B (3:31)

Well, yes, they're right and they admitted it. The issue came up in the European Parliament because in, in this case, since the Europeans have agreed to lower tariffs, they need to go to the parliament for action on this. And the Parliament is giving them a hard time and is going to probably continue to give them a hard time. And it's not, I think, any different from the mixed feelings within the commission or within the member state governments. You know, they don't like the agreement. They, they think the United States is bullying them and pushing them into a position that's not good for them. And of course, they're right about all of that. But as the Commission's, there was a hearing on it in the Parliament. And as the commission's witness, Sabina Vand, who those of you that are in Washington that attend our events, know that we've had her visit with us a couple times, as she pointed out, basically that, yes, it's a violation of wto. And yes, we don't like it, but, but it was the best we could do. And so that's sort of the defense from all countries, which fits into the scenario we've described previously, that there's no good news in this. There's bad news and there's less bad news. And Sabina was sort of saying this is in the less bad news category. It violates the most fundamental principle of the wto, which is the most narrow nation principle, which means concessions have to be uniform. If you give concessions to one, you have to give them to everybody. And of course, the ones the United States is negotiating are preferential for the United States, that is that concessions that Europeans are making, they're only making to the United States, they're not making to anybody else. And so that puts them and us in violation of the wto. Now, there are several ways out of it. One way, of course, is to say, at least to ourselves, well, we don't care and we're just going to do it anyway. And I think that's probably what you would hear from the White House. The Europeans, however, claim to care. And as you've heard me say in the past on this podcast, their enthusiasm for the WTO is selective because when they lose a case, they get a lot less interested in compliance. But when they win a case or when other people are cheating, they're very self righteous about it. And this is one of those occasions. So if you don't want to just ignore the wto, there's two things you can do. They can do something unilaterally, which is make the same tariff concessions to everybody. Now, that would cause a lot of political problems in Europe because it would open up some markets to substantial imports from very competitive producers that we might not be. You know, for example, if you wanted to eliminate auto tariffs, which is one of the things they're going to do, China's a member of the WTO and that would mean taking the tariff on their cars down. And it appears the Europeans, if anything, are poised to move in the opposite direction on that, ironically, again, in a way that's selective, where they'll be picking only on China. So there aren't a lot of innocent parties on this. But that's one thing they could do, is generalize their concessions. The other thing they could do, we would have to do it with them, is to take advantage of Article 24 of the WTO. Article 24 allows you to have regional or bilateral or plurilateral trade agreements in which you grant preferences to each other, but not to everybody. So we have a couple of those. We had what used to be called NAFTA, which is now USMCA. We have CAFTA. Dr. Which is the Central American and Dominican Republic Agreement. And we have bilateral agreements with Bahrain, Oman, Colombia, Chile, Australia, some others. All of these, we provide the benefits only to the other party and they provide the benefits only to us. The WTO Article 24 says you can do that so long as your agreement covers substantially all trade. And that's the key quote that you'll probably be reading about going forward, substantially all trade. And the US EU agreement pretty clearly doesn't do that. As far as concessions are concerned, it doesn't cover substantially all trades. Now we could get there by making a broader agreement, making a broader trade liberalization agreement with the EU to get into the category of Article 24. And if you read the summary of the EU agreement. And what Sabina testified to at the Parliament was it contained some language about how we would be having discussions to work toward that goal. So we've provided some short term cover here at the same time, you know, the dirty little secret of Article 24 is most of the 400 plus agreements that are done under that article that have been notified the WTO don't comply with the substantially all trade provision anyway, mostly because they exclude agriculture, which is a very sensitive topic for a lot of countries, particularly developing countries. So this is a case where everybody cheats. When I was in the government, one of my colleagues wanted to file complaints against the eu, among others, and a number of other countries for registering their Article 24 agreements when they didn't comply. And we never did that. And the reality is nobody else has ever done that either because the parties in the agreement don't want to do it because it would mess up the agreement. And the outsiders seem to not want to do it because I guess they don't care or they don't think that there would be much of a benefit to them if they complained. So a lot of these agreements don't meet the standards. So we'll see what happens. I mean, the Parliament committee that has to consider all this was concerned about it. And you know, they're always concerned about stuff like this, whether they're actually going to do anything about it. We'll see. Someone at some point is going to point out the large number of EU agreements that also violate Article 24, which may then calm everybody down. But at the moment, what we're seeing is a lot of rhetoric, a lot of unhappiness directed toward the United States and nobody here much caring much about that. Scott, over to you.

A (10:17)

Well, that sounds about right. Look, Europe has a number of economic lights that are flashing warning. So if you look broadly. Now, let me start by saying that the EU single market and the association agreements were probably the most important and most beneficial public policy of the entire European Union experience. That experiment lasts now 50 years or so since the six country coal and Steel Agreement. And while the single market was put in place about 30 years ago, it was the most beneficial to the most people of almost anything Europe has done from an economic policy standpoint. That said, there was never a second act to the single market and the association agreements. It's principally goods, it doesn't really cover services, and it's principally industrial goods, doesn't cover much in agriculture the way many would like to see it covered. So that essentially set the terms for bargaining at the WTO for Europe for many years, which meant they gave nothing, which means nobody got anywhere. And this is the problem with invoking the WTO 30 years after you've made your last concession. So yes, there is a Provision in Article 24, it's obsolete. It is violated in the breach by everyone and nobody seems to worry too much about that. And so when you get into a situation as Europe is at the moment, where with high energy costs and demographics which have turned negative and probably an over regulated and under innovating society, you become a taker in these things. And yes, Trump took their lunch money, no question about it. In fact, it was probably worse than that because essentially they were de industrializing the way it was and with the investment commitments, it looks like the European companies and sovereigns are going to fund their own deindustrialization by investing in the United States. So it's a bad deal for them, but they weren't in a position to get a better deal. At the end of the day, I understand why they're upset about it, but I'm not sure what there is to do at this point.

B (12:29)

I need to rise to the defense of the United States for just a moment because if you look at our article 24 agreements pre Trump. Okay, not currently pre Trump. I think all of ours do comply with the provisions because we've insisted that they do cover substantially all trade, including agriculture. So we have been the good guys on this for a long time and adhere to the rules.

A (12:53)

I think you're right, Bill. We're closer than most, but no longer.

C (12:57)

So guys, do we think this deal can still pull through? Like where did things go from here?

B (13:04)

Well, there's two issues in Europe. One is what the parliament will do. I mean, the parliament is the largest party, is von der Leyen's party, but they're capable of causing trouble and they're capable of adding things to the whatever legislation they're going to have to pass to implement the agreement that could cause the commission some grief. So we'll see how that plays out. I mean, a lot it's like any legislature. There's a lot of rhetoric and at the end of the day, people tend to come around and reluctantly do what the, in this case, what the commission wants. Right now we're in the rhetoric stage. So it's, I don't want to say absolutely nothing's going to happen, but the larger threat, I think, to its survival is that there's more to come. You know, what the agreement did was punt on a lot of things. And the main thing it punted on was digital trade issues. And that means several. One is the Digital Services tax, which is not really an EU thing, it's a member state thing, and not all the member states have it. I'm not sure that Trump understands that, but we'll see. But he said he's going to go after it. He went after Canada's digital services tax and with some success. Oddly, he did not go after the UK's tax, digital service tax, and they got to keep it. Now I think he'll also come in for a second bite on that with them too, but hasn't happened yet. At the same time, an issue that is digital and is in a commission's purview is they're multiplying pieces of regulation of the digital space in Europe, which primarily means the Digital Services act, the Digital Markets act, the AI forthcoming AI act, there's a Cloud act, and then there's a bunch of these things. There's also the older gdpr, the General Directive on Privacy that's been around for a long time. Trump doesn't like these. There's so much irony here. It's hard to describe things with a straight face. Google was just fined around US$3 billion, I think 2.95 billion euros for what was regarded as violations of either the DMA or the dsa. I think the dsa, as I recall, and that follows fines to Apple and to Meta as well, smaller ones. But Europe is developing a history here of substantial fines against American platforms, American digital service providers, for a variety of reasons. We ought to be devote a whole podcast to this at some point because it's a huge issue. Trump objects. Scott will have a chance in a minute to use the Animal House analogy about the basis for objection. But Trump objects, I think partly because they're American companies and they're our guys. You know, the irony of that, of course, is that by and large he hates them and is attacking them in the United States on content moderation grounds for being unfair to conservative voices and stripping them out of their platforms in favor of woke liberal DEI discussions. And so they're under attack here. Interesting. They're also under attack here from the left as examples of big tech monopolizing the space and oppressing American users and treating them unfairly. But when Europe does the same thing, that is attack the companies, Trump has been fairly stalwart in objecting to what they're doing. So what he wants the EU to do, ideally is to repeal the DMA and the dsa. Von der Leyen has pointed out publicly that this is not commission policy. This is legislation. This is EU law that has been passed. It can't simply be done away with. They'll have to, if they want to get rid of it, which they don't. But if they did want to get rid of it, they have to go through the whole parliamentary process again from the beginning. And setting it up took, I think, at least three years in each case. So if they were going to take it down, it would not be short. But I think that's the next confrontation. They will not and cannot change what they're doing. They believe in what they're doing. We just had a conversation with European digital regulators the other day, and they are committed to their approach. The Trump administration doesn't like their approach. So I think there's a confrontation coming, and that could very well imperil the survival of the deal.

A (17:52)

Well, look, regulation, like almost anything in life, is subject to the principle of diminishing returns. And it's often hard to see that as it's happening. I think in the case of digital regulation in Europe, they had a successful privacy regulation bill, mentioned gdpr, successful in that they, they crafted a policy and a set of regulations that, because they were the first mover, became almost universally adopted as the way to manage privacy. And very quickly it kind of became, it had some initial controversy, but quickly people just signed on and operated according to that standard, and that turned out to be okay with the world. So it kind of worked. And much like emissions standards for cars, which, despite all the complaining companies, met those requirements for 50 consecutive years, you get the feeling as a regulator, well, let's do some more. We're on a roll here. They keep meeting the goals that we set for them, even after they're complaining they can't. So let's do it again. And dma, I think, just went too far. So they've got to the point where it's clearly not a neutral set of rules. It is a rule that, that affects principally companies whose headquarters are not in Europe. It takes advantage of those companies in more than just money. It is a, it is a money grab for most of the member states that are applying these, these laws. But it's also, you know, deliberately allows access to American technology. And that's what the platform companies, I think, object to more than anything else, because their, their ideas and their innovation is going to be given away to less innovative rivals in the local markets. So it's a controversial policy because it's, it's in Many ways an overreach. And it's an overreach focused against a handful of, of highly successful, highly innovative American companies. And we've talked about this in the past, using the famous ROTC and golf practice scene from Animal House where the otter makes the comment, hey, they're abusing our pledges. They can't abuse our pledges. Only we could abuse our pledges. President Trump no doubt sees Apple and Google and Meta as our pledges. So we, while he has some issues with them, he doesn't want anybody else in that space. I do think it's sufficiently harmful to American interests that it won't be easily dealt with. Bill mentioned the reasons that it'll be hard to unpack, but I think somebody ought to think about how to get back off the precipice before this makes relations deteriorate any further.

C (20:43)

Well, I hope someone out there has made their trade, guys. Bingo with the Animal House reference. Let's move on. So basically, since Trump's early tariff proposals came out in the campaign, there's been kind of endless pontification, including on this podcast, I should say, about what the economic impacts of these tariffs would be both here and elsewhere.

B (21:05)

Wait a minute, wait a minute, wait a minute. We don't pontificate, we rant. Let's be clear about that. There's a difference.

C (21:12)

Whatever verb you want, Bill, go ahead. So we're down nearly eight months into this admin. And Scott, I know you've been looking at the numbers here. What does the data say and what do you make of it?

A (21:24)

Well, it's interesting. I think the most important conclusion. Look, I personally didn't make a lot of forecasts about what would happen. I don't think Bill did either. He was generally more pessimistic than I was. And we both had our concerns about what the impact was going to be, particularly on consumer pricing and availability of products and the kinds of things that Americans expect given the large consumer economy. But I think where we are now is driven mostly by the fact that tariffs, while threatened very high in initial stages, often were applied at a relatively modest level versus the original headline. China would be the exception for that, although the China tariffs were ratcheted way up in the early rhetoric and down again. And the second element that has moderated tariffs impact on the economy has been the virtual total absence of retaliation. And most of the models that economists used in discussing the effects of tariffs modeled retaliation because that's what everyone expected to happen. And somehow they've managed it in a way that that didn't that didn't happen. Now it does have a lot of consequences. A lot of the consequences of tariffs are having effects outside the United States. So Canada is in very tough shape at the moment. Their economy is actually shrinking over a percent mostly because of goods that would normally be exported to the United States. So Canada has gotten the worst of the Trump tariff treatment with respect to industrial economies. They had the best deal to start with which was USMACCA or nafta and they wound up with among the worst deals. And one of the things that happens when you're running a trade surplus, if something shifts that balance more toward neutral, you're the one with the unemployment to deal with. That's certainly happened in Canada. So Eurozone economic growth is also sluggish at the moment. That's I think mostly a product of their services sector which has largely been unreformed. It's very difficult to do so they get the weeds very quickly. The licensing requirements for Italian pharmacists and things like that or whether you can wash your car in Germany. I found out this was an issue talking to some friends who visited Germany and realized that it was against the rules to wash your car. You had to take it to the car wash. So there's that kind of regulatory morass. The member state level that's never really been unplugged and services is a big enough chunk of the economy so that really makes a difference. So European purchaser managers indices are showing real sluggishness mostly in the services area. So I don't think the tariffs of the goods trade impact is much is all that important in Europe at the moment. But they are in tough shape. They are in a, in stagnant conditions. Meanwhile, the US is sort of in a Goldilocks moment. It's not too hot, not too cold, maybe just right. The inflation seems to be straight lined. Both producer and consumer price indices are very consistent with the previous months. Markets continue to respond positively. They're at all time highs largely because earnings forecast seem strong. The jobs reports There have been some a number of controversial elements about how the data was collected before and reported before and what happened during the adjustments at the second and third intervals. But be that as it may, you're seeing some shrinkage in foreign born employment which given what's going on with migration policy is totally predictable. The second thing you're seeing is fewer jobs in a segment that basically is the. It's the CSIS segment, the part of the economy that is where NGOs live. And given the massive cuts of places like USAID, which funded a lot of jobs for a lot of people. It's also not surprising to see some labor declines there. I think what you're going to see soon is a pickup in wage rates for entry level workers just because of shortages that are caused by the migration policy. So I think when you look at the report, it's better than expected numerically from a, from an inflation standpoint, which is good news. The second piece of good news is the jobs report looks like what you'd expect these policies to produce. So I think we've, we've, we've had the. Not too soft, not too hard, just right and we'll see if it lasts. I don't think it will, but Bill's probably even less likely to think it will.

C (26:01)

Yeah. Bill, what's your take here?

B (26:03)

I tend to be in the doom category a little bit more than Scott. I think the negative impact has been delayed for some of the reasons he said. A lot of stockpiling, not just in Q1, but a lot more came in in July, I think with record deficits in July because the Chinese tariffs were the whole, the ceasefire was extended and for the other reason he mentioned, which is that the, the actual applied tariffs have ended up being less than the amounts that Trump was announcing. So, you know, people are, are coping. There's anecdotal evidence of price increases around, but I think that if there's going to be an impact, and I think there will be, but it will be in Q4 more than Q3, and I think we'll see it mostly in holiday shopping in October, November and December. But I think it's fair to say that so far the impact has been, so far has been less than the doomers have been saying and it may stay that way. Although despite that and despite the fact that today's report on the CPI was the same as July, which means it didn't get worse, it's still above the Fed's target and has been above the Fed's target considerably. So, you know, there's a risk here that we are going to reignite inflation. It may not take too much to do that. Right now I'm thinking that we're heading more toward stagflation. The bad news in the economy the past several months has been on the employment front. You know, only 22,000 new jobs created in August, a huge revision from last year, 911,000 jobs lower than what we had said through that. Now that was mostly on Biden. That wasn't done on Trump. Because it was March to March 24, 25. But the June figure was negative, as I recall, in the end, after a revision. So there's some signs that we're slowing down. And to go back to what Scott said, there's signs that everybody's slowing down. Yes, except probably in Southeast Asia and India. It's hard to blame all of that on tariffs, but you certainly can blame some of it on tariffs. And I think Scott made an important point. If there's going to be a big impact, it may well be in other countries and in their economic growth rather than here, but in a globally integrated economy, and we still have that, despite Trump's best efforts, that comes back to bite us. You know, less demand in Southeast asia means fewer U.S. exports, and in the end, we need exports if we're going to grow.

A (28:52)

Well, that's a great point, Bill. And we forget about that. One of the things that that 15% tariff and the softening of the dollar that's associated with that with universal tariff, is export competitiveness. Well, it's great to be more competitive on exports, and a lot of American exporters can feel that. But if there's soft demand in the markets that are that we'd like to export to, then it hurts us, too. So there's no free lunch out there or breakfast.

B (29:23)

Just saying.

C (29:25)

So let's wrap up with what is kind of an unusual topic for us as it revolves, the zeroing out of some tariffs by the Trump administration. One can be forgiven for forgetting we could do that. So in an executive order from September 5, is zeroing out tariffs on a range of commodities deemed not available or unavailable in sufficient quantities to the U.S. so, guys, we were just talking about the state of the domestic market here. Is this about prices or is this about something else?

A (29:59)

Well, look, it is patently stupid to collect tariffs or to raise tariffs on goods that are necessary for inputs for your production and have no domestic source. Tariffs do have a protective value benefit, I should say, to industries that produce domestically. But if there's no domestic production of a good, putting a tariff on it just raises the final consumer price and raises the prices to the producer. It's idiotic. It's one of the worst ways you can use a tariff. So zeroing it out is eminently sensible. Many of our competitors, like Canada, have done this in law. Basically, if you can show there's no domestic source, you can zero out tariffs in Canada of any input to your production process. And keep in mind, a trillion dollars of intermediate goods are imports in the US Economy that's intermediate. Good is are things used to make other things, so components, parts, whatever it might be. But you know, it's a sizable thing. So first, it's eminently sensible to not put tariffs on goods that are not produced in sufficient quantity domestically. So that's number one. Number two, this is a long battle that somehow is really hard to win in American politics. Bill and I both go back to before the earth cooled, say in 2006, when there was a thing called the Miscellaneous Tariffs Bill where you could, as a, as an importer, you could present the evidence that there's no domestic supply on an item and you could get relief, tariff relief in this once a year or once a Congress miscellaneous package of tariff reductions. It was, it was cumbersome, but it was worthwhile. A lot of companies worked on it. It became politically toxic for reasons that escaped me in about the aughts, 2006 or so. I don't recall the specifics of it, but many of us made the proposal that, look, why don't you just zero these things out, make it an ITC sort of regulatory process, don't get the Congress involved, keep the politics out of it and zero out tariffs by rule when you can. Of course, nobody listened to that, but we're once again zeroing out tariffs. So ultimately it's a good thing.

B (32:19)

I can explain why it was toxic. In the Biden administration, they figured out that the biggest beneficiary would be China. In the Miscellaneous Tariff Bill process. For years, most of the items that ended up being zeroed out were chemical precursors or chemicals, and they were integral to the production process. You know, it's an ingredient, and if you don't have it, you can't complete your process. But the biggest producer of most of them was China. And I think the political situation reached a point where there were a lot of members of Congress who were simply reluctant to provide a benefit to China, even though the benefit really was to the Americans who were going to be able to produce stuff cheaper. But that was the reason for it. But I agree wholeheartedly with Scott. This is one of the stupidest things you can do, is put tariffs on stuff that we don't make or don't grow. I mean, that the announcement Evan referred to, that was really good news for Starbucks because coffee is going to get zeroed out. We don't grow very much coffee in the United States. We grow some in Hawaii and maybe Puerto Rico, but that's about it. So your latte now is going to be. We talked about this before. Your latte is not going to go up 50 cents unless Trump makes the zeroing out selective and decides that he wants to still punish Brazil. But for the most part, you know, if coffee's out, you know, that's good for news for Americans. If bananas are out, same thing. I mean, the biggest impact, I think, in the economy will be what Scott said on intermediate products that will help produce, help keep producer prices down. But, but from the standpoint of the American consumer who just goes in and buys stuff, tropical fruits and vegetables, coffee, things that we can't get in the. Can't grow in the United States, those are gonna stay cheaper than they would be otherwise, and that's a win for everybody. So good move, administration. Can't believe I said that, but good move to the administration.

C (34:27)

Well, thanks to President Donald J. Trump, you can have as many bananas as you like.

A (34:33)

Yeah. Let's end the conversation before we lose this moment of happiness.

B (34:39)

I'm beginning to regret that I said anything, but next week I will be.

A (34:43)

Back saying something cranky because the rant is due. Yes.

B (34:47)

We didn't have one today. We'll have another one next week.

C (34:50)

Set your calendars for the rant. Thanks, guys. See you next week.

A (34:55)

All right, I know.

C (35:01)

You'Ve been listening to the Trade Guys, a CSIS podcast. For more audio content, visit csis.orgpodcasts thanks for tuning in.