When it comes to trade, there are a number of ways that a country can address grievances with partners. The past century or so, that's meant a lot of negotiation and more recently the involvement of the World Trade Organization. But President Donald Trump is relying on tariffs and in a big way.
Well, it may be effective from one angle, with dozens of country leaders now angling to negotiate and promise to buy more from the US, it has consequences for US businesses and global investment, and it doesn't necessarily tackle one of the administration's concerns, which is Chinese companies evading tariffs through third countries. We're all listening to Asia Centric from Bloomberg Intelligence. I'm John Lee in Hong Kong.
And I'm Katadmitriyeva, also in Hong Kong. And today we're talking to Abehi Ioha. She's a trade economist and assistant professor at Harvard Business School, and she's going to help us unpack tariffs, trade policy and all this other fun stuff. Thanks for joining us today.
Be Hey, thanks for having me.
Now we've had a lot of news on tariffs and trade policy. I want to ask you, just as an economist in this space, can you talk a bit about your kind of initial reaction, like when tariffs come in, what are the likely outcomes in the short term and also the long term.
I think there are two aspects of the current trade policy environment.
That are important to focus on.
So there's how high tariffs actually will be ultimately, but then there's also the uncertainty about what the tariffs are and how they will keep changing over time, and so
those things actually have different impacts. So you could think, for example, there's a world in which tariffs ultimately end up being ten percent on every country, every US trade partner, and then maybe everybody retaliates and it's ten percent all round, and businesses know that in advance, and so they plan and they factor that into their projections and how they think about hiring and investment and locating and all of
those decisions. And so the reaction is going to be very different from a world in which we still end up in the same ten percent tariff world. But there's a lot of uncertainty along the way about where tariffs really will be because there are changes in businesses behavior and decisions given uncertainty, right, so there's likely to be less investment because everybody's waiting to see where things will
ultimately land. Potential planned expansion or growth might be paused because people are hedging against risk of things changing over time because they don't know where things will end up.
So my initial reaction to the current trade policy environment is really that we're getting a double whammy of both the tariffs themselves, like the impact of the tariffs, but also the impact of the uncertainty of the business environment on what businesses are able to plan to do and what they're able to do in the short term and
the medium term. And so those are two things that I don't think people often distinguish between, but for the time being, I think it's the uncertainty that's actually having a significant impacts, even on businesses that are not directly trade exposed.
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and share. Abiah, you're an expert in global trade. What do you think is the current administration's goals in implementing these tariffs? Is it to reduce the trade deficit? Is it to bring jobs back to the US?
So, I think explicitly, and you can tell from the way in which the reciprocal tariffs that were announced on April second, also known as Libration Day, the way those tariffs were calculated. Essentially, we're calculated not based on you know, Vietnam charges US four percent times, so we're going to charge them four percent tires, but really tariff explicitly based on the trade deficit that the US has with Vietnam.
And so for that reason, I think it's pretty clear that the trade deficit is a key motivation for the tariff policies that are being put in place today, in the sense that I think the government, the current administration, really sees significant value in shrinking the overall US trade deficit in goods with its trade partners. One thing to keep in mind, I specify in goods because the US.
Actually a net exporder of services but it has a trade deficit.
Inputs with that point on the reducing the deficit, can you talk a bit about because there is a lot of information also misinformation, about what a trade deficit actually means for the US. Trump has said that it's a sign that the country is being taken advantage of that it's not selling its goods abroad, it's buying from other countries and helping those economies grow. Can you talk a bit about what the US trade deficit? To you as a trade economist, what does that mean?
So to be perfectly transparent, lots of factors can lead to a trade deficit. I think fundamentally you can just start with comparative advantage. Right, So, for example, you have likely have a trade deficit with your yoga teacher.
Do you do.
Yoga y in what way?
You probably pay your yoga instructor money for services rendered i e.
Teaching you yoga?
I don't know how much your yoga instructor buys from you, and so you probably are a net importer of yoga services from your yoga instructor unless you make stuff that your yoga instructor really loves to buy.
But if you think about the bilateral yeah, exactly.
But if you think of the bilateral trade deficits, those are often a function of multiple things. So of course they could be the function of trade barriers that countries might have non tariff barriers like standards or quotas, or foreign exchange restrictions, all sorts of things.
But they're also likely a function of comparative advantage, i e.
Some countries are better at producing some things than others. Some countries are relatively better at producing some things than others, such that there is gains from trade. And so, for example, Cambodia cannot afford most of the kinds of goods that the US produces because the US is a very rich country that produces very high quality goods, and Cambodian consumers tend to not have the high enough incomes to purchase
the kinds of goods that US produces. But the US tends to purchase the kinds of goods the Cambodia produces because they produce apparel that you buy from Walmart. So those kinds of things will lead to a bilateral trade deficit. And so for some countries you might have a state surplus because of comparative advantage. And for other countries, you might have a bilateral trade deficit. US has a bilateral trade surplus in goods with Australia, for example, and so
that's on the bilateral side. But I think there is a concern about the US overall trade deficit, So the aggregate trade deficit, if you add up the surpluses and the deficits across all its trading partners, that total amount and the fact that it has been a deficit over a period of time, I think is something that this administration is particularly interested in tackling, in the sense that maybe it is viewed as the result of potentially unfair
trade practices across a broad set of countries, or maybe it's also a signal that somehow the US isn't as competitive as it otherwise could be in global trade and
in the global economy and the global production system. But one other thing to keep in mind, and I won't go any further on this, since I'm not an international finance economist, but there is something about the balance of payments, which is just the difference in money that US residents and US it doesn't spend versus money that they receive from.
Others, and that balance of payments.
Part of that difference also has to do with the fact that the dollar is a global reserve currency, so people do like to hold dollars even if they're.
Not necessarily like using it in the short term to do things.
Just to follow up on that, so, I guess what I'm trying to get at is is a trade deficit always a bad thing? Like, is the US the fact that the US has a trade deficit? Is it necessarily a negative thing?
So no, Actually, if the US was a small, open economy that was subject to, you know, the vagaries of shocks from the rest of the world, you might be a little more concerned because basically decisions that the US makes wouldn't impact the world, but the world would impact it. The US is a large, open economy, and the strength of the US dollar is so important and said that
it really is like hard currency across the world. And so to that extent, it's actually not inherently a negative thing for a large open economy to have a trade deficit, because it's a function of multiple factors beyond just oh, you know, we're not producing enough or we're not competing enough. It could also be a function of people wanting to hold your currency. You could also be a function of people wanting to buy the government's bonds for example, and.
Hold that maybe I wanted to bring back the discussion on something you just mentioned that was services. Now for the listener, the trade deficit basically just takes me into account the trade of goods, so final products, but not services. And isn't services where the US is really strong, Like if you think of Google, Meta, Microsoft, like Disney films, this is where the US is strong. So is this in a way distorting the competitive advantage of the US.
So that's a really good question.
So if you add up both the US's trade surplus in services and then the US trade deficit in goods, it is an overall test. Yeah, so the services surplus does not exceed the deficit in goods. But to talk about the services surplus, yes, the US is a net exporter of services because it really does have a comparative advantage in services, and not just you know, thinking about services in terms of like tourism, but as you point out, in terms of like intellectual property in terms of innovation.
One of the interesting things is people always talk about, you know, where the screws are put into iPhones and how much of that value is being captured by the US. But a lot of the value of an iPhone accrues to Apple.
Apple is not a manufacturer.
All of the iPhone manufacturing is done by foxcon right, Apple does not manufacture physical goods. Yet most of the value of Apple is in the design, is in intellectual property en case within that iPhone, and most of that value actually accrues to the United States through the fact that there's essentially that's an export of services as an export of intellectual property. And so that's something that I think is left out of this conversation about treating goods.
Because the US does have a significant comparative advantage in knowledge production, in innovation, and whatever is being done on the goods side, one always needs to take into account, well, what could be the effects and the tradeoffs in terms of how innovation will continue to happen in the US and how the US will still be able to be a leader in innovating and producing these high value knowledge goods.
Yeah, that's exactly why on the Apple iPhone cases is designed in California, right, rather than made in China.
Yes, precisely, But tell us.
What's the impact on us small businesses. Can they pass on these tariffs in terms of higher prices.
Yeah.
Aberhei recently did a survey of about four thousand small businesses, and a lot of the findings were around kind of a lack of knowledge of tariffs, but also the inability of these companies potentially to pass on some of these costs. So we'd love to hear some of the other findings.
Yeah.
So interestingly enough, the survey was done shortly before the April second announcement, and the reason was we actually wanted to capture the full range, the full variation in the leafs and expectations about what would happen after April second.
We're planning to do a follow up.
But essentially, one of the key things that I think people forget is that compared to a large company, you should actually expect to see impacts of tires on small businesses sooner than you see on large firms. So people often have this perception that, you know, international trade is a large business game, and so small businesses aren't really that connected to the international economy in any direct sense.
But what we were able to see in our survey is that actually there was a good share of small businesses that potentially could benefit because they compete with foreign products in the US market, but then could be affected on the cost side because they import foreign products, some
from China, some from other parts of the world. And one key thing you always want to figure out when tariffs are implemented is that it's not always obvious who's going to pay for tariffs just because the tariff has been increased because them give you an example, if I have lots of substitute suppliers, right, I could go to a lot of other suppliers, and for example, there were one hundred US suppliers who could give me the same thing I was important from China, and so tires go
up twenty five percent one hundred and forty five percent. I could essentially get negotiate with my form supplier to eat some of that cost because they know I can go somewhere else. So in that case, just because the tariff increases doesn't mean my cost.
Increases, right, your supplier could end up paying that exactly.
So how do you actually get at that like the measure of how much of those costs you'd have to eat? So one question the business owners were asked was, well, if things were twenty five percent more expensive, like how
much of a discount will your supplier give you? And for a large air of them, no discount, So they would have to eat the additional cost of the tariff because they don't have you know, good alternatives and not that much bargaining power with their suppliers, which is not surprising because they're small firms, right, and so how are
they able to pass on those costs? Again, you might be able to pass on those costs if everybody around you is raising their costs then raising their prices rather on their customers, then actually maybe you might be able to get away with them without losing market share. Again, not to get too into the leads, but essentially you can always think of two things. So think of whatever
industry there is. You can think of the overall size of the pie in the industry, whether that's shrinking or expanding, And then you could also think about slices of the pie, how much market share you have within that industry. And so, for example, if everybody has to raise your prices and it's something that's non essential good, it's likely that the industry will shrink, right, because it's got to be more expensive. So people can spend less on that thing, but then
maybe your market share won't increase that much. But if you know you're competing with large companies who have that are negotiating power with their suppliers can eat some of those costs and not increase their prices. Whereas you're the only one who has to increase your price, then you're
probably going to do some customers to your competitors. And so for small businesses, that's the serious copy that they're having to do, which is that even if I try to pass this on to my customers, how much will I be losing to my competitors on this end? And I think you see a little bit in the media. People are getting creative with how they will communicate this
to the customers. Some people are adding a little line to their invoices and we see its showing this is the tariff's surcharge right on.
So this is why your price is highed.
It's just because there's a thirty five percent extra charge because steel is more expensive or something.
We're starting to do that already.
Oh yes, actually, and it's not even small businesses alone. I think fabletics also started doing that as well.
But yes, I wanted to shift the discussion to Asia. Under Trump's first administration, one of the big impact was a lot of companies leaving production away from China to Southeast Asia, and some of these countries, like Vietnam, were considered big winners. Is that going to be the case this time around?
So, well, the reciprocal tariffs that are now postponed at least for the next ninety days on Vietnam. Vietnam is facing one of the higher tariff increases because the US has by a lot of oral trade deficit with Vietnam, and so will Vietnam be another winner in this new round of tariff increases. It's not clear that that's the case, which is a big problem for the multinational companies who
invested a lot of money in setting up manufacturing in Vietnam. Well, we might see other winners, So it's not the case that overall you won't see maybe new winners emerged. So, for example, I think the Philippines has been actually quite excited. So their reciprocal tariff rate was I think about seven teen percent if I recall correctly, but they viewed as well, it's still significantly lower than most of the countries in
Southeast Asia. It's lower than Thailand, it's lower than Vietnams, and so maybe there's scope for moving some of that production and some of that manufacturing over to the Philippines to take advantage of now the more favorable tax treatment. The key thing though, is that because we are in an error that's so uncertain, and there have been so many changes to TIFT policies that have been announced, it's likely that businesses will probably do some scouting.
Right, Multinationals will do scouting, and.
They have entire departments that are trying to lay out what their optimal strategies are. But it will be some time to actually see anything manifest because people don't want to sink in, you know, hundreds of billions of dollars in capital investments in locations that might end up being hit with high tiers after all.
And there's also, of course, you know, just in terms of small businesses, you probably have supply chains that have been carved over many years and those relationships that have been developed, and you know, how easy is it for companies to switch to a country a different country.
Yeah, it's not easy.
So actually, one strand of research that has emerged over and actually was I think motivated by COVID actually, but I think applies here as well, is folks like Benklob who basically study these if you think of them like the scarring effects of shocks to supply change, right, so in the sense that some trade relationship are very kind of market based, so in the sense that like I really could buy my widget from a broad set of people, or I could buy if you think about goods that
are considered like commodities, it's essentially like one.
Supply is as good as the other.
The issue is that when you're producing differentiated goods, so goods that kind of require a lot more customization, that a little more specialized that it's really important. That requires like precision manufacturing for example, where it's really important you get those specs.
Right and you do the QA.
Then those relationship specific investments are really important, and it takes some time to switch because on the one hand, you of course care about cost, right cost including the tariffs, but then on the other hand there are costs of not getting it right. So for example, I switch to a new supplier even if the tariffs are you know, because I'm trying to save something on like a twenty five percent or even one hundred percent tiff, but then
my quality control declines by fifty percent. It's not clear how much I'm actually saving, right, So that's a key factor here in that some of these, especially like consumer electronics, which is potentially why they have that carve out because consumer electronics, some of these can be quite complex to
produce and require these relationship specific investments. And even if the goal for the US to ultimately bring some of that manufacturing back, it will take a lot of time to build in terms of kind of reorganizing those very intricate, very complex supply chains that are able to deliver these these electronic goods.
And I think Kim Cook from Apple has gone on record a number of times saying that they produce iPhones in China, not because it's the low cost producer, but a lot of the workers have skills you can't find anywhere else.
Precisely, we've talked so far in this conversation about trade in goods and services with sort of official trade, but one of the things that the Trump administration has cited as a reason for these tariffs, but also area of concern is sort of transshipments or rerouting of goods, which is actually different from normal trade, where you sort of take an item, add some value, ship it from that location. And there's this sense that Chinese companies in particular might
be trying to avoid teriffs. Can you talk a bit about the different is between like regular trade and then this sort of transshipment trade.
Yes, so transhipment is and or rerouting, however you might choose to call it rerouting relabeling transhipment. So this activity is essentially illegal activity in the sense that people who engage in that activity are mislabeling the true country of.
Origin of the good in order to avoid tariffs.
So it would be something like I fully produced that good in China and then I ship it to location A, and there we change the label on the box to make it say made in country A. We you know, lie on the certificate of origin saying this was made in country A. And the reason we do that is because you know, US tariffs on Chinese goods are much higher than US tariffs on country as goods, and therefore we do that to get access to the law.
Or tariff rate.
So the key difference between transhipment and what could otherwise be just like a normal global value chain activity where maybe some of it is done in China, but then it gets shipped elsewhere and some value is added there and then it gets shipped to the US. And so those are two very different activities. And anytime you have for the same product differential tariff rates for different countries, then there's that incentive to do transhipment because there's basically
a window of arbitrage right now. The bigger that gap is, the greater there is an incentive to do that for listeners.
So basically like in twenty eighteen, which is what we saw twenty eighteen, twenty nineteen, which is like China high tariffs, where can we get lower costs, Vietnam, Indonesia, Thailand right precisely.
Now.
The interesting thing is this time around, so we're not in reciprocal tariff land yet because those have been paused.
The rest of the world is facing something like ten percent have Chinese goods are facing one hundred and forty five per certain lavely on average, and so that gap is quite large, and so the scope for transshipment is actually much bigger now than it was in twenty eighteen twenty nineteen, because then we were talking about differences of you know, ten twenty five percent versus five percent or four percent, and so that is a huge window in which you can absorb some know, costs of shipping things
through other countries. You can you know, split the difference with all the collaborators involved in this legal activity and still mix them back.
You said that this re routing is illegal, but it must be hard for the US to track, Like what happens if you just get this box it says made in China and you just instead of you delete that and say made in Philippines or made in Vietnam. It's can they do anything about it?
Yeah?
And how much is this actually happening?
That's a great question. So the interesting thing is in the Vietnam's case.
So what we studied in our paper was that we actually were able to use Vietnamese customs data and we could actually track what looked like suspicious flows where all of a sudden, you see relatively high imports of a specific product from China into Vietnam by like the same company, and then you see that same company in a short period of time export.
The same product to the US.
And you're seeing that as a pattern that's not necessarily happening with their exports anywhere else or their imports from anywhere else, and so that's suggestive of what looks like childie shipment. So of course, you know CBP Customs on Border Patrol could do some data analysis to kind of track that, and they do do some of this in the sense that they do analyze data to see what looks like suspicious trade flows.
But for the most part, the enforcement.
Actually happens a lot of time after the good is already in the country.
So what happens is.
CBP will see what they suspect to have been evaded tariffs and then go to the importer and try to recover some of those gvs, saying, we think some of the goods you imported were actually made elsewhere and you lied to us about where they were made, and so we're going to charge with the tariffs that you should have been charged in the first place.
Part of how they get that information is.
There's a reporting system that people can So let's say I am a competitor with the Chinese firm that's opposed to all of a sudden this be subject to these high tariffs, and I'm seeing that these goods are still somehow ending up in the country. Really niarly, and I suspect that there's some TIFFs circunvention going on, so I can go on the CVP's website and actually report that I suspect that this particular country is abating TARSK. So that's part of how they get the information. Part of
it is by analyst in data. But how much actually happened. So the interesting thing is for Vietnam specifically, which we study in our paper, we actually find that between twenty eighteen and twenty twenty two, Vietnam's exports to the US grew by about eighty billion, so something around seventy eight billion dollars, and only like ten percent of that by
like our benchmark measures could be attributed. We could attribute towards rerouting or transhipment, and so you could think ninety percent of that was actually because there were a lot of multinationals that had made the investment to do actual production in Vietnam, even if they might be using some Chinese inputs, and so it wasn't as large a share as I think people.
Perceived it to be.
Where people really perceived that, like, you know, more than half of what was coming from Vietnam was really made in China. Will that be the case now with the higher you know, the larger wedge and this kind of gap, and what other locations might be potential rerouting or transhipment hubs. It's going to be an empirical question that I'm excited to dig into, because every time you have this disparity, you always create this incentive.
It kind of sounds like the US might be shooting itself in the foot with these terraffs. So like to your point, I mean, if there's a bigger gap between the Chinese tariffs and Vietnamese tariffs, then that would only to your point, encourage more transhipments now or more rerouting.
Yes.
So actually, from a policy like to minimize implementation costs perspective, something like the steel and aluminum tariffs actually make more sense in the sense that you have a uniform tariff across all locations. There's no incentive for transhipment in that case. Right, everybody's anything regardless of where it comes from. It's twenty five percent, So who cares whether I ship it from
China or from Vietnam or from Thailand. So product specific uniform TIFFs are not going to be subject to chair shipment in the way that country specific tariffs will be, and so you end up playing this game of whack
a mole. And the sad part about the enforcement is that every time you create this disparity with policy, you essentially run the risk in your enforcement activities of peneli seeing legitimate producers abroad and potentially missing in your thirst to like catch in your quest to catch the transhippers.
And the sad part is the legitimate producers actually have made capital investments and made these, you know, investments in production, whereas the rerounters don't need to make those investments, and they can kind of just like hop from So of course there's some costs of setting up an operation and finding collaborators and invading the authorities, but like they can kind of hop from place to place and you could be playing Wapamo with them for a long time. But
the legitimate producers do have those fixed investments. So one thing CBP does do when when, especially in cases where it thinks it's particularly egregious, is that CBP will go to locations abroad, whether the factory supposedly is to inspect it to see whether it looks like there's actual production going on there. Now, you can imagine that's very expensive and it's very happy to do when you have, you know, hundreds of millions of dollars worth of goods flowing into
the country on a regular basis. But to the extent that they can use sophisticated data intelligence tools.
Now, with the.
Access of data that we have, it might be possible to at least pinpoint likely candidate and go inspect some of these facilities.
Has it ever been a successful case of tariffs being used by a country to, you know, bring jobs back to the country.
So I think there's been this broad set of import substitution policies right in the sense that you use tariffs to essentially protect an industry such that it woke grow. Has there been a case in recent history of using tariffs in this way to bring back an industry that had previously existed and left through our shoring. Not to my knowledge, although I might be wrong because I'm not CHATGPI don't have the full breath of the entire existence
of the world. But I will say that in the history of like us, the current advanced economies, you know, Japan, et cetera, like multiple stages.
Tariffs have been used to protect.
Industries from declining or to allow some industries grow. So usually the interesting thing is countries often need to do like three key things if you're going to be doing something like this, which is it's not enough to reduce competition, because what happens when you reduce competition is that companies have less of an incentive to innovate or be very efficient or productive. So if all you do is just have a barrier to foreign competition, you're not necessarily going to lead.
To a thriving industry domestically.
So what a lot of countries have done in the past, and I'm pretty sure like Korea and Japan actually used some form of infant industry protection when they were building out their own manufacturing capabilities, is that there's both the carrot and the stick, right, So, yes, you're protecting those industries from foreign competitions such that they grow and they expand, But then there also has to be the stick and kind of incentives to make sure that these industries have
some incentive to be competitive, to be efficient, to innovate. And what that looks like from like a domestic policy perspective is, yes, we might give you, you know, subsidies, et cetera.
And we might give you some of this protection, but you have.
To reach some goal of exporting to this extent within the next few years, or you have to reach some level of like R and D spend that actually shows us that you're really investing in growing your productivity and growing your efficiency and growing your innovation rather than just sitting on your laurels and you know, getting fat off the benefits and the profit margins from having little competition. I will say one area in which actually you do see a lot of trade barriers to make sure some
production is done in industries is in agricultural goods. So if you go, for example, just go check like WT or tiret schedules.
I do that for fun. I don't know if you like to do that over your weeks.
But you always see, you always see this distinction between agricultural and non agricultural goods and kind of the tires that countries have.
And part of the reason is countries generally tend to.
Have higher tires on agricultural sector, so in parts of agricultural goods than they do on non agricultural goods. And the reason for that is there is this kind of like natural security self sufficiency argument for we need to make sure at least we retain some of our.
Food production within this country because.
In the event of whatever might happen geopolitically, we want to make sure that our citizens can be fed. Among other reasons, but that's one of them.
So we have talked about a lot in trade world ape Hey, what is on your mind these days?
So I think just overall, the most interesting aspect actually of the current changes in US trade policy is that it's really challenging. You know, what has seemed like a pretty stable global trading system, you know, since GAT and the WTO, and so here is the United States taking unilateral action relative to a lot of its trading partners in ways that many of them would argue are not
consistent with being part of the WTO. And so I think one key question in everyone's mind is, well, what will happen not just with US China relations, or US Canada or US Mexico or U s relations, but whether we're really in an age where that period of free trade consensus, globalization consensus is really over.
Whether this marks kind of a pivotal moment.
In the overall global trading system, where countries might be a lot more protectionists, maybe even pmtive B that they used to be and that they have been for the last few decades.
Yeah, there's sort of an ending of an era and entering potentially a more protectionist one, something we hope to unpack over future episodes for sure. Thanks so much for joining us today.
No, thank you, This was a lot of fun.
You've been listening to the Asia Centric podcast from Bloomberg Intelligence and Cutting me Treva in Hong Kong, and I'm John Lee.
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