What's Behind the Great Trade Skirmish

a show about the global economy. This week, we step back from the daily skirmishes to try to figure out what's really going on here and just as importantly, where we are headed. I'm Scott Landman, an economics editor with Bloomberg News in Washington, and I'm Daniel Moss, economics writer and editor at Bloomberg View in New York. Guiding us through thee she was Shannon O'Neil, a Latin American trade ex but at the Council on Foreign Relations who's also

working on a book about the global supply chains. Riveting stuff and perfectly timed, Shannon, Welcome back to Benchmark. Thanks for having me so, Shannon. We'll get to steal an aluminum shortly, but first let's try to define the terrain what actually is a trade war other than a campaign slogan. Well, it definitely is that a campaign slogan. But I would say if we think about a trade war, UM, not to stretch this metaphor too far, but right now we're

having skirmishes. We're having the Trump administration upset about particular products, about steel, about aluminum, and launching out not just at China, which is really the source of their ire, but at the overall world. UM. But that really is one particular skirmish, and we've seen these in the past, particularly over steel

as well as other issues. If we would get to a trade war, which I don't see yet but we're getting closer to that is where you start seeing a tip for tattery, t allation from countries that may have nothing to do with the underlying original grievance. And see see other sectors, say agriculture, other sectors in the economy hit with retaliatory tariffs and then this back and forth. So that to me would be what we would see as a full grown trade war. So we'll get back

to China a second. But when was the last time we were in a war? What happened? Who won? A lot of this is very fuzzy. The one that everybody goes back to is is back in the nineteen late twenties, early thirties with a Smoot Holly Act, And there we really did see a trade where we saw dozens of countries react to each other, throw up their trade barriers, tariffs and others, and the overall global economy take a sizeable hit because of it. That is the classic trade war.

But we've seen skirmishes before. We've seen them in the nineteen eighties with the U S and the Japanese and others. We've seen them along the way. And what it does, what history seems to tell us, is that in the end, no one really wins. So when we're talking about today, you said we're still in kind of skirmish is at the moment? How will we know if we're in a full blown trade war as opposed to say just sponsoring

some rebels with cash and some spare M sixteens. So one of the things I would say is I look back at the last seventy plus years, as we've actually had in this particular area in the trade arena, we've actually had some rules of the road. Um, we had it through gap than through the w t O, the World Trade Association organization. We have seen more and more countries join in and actually allow sort of a multilateral system to develop, also including free trade agreements among many

different countries. So there has been many countries this idea that it is better to follow these overall rules multilateral rules. Sometimes you win, sometimes you lose in particular sectors, but the rules and the stability that provides has is beneficial overall to your economy as well as others. And so

the issue today is do those rules stand. And we have had countries along the way who that have defected from these rules, that have not followed the rules, Ida being one of the the you know perpetrators here where they don't tend to follow those rules even as they've tried to join the World Trade Organization, the w t O and the like. And so the question here, I think is do those overall rules falter. That's when you

get into a real trade war. And what I would be looking for is, as these steel and aluminum tariffs go forward, do the Europeans retaliate the way they have said that they'll go after agricultural products are products in particular districts of Mitch McConnell and Paul Ryan and others. And then does the Trump administration retaliate that he's threatened back that he'll put a tariff on cars. If you start seeing this tip for tap back and forth, I think that's where we really will see see a full

blown escalation. So you mentioned Japan. It didn't seem like it at the time when people were smashing Toshiba's on the steps of Congress, but Japan relied on the US for its defense. The two countries were treaty allies. The post nineteen political system is a product of US in position. I mean, what did we miss then and now we at risk of missing it now. We did see incredible tensions. The Reagan administration put on several types of protectionist measures, tariffs,

but more voluntary controls the Japanese agreed to. There's a lot of back and forth there, and partly because of the things you mentioned, there was this underlying defense alliance. There was an underlying agreement on a lot of other issues there that they were able to disagree strongly, vehemently about the trade issues, but come to some sort of agreement. And what's different today is that that doesn't seem to be the case with China. We don't have as many

areas of agreement, we don't have as many partnerships. We certainly don't have the security alliance that we had with Japan or that we've had with Europe and other places. So I think there are less easy areas of cooperation to turn to to try to take down the temperature on on these areas of conflict, which are definitely in the commercial area along with others. But was that type

of context actually available at the time. If you go back to just iconic cult trull symbols of that era, the classics got to be the Michael Crichton book Rising Sun and the movie that came of it, you would never know that the U. S And Japan were close military allies. I mean that was depicted as a war, It's true, right, and that was It was an incredibly

tense time. And so perhaps we come out of where we are today and we come out the other end, and you say, oh, we forgot about all these other things that that bound the United States and China, or bound the United States and Europe together. But I do think that Chinese US relationship is a very different one. Today, there's no military alliance. There's no military alliance, and there's

there's a distance over over time. There you don't have this long history of cooperation where you have other areas of the government, if not in the popular perception, but other areas of the government that had long standing partnerships and communications and day to day working back and forth that could calm down or at least bring in those

securities concerns, those defense concerns to the overall relationship. And today, I would say, as we look at that s Chinese relationship, it's not just the commercial side that worries the United States, but it's the defense side that worries as well. Right General Madison others on Defense Department are very worried about where China is going on the defense side. On the security side, it's positions in South China, sea, in the in the like. So that isn't an area today of cooperation.

In fact, is one of potential conflict or worry as well. Shannon, we mentioned earlier that you're working on a book about global supply chains. The tariffs imposed by President Donald Trump were on imported steel and aluminum. Before that, uh, there were solar panels washing machines. Is there a pattern here and how with this figure into these kinds of global supply chains. Are they going to get gumped up by these tariffs or is everything just going to keep functioning smoothly.

This is something that I do think is threatened by this back and forth on on tariffs. And what we have seen around the world is yes, there are global supply chains, but there are really regional hubs that have developed. So we have one in Asia, we have one in Europe, and we have one here in the United States in

North America. And so anything that would put tariffs to limit protect the movement of goods between the three nations here in North America, the United States, Canada, and Mexico could come up, as you say, these supply chains and so these tears. Right now, the Trump administration has said that steel and aluminum will be that our neighbors will be exempt at least until we see whether or not

not to as solved. So it hasn't happened yet, but if we saw steel tariffs aluminum tearrists put on Canadian and Mexican products, this would particularly hit these very integrated supply chains and the worst off those hit hardest would be the auto industry. These are big inputs into the auto industry. Much of that steel aluminum comes from Canada, comes from Mexico, goes into US cars is put together in US factories, and so those are the ones that

would lose out. And in fact, one of my colleagues at the Council Foreign Relations did is that calculation and said that if we applied all these tariffs, that yes, you would see maybe upwards of thirty thousand steel jobs recovered, but you would see at least that much in just the auto industry, that you would see a decline of forty plus thousand jobs in the first couple of years, because you would see people cut back on buying cars. Just that little increase in price in the overall car

would lead to really ripple effects through the supply chains. Now, the President sign to national security in the steel and aluminum decisions and then went on to say that national security allies would have opted outs. Reconcile that for US, well, consistency doesn't seem to be part of this overall plan here, and and that is the real question. And pulling out the national security banner as the reason to put these these tariffs in place, you're saying that all these countries

are gonna apply to are threatening national security. But then this is the question. But then the question is if you allow people to be exempted, and in for instance, what they're saying is you're allowed to be exempted Mexico and Canada as long as they renegotiate NAFTA, then you're saying that actually, this isn't for national security reasons, this is for some other sort of reason, which is a

real question. And then this also, if we allow any issue to be put forward for national security and it's a broad blanket that affects every country. I mean, we're saying Brazil and Germany and other European countries, all of these are national security challenges to the United States. Then you're inviting back from those countries their ability to say that things that they want to protect in their economy

are asta national security interests. So you know, French farmers can say that it's a national security interest to to keep out US grains or other products. We could see this reverberate through the system and and a lot of the careful work that's gone to build the World Trade Organization,

these these global rules could begin to fall apart. Well, I was just going to follow up on that, these global rules you're talking about, even though you know some actors, some states are going a little bit out side, it seems like talking about national security and the possibility of other countries using other kinds of justifications that might not

be on their face totally justified. Is its own way of sort of scrapping the rules and in a way that nobody would agree on them anymore and could lead to a lot of unforeseen consequences. Is that a fear that you might have. It is a fear that I have. I mean, it's a fear that we return, not to go back to your your philosophy courses in college. But are we moving back to this hobbsy in world where

might makes right and everything's nasty, British and short. Or do we have a set of rules that people abide by, and when one actor, one player doesn't abide by the rules, do the others come together and punish that individual or that actor or that country for violating the rules. Or do you just throw the whole table over and say, okay, no, this person broke the rules. We won't have any rules at all and we'll just see what we could the

most we can gain for our own country. And what we've seen in history is that that doesn't benefit everyone loses in that. In that case, yes, you might gain a bit more relatively than the others, but the pie shrinks. Now, when China positions itself in contrast to the US as supporters of the rules based system, what do they really mean. China has benefited tremendously from this rules based system. There's

no doubt about that. They have grown if you think back to the late eighties, from a very small part of the world economy and the world exports to now one of the heavyweights. So this is something. This openness of markets, the ability to trade back and forth, the real consistency and rules has been a huge benefit to China.

So of course they want the system to continue. Now, what the United States and many other countries want, and it's not just the United States but Europe and in Latin American countries all over the world, they want China to play by some of the same rules that they're playing by. And there is in many industries there's significant evidence that China forces the transfer of intellectual property and

technology there's significant evidence of that. China in many ways unfairly props up staten't enterprises, gives them cheap credit, free land, removed from taxes, all sorts of things that create an unlevel playing field for for the private sector in the United States or Europe other places. So the Bosking and Great tripr right now, this is true, but you know, don't let the facts get in front of a good story,

right and they're playing this to the hills. Um. But if the United States wants to step forward and enforce the rules, they're gonna need all these other countries that also want to enforce the rules together, So like the EU, like the countries in Latin America, Brazil, like Canada and Mexico together, that would be a much starter strategy in my view, to take on what may have been unfair practices,

which I have been unfair practices and stealing aluminum for instance. Shannon, now that we're going down this path of skirmishes with an eye toward potential a war, rules being thrown out the window. New rules are picture early being written. Can we ever go back to a more rules based system or are we not going to get back there unless there's a whole war that forces everybody to start back over again. Well, I don't think we've entered the battlefield

here yet. I think we're still before the war. But if we enter this, it will be hard to walk it back. And I think one of the telling aspects here is do we see in the coming months and years, do we see nations rally around a somewhat fragile World Trade Organization, the w t O and support it. We may need to reform it to make it stronger, to make it actually do the things that it needs to do, or do we see it blown up? And that really

is is going to be a crucial moment. If we blow the World Trade Organization up, I think it will take many years, if not a decade or more, to rebuild that system. But it's still there. It's not gone yet. It's just in jeopardy. Shannon, you and I were both guests at the twenties seventeen Annual Mexican Business Summit, and there was a lot of angst, a lot of gnashing

of teeth. Executives there thought, well, look, if we just set up these global supply chains, corporate interest will take care of itself, and we don't really have to worry about government at all. And the shock of the election, it's fair to say, was still sinking in. People were walking around stunt. What did they And by extension, we in the economic mainstream mess. I think what economists and investors and others sometimes miss is the rationality of the investment.

The rationality decisions often belies the politics. And for many years we've forgotten the politics and politics are emotional. Politics are about people and ideas and aspirations, and some of that is not necessarily rational, or some of that only sees, you know, part of the proverbial elephant that's in the room. And so this is the challenge. I do think the United States, the world trading system, we were coming back from a global recession. We thought, okay, the economics has

worked itself out, We're we're moving forward. This is all going to be fine. But those people, whether in Mexico or in the United States, around the world, that got hit by the recession, they were left behind. And it's not just that recession, it is the transformations that are happening around the world. Trade is a small part of this, a part of it um, but other things are happening.

So I think the politics will be a guiding force as we look forward for the next couple of years and in decade, and that is something that frankly, I think a lot of those that talk about these issues were missing Shannon. Given these trends in politics one year from now, will we be in a global trade war? I'd like to stick with my optimistic nature and say no, but I do think these recent steps have been worrying. The one thing that I do see is that many

countries around the world are moderating their behavior. Yes they're upset, yes they think it's unfair, but we haven't seen the quick reaction in many of these places that one might expect to what many will consider an affront. And so as we look forward, in particularly, I think about Latin America, where I spent a lot of time and look, right now, we probably have over the last few decades, we probably had the most free trade, friendly, pro market set of

governments that we've had in many, many years. That may change this year because there's a lot of elections, a lot of people are going to come up, and we may see things turn over. But but that tells me as you look at this hemisphere, as you look at Europe, as you look at other places, there's a lot of leadership, and there are a lot of voters who have voted for those leaders in democracies, who still believe in these fundamental rules of the game, who still see trade as

the way to prosperity and to growth. So I think we need to temper our pessimism um about some of the rhetoric that's going back and forth that can be quite hostile or acrimonious. And do remember that there is a large segment of the world that has benefited from this opening, that have seen their incomes rise, um, And so can we find a way for this net benefit to be more inclusive? That is the challenge of these politicians. Does that optimistic view about governments in the America's hinge

on the outcome of Mexico's presidential election? What does the candidacy of Andreas Manuel Lopez Albert or Maine. This is really I think a bell weather for this optimistic versus pessimistic view and the front runner right now um and they call AMLO, that's his hackronym. He is an old school state development protectionist type. He was raised or came of age politically of age in the nineteen seventies and he's still there economically, that's how he sees the world.

And this is really to me from Mexico, this is a bell weather election on the economic model of the last thirty years. This is an election about NAFTA. Is Mexico's path to prosperity, to grow the one that engages the world, that's market friendly, that's US friendly, that looks more openly, or do you go back to a very closed economy, one that's self sufficient as he would say, that's turned inwards. Now we can talk as economists about why that doesn't really work and why that won't happen,

But but that vision is his vision. So I do think what happens July one, which is when this election happened, has huge ramifications not just for Mexico but for for this direction. Do you get one of the NAFTA partners, who in many ways matches Trump's temperament on trade, would turn back to a protectionism And I think that has a lot to say what would happen to NAFTA, But in general, what would happen with this tip for tat the potential back and forth you might see that would

lead to a trade war. Now, it can seem like a fairly arcane thing to have an entire presidential campaign of a country of more than a hundred million people john NAFTA. But it's a central organizing principle of the entire Mexican country, is it not. Everything has been geared towards its economic relationship with United States, like everything it is, And NAFTA has really become the rule of law, the underlying rules for foreign investment for companies operating international companies

operating in Mexico. So if you pull that away, you're left with Mexican rule of law, Mexican domestic courts, which are much more fragile and at times much more likely to be swayed, to be more arbitrary, uh than to

uphold a much more balanced rule of law. So this is a huge fear of those that are down there, and frankly, it's a fear not just for international companies, for domestic companies, for the Mexican companies that want to operate in a place that's quite open to new ideas entrepreneurship.

Mexico has been moving in that direction. And the worry is if you pull away NAFTA, if you turn back in if the state takes a much greater role in the economy, choosing champions and the like, back in that way of the nineteen seventies, that you will stifle a lot of the pretnership, the productivity, and the growth that has allowed Mexico to prosper over the last thirty years. All right, Shannon, Well, maybe we can have you back after the Mexican election or if there's a full blown

trade war. Either way, I would love to thank you. Let's hope that doesn't mean next week exactly. Shannon, thanks so much for being on Benchmark. Will be back next week. Until then, you can find us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app, and podcast destinations such as Apple Podcasts, Spotify or wherever you listen. Please take the time to rate and review the show, and you

can also find us on Twitter. You can follow me at at Scott Landman Dan You're at Moss Underscore Echo, and our guest Shannon O'Neil is at Shannon Kay O'Neil. Benchmark is produced by Toper Foreheads the head of Bloomberg Podcasts, Francesca Levy. Thanks for listening. See you next time. The tent, the super Barer and my fingers the bod