Trade Wars 101: What Businesses Need to Know

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series. And in today's discussion, we're going to talk about trade wars. What are they? How do you know you're in one, and how do they get resolved? 

Joining me today is David Young, President of the Committee for Economic Development, which is the Public Policy Center of The Conference Board, and Erin McLaughlin, the senior economist from our Economic Center here at The Conference Board. Welcome to both of you.  

Erin McLaughlin: Thank you.  

David Young: Great to be here.  

Steve Odland: All right. So if anyone's an expert on trade wars, it's the two of you. And David, you've come at it from a policy perspective for quite a long time. I'll start with you. What the heck's a trade war?  

David Young:Yeah, it's a good and very important question, Steve. The simplest definition of a trade war is when countries begin raising tariffs or taking other measures to block the normal or free flow of goods and trade. So a trade war is typically between two countries or two economic blocks, but it doesn't have to be.  

One of the effects of a trade war is diversion of trade. Think about this of like a knock-on effect, a butterfly effect, if you were. For instance, if the US puts high tariffs on China, they'll simply try to sell that—meaning, China will try to sell or sometimes dump products in another area such as Europe or Southeast Asia. And that affects those economies, as well as making it harder for them to compete with a flood of new products. 

Another example could be the UK. The UK is worried that the new tariffs on steel and aluminum, even though they do not yet cover the UK, could lead to subsidized Chinese steel flooding the UK market, thus hurting UK manufacturers, even though they are not set and subject to US tariffs. So there are many different ways that countries can be exposed to a variety of tariffs, and we can get into those momentarily.  

Steve Odland: Yeah, I think you meant aluminum, but if somebody, if one country puts a tariff on another country, that's not a trade war.  

David Young: It could potentially be. It all depends on the response and retaliation.  

Steve Odland: Ah, OK. Soit's not just one action. It's multiple actions that are required.  

David Young: And most likely one action would result in another action from another country.  

Steve Odland: OK. Did you agree?  

Erin McLaughlin: I do agree. There is no technical economic definition of a trade war. However, we've all experienced the White House announcing various tariffs over the last month or so, taking some of them back, we've had some reciprocal. However, on April 2, there's going to be announcements for 200 economies, which is all the economies that we trade with. So I think that we're ready for many more than one country or one region that we have tariffs on the imports for those countries, and that there is expecting to be more reciprocal tariffs, as well. 

Steve Odland: What I hear from both of you is that a trade war, it's not a unilateral action. It's a multilateral action and it's between two countries, but it's a tit-for-tat situation in which then gets into a prolonged conflict because it's not just "Oh, well, I'll match your pricing, and it's a nice friendly thing." There is conflict to this and hence, the word "war," which is a nonkinetic war, but it's not fun. 

David Young: No, and you mentioned conflict around this idea of this escalation. I think one of the questions would also be, how do you de-escalate? How do you remove yourself from a trade war?  

Just one thing, also, I think important to clarify here. When we talk about trade wars, the focus in the US at the moment has very much been around tariffs, but tariffs are only one mechanism that creates potentially a trade war. 

So just a couple of words on other mechanisms that are out there. We've heard of anti-dumping and countervailing duties. Another one would be subsidies. This is where we're looking at subsidies helping domestic production, lowering the cost of domestic production when it helps countries to export at lower prices. One important one would be, changing standards is another way that may appear neutral but actually is a mechanism underpinning potential trade wars.  

Steve Odland:So I thought the WTO, the introduction of the WTO, and everybody joining it, and China was admitted, I thought this was supposed to govern trade and it would be the end of all of this nonsense.  

David Young:Yeah. So just a little bit of history on the WTO, the World Trade Organization. It is the successor of the older General Agreement on Tariffs and Trade.  

Steve Odland: GATT.  

David Young: Yes, it set a goal of freeing global trade as much as possible—and I think it's important here—as much as possible. Countries that belong to the WTO are required to give "most favored nation" status to all other members, with very limited exceptions. Disputes, if not solved bilaterally, are supposed to be solved through the formal cases at the WTO, which a panel here. So this is where it gets quite interesting. 

So yes, Steve, you are correct. The WTO is and was supposed to stop all of these. And to some degree, also, the USMCA is also meant to do this. During Trump's first administration, the US declined to appoint judges to the WTO appellate body, which you can see there being some problems now. Biden continued this same policy and this stance. 

So the WTO reform has been very hard to achieve, and the dispute resolution system cannot give final resolution to cases. So the WTO actually cannot in and of itself act on these tariffs.  

Steve Odland: OK, but Erin, the current administration did not invent tariffs. And before this administration.  

Erin McLaughlin: For the Tea Party of 17- whatever. 

Steve Odland: And before. But even before this, if you looked at the tariff rates being applied by country, the US was one of the lowest level of tariffs, quite close to 2%, while most other nations had much higher levels of tariffs on our goods. It was an unlevel playing field before this latest round. 

Erin McLaughlin: Yes, it depends on the country. For Canada and Mexico, for example, our trade agreement with them is a free-trade agreement. In theory, there are no tariffs between us three countries and North America. But we do not have a free-trade agreement with the European Union, for example. Yes, there are tariffs on different goods that go back and forth between us and them and, of course, other countries, as well. 

Steve Odland: But again, before this current round of, so I just want to set up the current administration, there were limitations by Canada, even with USMCA, on their import of US products. To David's point, that may not have been a tariff, but it was trade limitation. 

My point is that, and I think David makes the point, that trade wars can start with tariffs, but there can be a lot of other things. But from an economic standpoint, it was not a level playing field before this round of tariffs, right? So you go back to the beginning of time. Who started this? And, how do you know when you're then in one, versus it's just all this other stuff that's going on every day.  

Erin McLaughlin: Right. Well, most economists are not in favor of tariffs in general. And of course, when it comes to trade, one could say there's never a level playing field, right? There's advantages and disadvantages, there's tariff considerations, and there's other things like subsidies, flooding markets, so there's so many different ways that things can be imbalanced.  

But for the most part, most economists feel, and our analysis shows, that, using tariffs to have big influences on trade, especially tariffs that are countrywide and not specific to a product or a commodity, can just end up raising prices for consumers, for manufacturers. 

And so one of the things that we're seeing, which is what makes us think, OK, this is not just a passing thing, but actually a trade war, is that the instrument of tariffs on whole countries or on all 200 economies that we trade with is a pretty blunt instrument.  

Steve Odland:Yeah. Now David, some people say that the intent here behind the US tariffs is to drive revenue to the US Treasury, and it really is intended to be a tax, as Erin said, and I want to come back to that in a minute. But other people say no, this is just negotiations, and let's throw it all out there in order to get people to lower their barriers and get to a level playing field. 

You'rethe policy expert, which is it?  

David Young: It can be a bit of both. And let's just look at—  

Steve Odland: Listen, I've got a two-handed economist. We don't need a two-handed policy person, too. On this hand and on that hand.  

David Young: But I think it'sa really interesting thing, and how Trump is using them, and some part of the conversation that we've had is using tariffs for benefits beyond just trade. For example, Trump is also looking at tariffs and renegotiating the current relationship between the US, Canada, and Mexico around other important issues that he campaigned on.  

So the two that jump to mind are the fentanyl crisis and border security. And to solve those, Trump is using tariffs as one of the levers to try and solve those two important problems that are very important to his voter base. 

Steve Odland: But you also have USMCA up for renewal.  

David Young: Next year.  

Steve Odland:Yeah, but soon. So could it be, no negotiator is going to lay out his or her strategy because that would undermine the whole thing. But could it be that this is just all—  

David Young:Very, very early preparation and negotiation around next year's USMCA, yes.   

Steve Odland: Or is that just a pipe dream?  

David Young: No, I think it's very realistic. That he's very proactively showing his cards around, "Hey, guys, here's the US economy. This is the direction of travel. We know the USMCA is up for negotiation next year. Let's start having the conversation now." 

And you're actually seeing this in some of the reactions. President Sheinbaum in Mexico is a good example of, Trump is putting forward these tariffs. And actually now there is a dialogue going on between the US and Mexico with regards to many of these issues, whether it's fentanyl, whether it's border security, and whether it's trade imbalances. 

Steve Odland:Yeah. So you think between Mexico and Canada, it could be that it's the beginning of the negotiation of USMCA, but also negotiating some of these border issues. Does that suggest that this could be resolved relatively quickly and those tariffs could be taken down? 

David Young: Honestly, I think it depends on the reaction and retaliation of what happens. Another interesting thing that Mexico is doing, and this is an indirect benefit to the US, is they are already now renegotiating their trade relationships with China.  

Erin McLaughlin: Yes, that'svery interesting.  

David Young: I find that really interesting, which is another benefit to the U. S. In addition to the border, in addition to fentanyl, in addition to US-Mexico trade imbalances, you'reactually seeing this knock-on, indirect impact of Mexico actually renegotiating their trade imbalance with China.  

Steve Odland:Yeah. So others are acting on a similar thing. Erin, are we going to have to pay more for avocados from Mexico? 

Erin McLaughlin: Probably.  

Steve Odland: Oh, Erin.  

Erin McLaughlin: In the short term. But maybe not the long term.  

Steve Odland: OK.  

Erin McLaughlin:Yeah. Our analysis showed that essentially, tariffs on Canada and Mexico, because they are two of our three largest trading partners, China being the other, if we have 25% tariffs across the board, it hurts all of us. It actually hurts them a little bit more than it hurts us because we're such a big economy, and we're the big purchasers of things. And so food and perishable goods are going to be where we first feel it there.  

Steve Odland: We had big food inflation before the election. This was the whole point of the election and one of the big reasons that people. Explain to me the strategy here of then creating more food inflation.  

Erin McLaughlin: Well, I'm not really sure what the strategy is. I do think it's interesting, and I'm trying to think of the expression. But you can't fight with everybody in your family at the same time, right? You need a couple of allies. 

So I think, I hope, if I was advising the administration, I would say, "Make up with your closest family members, Canada and Mexico, pretty quick, so that you can really focus on the extended family that you really have a hard time with and that you really need to solve the issues with." 

Steve Odland: And this is why some people think it's just a negotiation strategy, and it's short term, right?  

Erin McLaughlin: It could be. And I think the President has said that we might have some short-term pain. When you think of supply chains, you really think of the physical, hard infrastructure that is a supply chain. We are so connected to Canada and Mexico. Things do not have to come in on big ships. They don't have to go through canals and other tight geopolitical nonsense kind of places.  

Having good relationships with them, maybe ironing out our tensions, getting some of the border issues and the drug issues taken care of so that we can really focus on some of the larger, more global trade issues, I think, and I hope, is what we're looking forward to. 

Steve Odland:We're talking about trade wars. What are they? And how do you know you're in them and out of them? We're going to take a short break and be right back.  

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland, from The Conference Board. And I'm joined today by David Young, the president of the Committee for Economic Development, which is the public policy center of The Conference Board, and, as well, Erin McLaughlin, the senior economist here in our Economics Center.  

OK, so let's go back, David. We talked before the break that maybe Canada and Mexico are in a class by themselves.  

David Young: Maybe.  

Steve Odland: Maybe.  

David Young: Can I just make one comment on the Canada thing, because I think this is fascinating what you're saying. It's like they're meant to be our buddies, our friends. And you see a very different approach between what Mexico is doing, where they'reactually in a conversation with the new administration with regards to what they can do to limit the impact of tariffs.  

But Canada taking a very different approach. I read in the paper yesterday, they're taking an elbows-up approach to it. And I feel like—  

Steve Odland: Well, they're all hockey players. They're trained this way.  

David Young: Exactly. But they're taking a very different approach. And the impact of the tariffs, and the US and Canada actually being friends, I'm not sure how you actually walk that back. And we talked about the indirect knock-on effects of tariffs, and you're seeing that politically now in Canada, with Prime Minister Carney now.  

Actually, firstly, he's going to Europe.He's not coming to the US as a first stop. You're seeing a boycott of US -made goods in Canada. You're seeing a boycott of US holidays. So part of me challenges—  

Erin McLaughlin: A boycott—that's not a regulation. That's not a tariff. That's a purposeful, consumer-driven—  

David Young:Yeah, a cultural decision.  

Erin McLaughlin: Right, they feel emotionally betrayed.  

David Young: Which I find pretty interesting. And I'm not sure how you walk that back over time. But Steve, to get to your question on China, again, they've taken a different approach. They are taking decisive, retaliatory actions against the US, and I also think here they see an opportunity. They're vowing to fight here to the bitter end. Beijing is imposing additional tariffs ranging from 10% to 15% on specific American imports, notably soybeans, pork, beef, chicken, and cotton, which will hurt Trump's Midwest voters. 

They're also leveraging America's April 2 tariffs, which they're looking, I think their question from the Chinese point will be, how do they leverage that to boost trade with other nations around the world? I don't think it will make up for the loss that they'll have with the US market. But they'll try and diversify elsewhere.  

Steve Odland: Yeah, but Erin, let's go back to the economics of this. China imports very little from the United States. But the United States imports a whole lot from China.  

Erin McLaughlin: Yes.  

Steve Odland: There is a disproportionate impact, even if there are reciprocal tariffs here. 

Erin McLaughlin: Yes.  

Steve Odland: And what is China's strategy in their tariff policy here?  

Erin McLaughlin: I think, as Davy said, I think some of their strategy is to cause us pain, to cause the US business, agriculture community pain. I think that if you are a US business, and you are importing either manufactured pieces or finished goods to sell here in the US, you have to diversify your supply chain, but that takes time.  

Steve Odland:So there are bigger geopolitical, you're both saying the same thing on China. There are bigger geopolitical things here. It's not a purely economic thing. We're not negotiating specific border things. This is a bigger relationship. 

Erin McLaughlin:It's a bigger relationship, and as an economy, they are a huge economy. They are in a position where they're trying to launch, for example, selling electric vehicles worldwide at a time when the US would love to be in that position where we're selling our vehicles worldwide.  

They've also invested in other nations' infrastructure, and especially other nations with natural resources, mineral resources, Belt and Road. And at the same time right now, where the US is receding from some of our both soft diplomacy and investments globally. Sothere's a real dichotomy between the actions China is taking and the actions the US is taking.  

Steve Odland: But let's go back to this notion of tariffs as a tax. So a tariff is paid at a border, essentially, and that it's collected on goods that come across that border.  

Erin McLaughlin: Into the country.  

Steve Odland: And that those collections, those funds go to the Treasury of that country. In this case, the US Treasury. But where does the cost go? Does the cost get translated all the way through to the end consumer? Or is it pushed back up in the supply chain?  

Erin McLaughlin: It really depends, and we've talked about this a little bit before. At rates like 25%, that's high enough that I think we can assume that some of those costs are going to be passed on to a consumer. But yes, when a good comes into the United States through a border crossing, the wholesaler, the importer, the manufacturer, whoever is taking in that good, has to pay that border tax. And then they can absorb it, or they can pass it on to within their supply chain or even to the end consumer. 

Steve Odland: And they could absorb it. Some of the European car manufacturers are saying that they're going to, their margins are going to get hit, and they'll give it X number of months to where they'll absorb it, after which they'll—  

Erin McLaughlin: Re-evaluate.  

Steve Odland:They'll re-evaluate. So basically what they're saying is they're hoping that this is transitory, essentially.  

Erin McLaughlin: And it may be. I think one of the things that'sreally interesting, when we have more of a macroeconomic conversation, is that the uncertainty around these tariffs, either what's happened so far over the last month and a half or what's about to happen, is slowing down business decisions and slowing down consumer decisions. 

Steve Odland: OK. But essentially, if these things are not transitory and the costs go up, and that in and of itself is inflationary.  

Erin McLaughlin: It is inflationary, yes.  

Steve Odland: And, as an economist, that's not a good thing.  

Erin McLaughlin: Not a good thing. Right.  

Steve Odland: And as a policy person, that's not a good thing, either, because that's not good for administrations to govern over a period of high inflation. And the Federal Reserve, in the case of the US, but central banks have to keep interest rates high, the cost of borrowing is high. It's just, it's wrong. It's bad economically, it's bad policy long term, even if it accomplishes short-term results. 

David Young:Yeah. Can I just make two comments, as well, to the point earlier in terms of when you look at the supply chain and how if there is a 25% tariff, how is it actually being paid? And what you're seeing now is before you go to the consumer, the end of the supply chain is actually now having to make upfront payments to the suppliers before it because they can't actually afford. Not many organizations, especially when you look at the automobile industry, you've got the smaller players in the middle of the supply chain now being hit with 25%, they don't have the working capital to actually pay it. And that's another challenge is, how do they actually get the working capital to afford the tariffs?  

Steve Odland: Which is now more expensive because interest rates are high. But let's go back to the economics of this because, if you listen to some of the rhetoric, and you don't know whether the rhetoric is really fact, or if it's rhetoric, but there's talk about, the US administration is saying, "Well, we'll replace the income tax with this."  

If that happened, which is, I don't know how, but if, say that they were able to go back to the Hoover days and replace the US income tax with tariffs, it's really, they become a consumption tax at that point, does that have the same effect on the economy?  

Erin McLaughlin: It would slow down purchasing, it would make the consumers and businesses purchase less because of the higher costs. And our analysis and other folks' analysis shows that there would not be enough contributing to the federal Treasury to offset it.  

And so you have a slowing economy. You have people purchasing less, we're in a consumer-based economy. And you have less money that doesn't offset that slowing economic and higher prices.  

Steve Odland: And The Conference Board has lowered its GDP forecast for the year to around 2% already, just with what's been announced. If it slowed any significantly more than that, even if it doesn't go negative, it's going to feel like a recession. So if they actually did this, it would be recessionary, too.  

Erin McLaughlin: It could be, yes.  

Steve Odland: Or, at least, it could be that awful S-word, stagflationary.  

Erin McLaughlin: Stagflation, yes. And I think that's where the labor, keeping an eye on the unemployment rate, is really important. And I think that's what we're going to hear from the Fed and monetary policy makers, as well. The Fed has two mandates: to try to keep inflation down, but also to try to keep unemployment low.  

And we have really low unemployment and have had even during this time of higher inflation. Unemployment's at about 4.1%. We think right now it could go up to 4.4 or even higher by the end of the year, and that will change the behavior of the Fed, potentially, but that rising unemployment rate is going to slow down the economy.  

Steve Odland: But that also politically is very dangerous, Davy, if you've got a populace that has less work available, and presumably then it hits wages, that's bad politics. 

David Young:Yeah, you would think it would be.  

Steve Odland: OK. So anyway, we're sitting here, Davy, in this period of time where all of this is in the air. You've got lots of theories around why governments are doing this, but nobody knows for sure. So that has created this incredible uncertainty. Policy uncertainty is bad for business. CEOs do not like uncertainty. Talk about the damage of uncertainty.  

David Young:Yeah. And what you're seeing, one, you're seeing it primarily in the markets at the moment.  

Steve Odland: Stock market.  

David Young:Yeah. And from all the CED trustees that we speak to, uncertainty is one of the worst things that they can face because they don't actually know what to do.And one CEO yesterday said to me, "Davy, it's like whiplash on a daily basis."  

And with these large multinational businesses, think of them as like oil tankers. They can't be turned very quickly. And so some of them are trying to figure out, OK, how do they actually build in resilience into their operational strategy? It'svery difficult.  

Steve Odland: And Erin, people talk about CEO uncertainty as something that's a psychological problem. In fact, it's a real economic problem because the uncertainty is uncertainty of cost, uncertainty of interest rates. So they don't know how to even model the potential impact of future investments.  

Erin McLaughlin: For example, when we saw tariffs on China before, we saw many companies look to either other low-cost Asian economies, such as Vietnam, that they could turn to or to even nearshore, which is slightly different than reshoring, to Canada or to Mexico in order to get supply chains closer, maybe take advantage of Mexican manufacturing, which is of lower labor costs than the US and Canada.  

Steve Odland: One of the reasons for the uncertainty is that every nation is right now on the table. So if you are a global company that is OK changing your supply chain and where your production happens, you need some certainty as to the economy in the country that you're going to go to is going to be the right one. And if you cannot make that decision right now, or you don't feel comfortable making it for some months, that will essentially also slow things down.  

So Erin, when we started, I asked you, how do you know you're in a trade war? How do you know when you're out of a trade war? How does this end, and how will people know that the trade war is over?  

Erin McLaughlin:That's a great question. I think that when we have more than a quarter or two of some level of tariffs in place, and things are not changing. I think when we have a chance to see the renegotiation of the next trade agreement here in North America, that will bring some certainty.  

David Young: Those will be the two. Those are the two things.  

Erin McLaughlin: Those are the two things  

David Young: That you actually have a reduction of tariffs, obviously. Also, you have either the creation or the renegotiation of existing trade agreements.  

Erin McLaughlin: And when April 2, which is that date that we are expecting to see a number assigned, a tariff number potentially, to each of the economies that we trade with, there's going to be a ripple effect. And those economies, most likely most of them, will come back with some reciprocal tariffs. I think we are not going to see resolution for some months to come.  

Steve Odland: Yeah, and the Fed has extended its rate pause and is taking up its forecast for inflation and revising down GDP forecasts, everything that The Conference Board has already done.  

Davy, final thoughts on where we are. 

David Young: Well, I think this April 2 deadline is pretty interesting. And Treasury Secretary Bessent said, "On April 2, each country will receive a number that we believe represents their tariffs. For some countries, it could be quite low. For other countries, it could be quite high."  

The other part here around April 2 is, while that is a deadline, the deadline can always be pushed out. 

Erin McLaughlin:That's true.  

David Young: Providing a period of time for renegotiation.So it will be interesting to see what exactly happens on April 2, and to what extent that deadline is pushed out on a case-by-case, country-by-country basis for providing an opportunity for further renegotiation.  

Steve Odland:So hold on to your hats, folks, more is coming. It's never a dull moment in the world of tariffs, and it can be terrifying.  

Erin McLaughlin, David Young, thanks for being with us today.  

David Young: Thank you.  

Steve Odland: And thanks to all of you for listening to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.