The World That Tariffs Will Make

DAN KURTZ-PHELAN

Mike, thank you for joining me today. The proximate reason for this conversation is your essay in our new issue, “After the Trade War,” but it’s been a long time coming.

MICHAEL FROMAN

Well, thanks for having me.

DAN KURTZ-PHELAN

Before we get consumed with trying to understand both the drivers and consequences in the ongoing trade war, that really started with Donald Trump’s Liberation Day tariffs in April, I think it’s worth stepping back and trying to understand not just how we got here, but also more fundamentally what we’re talking about when we talk about global trade. There’s a line in your new essay that has stuck with me, quoting you here: “Trade policy has gotten both more credit and more blame than it deserves in the economic debates of recent decades.” Trade, as you know, can be deployed as a kind of damning metonym for globalization and economic change, more broadly, over the last few decades. And the essay’s stark opening line is that the global trading system as we know it is dead. But to start, what was the global trading system as we knew it? What were those essential components? And how much of when we look at the economic change of these past few decades was really about trade versus other things?

MICHAEL FROMAN

Well, first, I think if you look back over the last 80 years since the end of World War II, through successive rounds of negotiations, we’ve seen the creation of a rules-based system that more and more countries and a larger and larger part of the global economy adhere to or signed up to. So it started with tariffs and trade in goods, primarily manufactured goods. It expanded over time to agriculture. Agriculture is more complicated than goods because there are a lot of inherent subsidies that countries have. Really, all countries have subsidies for agriculture in one form or another, and some are more distortive of trade than others. It expanded to services, so that’s a big part of our economy now. About 80 percent of the U.S. economy is in the services sector. And then it also expanded into other areas like labor and environment, how to make sure there’s a level playing field among countries. So that if one country has high labor standards and is competing against one with low labor standards, that doesn’t adversely affect the first one.

So it dealt with a number of expanded issues. And as it expanded, the network of rules grew further and stronger. But also, it probably impinged more on domestic policy in some regards, and that also led to, in some ways, a counter-reaction. The reason why I say trade gets more credit and blame than it probably deserves is that a lot of what people associate with trade in a negative fashion is really the globalization and the integration of the global economy. And that has very little to do with trade policy. It has much more to do with technology, with the fact that there was the invention of the container—the shipping container—which made it possible for companies to put their supply chains anywhere in the world because they could reliably ship from one place to another.

Or when it came to services, the spread of broadband. When you had broadband around the rest of the world, you could put your call center in the Philippines or in India. It didn’t need to be in the Midwest. So a lot of the things that people associate with trade are really about technology and the dynamism of globalization, which, by the way, continues. And even if we take a step back from free trade per se, the ongoing momentum of technology integration is still there.

DAN KURTZ-PHELAN

I have in my head a line in the piece that self-flagellation has become a kind of a necessary price of admission for any discussion of global trade. So I don’t want to ask you to engage in self-flagellation, but I think it’s worth lingering on the blame side of the ledger for a bit. When you look at the flaws of the old system, where do you think the critiques are accurate—the kind of critique that I think is fairly conventional at this point—and where is that critique totally off base?

MICHAEL FROMAN

Where I think it’s accurate is that there is insufficient attention paid to the fact that whenever there is economic interaction, there are winners and losers, and the benefits of globalization are not equally shared. So when you have an integrated economy, under the economic rules of comparative advantage, it may make more sense to move your factory to a lower wage economy to produce. And that’s going to affect workers. That’s going to affect workers in the United States. Now, the United States is an incredibly dynamic economy and has reinvented itself. There was a time when 30 percent of the American workforce worked on a farm and produced agriculture. Now, it’s less than three percent. And those workers who no longer are needed on the farm because there’s been technological enhancements went to the cities or went to the towns and took on different jobs and got trained for different jobs and were at near full employment, and economies tend to absorb people.

But there’s a certain nostalgia, and I don’t mean that in a pejorative way. I think people remember back when somebody could have a factory job, probably a unionized factory job, and have sufficient salary and benefits to support a family. And as those jobs tended to move to other countries and they took on maybe a services job that wasn’t unionized, that didn’t have the same benefits, it became harder and harder to maintain the American dream and the middle-class standard of living. And I think that’s a real issue. I think that one of the big failures, and I cited in the piece, is that we never accompanied trade policy with a sufficiently robust set of domestic policies designed to ensure that American workers would be able to survive and thrive in a rapidly changing economy, wherever that change came from—whether it was from globalization, whether it was from immigration or whether it was from technology.

Whatever the impact of globalization was—and the estimates are, for example, that when China came into the World Trade Organization and became fully integrated into the global economy, it probably had an effect on two to three million manufacturing jobs in the United States. We have 330 million people; we have a workforce of about 150 million people. But over a ten to 12-year period, two to three million manufacturing workers were affected. If you think about the potential impact of artificial intelligence and robotics, and the combination of those two things, we could see a much greater impact than two to three million jobs. And yet we still don’t have the domestic policies. Neither the Republican or the Democratic administrations or Congress have really paid enough attention, in my view, to what’s necessary to ensure that people can live through transitions, get lifelong learning, take on new skills, and have good, high-paying jobs to support their families and their communities going forward.

DAN KURTZ-PHELAN

You were in senior government positions through the Clinton and Obama administrations at the White House and Treasury Department, and then you were U.S. trade representative for the second half of Obama. Just to make this concrete, if you could go back to those jobs, what would you do differently if you knew what was going to happen and how the politics of this were going to shift over time?

MICHAEL FROMAN

Well, one, I think first, I would pay a lot more attention or get people who were better than I am at this to pay a lot more attention to the politics, period. I think we saw the politics changing. We saw the declining support for trade as people were feeling alienated by the economic system, and there wasn’t a sufficient political or policy response. So I would certainly do a lot more around that. And part of that is about communication and explaining to people better and making it more real for people: what the benefits of trade are, what the cost and benefits are of going down different pathways. But part of it is very much the substance of policy, as I said, to make sure we have policies that are not just designed to optimize for those who are going to win from globalization, but are there to ensure that those who may be adversely affected are taken care of as well.

DAN KURTZ-PHELAN

Focusing on the China dimension of this, so much of the dissatisfaction with the international order in the United States and other capitals I think comes down to shock of China’s entry, both into the global economy, into a real geopolitical position that threatens a lot of the core pillars of the system as it existed. You noted in the new piece and in pieces you wrote in the past that the multilateral trading system, quoting you here, “suffered from design flaws that proved to be particularly salient with the rise of China—and consequently planted the seeds of the system’s demise.” I think some of that is about the assumption that China would converge with us over time, that it would become more like us both economically and politically, but also certain economic practices that were central to China’s rise that just weren’t things that the system had focused on, or the system wasn’t set up to address them. What were those and where were those specific failures from the global trading system as you saw it?

MICHAEL FROMAN

I think when the World Trade Organization was created in the mid-1990s—so this is before China had demonstrated it was on this path of market reform, it was just at the early stages of that, and certainly before they joined the international trading system—the rules that were created didn’t really anticipate an economy as big and as important and as integrated into the global economy like China’s that was following a very different playbook. So, state-owned enterprises, the distortive effect that state-owned enterprises had. Now, lots of countries have state-owned enterprises. Europe has Airbus, which is effectively owned by several governments in Europe. But the portion of the Chinese economy that was controlled by state-owned enterprises and the distortive effect they had across several sectors was not something that the system fully anticipated. Similarly, the subsidization that the Chinese government was willing to put into one sector after another in order to gain prominence or dominance in it over time, whether it was solar panels or now electric vehicles, machinery generally, that was not anticipated—how to put constraints on subsidization. China’s practice, frankly, of intellectual property rights infringement was not fully integrated into the system. There were rules on intellectual property rights, but it was not the strongest part of the WTO compared to many of the other disciplines.

So there were several areas where I don’t think the global system anticipated the nature of the China challenge, and that wasn’t an oversight. I think it was in part that there was a view that China was on an inexorable path towards greater market opening, greater liberalization. [former Chinese President] Jiang Zemin and [former Chinese Premier] Zhu Rongji, in the 1990s, very much laid out their model for that. I think one thing we did not anticipate was that trajectory would not necessarily be linear. It didn’t go as far, it didn’t go as fast as we anticipated. And [Chinese President Xi Jinping], in many respects, prevented it from continuing and, in some places, reversed it. That’s, I think, a cause of a lot of the tensions that we see now between, not just China and the United States, but China and the rest of the global economy.

DAN KURTZ-PHELAN

And my sense is that the Obama years was the moment when people in the U.S. government really started to run up against some of these central features of the Chinese system and become frustrated with the inability of both Washington and the global system more broadly to really do anything about them. Is that fair?

MICHAEL FROMAN

I think that is fair. I think when the Obama administration came in, for example, there was a big multilateral negotiation going on under the World Trade Organization called the Doha Round, and it was designated to be the development round. If you go back and read the documents of the Doha Round, it’s really quite astounding because it was basically saying countries like China shouldn’t be asked to do as much as countries like the United States. And the United States, Europe, other developed countries should have strong disciplines on their behavior. But developing countries—and China was very much defined as a developing country—should have much freer reign. And in 2009, as we’re looking at what China had become over a relatively short period of time, over the previous eight or nine years, that just was not palatable. You couldn’t imagine locking that in.

And the Obama administration—this is just one example. I remember President Obama going to some of these summits, the G-20 summit, and saying to his counterparts, “This is not going to happen. This Doha Round is not going to get completed on the trajectory it’s on. This is not an acceptable outcome, and we need to take a hard look at this.” And that was a shock to the system. It was probably the first time, I think, any country, and certainly the first time the United States, had stood up and said, “We need to take this into account, the rise of China, a very different model, as we think about this going forward.”

That was one element of it. And then in the bilateral negotiations and consultations with China, there were lots and lots conferences between U.S. officials and Chinese officials, and we would lay out over and over again sort of the bill of particulars of what China was doing that was distorting trade, that was creating tension. We would warn the Chinese—we would remind them—that their incredible success in alleviating poverty in their country was dependent and was, in many respects, aided by a very benign international environment, the fact that the rest of the world was willing to rely on China as its manufacturing floor, and to open its markets to Chinese imports. And if that benign international environment changed, that would put pressure on China. It would create problems that China needed to address these issues.

And I think we made some modest progress. But on the whole, I think, China basically stiff-armed the rest of the world, and that’s exactly what’s happened now. Now, the benign international environment is largely gone. And the U.S. economy is closing to China. Europe is becoming more protectionist. Notwithstanding recent summit meetings, India, Brazil, other major emerging markets are very worried about Chinese imports undermining their own aspirations to develop a manufacturing sector. And it’s going to, I think over time, require China to look inward at the kind of reforms that we’ve been encouraging them to do for several years now to focus more on their domestic economy, domestic demand-led growth, consumer demand-led growth, as opposed to relying on subsidizing exports as a way towards growth.

DAN KURTZ-PHELAN

Do you see any sign that this new response to China’s intransigence on that front will be more effective than the kinds of messages you tried to send a decade ago?

MICHAEL FROMAN

Yeah, I think a couple of different factors are coming together. One, the rest of the world is beginning to articulate this to China. There’s more coherence, I think, among the rest of the world than there has been before in terms of the nature of the China challenge. And then China, for its own reasons, has laid out its strategy of dual circulation, or however you want to put it, that focuses more on being more self-reliant and looking internally for some of its growth as well. Now, it has not stopped China from producing way too many factories of electric vehicles and excess capacity for steel and solar panels and a variety of other products that they’ve got to find a market for.

And it has not yet led China to do the kinds of reforms, like putting in place a real social safety net so that people, consumers are not saving so much of their earnings, but are actually spending it and driving demand at home. But that, I think, is the next step. And hopefully, through this process, while it’s more painful now than it had to be, hopefully, China will go down that path and that will, I think, relieve some of the tensions with the rest of the world.

DAN KURTZ-PHELAN

You wrote a piece in the spring called “China Has Already Remade The International System,” arguing that after years of complaining about some of these features of Chinese economic policy, the United States and a lot of other countries had essentially decided to adopt them for ourselves. Quoting the piece here: “the United States is now operating largely in accordance with Beijing’s standards, with a new economic model characterized by protectionism, constraints on foreign investment, subsidies, and industrial policy—essentially nationalist state capitalism.” That seems even more true with a few more months on the record given the government taking stakes in Intel and having a “golden share,” right?

MICHAEL FROMAN

Exactly.

DAN KURTZ-PHELAN

So that piece certainly stands up. But I’m curious, as you look at the ways in which the United States has tried to learn from Chinese economic success, do you see anything in there that is a wise policy change or is that all kind of imitation that we’ll pay for over time?

MICHAEL FROMAN

I do think there is a rationale for some of these measures, particularly where national security is at stake. The Biden administration, I think, was quite focused and judicious in how they used some of these tools. So the CHIPS and Science Act, for example. This is more of a reliance on Taiwan, rather than China, but being overly dependent on any one country for something that is so critical to our economy, but also so critical to our national security, I think, is dangerous. So we became overly complacent because it was so attractive to produce in China. Not just the cost of labor, because actually the cost of labor went up over time. But the whole infrastructure and the management there that made China the obvious place to put your next factory, if you were in a boardroom deciding on behalf of a company—we became very complacent about it.

And the number one rule of risk management in anything is diversification. You don’t want to have all your eggs in one basket, and that’s precisely what we did. So I think there is a case in select areas to say, “Okay, we need to have some production of advanced semiconductors in the United States. And by the way, if we can’t do it in the United States, then let’s at least do it in partnership with some trusted allies and partners around the world. We can’t be totally reliant on our chief competitor and potential adversary, China, for something that’s so critical to our national security.” And that could lead you down the path of targeted export controls, targeted foreign investment constraints, and targeted industrial policy.

I think the challenge is when—it’s a bit of a Pandora’s box. Once you say, “Okay, the government is going to begin to play this role in the economy,” where do you stop? Is it just semiconductors? Is it semiconductors and electric vehicles and batteries? Does it spill over into the protective clothing that we didn’t have during COVID? How about the ingredients that go into pharmaceuticals? We’re almost completely dependent. Something like 70 to 80 percent of all the active ingredients for our drugs come from China. Is that a national security issue? Should we do whatever is necessary, including government intervention in the economy, to ensure that we’ve got production here in the United States? Is it sufficient to say we can buy it from Switzerland, Canada, Ireland, elsewhere? Those are the kinds of questions I think we need to deal with on a sector-by-sector basis.

DAN KURTZ-PHELAN

That brings to mind a point you made in yet another piece that you wrote for Foreign Affairs. This was before the election, in which you noted with some surprise that probably the most important speech on the international economy that was given in the Biden administration was delivered not by the treasury secretary or by the U.S. trade representative or the commerce secretary, but by the national security adviser, Jake Sullivan. This was a speech given at Brookings, unfortunately not CFR, in 2023. What was so striking about the fact that it was the national security adviser delivering that speech?

MICHAEL FROMAN

Well, I think it really does mark the ultimate convergence of economics and national security, the notion of economic security. When you’ve got the national security adviser focused on, “What is it we need to do domestically to have a strong economy to support our national security? And what is it we need to do internationally, whether it’s through export controls or our foreign investment constraints, to ensure that we remain a leader in these critical technologies?”, I think it really demonstrated that these two worlds, which for a long time had been quite separate—quite separate in terms of intellectual framework, as well as organizationally.

At the White House, you had the National Security Council, you had the National Economic Council. I worked in two administrations at the nexus of those two organizations, but that was the only effort really to try and bring those two worlds together. I think this was really reflecting what Jake Sullivan laid out, was reflecting the next phase of that, which is that these two worlds really are one. And we need to think through national security through an economic lens. We need to think through economic policy through a national security lens.

DAN KURTZ-PHELAN

You stressed how difficult it is to really define national security in a way that doesn’t become kind of endlessly expansive. The Biden administration’s phrase here was that you need a “small yard and a high fence”, and that yard seemed to kind of grow week by week. Do you have a kind of framework in mind that would allow us to settle on a clear definition and prevent that endless expansion of the yard?

MICHAEL FROMAN

I think it starts with national security: what are the technologies that are critical to warfighting, to intelligence, to the core elements of national security? So it’s sort of concentric circles. The next circle is economic competitiveness: what is it that we need to be the most competitive, the leading economy in the world? I think it’s the jump from national security to economic competitiveness, which can make that yard much, much bigger. And we just need to be careful. It doesn’t mean there aren’t certain issues, like artificial intelligence, where we think it’s such a general purpose technology that’s going to have such broad impact on national security, on intelligence, on warfighting capabilities, but also on the capacity of our economy to lead across any number of sectors, that we need to have the capacity and play a critical role in leading that sector.

I think there are cases to be made, but I think this one has to be really rigorous about: what does it mean? And where do you draw that line? And then what tools do you use? Do we need industrial policy to do artificial intelligence when the private sector is pouring literally hundreds of billions of dollars every year into it? Perhaps not. Maybe we don’t need taxpayer dollars to build data centers. Do we need it to support the basic science and research and development that’s necessary to lead to some of these major technologies, where the private sector may not have the incentive to do so? Well, perhaps. So I think, again, looking at what the technologies are, why we need them, and then what tools are most appropriate to use.

And then I’ll just emphasize again: what do we have to do ourselves? What has to be done within our borders? And what can be done in partnership with allies around the world? And I don’t think enough attention has been paid to that. I’ll take one example: shipbuilding. We’re clearly way behind in shipbuilding. We have very little capacity to build naval ships, submarines ourselves compared to China. But Japan, South Korea—both are pretty advanced in shipbuilding, are able to churn them out faster than we can. Maybe we should be investing in shipbuilding in the United States. But in the meantime, shouldn’t we be partnering with our allies to build our ships over there? There’s some legal obstacles to that; we should be addressing those.

DAN KURTZ-PHELAN

The broader decline in manufacturing in the United States is one of the chief complaints you hear from both people in the Trump administration, but also critics of the previous global trading system on the left and really across the political spectrum. There’s kind of a debate between trade policy experts and economists about whether having manufacturing capacity in the United States, or to what extent that is important on its own, rather than addressing the national security concerns with allies and others. If you look at those arguments, can you—apologies for the bad pun here—steelman the argument for reassuring U.S. manufacturing that is made by some of those critics? Where do we need manufacturing capacity here, whether that’s because of jobs or security concerns or anything else?

MICHAEL FROMAN

I think we need to take a hard look at this, and you mentioned jobs there at the end. Because my sense is that manufacturing in the future, it may well be the case that we need to produce more manufactured products, particularly in particular sectors that are relevant to national security or broad economic competitiveness in the United States. But we’re likely to do so with fewer workers than we did in the past, and we should be clear-eyed about that. What we see in China going on now and other countries—Japan, South Korea, elsewhere—the factories of the future, they may produce more manufactured products, but our manufacturing job numbers may not go up that much. Those are, I think, two separate issues and sometimes they get conflated.

I would start with the first, which is really: what products do we need to make here to be a serious real economy? And yeah, economists will say, “Well, it doesn’t really matter.” I get it that there are benefits to being a manufacturing country, particularly when it comes to products that are central to our national security. I also think we need to further explore integration with allies and partners. Again, I’m just sort of ringing that bell again because I think we haven’t paid much attention to that. And in fact, we’ve sort of pushed a lot of our partners away who could be diverse sources of some of this material that we don’t have to produce or where it doesn’t make sense to produce it in the United States alone.

DAN KURTZ-PHELAN

So let’s focus in on the Trump dimension of this. We’ve avoided that for the first stretch of this conversation, but I do want to get your sense of how things have played out in the last five or so months since the tariffs really started to escalate. As you look back at the international reaction over those months, and the economic reaction, what has surprised you, if anything, about their response to Trump’s tariffs?

MICHAEL FROMAN

Well, look, I think one thing that surprised me is that if you had asked people a year ago, “What would the world look like? Will you accept a world in which tariffs, at a minimum, from the United States are ten percent? It may go up to 50 percent,” I think most of the world would’ve said, “That’s crazy. It would be disastrous, it’d be catastrophic.” I think the president has successfully, in his negotiating approach, laid out very high demands and then ratcheted back from those demands to something that is still very high historically. Before the first Trump administration, the average applied tariff was about 2.5 percent. We’re now at about 16, 17 percent. And we’ll have to see where this lands because there are a lot of other trade cases currently going through the system, which could raise tariffs in particular sectors even further. Of course, on the other hand, some of the tariffs that the president has put on have been challenged in court, and we’ll have to see how the court decisions ultimately play out as well.

But we are five, six times the tariff levels we were before. And I think it surprises me that the markets have sort of absorbed that; other countries have basically been forced to accept that. It shows the leverage that the president has been able to use with other countries. Now, it comes at a cost over time, I think, in terms of our relations with these other countries. But the reality is they’ve come to the table, and they’ve been eager to sign agreements to get off the front pages of the newspaper. So I think that surprises me. I think, so far, the economic impact of the tariffs—and I say so far because I think we shouldn’t be complacent about this—some of these impacts may come in the coming quarters. So far, the impact has not been catastrophic.

There are lots of anecdotes of companies that have had to close down because they were reliant on particular inputs that were coming in from abroad that are now subject to high tariffs they can no longer afford to produce. We see the ticking up of inflation, but not as high as many would’ve expected at this point. We have not seen the impacts on growth necessarily, although, obviously, some of these recent job numbers are of concern, but there are various explanations for that. So I’d say the economic impact, so far, has not been catastrophic. The market impact has been positively complacent, and we’ll see how that plays out over time. My sense is we have not seen the end of this story yet.

DAN KURTZ-PHELAN

What is your explanation for the complacency of the markets? Is that kind of mass delusion and we’re all kind of headed for a fall, or is there some real signal there?

MICHAEL FROMAN

Well, look, a lot of people put too much faith in the markets. Remember, markets tend to go to extremes, and that’s why we have bubbles and then why we have crashes. We’ve had the great global financial crisis, we had the dot-com bubble, we’ve had real estate bubbles. So every ten years or so, we have a major economic crisis because of a market reaction, and so I don’t put too much weight on, certainly, the equity markets. I think the equity markets—and I’m no expert in this—look for any piece of good news. When it comes to the tariffs and President Trump, they have expressed relief that we’re only at ten, 15, 20 percent tariffs, not 50 or 100 or, at one point, 140 percent tariffs on China. Again, had you said to market participants a year ago, “What do you think the reaction will be to 15, 20 percent tariffs?”, I think they would’ve expected something much more significant.

DAN KURTZ-PHELAN

What about the lack of serious response from other countries? I think really only China and Canada have responded in any meaningful way with economic measures of their own. Plenty of other powers, including the EU, talked a lot about what they were going to do in response, but when it came down to it didn’t really do much. I think people in the Trump administration would say, “Look, we’ve extracted lots of pretty significant concessions from other governments when it comes to access for U.S. goods and U.S. companies, and not seeing a lot of meaningful reaction and response.” What is your explanation for that? Again, do you think there’s more coming that we’re missing or does this say something about the ability of the United States to get away with this?

MICHAEL FROMAN

Well, I am surprised that there hasn’t been more traditional retaliation. I think, again, President Trump made it clear that if a country retaliates, he’s just going to keep on increasing the tariffs. At some point, the tariffs become prohibitive, so it doesn’t matter if it’s 50 percent or 100 percent. At some point, you’re just not going to buy a product from that country, so it doesn’t really matter. But he’s made it clear that he would increase the tariffs, assuming he’s got the authority to do so, and that’s what’s being currently litigated in the courts. So we’ll have to see again how that plays out. I think what you do see—and you mentioned China—China has spent the last few years preparing for this moment and discovering where they have leverage over the United States. And they have leverage over access to critical minerals, to magnets, to a number of products. Even some of the semiconductors that we want to produce here end up going back to China for processing in one form or another. So they’ve got a lot of leverage over us.

In my view, they’ve played it very well to demonstrate in a targeted way that they’re prepared to use that leverage, and that has forced the Trump administration to back down. China will continue to do that. They will continue to use leverage as necessary to get the United States to come to a more reasonable position. I think the other countries haven’t used that kind of leverage with the United States. We’re completely dependent, as I understand it, on Canada for potash, which is a chemical or a product that goes into fertilizer and a variety of other things. I haven’t seen the Canadians say they’re going to cut off our supply of potash. So there are things that other countries can do.

I think one question will be, Dan, what happens when we want another country to work with us on another issue? Export controls, for example. We control a number of these products. But in some sectors, it requires allied cooperation. And it’s painful for an allied country to say to its company, “The United States has requested that you not sell this product to China. Out of our relationship with the United States, we are asking you not to do that, and we’re forcing you not to do that.” Whether we’ll have the goodwill to get other countries to do that kind of thing going forward, I think, remains to be seen.

DAN KURTZ-PHELAN

Let me just linger on the legal case that you mentioned, the litigation over whether Trump is even allowed to impose these tariffs under the authority that he is invoking, the International Emergency Economic Powers Act, I believe, IEEPA. You spent plenty of time looking at the kinds of tools that a president has to engage in negotiations and use American economic power. Do you believe that Trump is doing this legally?

MICHAEL FROMAN

He’s using a number of different authorities. The one that’s been challenged has been IEEPA, as you said. He’s declared that we’re in an economic emergency and that allowed him to use it. That’s a novel use of IEEPA. I can’t tell where the Supreme Court’s going to come down on that particular question. I do think, whether or not he can use IEEPA for these tariffs, he has plenty of authority that’s been delegated to the executive over decades to impose tariffs. They take more time. IEEPA was his shortcut to be able to declare an emergency and immediately do it. But he has—there’s something called Section 301 and Section 232 and Section 122. There are all these other authorities that the president can use, the U.S. trade representative can use, and the Department of Commerce can use to impose tariffs in other countries if they’re determined to do so. So my sense is, one way or the other, the president’s going to find a way to impose tariffs if that’s what he wants to do. If his exercise of authority under IEEPA is overturned, then he may just be required to jump through a few more hoops.

DAN KURTZ-PHELAN

In the new essay, one of the really scary scenarios that you lay out is contagion. And I’ll read one line from the piece here, which I think makes it very clear. You write: “The risk of the United States and China playing by their own rules, with power the only real constraint, is contagion: if the two largest economies in the world operate outside the rules-based system, other countries will increasingly do the same, leading to rising uncertainty, drags on productivity, and lower overall growth.” As you look at those fears now, in the months after Trump imposed these tariffs, what would real contagion look like? And if that does spin out of control in the way you worry about, where does that take us?

MICHAEL FROMAN

Trade in every country is controversial, and there’s a politics of trade in every country. So if the United States and China go their own way, which they are doing, you could see other countries saying, “Well, why should we live by these constraints? Why should we be bound by these tariffs? We’ll increase tariffs too, or we’ll increase subsidization, or we’ll prevent foreign companies from doing business in our country, which we committed to allow before because it undermines our domestic constituencies.” So that’s the risk, is that Europe turns inward. The major emerging economies—India, Brazil, Indonesia, South Africa, et cetera—they turn inward. And suddenly, you see sort of a downward spiral of disintegration, of de-integration of the global economy. And that takes us back to the interwar period. This is before the global rules-based system was really created, when trade was used as a weapon among countries.

And it led to—in many respects, from trade, it became quite easy to slip into military conflict. So that’s the risk is that—I mean, the darkest scenario is that we end up back in sort of a Hobbesian state of nature, where every country’s doing their own thing at the expense of the others, driven by domestic pressures and politics. But the permission structure has been created by the two largest economies of the world, the United States and China, following their own set of rules. And us being back in a world where countries take actions with each other, that could ultimately lead to conflict.

DAN KURTZ-PHELAN

How far down that path are we right now?

MICHAEL FROMAN

I don’t think we’re terribly far down that path. I think what you’re going to see—I’ll give you an example. The first Trump administration started using something called Section 232 in novel ways. Section 232 says you can restrict trade if it’s in the national security interest. So the Trump administration first did it on steel and aluminum. They threatened to do it on autos, including autos coming from Germany, which, again, was very much a stretch to say how an auto coming from Germany is a national security threat to the United States. But that opened the Pandora’s box. Now there are 92 filings at the World Trade Organization—the last time I saw, it was about 92—of countries doing everything from food stuffs to consumer goods saying, “These are now national security issues.” And it’s transparently just an effort by countries to protect their domestic producers of one product or another, but following the example of the United States, who use section 232 in this way.

So that, I think, is the risk: that other countries follow our example in one thing after another. So far, I’d say it’s been relatively modest. The system hasn’t fallen apart. A lot of countries, particularly smaller countries, they really look to the WTO as their only way of engaging with the global economy in a constructive fashion. They don’t have market power like the United States does or China has, or the EU, or Japan. So they rely on the rules-based system to create some stability in their economic relations. And I think they’ll be reluctant—they will only do this if they absolutely have to.

And similarly, Europe, which, as you mentioned, threatened to retaliate against the United States. But the whole European project, the whole notion of the European Union has been defined around integration, economic integration. There’s almost an ideological commitment to free trade there. Now, they’re not free traders. They have lots of protectionism. But they articulate a commitment to free trade that is much stronger than ever has been the case in the United States or many other places. And I think they’ll be reluctant to abandon the system as well. I think what you’ll see at the margins is that countries will take actions to protect domestic industries and constituencies. And it’ll become just a less efficient, slower growth economy, and that’s a downward spiral.

DAN KURTZ-PHELAN

Any attempt to divine some kind of strategic logic in Trump’s mind is, I think, met justifiably with some degree of skepticism, so I’m not asking you in this next question to tell me what’s in Trump’s head. But I do think that there are policymakers in the administration and policy thinkers around Trump who see in those impulses an opportunity for building a new kind of global economic system. There are various components of this and various different visions. If you look at what Bob Lighthizer, your successor as USTR, might say, or I think Jamieson Greer, the current USTR, probably has a theory of his own on what should come next, if they do succeed, if they do succeed in building a new system, what would that vision look like? Can you imagine a reasonably positive scenario that would come out of that?

MICHAEL FROMAN

Look, I think they do have a theory of the case, and the theory is: given the size and the importance of the U.S. economy, which continues to be the most dynamic, the most resilient economy in the world, that if they put up a wall of tariffs around the economy, companies from all over the world will be forced to move their production, move their supply chains to the United States if they want access to the U.S. economy. It is a big experiment. And one question will be: will tariffs alone do it or not? And at what level will they do it? Or if they really want to build manufacturing in the United States, it’s going to have to be some combination of tariffs and industrial policy and subsidization and regulatory preference, and the like. In some ways, it’s becoming, as we talked about earlier, more Chinese than American per se, at least in terms of our tradition.

That’s a big open question. And I think the really interesting challenge, the politically interesting challenge for the Trump administration is that by imposing this wall of tariffs—on one hand, by the way, it is bringing in revenue, and that has been a goal of the Trump administration, and is succeeding in bringing in revenue. I think a couple of hundred billion dollars so far this year, of revenue or is anticipated for the year. But I think the challenge is, if you look back at globalization, the benefits of globalization were broadly felt by everybody, as a consumer or as an importer of inputs. I mentioned this in the piece. Nobody walked out of a Walmart and said, “Thank goodness for the World Trade Organization.” But the reality is that the global system, the rules-based system allowed American consumers, particularly low-income consumers, to spend a smaller portion of their disposable income on the critical goods for their family, whether it was clothing, footwear, or food, et cetera. But it was sort of invisible.

The costs of globalization were very acute, very visible. And it was the factory in Lordstown, Ohio, Youngstown, Ohio, that closed down and moved to Mexico or moved to China; the jobs lost in those communities; and the impact that that had in those communities, on the social fabric. And again, the downward spiral, because investment didn’t come in right away to replace those jobs with other good jobs. There was a lag or it didn’t happen at all. It happened elsewhere in the country. Now the Trump administration is engaging in a grand experiment where the cost of tariffs are going to be felt by everybody and be quite visible, because there’s so much attention paid to them.

And the benefits if they’re right—that by putting up a wall of tariffs, we’re going to increase manufacturing in the United States—that benefit is going to be felt four or five, eight years from now by a relatively small number of workers in a relatively small number of sectors in a relatively small number of geographies. That’s a politically really interesting challenge to manage where everyone feels the cost now, but is saying, “It will be worth it if it succeeds in the long run.” And we just don’t know whether it’s going to succeed.

DAN KURTZ-PHELAN

The early evidence seems to be that it is not bringing back manufacturing jobs from what we can see. And part of that is because so many inputs into manufacturing in the United States come from other countries and now are facing high tariffs. Do you see any reason to think that dynamic will change?

MICHAEL FROMAN

No. I am skeptical that tariffs alone will achieve their objective. And you’re absolutely right. I mean, what we’re seeing is those anecdotal announcements by a company or by a country that they intend to invest in the United States. Again, we don’t know how many jobs will be created by that, but you’ve seen a pretty steady set of announcements that the administration has highlighted. What’s harder to see is exactly what you pointed out, which is that as the costs of steel go up—well, we’ve seen this from the first Trump administration. They put tariffs on steel in 2018. Seven years later, there are 1,000 more steel workers than there were before, but there’s 75,000 fewer workers in manufacturing industries that use steel because their input costs went up.

So again, it’s sometimes hard for people to say, “Okay, that was because of the tariffs, because it’s downstream.” But that, I think, is what we risk, is that a lot of our manufacturing that is reliant on inputs from other countries are going to see their cost go up. They’re going to become less competitive, less productive, and we’re going to see, on the whole, fewer manufacturing jobs rather than more.

DAN KURTZ-PHELAN

One interesting reaction to your recent piece has been from probably people who you’ve worked closely with in the trade community, who find you sort of too pessimistic about the existing system. They see a bigger role for the WTO going forward than you do. They see more hope that other actors can kind of preserve some of the key rules of a rules-based global trading system. Why do you think they’re too optimistic? Why do you think their critiques are wrong?

MICHAEL FROMAN

Look, part of me hopes that they’re right and that I’m wrong. But I think the reality is if you have the two largest economies not really abiding by the rules, even if the rest of the world continues to try and support the system, it’s going to affect a smaller and smaller portion of global trade. And that means we don’t really have a multilateral rule space system left. You’ve got different groups of countries following different sets of rules. I think the natural inclination is to look back with nostalgia and say, “Okay, when this administration’s over, we’re going to go back to the way things were before.” I don’t think that’s going to happen. I think there’s no going back. The toothpaste is out of the tube. And I think what we need to do is think through, “Okay, what are the elements of the old system that should be preserved in some other form? Where do we need to reform the system? And where do we need to come up with new rules or new mechanisms altogether to take into account the lessons of the last 80 years and the lessons of this grand experiment?”

DAN KURTZ-PHELAN

And as I read you, the most important element of that old system that you want to see preserved in something new is just the existence of rules of some kind. It almost matters less what exactly the rules are, but some rules that provide a degree of predictability and prevent the system from being defined purely by power and ad hoc transactions. Is that a fair way to characterize it?

MICHAEL FROMAN

Yeah, I think that is fair. I think you want a degree of stability and predictability. You’d rather avoid chaos and anarchy. Because I think, in a system that’s defined by chaos and anarchy, there’s lots of room for conflict and lots of room for suboptimal economic behavior where we’re going to find slower growth, lower productivity. And ultimately, that is going to hurt precisely the people that the administration is trying to support. So yes, I think some degree of rules. And in the piece, I argue, even if you can’t get rules that apply to everybody and every economy in the world, groups of countries can come together plurilaterally and agree to rules that they’re willing to live by. And then if it’s open plurilateralism, so that other countries can join if they want to adhere to those rules, that may be a second best, but still a better solution than chaos and anarchy.

DAN KURTZ-PHELAN

Just to try to end this on a relatively optimistic note: if we do see this interlocking network of plurilateral relationships, that countries come together on different sets of issues and there won’t be one single unified system, but you’ll have lots of cooperation and lots of attempts to settle on common rules, that might be less economically efficient, but would not, to your view, be disastrous. So it might, in some ways, address some of the weaknesses of the old system in very reasonable ways.

MICHAEL FROMAN

I think that’s right. I think that’s absolutely right. Again, the orthodox economists may not love it. It’s not Pareto optimal in their view. But I think it may be more politically sustainable over time, and more durable over time as well.

DAN KURTZ-PHELAN

And if we look at the next three or four years, what would the key steps to getting to that kind of system look like?

MICHAEL FROMAN

Look, I think first of all, other countries will go about it with or without the United States. We’ve already seen the agreement that used to be known as the Trans-Pacific Partnership evolve now to include not only the other 11 countries that were in it at the beginning, but also the United Kingdom. And even the EU is considering some relationship with that. So they’re willing to move ahead with trade-liberalizing integration agreements, even if the United States is not. I think it still requires, in my view—or it should require—U.S. leadership because we don’t want to live in a world where all the rules are being defined by somebody else, particularly China. So when it comes to technology, or AI, or the nexus of economics and national security, perhaps we should be leading an effort with our allies and partners to come up with a set of rules, so there’s coherence in how we approach these issues. So that’s going to take U.S. engagement and U.S. leadership.

DAN KURTZ-PHELAN

I really like the framing of this as a grand experiment, and we’ll have to pick up the results of that experiment later on. But for now, Mike, thank you for the great piece in our new issue. It’s called “After The Trade War,” and thanks so much for doing this today.

MICHAEL FROMAN

Thanks for having me.