smashing Toshiba's on
Speaker 1: the steps of Congress, but Japan relied on the US
Speaker 1: for its defense. The two countries were treaty allies. The
Speaker 1: post nineteen political system is a product of US in position.
Speaker 1: I mean, what did we miss then and now we
Speaker 1: at risk of missing it now. We did see incredible tensions.
Speaker 1: The Reagan administration put on several types of protectionist measures, tariffs,
Speaker 1: but more voluntary controls the Japanese agreed to. There's a
Speaker 1: lot of back and forth there, and partly because of
Speaker 1: the things you mentioned, there was this underlying defense alliance.
Speaker 1: There was an underlying agreement on a lot of other
Speaker 1: issues there that they were able to disagree strongly, vehemently
Speaker 1: about the trade issues, but come to some sort of agreement.
Speaker 1: And what's different today is that that doesn't seem to
Speaker 1: be the case with China. We don't have as many
Speaker 1: areas of agreement, we don't have as many partnerships. We
Speaker 1: certainly don't have the security alliance that we had with
Speaker 1: Japan or that we've had with Europe and other places.
Speaker 1: So I think there are less easy areas of cooperation
Speaker 1: to turn to to try to take down the temperature
Speaker 1: on on these areas of conflict, which are definitely in
Speaker 1: the commercial area along with others. But was that type
Speaker 1: of context actually available at the time. If you go
Speaker 1: back to just iconic cult trull symbols of that era,
Speaker 1: the classics got to be the Michael Crichton book Rising
Speaker 1: Sun and the movie that came of it, you would
Speaker 1: never know that the U. S And Japan were close
Speaker 1: military allies. I mean that was depicted as a war,
Speaker 1: It's true, right, and that was It was an incredibly
Speaker 1: tense time. And so perhaps we come out of where
Speaker 1: we are today and we come out the other end,
Speaker 1: and you say, oh, we forgot about all these other
Speaker 1: things that that bound the United States and China, or
Speaker 1: bound the United States and Europe together. But I do
Speaker 1: think that Chinese US relationship is a very different one. Today,
Speaker 1: there's no military alliance. There's no military alliance, and there's
Speaker 1: there's a distance over over time. There you don't have
Speaker 1: this long history of cooperation where you have other areas
Speaker 1: of the government, if not in the popular perception, but
Speaker 1: other areas of the government that had long standing partnerships
Speaker 1: and communications and day to day working back and forth
Speaker 1: that could calm down or at least bring in those
Speaker 1: securities concerns, those defense concerns to the overall relationship. And today,
Speaker 1: I would say, as we look at that s Chinese relationship,
Speaker 1: it's not just the commercial side that worries the United States,
Speaker 1: but it's the defense side that worries as well. Right
Speaker 1: General Madison others on Defense Department are very worried about
Speaker 1: where China is going on the defense side. On the
Speaker 1: security side, it's positions in South China, sea, in the
Speaker 1: in the like. So that isn't an area today of cooperation.
Speaker 1: In fact, is one of potential conflict or worry as well. Shannon,
Speaker 1: we mentioned earlier that you're working on a book about
Speaker 1: global supply chains. The tariffs imposed by President Donald Trump
Speaker 1: were on imported steel and aluminum. Before that, uh, there
Speaker 1: were solar panels washing machines. Is there a pattern here
Speaker 1: and how with this figure into these kinds of global
Speaker 1: supply chains. Are they going to get gumped up by
Speaker 1: these tariffs or is everything just going to keep functioning smoothly.
Speaker 1: This is something that I do think is threatened by
Speaker 1: this back and forth on on tariffs. And what we
Speaker 1: have seen around the world is yes, there are global
Speaker 1: supply chains, but there are really regional hubs that have developed.
Speaker 1: So we have one in Asia, we have one in Europe,
Speaker 1: and we have one here in the United States in
Speaker 1: North America. And so anything that would put tariffs to
Speaker 1: limit protect the movement of goods between the three nations
Speaker 1: here in North America, the United States, Canada, and Mexico
Speaker 1: could come up, as you say, these supply chains and
Speaker 1: so these tears. Right now, the Trump administration has said
Speaker 1: that steel and aluminum will be that our neighbors will
Speaker 1: be exempt at least until we see whether or not
Speaker 1: not to as solved. So it hasn't happened yet, but
Speaker 1: if we saw steel tariffs aluminum tearrists put on Canadian
Speaker 1: and Mexican products, this would particularly hit these very integrated
Speaker 1: supply chains and the worst off those hit hardest would
Speaker 1: be the auto industry. These are big inputs into the
Speaker 1: auto industry. Much of that steel aluminum comes from Canada,
Speaker 1: comes from Mexico, goes into US cars is put together
Speaker 1: in US factories, and so those are the ones that
Speaker 1: would lose out. And in fact, one of my colleagues
Speaker 1: at the Council Foreign Relations did is that calculation and
Speaker 1: said that if we applied all these tariffs, that yes,
Speaker 1: you would see maybe upwards of thirty thousand steel jobs recovered,
Speaker 1: but you would see at least that much in just
Speaker 1: the auto industry, that you would see a decline of
Speaker 1: forty plus thousand jobs in the first couple of years,
Speaker 1: because you would see people cut back on buying cars.
Speaker 1: Just that little increase in price in the overall car
Speaker 1: would lead to really ripple effects through the supply chains. Now,
Speaker 1: the President sign to national security in the steel and
Speaker 1: aluminum decisions and then went on to say that national
Speaker 1: security allies would have opted outs. Reconcile that for US, well,
Speaker 1: consistency doesn't seem to be part of this overall plan here,
Speaker 1: and and that is the real question. And pulling out
Speaker 1: the national security banner as the reason to put these
Speaker 1: these tariffs in place, you're saying that all these countries
Speaker 1: are gonna apply to are threatening national security. But then
Speaker 1: this is the question. But then the question is if
Speaker 1: you allow people to be exempted, and in for instance,
Speaker 1: what they're saying is you're allowed to be exempted Mexico
Speaker 1: and Canada as long as they renegotiate NAFTA, then you're
Speaker 1: saying that actually, this isn't for national security reasons, this
Speaker 1: is for some other sort of reason, which is a
Speaker 1: real question. And then this also, if we allow any
Speaker 1: issue to be put forward for national security and it's
Speaker 1: a broad blanket that affects every country. I mean, we're
Speaker 1: saying Brazil and Germany and other European countries, all of
Speaker 1: these are national security challenges to the United States. Then
Speaker 1: you're inviting back from those countries their ability to say
Speaker 1: that things that they want to protect in their economy
Speaker 1: are asta national security interests. So you know, French farmers
Speaker 1: can say that it's a national security interest to to
Speaker 1: keep out US grains or other products. We could see
Speaker 1: this reverberate through the system and and a lot of
Speaker 1: the careful work that's gone to build the World Trade Organization,
Speaker 1: these these global rules could begin to fall apart. Well,
Speaker 1: I was just going to follow up on that, these
Speaker 1: global rules you're talking about, even though you know some actors,
Speaker 1: some states are going a little bit out side, it
Speaker 1: seems like talking about national security and the possibility of
Speaker 1: other countries using other kinds of justifications that might not
Speaker 1: be on their face totally justified. Is its own way
Speaker 1: of sort of scrapping the rules and in a way
Speaker 1: that nobody would agree on them anymore and could lead
Speaker 1: to a lot of unforeseen consequences. Is that a fear
Speaker 1: that you might have. It is a fear that I have.
Speaker 1: I mean, it's a fear that we return, not to
Speaker 1: go back to your your philosophy courses in college. But
Speaker 1: are we moving back to this hobbsy in world where
Speaker 1: might makes right and everything's nasty, British and short. Or
Speaker 1: do we have a set of rules that people abide by,
Speaker 1: and when one actor, one player doesn't abide by the rules,
Speaker 1: do the others come together and punish that individual or
Speaker 1: that actor or that country for violating the rules. Or
Speaker 1: do you just throw the whole table over and say, okay, no,
Speaker 1: this person broke the rules. We won't have any rules
Speaker 1: at all and we'll just see what we could the
Speaker 1: most we can gain for our own country. And what
Speaker 1: we've seen in history is that that doesn't benefit everyone
Speaker 1: loses in that. In that case, yes, you might gain
Speaker 1: a bit more relatively than the others, but the pie shrinks. Now,
Speaker 1: when China positions itself in contrast to the US as
Speaker 1: supporters of the rules based system, what do they really mean.
Speaker 1: China has benefited tremendously from this rules based system. There's
Speaker 1: no doubt about that. They have grown if you think
Speaker 1: back to the late eighties, from a very small part
Speaker 1: of the world economy and the world exports to now
Speaker 1: one of the heavyweights. So this is something. This openness
Speaker 1: of markets, the ability to trade back and forth, the
Speaker 1: real consistency and rules has been a huge benefit to China.
Speaker 1: So of course they want the system to continue. Now,
Speaker 1: what the United States and many other countries want, and
Speaker 1: it's not just the United States but Europe and in
Speaker 1: Latin American countries all over the world, they want China
Speaker 1: to play by some of the same rules that they're
Speaker 1: playing by. And there is in many industries there's significant
Speaker 1: evidence that China forces the transfer of intellectual property and
Speaker 1: technology there's significant evidence of that. China in many ways
Speaker 1: unfairly props up staten't enterprises, gives them cheap credit, free land,
Speaker 1: removed from taxes, all sorts of things that create an
Speaker 1: unlevel playing field for for the private sector in the
Speaker 1: United States or Europe other places. So the Bosking and
Speaker 1: Great tripr right now, this is true, but you know,
Speaker 1: don't let the facts get in front of a good story,
Speaker 1: right and they're playing this to the hills. Um. But
Speaker 1: if the United States wants to step forward and enforce
Speaker 1: the rules, they're gonna need all these other countries that
Speaker 1: also want to enforce the rules together, So like the EU,
Speaker 1: like the countries in Latin America, Brazil, like Canada and
Speaker 1: Mexico together, that would be a much starter strategy in
Speaker 1: my view, to take on what may have been unfair practices,
Speaker 1: which I have been unfair practices and stealing aluminum for instance. Shannon,
Speaker 1: now that we're going down this path of skirmishes with
Speaker 1: an eye toward potential a war, rules being thrown out
Speaker 1: the window. New rules are picture early being written. Can
Speaker 1: we ever go back to a more rules based system
Speaker 1: or are we not going to get back there unless
Speaker 1: there's a whole war that forces everybody to start back
Speaker 1: over again. Well, I don't think we've entered the battlefield
Speaker 1: here yet. I think we're still before the war. But
Speaker 1: if we enter this, it will be hard to walk
Speaker 1: it back. And I think one of the telling aspects
Speaker 1: here is do we see in the coming months and years,
Speaker 1: do we see nations rally around a somewhat fragile World
Speaker 1: Trade Organization, the w t O and support it. We
Speaker 1: may need to reform it to make it stronger, to
Speaker 1: make it actually do the things that it needs to do,
Speaker 1: or do we see it blown up? And that really
Speaker 1: is is going to be a crucial moment. If we
Speaker 1: blow the World Trade Organization up, I think it will
Speaker 1: take many years, if not a decade or more, to
Speaker 1: rebuild that system. But it's still there. It's not gone yet.
Speaker 1: It's just in jeopardy. Shannon, you and I were both
Speaker 1: guests at the twenties seventeen Annual Mexican Business Summit, and
Speaker 1: there was a lot of angst, a lot of gnashing
Speaker 1: of teeth. Executives there thought, well, look, if we just
Speaker 1: set up these global supply chains, corporate interest will take
Speaker 1: care of itself, and we don't really have to worry
Speaker 1: about government at all. And the shock of the election,
Speaker 1: it's fair to say, was still sinking in. People were
Speaker 1: walking around stunt. What did they And by extension, we
Speaker 1: in the economic mainstream mess. I think what economists and
Speaker 1: investors and others sometimes miss is the rationality of the investment.
Speaker 1: The rationality decisions often belies the politics. And for many
Speaker 1: years we've forgotten the politics and politics are emotional. Politics
Speaker 1: are about people and ideas and aspirations, and some of
Speaker 1: that is not necessarily rational, or some of that only sees,
Speaker 1: you know, part of the proverbial elephant that's in the room.
Speaker 1: And so this is the challenge. I do think the
Speaker 1: United States, the world trading system, we were coming back
Speaker 1: from a global recession. We thought, okay, the economics has
Speaker 1: worked itself out, We're we're moving forward. This is all
Speaker 1: going to be fine. But those people, whether in Mexico
Speaker 1: or in the United States, around the world, that got
Speaker 1: hit by the recession, they were left behind. And it's
Speaker 1: not just that recession, it is the transformations that are
Speaker 1: happening around the world. Trade is a small part of this,
Speaker 1: a part of it um, but other things are happening.
Speaker 1: So I think the politics will be a guiding force
Speaker 1: as we look forward for the next couple of years
Speaker 1: and in decade, and that is something that frankly, I
Speaker 1: think a lot of those that talk about these issues
Speaker 1: were missing Shannon. Given these trends in politics one year
Speaker 1: from now, will we be in a global trade war?
Speaker 1: I'd like to stick with my optimistic nature and say no,
Speaker 1: but I do think these recent steps have been worrying.
Speaker 1: The one thing that I do see is that many
Speaker 1: countries around the world are moderating their behavior. Yes they're upset,
Speaker 1: yes they think it's unfair, but we haven't seen the
Speaker 1: quick reaction in many of these places that one might
Speaker 1: expect to what many will consider an affront. And so
Speaker 1: as we look forward, in particularly, I think about Latin America,
Speaker 1: where I spent a lot of time and look, right now,
Speaker 1: we probably have over the last few decades, we probably
Speaker 1: had the most free trade, friendly, pro market set of
Speaker 1: governments that we've had in many, many years. That may
Speaker 1: change this year because there's a lot of elections, a
Speaker 1: lot of people are going to come up, and we
Speaker 1: may see things turn over. But but that tells me
Speaker 1: as you look at this hemisphere, as you look at Europe,
Speaker 1: as you look at other places, there's a lot of leadership,
Speaker 1: and there are a lot of voters who have voted
Speaker 1: for those leaders in democracies, who still believe in these
Speaker 1: fundamental rules of the game, who still see trade as
Speaker 1: the way to prosperity and to growth. So I think
Speaker 1: we need to temper our pessimism um about some of
Speaker 1: the rhetoric that's going back and forth that can be
Speaker 1: quite hostile or acrimonious. And do remember that there is
Speaker 1: a large segment of the world that has benefited from
Speaker 1: this opening, that have seen their incomes rise, um, And
Speaker 1: so can we find a way for this net benefit
Speaker 1: to be more inclusive? That is the challenge of these politicians.
Speaker 1: Does that optimistic view about governments in the America's hinge
Speaker 1: on the outcome of Mexico's presidential election? What does the
Speaker 1: candidacy of Andreas Manuel Lopez Albert or Maine. This is
Speaker 1: really I think a bell weather for this optimistic versus
Speaker 1: pessimistic view and the front runner right now um and
Speaker 1: they call AMLO, that's his hackronym. He is an old
Speaker 1: school state development protectionist type. He was raised or came
Speaker 1: of age politically of age in the nineteen seventies and
Speaker 1: he's still there economically, that's how he sees the world.
Speaker 1: And this is really to me from Mexico, this is
Speaker 1: a bell weather election on the economic model of the
Speaker 1: last thirty years. This is an election about NAFTA. Is
Speaker 1: Mexico's path to prosperity, to grow the one that engages
Speaker 1: the world, that's market friendly, that's US friendly, that looks
Speaker 1: more openly, or do you go back to a very
Speaker 1: closed economy, one that's self sufficient as he would say,
Speaker 1: that's turned inwards. Now we can talk as economists about
Speaker 1: why that doesn't really work and why that won't happen,
Speaker 1: But but that vision is his vision. So I do
Speaker 1: think what happens July one, which is when this election happened,
Speaker 1: has huge ramifications not just for Mexico but for for
Speaker 1: this direction. Do you get one of the NAFTA partners,
Speaker 1: who in many ways matches Trump's temperament on trade, would
Speaker 1: turn back to a protectionism And I think that has
Speaker 1: a lot to say what would happen to NAFTA, But
Speaker 1: in general, what would happen with this tip for tat
Speaker 1: the potential back and forth you might see that would
Speaker 1: lead to a trade war. Now, it can seem like
Speaker 1: a fairly arcane thing to have an entire presidential campaign
Speaker 1: of a country of more than a hundred million people
Speaker 1: john NAFTA. But it's a central organizing principle of the
Speaker 1: entire Mexican country, is it not. Everything has been geared
Speaker 1: towards its economic relationship with United States, like everything it is,
Speaker 1: And NAFTA has really become the rule of law, the
Speaker 1: underlying rules for foreign investment for companies operating international companies
Speaker 1: operating in Mexico. So if you pull that away, you're
Speaker 1: left with Mexican rule of law, Mexican domestic courts, which
Speaker 1: are much more fragile and at times much more likely
Speaker 1: to be swayed, to be more arbitrary, uh than to
Speaker 1: uphold a much more balanced rule of law. So this
Speaker 1: is a huge fear of those that are down there,
Speaker 1: and frankly, it's a fear not just for international companies,
Speaker 1: for domestic companies, for the Mexican companies that want to
Speaker 1: operate in a place that's quite open to new ideas entrepreneurship.
Speaker 1: Mexico has been moving in that direction. And the worry
Speaker 1: is if you pull away NAFTA, if you turn back
Speaker 1: in if the state takes a much greater role in
Speaker 1: the economy, choosing champions and the like, back in that
Speaker 1: way of the nineteen seventies, that you will stifle a
Speaker 1: lot of the pretnership, the productivity, and the growth that
Speaker 1: has allowed Mexico to prosper over the last thirty years.
Speaker 1: All right, Shannon, Well, maybe we can have you back
Speaker 1: after the Mexican election or if there's a full blown
Speaker 1: trade war. Either way, I would love to thank you.
Speaker 1: Let's hope that doesn't mean next week exactly. Shannon, thanks
Speaker 1: so much for being on Benchmark. Will be back next week.
Speaker 1: Until then, you can find us on the Bloomberg terminal,
Speaker 1: Bloomberg dot com, our Bloomberg app, and podcast destinations such
Speaker 1: as Apple Podcasts, Spotify or wherever you listen. Please take
Speaker 1: the time to rate and review the show, and you
Speaker 1: can also find us on Twitter. You can follow me
Speaker 1: at at Scott Landman Dan You're at Moss Underscore Echo,
Speaker 1: and our guest Shannon O'Neil is at Shannon Kay O'Neil.
Speaker 1: Benchmark is produced by Toper Foreheads the head of Bloomberg Podcasts,
Speaker 1: Francesca Levy. Thanks for listening. See you next time. The tent,
Speaker 1: the super Barer and my fingers the bod