Transition 2025 Series: Tariffs and Trade

Panelists discuss the potential impacts of President-elect Trump’s proposed trade policies on global supply chains and analyze shifts in U.S. trade policy over the last eight years.

This meeting is part of the CFR's Transition 2025 series, which examines the major foreign policy issues confronting the Trump administration.

SWANSON: Hi. Welcome to today’s Council on Foreign Relations Transition 2025 Series meeting, Tariffs and Trade. My name is Ana Swanson and I’m the trade reporter for the New York Times. And I’m delighted to preside over today’s discussion. This meeting is the first of CFR’s Transition 2025 Series, which examines the major foreign policy issues confronting the Trump-Vance administration.

So I’m delighted to have this fantastic panel with us this morning. We have Heather Hurlburt, associate fellow of the U.S. and Americas Program at Chatham House, also the former chief of staff to the United States Trade Representative Katherine Tai; Dennis Shea, the executive director at the J. Ronald Terwillinger—did I get that—(laughs)—

SHEA: Terwillinger. Terwillinger. (Laughter.)

SWANSON: —Center for Housing Policy at the Bipartisan Policy Center, also the former deputy U.S. trade representative and U.S. ambassador to the World Trade Organization; Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations; and Pat Toomey, board member and advisor of Apollo Global Management and former U.S. senator from Pennsylvania, also a member of the Council on Foreign Relations. So thank you so much for being with me here this morning.

I want to dive right in because I’m sure we have a lot of ground to cover and a lot of great audience questions as well. So I thought, because we live in—we’re living in very pivotal and uncertain times, it seems like, when it comes to the world of trade, I thought I would ask each of you just to make one quick prediction of a development that you expect to see in international trade over the next four years. We’ll just do kind of a lightning round and then go into some different topics. So, Senator, would you like to start?

TOOMEY: Sure. Thanks, Ana.

So I guess the prediction that I would hazard to make is that a lot of folks will be surprised at the extent to which President Trump will pursue broad, aggressive tariffs. There’s a lot of discussion that this is a negotiating position, this is blustering, this is how he intends to intimidate counterparts to negotiations, but he’s not going to carry through. I spent four years arguing with the president about trade. And I will tell you, in my opinion he has some profoundly misguided notions about trade, and deficits, and tariffs, but he believes them very strongly. And he is not going to be held back the way he was in the first term by people around him who were believers in international trade and restrained his instincts. And so I think he will be aggressive. More so than I think a lot of folks think. And I think he will then discover that he has walked into a buzzsaw, because the completely predictable backlash will occur. And it’s going to get messy.

STEIL: I’ll make two very big predictions, one of which a really easy one, a slam dunk, and the second one may be a little more ambitious. The first one is that the new tariffs, that I agree with Senator Toomey are coming. will not actually make a dent in the trade deficit. Economists never tire of reminding people that tariffs tend to push the value of the currency up when the economy is operating at full capacity. It simply shifts the source of the deficit around the world. During Donald Trump’s first term, the U.S. trade deficit actually increased by 40 percent, very substantial. So it may not increase quite that much this time, given that it’s been on a rising trend since the first Trump administration, but it’s going to.

Second, the more ambitious prediction, is—I really do want to be an optimist. I think there are—there are many things, rational things, we can do on the policy front that would make a dent in the trade deficit. And I believe we’ll finally begin having a serious discussion in Washington about those things that we can do. And hopefully we’ll get into that in the discussion later.

SHEA: Well, thanks. Thanks to the Council on Foreign Relations for having me and hosting this. My prediction is very immediate and personal to you, Ana, as a trade reporter for the New York Times. I think you are going to have one of the busiest days—(laughter)—in your professional life on April 1 of this year, when a number of really important reports, required by the America first trade policy executive order, which was issued I think on Monday, are required to be submitted. Issues related to how to remediate the unbalanced trade that the United States has, how to—assessing the PRC’s behavior and the phase one China deal and whether other actions should be taken, assessing whether legislation to remove permanent normal trade relation status for China is worthy, and stuff on de minimis—the de minimis exemption.

So there’s just an enormous number of reports that are going to be out, required to be submitted by April 1 from the various agencies. So I would suggest that you get a lot of sleep. (Laughter.) And whatever your caffeine delivery device is—coffee, Red Bull—you know, just stack up on it.

SWANSON: Try to take my vacation before then.

HURLBURT: Thanks. Well, since my colleagues on the panel have taken all of the easy predictions—(laughter)—I will build on them to say a couple of maybe more controversial things. One is that, given particularly what Senator Toomey said, we will get to the end of this four years with the WTO considerably less viable than it is right now as a foundation for global trade. And secondly, you will see among our foes, but also our friends, a lot more interest in trading blocs. And so we will continue, and U.S. actions will accelerate, the move away from the ’90s-era vision of a truly global trading system. And the question for all of us who want to think about, as you said, Benn, optimism and picking up the pieces, is to understand that that’s the world we’re going to be starting from.

SWANSON: Great. And this feeds off of Dennis’s remarks, but I wonder—you know, we did not actually see tariffs on day one of the Trump administration. The president had previously talked about that on social media. Do you think this is a potential sign of a more moderate approach, or just a bigger wind up? And I—you know, more broadly, where are we today with trade in the Trump administration, versus where you would—where you thought we would be, given the rhetoric?

SHEA: Well, I think April 1 is not too far away. And I think, you know, these reports are to build the intellectual and factual predicate for the various actions. To respond to Senator Toomey’s point, I think President Trump supports trade. We want more trade. But it needs to be fair trade and more balanced trade. So I think, you know, unfortunately, the Biden administration did not enforce the phase one trade agreement, even though there were enforcement mechanisms in there. So I think that will be something that will be—will be on the—on the plate shortly in the spring.

TOOMEY: Can I just add one point?

SWANSON: Yeah, go ahead.

TOOMEY: I think some of the statutory provisions that the president is likely to invoke to use—to impose tariffs, Section 232, Section 301, I believe, and I could be corrected if I’m mistaken, but I think some of them require a report from Commerce Department, I think in some cases. So it could be that this is—this is just a statutory obligation if you intend to invoke some of these provisions.

STEIL: And there is a debate going on among his advisors about the extent to which we should be applying tariffs, whether we should be using it as a broad-based tool or whether we should be using strategically for different purposes. So I agree with Senator Toomey that President Trump is going to be less restrained this time around. Having said that, the same sort of debates are going on within this incoming administration that went on in the last one. For example, during the first Trump administration you had advisors like Peter Navarro who were simply against trade with China. There were others in the administration—you and I were talking earlier about Bob Lighthizer, for example—who were not great fans of trade, but were more willing to use trade as a vehicle to produce trade agreements that, broadly speaking, were supposed to be a benefit to the United States. So those debates will still go on within this administration.

HURLBURT: Yeah. Very much to that point, this is the Trump way of showing that the party is every bit as riven on trade as the Democrats are. And the fundamental thing underneath that is that we don’t have any kind of societal agreement on what kind of economy we want, and thus we don’t agree on what trade tools we want to use to produce the economy we want. And it’s interesting to me that even Trump, who commands his party, in a way, no president of either party has in a long time, isn’t—or, isn’t yet able to get past that. And I think—I mean, it’s interesting, Dennis, because the debate over whether there is anything in phase one to enforce and whether it was worth doing also splits both parties.

SWANSON: Given those competing impulses, I wonder if you think that a 25 percent tariff on Canada and Mexico will go into effect on February 1. I mean, that’s a pretty substantial tariff to put in place on our closest neighbors. What would be the economic consequences of that?

SHEA: Well, I have no idea whether a 25 percent tariff will go on—be imposed on Canada or Mexico on February 1. I will—to Senator Toomey’s point, I know President Trump in 2019 suggested that Mexico—if it did not solve its migration issue, would impose a tariff on Mexico. And the authority he was—I believe he was intending to use was the International Economic Emergency Powers Act, which does not require these reports, which can be done just by presidential action. So I think the president—I’ll just say, I don’t know whether the president’s going to do that. But if he were to do it, I would assume he would invoke the International Economic Emergency Powers Act to do so.

SWANSON: OK. Do you think that would effectively mean that USMCA is over? What do you think the implications of that for USMCA—

HURLBURT: No. I mean, what it’ll mean—I was going to say, if there are 25 percent tariffs on February 1, either they won’t be on for very long or they will immediately be significantly exemptioned and caveated the minute that the markets react to what that means for the auto industry, for energy, and several other major sectors where trade in North America really sets the foundations of our economy. So USMCA will be used as a backdrop for transactionalism, which is the hallmark of how this administration approaches trade. So where those of us who might come from a more legalistic mindset might think, oh, well, this means it’s over, no. It just means that it’s one more thing you can negotiate against.

STEIL: You will recall that USMCA, which is the greatest trade agreement in human history, replaced NAFTA, which was the worst trade agreement in human history. (Laughter.) And if you compare the two, you—I mean, you really have to get in there with a magnifying glass to find the difference. And there’s a little more protectionism in it, but it’s pretty much the same thing. So you’ve got to ask whether we’ll see this same game plan this time. USMCA, which presumably was destroyed by Joe Biden, would now be fixed by Donald Trump. You know, we will rename the Gulf of Mexico the Gulf of America. We’ll make that our new logo. And we’ll have another new greatest trade agreement ever. That’s very possible.

TOOMEY: Yeah, and I certainly don’t know whether it’ll be 25 percent, or what the time frame will be. But I do think the tariffs are coming. I think the president thinks that the tariffs will eliminate the trade deficit, right? If you read Bob Lighthizer’s book, No Trade is Free, I think is the title of the book, he spends the entire book defending protectionism and concluding with a policy prescription of a 10 percent universal tariff on all imports, except China which would be subject to much higher tariffs, followed by increasing that by 10 percent periodically and indefinitely until such time as the trade deficit goes away. In Donald Trump’s mind, a trade deficit is very, very close to the measure of the extent to which your trading partner is stealing from you. And that’s the way he thinks about this. And why wouldn’t you want to stop the stealing? And many, many arguments presenting alternative thoughts on this were unsuccessful, on my part. (Laughs.) So that’s part of why I think this is coming.

SWANSON: It seems to me that you can organize President Trump’s tariffs into kind of—in three major buckets, right? So some are a source of leverage in negotiations. You know, increasingly, he’s talked about some as a source of revenue to offset tax cuts. And then, of course, he’s long thought about them as a way to reorder international supply chains. So, you know, it seems to me that those tariffs might have sort of different prospects, you know, whether or not they would actually be put in place. And there are also some internal contradictions there, right? Benn, you had been talking about that.

STEIL: Yeah, there are some serious internal contradictions. Donald Trump has claimed that tariffs would bring in significant tax revenue, that that tax revenue would come from abroad, and that they would repatriate production, particularly in manufacturing, to the United States. That’s impossible, across the board. First of all, foreigners do not pay the tariffs. Tariffs are import taxes paid by the importer. One can argue that, well, in fact the exporters pay the tariffs because they lower their prices by the amount of the tariff. That would presume that the U.S. importer is what’s called a monopsonist, which—company that has enormous buying power. And if the importer is a monopsonist, you don’t need tariffs to beat down prices. In other words, if a monopsonists can say there’s been a 10 percent tariff, we demand that you lower your price by 10 percent, they don’t need to wait for the tariffs. They would say it now. Lower your price by 10 percent, or else.

Second, it can either bring in significant revenue or protect U.S. manufacturing. It can’t do both. If it brings in significant revenue, it’s because we continue to import goods from abroad. That’s where the tariff revenue comes from. If it does protect U.S. manufacturing, we don’t get revenue from abroad because we stop importing. So it can’t do all those things that Donald Trump claims.

TOOMEY: Yeah, and even—

SHEA: I’d start—(laughter)—

SWANSON: We’ll get to each of you. Senator, do you want to go first?

TOOMEY: You know, you can distill it down to a very simple contradiction. Donald Trump likes to say that American consumers are not going to pay for these tariffs, and they’re going to bring back a revival of domestic manufacturing. Well, wait a minute. If there’s no additional cost to American consumers, then why are they going to change their buying patterns? Why is it going to have any effect? As Benn says quite rightly, both can’t be true.

SHEA: Well, let me just say, there are multiple reasons for the tariffs. You addressed a few. But I think the first and most important one is adjusting the trade balance, remediating the global trade balance. The U.S. has accumulated $22 trillion in global trade deficits. And Bob Lighthizer is right—I recommend you read his book, No Trade is Free—that, you know, this is just an unsustainable situation for the United States to be funding current consumption by selling our assets, and the future earnings on those assets, to foreigners. A 22 trillion (dollar) position—negative position is just not acceptable. So that’s one of the reasons.

The other reason—another reason is changing objectionable behaviors. That was the reason for the China tariffs. We had negotiations, strategic economic dialog, Joint Commission on Trade and Commerce, twenty-seven cases that we won at the WTO against China. Didn’t move the needle. So you got to put some leverage on them. And that was the purpose of the tariffs against China. It brought them to the table. We had a—we had an agreement. Another reason is, you know, leverage for maybe non-trade related aspects, like migration and fentanyl. So that’s another purpose. And the final purpose is revenue. I know you don’t think it brings in revenue. I know economists who say it will bring in revenue.

TOOMEY: From abroad?

SHEA: Yeah. It’ll bring in revenue. Coalition for a Prosperous America. I don’t know what you think of them, $263 billion in revenue, with a global—they estimate that the global 10 percent trade tariff will result in. I will say that, you know, if I had a dollar for every time I heard that the China tariffs are going to lead to Smoot-Hawley, another Smoot-Hawley situation, I’d be very, very wealthy. They did not have an appreciable impact on inflation. So when you hear a lot of the economists talk about, you know, this is going to happen, that’s going to happen, you know, I heard a lot of that during the first Trump administration on the China tariffs, and none of it materialized.

SWANSON: So you’ve all left out the single most important purpose of tariffs, which is signaling in politics. And that, I think, president—after a generation where we really hadn’t used tariffs for much of anything—President Trump in his first term really revived them. And I think it was duly noted across the political spectrum that they were incredibly effective in getting people to pay attention. And, frankly, Dennis, your and my former colleagues at USTR and at Commerce can slave for years on policy tools that are much more effective, and no one cares. So if you want to signal to the public that you are taking on issue X, Y, or Z, tariffs are now an irresistible way to do it.

What that means, if you actually want to move the policy lever, you have to combine tariffs with other measures, whether it’s export controls if China’s your concern, or, frankly, industrial policy at home if rebuilding the industrial base is your concern. And so the question—one of the questions that I have, quite apart from the numbers bingo that we’re playing, is I see little to no evidence that we’re coupling the tariff conversation with a more substantive conversation on economic and industrial policy. And that leads me back to my original point, that this is a signaling game. And we’ve built up a kind of call and response effect, both in the United States and overseas, where President Trump does this and it produces—it produces both political and economic effects that so far seem to favor him.

SHEA: I think it’s partly maybe a signaling game, but it also is trying to remediate specific problems. But I agree with you that there needs to be more integration between tariff policy, trade policy, technology standards, export restrictions, investment—outbound and inbound investment. All these things need to be—particularly vis-à-vis China—need to be sort of greater integrated.

TOOMEY: Could I just—to follow up on a point where I have a difference of opinion with Dennis on whether and to what extent a trade deficit is sustainable, I don’t know. Our economy has been massively outperforming all the economies with whom we have trade deficits. China had at a more rapid growth pace, of course, coming off a very, very low base, and now it’s increasingly questionable how long they’ll be able to sustain this. And one of the criticisms, and Bob Lighthizer makes this, is that, well, we end up selling off America because the capital account surplus that accompanies a trade deficit, it constitutes the foreign purchase of American assets.

I think that suggests a point of view that thinks of America and our economy as a finite pie, where we all have to fight for our slice. And so we don’t want the foreigner to get a bigger slice, because then that’s that much less for the rest of us. In fact, it’s not a limited pie. It’s a growing pie. And it keeps growing. And I think the—you know, we were terribly worried about Japan’s economic might, and our trade deficit with Japan, and how they were closing in on the U.S. in terms of the size of our economy. And people predicted, back in the ’80s I guess it was, that Japan was going to be a bigger economy than the United States. It was just a matter of time. It’s now a much smaller fraction of our economy than it was then. So the idea that we should impose these taxes on American consumers because we have an unsustainable trade deficit, I think that’s problematic.

STEIL: I want to address the imbalances issue. Imbalances can be very dangerous when they get too large because when they do unravel, they tend to unravel very quickly, with enormous disruption. More so in the developing world than in the United States, but we’re the ones who have to pick up the pieces through things like IMF programs. I mentioned at the outset that I do believe that there are far more effective tools than tariffs for addressing the imbalance question. Let me just raise the main one quickly.

There are two moving parts when we talk about trade flows. There are the goods and services going across the world, and there are the financial flows that are associated with them. Now, typically policymakers believe that the goods flow and then the finances flow from them. But the causation actually moves in both directions. If, for example, foreigners want to own assets in the United States, well, they’re going to have to give us goods in order to get the dollars with which to buy those assets. So the extent to which Chinese investors want assets in the United States, they will have to give us goods in order to earn the dollars. And they’ll often do that by dumping the goods at below cost. Often, they can do that because of subsidies from the Chinese government.

Now, why might they want assets in the United States? And here’s a perversity in U.S. policy that could be pretty easily rectified. Because of longstanding tax treaties between the United States and China, China’s state portfolio investment in the United States is tax free. When the Chinese sovereign wealth fund, for example, which is a massive institution, buys portfolio investments in the United States, they literally pay no tax. So if Senator Toomey is interested in buying an asset, he’ll probably pay 37 percent tax on it. CIC, the Chinese sovereign wealth fund, will pay nothing, which gives an enormous incentive to sell the asset to the foreigner, rather than to Senator Toomey.

This also fuels the current account deficit, the capital account surplus, the money coming in is a mirror image of the current account surplus. So if we merely exited this bilateral treaty with China and applied the normal 30 percent withholding tax on foreign portfolio investment in the United States, I’ve done some calculations, I believe that the Chinese portfolio investment in the United States would go down by $515 billion. And that would reduce the current account deficit by about $30 billion. You could increase the tax all the way up to 100 percent. And remember, the Chinese investment in—the portfolio investment in the United States during the financial crisis was basically getting zero returns. That would reduce the current account deficit by about $100 billion. So there are ways to address the current account deficit that I believe are far more intelligent and productive than tariffs.

SWANSON: I could see that being an idea that could have some support in Washington. But before we quickly go to audience questions, I did want to ask—I’ll start with the senator—you know, trade is, of course, the purview of Congress. But Congress has also given the president a lot of authorities on tariffs. How do you see that balance of power between the president and Congress developing over the next four years?

TOOMEY: Well, I mean the story—I mean, one of the central stories of American governance over the last several decades has been the abrogation of responsibility by Congress to the executive branch. It comes in various manifestations. Vague statutes are one, provisions where the president can simply declare—whether it’s an emergency or something else—he can invoke various provisions and then do whatever he wants. And I think trade is such a case. The Constitution actually—I hasten to remind all of us that the Constitution assigns to Congress the responsibility for regulating commerce among the nations. You wouldn’t know that by watching what—you know, what actually happens in this town. It’s as though the president is the sole arbiter of how we trade with other countries.

So I think it’s been a terrible lack of responsibility, a shift of authority from Congress to the president. And I’m not suggesting that the 535 members of Congress should all sit down and negotiate a trade agreement. I get the sense of having a trade rep. But the trade rep actually, in theory, reports both jointly to the president and to Congress. You wouldn’t know that, right, from looking at how trade reps from both parties have behaved in recent years. So obviously I think this is highly unfortunate.

I had a bill with Mark Warner, by the way, Democrat on the Senate Finance Committee. And we—I think we ended up having a majority of the Committee on the bill. And it was a simple idea to start to restore a little bit of balance and a little bit of congressional responsibility. The idea was, if a president wants to invoke Section 232, which is the national security justification for imposing trade restrictions, he has to develop his argument for why, and he needs an affirmative vote in Congress. And we’d make sure it would be expedited. Congress couldn’t just punt on it. But he had to have an up or down vote. I think that’s a modest step in the right direction. I was not able to persuade the chairman at the time, Wyden, to mark up the bill. But we had a majority of members on the Finance Committee who were in favor of it.

HURLBURT: I want to jump in and violently agree with Senator Toomey on that. (Laughter.) Just to mix things up a little bit. And it was really noteworthy in the Biden administration, the only thing you could get agreement on in Congress was that they were mad at us. But when you said, sure, OK, so pass a trade promotion authority, tell us—pick a thing that you want us to do. And there was no possibility of getting agreement on any particular thing. There was no agreement on any kind of market opening. Nor was there agreement on some of the, well, we should go back and change things, that some of our progressive colleagues and some of our Republican friends wanted to do so. Just violently agree with Senator Toomey and also note, again, that this is because the American people—we fundamentally have some different visions spinning around out there about what we would be using trade to do.

SWANSON: Dennis, and then we’ll go to audience questions.

SHEA: Sure. I also agree the Constitution, Article I, Section 8, gives Congress the authority to regulate foreign commerce. But Congress has delegated authority, as has been mentioned, under Section 232, 301, 201, all these various statutes, to the president. I will say, Congress, you asked—you started this conversation with a request for predictions. I think I would not be surprised if Congress acts to remove permanent most favored nation trading status for China. I think Congress in the next four years, if not sooner, could easily do that.

Also, every five years, USTR is supposed to issue a report assessing the costs and benefits of membership in the—in the World Trade Organization. And that report will be due later this year. And in the past previous five-year periods nothing—there’s been some—the Congress has the opportunity to pursue a joint resolution, a privileged resolution, with—you know, to withdraw from the WTO. So I could see that potentially having a little bit more legs this time around than it has in the past.

SWANSON: That’s fascinating. OK, great. Well, at this time I’d like to invite the members to join the conversation with their questions. There’s a reminder that this meeting is on the record as well.

Q: Tom Petri, former member of Congress.

You’ve been talking about it from the American point of view. Could you talk a little bit about the implications of the change in our trade policy for agriculture? And, from the point of other countries, where we’re vulnerable with the trade regime, and where the pressure is going to rise in the United States for—I mean, put trading on bananas and coffee, we import all that, practically. But suddenly wheat, and we’re competing with Brazil, and Argentina, and, I’ll say, a lot of countries in agricultural commodities. So just curious to see how this buzzsaw that was referred to is going to unfold, and who the losers will be in all of this.

SHEA: I’ll just convey my experience at the WTO during the first Trump administration. I mean, the Chinese did retaliate against U.S. agriculture producers. And President Trump stepped in with additional subsidies to support the farmers. So they were—so that the damage that they are suffering or the harm that they were suffering was mitigated. My role at the WTO was to point out that we were completely within the subsidy limits allowed under the agriculture commitments that we made at the WTO. So I will also point out that probably rural communities and the people in agricultural community in the United States are some of the biggest supporters of President Trump. And they understand—they have taken it—they have taken a hit, but they understand that there are other motivations, other objectives to be achieved.

TOOMEY: So I would say I think our agricultural sector is going to get hit with a very aggressive retaliation by our trading partners. I think that will be enormously problematic. I think it’s a terrible policy if the administration decides, OK, we’ll just hand out checks to anybody who is adversely affected. Let’s just—let’s just create a new welfare category. Anybody who is subject to retaliation from our trading partners on whom we’ve imposed tariffs, we’ll just—we’ll just wire them some money. And that is what was done. And, by the way, one of the many concerns is—think about the opportunity for crony capitalism. It’s going to be the best connected, the most sympathetic people that will be most likely to be in line for the biggest check. And is this the way we should be running our economy, really? But I worry that that could well be a part of the reaction function here.

SWANSON: Let’s take another one in the back here.

Q: Good morning. Martina Vandenberg from the Human Trafficking Legal Center.

And my question has to do with trade policy and forced labor enforcement. So under the first Trump administration we saw very robust enforcement of Section 307 of the Tariff Act of 1930, which prohibits the importation of goods made with forced labor. Under the Biden administration, we saw very robust enforcement of the Uyghur Forced Labor Prevention Act. And so I’m curious to know from all of you what you see as the role of enforcement of forced labor in U.S. trade policy in a second Trump administration.

HURLBURT: Martina, I’m really glad you flagged that. And I will start with one kind of very pragmatic observation, which is that toward the end of the Biden administration we were finding that because of the cumulative number—between things that Trump one did, things that we did, and things that Congress did—we had dramatically increased the burden of enforcement on our friends at Customs and Border Patrol. And Congress had not seen fit to concomitantly raise the resources that they need to actually do the enforcement, which you’re nodding because I suspect you already know but others in the room may not.

So the sad reality is that already Customs and Border Patrol was not funded to do the level of enforcement that it’s been made very clear on a bipartisan basis that the American people want to keep slave-made goods out of our—out of our markets. And I’ll just maybe note that I’m even more concerned, given all the other things that we seem to be lining up Customs and Border Patrol to do under the Trump administration, whether there will possibly be the level of resourcing that’s needed to make—to make those laws reality.

SHEA: Well, I’ll just say I think it’s a very important issue. And I think the Biden administration also tried to bring in forced labor into the negotiation around fishing subsidies. Which I thought, unsuccessfully at the—unsuccessfully at the WTO. So I thought—personally, I thought that was a good thing to do. Every year the WTO has this conference on cotton. And of course, so much cotton is produced in Xinjiang and is subject to forced labor. And I remember after I left the WTO, I wrote a piece suggesting that this should be part of the discussion at the WTO on the use of forced labor, in cotton production, because it’s clearly lowering labor costs and having an impact on international trade. And that fell on deaf ears. And, you know, some of the—you know, sort of the really strong free trade folks in town didn’t react very positively to that suggestion.

SWANSON: All right. We have a question from online.

OPERATOR: We’ll take our next question from Keith Rockwell.

Q: Thank you very much. Hello, everyone. Thank you very much for the fine presentations you’ve all made. I have a question that I’d like to hear from everyone, but particularly from Ambassador Shea. (Laughter.) Heather—

SHEA: Hi, Keith.

Q: Hi, Dennis. (Laughter.)

Heather mentioned this and, Dennis, you did too. Everyone is in agreement that the WTO is in dire need of reform. And I’d like to ask you all, but Dennis you especially, what do you think the prospects are for reform of the WTO in Trump two, particularly with respect to dispute settlement?

SHEA: That’s a big question, Keith. I think the—thank you for the question. And I think the WTO really did a disservice to itself. They appointed—reappointed the director general Ngozi Okonjo-Iweala in a truncated process, intentionally to avoid her being considered for reappointment during a Trump administration. That was clearly designed to prevent the Trump administration from having a say in the matter. So I think that was a very bad start to the Trump two WTO relationship.

When I was at the WTO we tried to—we put, you know, notifications. Countries don’t notify their subsidies. That’s an important part of the WTO transparency. We put forward a proposal to impose some penalties for failure to notify. That failed. Put forward a proposal to say that the WTO is based on market orientation trade among market-oriented economies. That that failed, miserably. We put forward a proposal that would say you can’t have—you’re not entitled to special and differential treatment as of right if you are a(n) OECD member, a member of the G-20, a major player in international trade, because currently countries like China, India, Brazil, large trading nations, can claim that they’re exempt from the rules as of right, or carve outs, get special treatment. So we put forward proposals, had a very robust reform agenda. And it didn’t—frankly, it didn’t go anywhere.

With respect to the appellate body, I mean, I would say, folks, our concerns about the appellate body are not a Trump concern. They’re not a Republicans concern. They’re an American concern. I got—you know, it was probably treated—that point was treated with some skepticism. But then the Biden administration came in and, lo and behold, they blocked appointments to the appellate body. So I think the appellate body is dead. The appellate body—you know, remember in that Chevy Chase SNL, you know, this is the nightly news. I’m here to report that Francisco Franco is still dead. I mean, the WTO is dead—the appellate body is dead. (Laughter.) I know—I know. The appellate body is dead. And so they have to come up with a different form of dispute settlement at the WTO.

HURLBURT: Ana, if I can jump in, I promise to be brief. Just one thing. We disagree, that Ngozi has a thankless job because she’s stuck between the bipartisan set of concerns that Dennis described and our European friends who, despite having heard from two administrations that the U.S. was going to have to see some really significant reform, have not moved to a place, frankly, of understanding that their own climate policy puts them at odds with the WTO, the way it was written thirty years ago, and also Beijing, which is fundamentally, as, Dennis, you also said, undercutting the spirit and the letter of the WTO. So in my view, Ngozi has done a great job in an impossible circumstance.

But none of that changes the fact that you have these three main stakeholders with all completely different visions, plus, by the way, emerging economies who are also deeply dissatisfied but can’t get a word in edgewise among this fight. So in my view, there’s no prospect for progress at the WTO, not just because I think this administration has other priorities but because we’re going to have to have some other voices besides the United States say, look, we actually now have not just the U.S., which is very public with its problems, but also the world’s second-largest economy, fundamentally not trading on WTO terms. And until we think about how we’re going to deal with that, we won’t make progress. And I say this as someone who does think there’s a role for the WTO and does not want to see it go away.

SWANSON: Benn.

STEIL: I’m extremely pessimistic about the survival of the WTO. And I would highlight two problems that were created during the first Trump administration that became far worse under the Biden administration. The first thing is that we started justifying all our protectionist actions under the umbrella of national security. So when we would notify the WTO that we were taking action, we started to classify the reason as national security. And our argument has always been that that was not justiciable. In other words, the WTO could not sit in judgment of whether our actions were justified under national security.

The second thing we did, which is very much connected with that, is that Donald Trump stopped appointing or reappointing members of the dispute settlement appellate body. And that, again, continued under President Biden. But national security notifications, not just from the United States but around the world, exploded under the Biden administration. So, for example, the developing world learned that this is a get out of jail free card for protectionism. So if you go back to 2019, there had been virtually no notifications from the developing world invoking national security. Now it’s enormous. It’s 70 percent of the notifications.

And these—what are the justifications used? National security has been invoked to protect door frames, alcoholic beverages, cocoa beans. I mean, it’s that ridiculous. Now, Dennis is a trade lawyer. I don’t know the technical term for it. We economists would call it bullshit. (Laughter.) And so this combination of unlimited invocation of national security and having no appellate body that can deal with any dispute settlement means that the WTO, for all intents and purposes, is neutered. And I don’t see any way out of this right now.

SWANSON: All right. Senator, did you want to jump in on this, and then I’ll go back to questions? Yeah.

TOOMEY: Well, just briefly. To say I think Benn makes a very good point. And Dennis suggests some reforms that I think probably make a lot of sense. But I think at the end of the day it is very helpful to have some multinational body to bring—you know, in which to adjudicate disputes. I mean, in the absence thereof it seems analogous to me, like, trying to play an international basketball game but insisting there can’t be any refs. I’m not sure how well that’s going to go over time.

SWANSON: Great. In the back here, please.

Q: Hi. Mara Lee, International Trade Today.

Senator Toomey, you mentioned cronyism. And I wanted to ask about the possibility that we’ll see a repeat of what we saw in the first Trump administration in terms of exclusions to tariffs. For instance, it was widely believed that smartwatches were spared because Tim Cook came and spoke to the president. And there was a recent study out of Lehigh University and some other universities that companies that gave more to congressional Republicans were more likely to receive exclusions through the USTR.

TOOMEY: Yeah. I certainly don’t know how exactly this is all going to play out, but I think this move towards protectionism and the use of tariffs, the abuse of the national security provision as the justification, I think it is very likely to lead to all kinds of abuses, all kinds of opportunities for crony capitalism. And I do worry about that.

SWANSON: Here in the front.

Q: Thanks. Kellie Meiman Hock with McLarty.

It strikes me that USMCA is going to be the canary in the coal mine on a lot of these dynamics, given that we’ve got the review around the corner. And during the renegotiation of NAFTA one of the best things that really happened was when President Trump threatened to withdraw, because it made folks realize at the congressional district level what that impact would be on the factories in their districts, et cetera. I’m wondering if this 25 percent tariff proposal might be viewed in a bit of the same way to tee up perhaps some productive conversations that might allow us to pivot to some different approaches. I’m thinking maybe viewing USMCA a little bit more like a customs union, as opposed to a free trade agreement, where we align on actually increasing some tariffs on some items where China has overcapacity, and/or looking at having a CFIUS-like sort of an approach at the North American level that might signal politically to the American people—although I don’t know how many swing state voters were paying attention things like CFIUS—(laughter)—but, you know, trying to make this a bit more accessible, right? To explain, look, we are using North America as a way to be more competitive to take on China. Are there policy approaches that we might explore during this USMCA review? Thank you.

HURLBURT: You know, Kellie, I think you lay out there the best case, most optimistic scenario for how this can go. And I’ll add another one in a moment of optimism. Which is that the approach to steel and aluminum, that we talked about with our European colleagues and were unable to get them across the finish line on during the Biden administration, is also something that we could look at in a continental customs union-type context, given the Mexican government, in particular’s, willingness and understanding that it faces some of the same pressures that U.S. producers do. So I think there’s a lot of scope for really interesting work there.

I mean, if I were talking about this in a nonpartisan context I would say also there’s a lot of scope in the clean energy and climate space more broadly, where we maybe did less on the first USMCA. And if I were—if I were advising a Harris administration on what to do there, that’s a whole set of things. And I think it’s possible, frankly, to—some of them are still possible under a Trump-Vance energy domination kind of framework, where all kinds of energy are good.

So I think, yes, in an optimistic world, you could—you could imagine another leap toward really productive integration across the hemisphere. But I’m also concerned that we’ll actually have a harder time concentrating minds than we did eight years ago. And that because there’s so much chatter about 10 percent tariffs, and 25 percent tariffs, and 100 percent tariffs I’m no longer very confident that we’ll be able to concentrate minds on the value for companies, but also for workers, frankly, in the hemisphere. So I’m more concerned about chaos. (Laughs.)

SHEA: Well, I’ll just say one of the reports that President Trump put in the executive order on day one was to direct USTR and some other agencies to begin the process of reconsidering and assessing USMCA. So one of the innovations was, in USMCA as you well know, is the six-year review period by the parties. So there was something new and different from NAFTA, including digital trade provisions and changes on rules of origin, labor and environmental standards, and reforms to investor state dispute settlements. So it was a significant departure from NAFTA. So I think there will be—obviously, there’ll be a reassessment of USMCA, which is required by the agreement. And, you know, the president’s got the ball rolling through his executive order.

SWANSON: We’ll go back to online for another question.

OPERATOR: We’ll take the next question from Farooq Kathwari. Mr. Kathwari, please accept the unmute now prompt.

Q: Unmute. All right. Thank you very much. I’m Farooq Kathwari. I’m CEO of Ethan Allen.

We are a vertically integrated company. We have—80 percent of our manufacturing is right here in the United States, which we operate. And 20 percent—I’m sorry—60 percent of our manufacturing is in the United States, and 20 percent is—or, I would just say, 80 percent of our manufacturing is in the United States and south of the border, which is approximately—just to give it—to make sure that I say it correctly, 40 percent in the United States and 40 percent is in Mexico and Honduras, and 20 percent comes from East Asia. So we control, we manufacture. So we would love to—we have gone against all trends and maintained manufacturing in the United States.

But there are two major challenges that we got to discuss. First is talent. We lack talent here in the United States. Second is health cost. Our health cost is two and a half times higher than Canada, fifteen times higher than Mexico, and twenty-five times higher than Honduras. Unless we address those issues as well, how are we going to manufacture in the United States? We are dedicated to manufacturing. As I said, we make—we have 80 percent of our manufacturing we control ourselves in the United States and south of the border.

SWANSON: Good point. Does anyone want to jump in on the economics there of that, or other aspects that the government could do to help?

HURLBURT: I mean, I will say this goes back to the point I made earlier that your trade policy is only effective if it’s accompanied by broader attention to the economy as a whole. And without turning this into a tooting the Biden horn, I mean, we did do historic things on the domestic side, which you now see the results of as were referred to in how nicely the economy is humming along and the new investments in manufacturing and job creation. And to Mr. Kathwari’s point—it’s good to hear you, sir—if we don’t—if we are having—you know, it won’t matter how big the tariffs are if we aren’t also investing at home in a comprehensive way. And I continue—I just—tariffs aren’t a substitute for a serious economic policy, and if what you’re trying to do is regrow manufacturing for a serious industrial policy.

TOOMEY: Yeah. I think one thing that is worth pointing out here, and every manufacturer certainly has their challenges. And I have no particular insights on Ethan Allen, per se. But there’s a sort of widely dispersed view that we’ve had some terrible, catastrophic manufacturing decline in the United States. And that that’s one of the big problems that has to be dealt with. I remember campaigning around Pennsylvania. And people would ask some variation of the questions, why don’t we manufacture anything in America anymore? And they really genuinely meant it, because this is what they hear. So it’s interesting to remember that the all-time peak year in manufacturing output in the United States of America was 2018. 2019 was almost identical. We had, of course, a decline after COVID, and then it has since come back to almost eclipse 2018, although it hasn’t quite eclipsed it yet.

What has happened, of course, is a dramatic, dramatic decline in the percentage of the workforce that works in manufacturing, which is driven, to a very large degree, by technology and automation. It’s the exact same thing that happened in agriculture a hundred years ago. What percentage of Americans worked on farms? Maybe half, nearly. Today, it’s about 2 percent. And yet, we produce more agricultural product than then, than ever, by far. So I think that context is sometimes missing.

SHEA: I’ll just say, as a counterpoint, I mean, we’ve had whole entire industries ripped from the United States—chemicals, electronics, textiles, nuclear. Just gone. Often not as a result of comparative advantage of other countries but as a result of industrial policies and beggar-thy-neighbor policies of other countries. So I don’t think Japan had a comparative advantage around electronics, but they had an industrial policy to create—to create an electronics industry. And as a result, a lot of it moved over there. And a lot—a lot has moved over to China because of their industrial policies.

SWANSON: Let’s go to another online question, please.

OPERATOR: We’ll take the next question from Erin Ennis.

Q: Hi. Thanks so much for the opportunity to ask a question.

And, Ana, I’m afraid the question I’m going to ask might impact your vacation plans. (Laughter.) Two months feels like a really short time to do a deep dive into the issues that are identified in the America first trade policy. And that seems to suggest the administration may know the answer to some of its questions already. So how predictable are the outcomes of these reports that we’re going to see on April 1?

SHEA: Well, I think, no doubt, there’s been a lot of thinking. I mean, the president’s been on the campaign trail talking about a global 10 percent tariff, talking about China, talking about reciprocity in tariffs. So obviously there’s been a lot of thinking going on. But I think the reports give a—give a moment to, you know, articulate an intellectual and factual predicate for taking whatever action may be forthcoming. And, you know, two months, things can change. You’ll have, you know, administration presumably with some decisionmakers in place. And they can sort of hash it out. And, you know, who knows what the ultimate end product will be?

HURLBURT: So I’ll jump in on that as well to note that several of the topics called out in the executive order reference areas where either the Tai USTR or the Raimondo Commerce Department—and I have a colleague from the Raimondo Commerce Department lurking in the back of the room who can be assaulted for questions on this afterwards. But so a number of them look, to me, like what the job is, is look at what the Biden administration did, scrub it to match Trump preferences—less emphasis on labor unions, for example, maybe less emphasis on climate—but, you know, check—and that in some cases there is an assumption that fundamental work, whether it’s on Chinese unfair practices in the shipbuilding industry, whether it’s some of the assessments of other areas, whether it’s the 232 reviews—but that the assumption is that there is a work product already sitting there done by the bureaucracy, and that there’s a short period necessary to Trump-ify it, frankly.

SWANSON: Do either of you want to jump in before we close? Oh, no? Do we have time for another one, or should I—maybe one quick one from in the room. Back here, please.

SHEA: Make it an easy question. (Laughter.)

Q: Yeah. Good morning. Thank you.

I actually just wanted to follow up on your kind of comments about using strategically invocations of national security in trade policy. And my concern is really one of larger militarization and this fundamental shift in assuming trade, especially with China, is a national security threat. And I’m wondering about the risk or the potential for military conflagration as a result of this. I know that President Trump has insisted that he will not get involved in any more international conflicts, but the hysteria especially around China and building ports in the Americas or trafficking fentanyl, and the relation to military responses greatly concerns me. And I wonder what you thought about that.

SHEA: I’ll just say that China has probably the largest military buildup in history, short of buildup during war. Biggest cruise, ballistic—cruise and ballistic missile program in the world. They’re a massive—creating a massive Navy, supplemented by Coast Guard, supplemented by maritime militia. They’re clearly—President Xi has indicated that taking Taiwan is a priority of his. So I don’t think the trade policy is stoking the embers of war. I think our trade policy is responding to what the Chinese are doing.

HURLBURT: So I’ll jump in because I think there’s two uses of the word “security” here that are challenging for us in this field. And one is the challenge we face from the growing number of technologies that are truly dual use. So that where you—they have harmless applications in the civilian side, but applications on the military side that have really serious consequences for Chinese efforts toward Taiwan. Russian ability to follow—to continue its war in Ukraine is another area where you have a really serious hard security problem around things that might seem quite harmless, like the cute little drones that your kids like to play with.

But very core to the Lighthizer view of trade, and one that I think has immediately been picked up globally, is this idea that if a large swath of your population is dissatisfied with its standard of living and is dissatisfied with the kind of work that it has—and I think this is where the deindustrialization is a real problem—and that it doesn’t matter—don’t matter how it happened, don’t matter why it happened. But if you have a chunk of your population that can’t live the way it wants to live, that that turns out to be quite dangerous to the security of your government. And that’s true whether you’re an emerging economy that your leader staying in power is dependent on cocoa, and it’s true if you’re a Democratic or Republican president in the United States that faces elections.

And so in that sense—and I got to say, the public doesn’t differentiate between those two definitions of security. Security is, do I feel secure in my home, my community, my job, my way of life? And so in that broader sense, what we’re seeing is a replacement of globalization and efficiency as the ultimate goal with security in your community as the ultimate goal. I agree with you that militarization is a real problem here. But that doesn’t, unfortunately, take away this real, profound problem of insecurity that people are feeling globally, and that they are clamoring for their governments to use trade tools in all kinds of ways to deal with.

SWANSON: Do you want to have the last word?

TOOMEY: Let me just add a thought on this. So, obviously, you know, invoking national security to impose tariffs on modest amounts of specialty steel coming from Canada, it’s just completely ridiculous. And it was simply the excuse that was needed for the president to do what he wanted to do. The thing that does concern me is—Dennis is completely right about the military buildup of China. It’s breathtaking, both in its sophistication as well as its sheer scale. And I think the best way that you dissuade people from becoming militarily aggressive is you maintain the ability to ensure them that they would not prevail. And we have not been investing. So I will speak in favor of militarization to the extent that we, I think, need much more significant investment in military hardware, capabilities, technology to be able to dissuade the kind of actions that others might want to take.

SWANSON: All right. Well, thank you so much for joining today’s session. We’re out of time, but thank you to our panelists for speaking here with us today. And I want to note that the video and transcript of today’s meeting will also be posted on the CFR website. So, thanks. (Applause.)

(END)

This is an uncorrected transcript.