C (3:34)

So what's the balance of payments? What's the definition there?

B (3:36)

I was afraid you were going to ask me that, Sagat.

A (3:39)

Well, there are two accounts. There's the current account. Okay. And the capital account. So if you think of the national accounts, and the current account is split between basically trade and payments deficits and surpluses and investment. So basically a trade deficit is an investment surplus. It's double entry bookkeeping. And the current account at the end of the day always balances, just like a company's balance sheet is always in balance, even if the company's going out of business the next day because it's double entry bookkeeping. And your debits can't match your credits identity.

B (4:16)

Got it.

A (4:17)

All right. So now the balance of payments includes a number of other things beyond trade. And there's a list of them. It's a very specific calculation. But most importantly, it includes swaps of currencies, which is what makes it a more important measure for managing in the near term. The trade balance isn't really managed at all in the near term and almost nothing to do about it in the short term. But it's also not particularly harmful. I mean, trade deficit's an investment surplus. So when it comes to goods, but when you include currency flows and the other elements of the balance of payments, which is just the larger measure of the two, balance of payments crises happen that do exist, happened in the United States in 1971, which was clearly in the minds of those who wrote the statute. Right.

B (5:07)

So, but where we are right now is you've got most economists saying we don't have a Balance of payments crisis, the criteria are not met. And it's usually defined as a situation basically where the government doesn't have enough money to pay its foreign debts and it doesn't have enough reserves to cover its obligations. And that appears not to be the case with the United States. And we're not about to go to the imf, the International Monetary Fund, to borrow money, which is what the usual sign that you have a balance of payments crisis. We're not there yet. And so what we're heading into is, first of all, the economists on this one have struck first by saying that this is all phony. But as is entirely predictable, the lawyers are in hot pursuit. And so I think litigation will follow, and it's only a matter of time before there's a lawsuit that says the President has once again exceeded his authority by determining a crisis that doesn't exist under the statute. Now, I know, you know, in our emergency podcast, I said that may happen, but it may not make any difference because it's only 150 days.

C (6:14)

Right.

B (6:15)

You know, and. And the litigation will play out longer than that. It occurred to me after I said that that that was probably stupid because it may not make a difference immediately, but. But it will make a difference if you're going to get a refund. And if you want to get a refund from the 150 days, the way to begin is by claiming that the tariff is illegal and trying to get the Supreme Court to make the same decision that they made on the IPA tariffs. So there will be litigation, I think, and it will matter. It won't affect 150 days. It'll all come up later. But if people want to get that chunk of money back, they're going to have to pursue the case legally.

C (6:51)

Scott, where are we today?

A (6:53)

Well, look, I think what was foreshadowed in Justice Kavanaugh's dissent about the tools still available to the President has come true. There was clearly a Plan B, and the Plan B was adequate enough for Treasury Secretary Scott Bessen to come out and say, we don't forecast any revenue shortfall because of. Because of this decision. So they clearly had thought this through, but there will be a requirement for more fact finding. In general, I think the way to characterize the President's decision and its practical effect is that it cuts out the thing that was the fastest. The President, I think, really liked AIPA because he could do it quickly. There were very few procedural hurdles in the way he could make things happen. And it was that ease and speed of usage that really appealed to him. And that's why all these emergencies, so that's not available. And so what happens is the speed won't be as rapid as it's been in the past. What will be increased is a level of discipline because the other statutes that are usable, including the Section 122 of the 74 Trade act, have requirements that things have to happen. You have to have findings. In some cases, you have to consult with Congress, in this case, 150 days. You would have to get the approval of Congress to extend many of the, the section 232. There's a long investigation. So all these things will raise the level of discipline. First, I think is good. We're going to have to go back to all the trading partners with these negotiations that we've concluded and make sure we both agree that they mean the same thing. Got to render them to writing. Somebody's got to approve them. Otherwise they're just ephemeral. They'll disappear in arguments that go on past the administration. So slower speed, greater discipline, I think, is the, is the basic element. How that discipline comes in will be different in each case. And I'm not sure there's time in the section 122, 150 days is not much time to litigate.

B (8:51)

There's one little footnote here that we owe a debt of gratitude to Don Shackelford for, who wrote a piece on this pointing out that WTO rules require a WTO member and we are one to notify the WTO if they are going to take an action pursuant to a balance of payments crisis. And the WTO then is supposed to consult with the International Monetary Fund to determine if in fact there is a crisis and that therefore the government's action was legitimate. There's no particular penalty. And this administration, I think, as well as the last one, to be fair, has demonstrated that it doesn't really pay much attention to WTO rulings. But one interesting little footnote is this administration, like the previous one, has come out strongly in favor of more transparency and has dinged other countries for not reporting to the WTO the actions they take, not reporting their subsidies and not reporting a lot of other things that they're supposed to be reporting. And the discipline is eroding. And I think they're right about that. And in fact, the paper that the Trump administration submitted to the WTO in January, this was a feature, one of the things they thought the WTO reform should focus on making sure there's more transparency. Well, now the shoe is on the other foot, if you will, it's the United States that's supposed to be notifying. In this case, to my knowledge, which was two hours old, they haven't done that. Now, whether they haven't done it because they forgot or because they haven't done it because they don't intend to do it, I don't know. But it's a little awkward for a country that says transparency is really important and everybody else is guilty for us not to do the very thing that we're insisting everybody else do, when in fact there's not really a consequence except embarrassment if the IMF decides that this is all phony. But they have no power to do anything unless you're borrowing money from them, which we're not.

C (10:42)

So I want to turn now, if we can, to the refund issue and what is really a big procedural question. And I think I saw an estimate this week from Wharton that we could be talking about something like 175 billion that is subject to refunds. So, Bill, maybe I'll start with with you again. I know, Scott, there's been some news that came out today actually, we want to get into. But in practice, what is supposed to be happening right now, in reality, what is actually happening?

B (11:06)

Well, I think prior case law requires refunds in this circumstances. If a tariff is ruled illegal, people are supposed to get their money back. There actually is a precedent for this in law. And that was, and Scott will remember this, the harbor maintenance fee that was enacted 20 or so years ago, which was subsequently ruled invalid by the Supreme Court. And in fact, people got their money back. The Customs Service set up a process for doing that. And if you look at big picture, refunds are not an extraordinary or unusual thing. The IRS does this for millions and millions of people, of taxpayers every year. Customs does it daily because overpayments and underpayments are chronic. You know, people misestimate the amount of the duty. Customs misclassifies things. There's always back and forth. The mechanics are there. The normal process is that the importer, the guy who paid the money in the first place, has to come in and demand the money back. And that then produces a paperwork exercise, which I think is at least partly redundant, because in order to pay the duty in the first place, paperwork had to be submitted, you know, and you had to explain, here's what I'm importing and here's what the value is, here's what it is. So this is why I said in the last podcast, the government can make this Hard or easy. They could just say, well, there's records of all this stuff and the CBP has gone electronic entirely as of earlier this month. They just push some buttons and give everybody the money back. It's probably not that simple, but it could be made relatively simple. The signs so far are that they're not going to do that and that they're going to expect companies to file a protest to get their money back and if necessary, a lawsuit. If there's a happy note here, there's the apparently widespread view by both companies and the government that the Court of International Trade will sort all this out. And the Court of International Trade and the case was sent back to them precisely to do that will make a decision about how this is supposed to work and what everybody has to do. The government stipulated to a lower court, I think it was a court of Appeals for the Federal Circuit in the fall, that if the tariffs were invalidated, they would get. People would get their money back. The government seems to have conveniently forgotten that promise now. But the courts won't forget and the Court of International Trade won't forget. So I think the government's on the hook. The CIT will set up a process that's going to take a little while. You know, the Supreme Court has to enter its. There's a lot of paperwork. Has to enter its decision formally, the case has to be returned to the Court of Appeals. Formally. They then have to return it to the Court of International Trade with a directive to do something so the court will get around to it. The last time around, the Court of International Trade acted quite efficiently on this, you know, and they produced the decision in a couple months, but still a couple months. So like I said last week, people think, you know, they're getting the check next week. Well, it wouldn't be a check anyway, getting electronic payment next week. That's not going to happen, but we'll see.

A (14:11)

Well, look, the only thing that's unusual here is the scale, all right?

B (14:14)

Yes.

A (14:15)

Refunds happen all the time, okay? And there's nothing unusual about that. And it's not unusual for the person who thinks they are owed a refund to file for it. You do that with your income taxes. I had to explain this to one of my daughter, the piano teacher. She's a small business person. I said, gethin, you gotta file your return to get the refund, okay?

B (14:34)

They don't just send it to you.

A (14:37)

You can't just do the math and say, hey, I got a refund coming. You got to file it. So you do have to file. But keep in mind, if you want to return a product to a local retailer, you got to take the product back and make a claim. So that's not unusual at all. The unusual part is the scale of that's involved here. And so that's probably going to take the time and offer the opportunity for a little less helpful and friendly government service than we're accustomed to put it that way.

C (15:05)

Now, what has FedEx done today? This is re record this on Thursday. I think there was some news from FedEx just a couple of hours ago.

A (15:11)

Well, FedEx is not only a package delivery firm, they act as the customs broker for their customer. So you have a package you want to deliver to Canada, say, that requires the services of a customs broker and the display of information, all that the customs brokers collect to ensure that the package is declared properly, that all the systems are in order to FedEx provides that service to its customers and therefore it has a fairly good picture of all the duties that are being collected on any given shipment, which puts them in a position to refund more quickly. And they've committed to just that based on the data they have submitted to CBP and Canada Customs in the case of that single package to essentially either facilitate or issue the refund. I forget what the statement actually said, but one of them.

B (15:56)

But this is important because if they do it, I mean my question to maybe to Scott is if they do it, might everybody else do it too and consumers actually might get some money back?

A (16:05)

It's possible. And now FedEx is unusually efficient at this sort of thing because of the way that they're structured. They were a package delivery company before they were a customs broker. So but the fact that they have integrated systems and they have a retail facing, I think it's easier for them. If you have a complicated supply chain, particularly retail supply chain, I think it's going to be harder to track it down and may take more time.

B (16:28)

The bellwether then will be if Amazon says the same thing, that might make a difference.

A (16:33)

Yes, Amazon is a much more complicated picture because there's so many sellers behind the screen.

C (16:39)

Well, can we look a little bit further down the road, Scott, and just talk through the role that sections 232 and 301 will play in the administration strategy. I think that U.S. trade Rep. Greer said that they plan to launch a new accelerated set of investigations under both 232 and 301. So how is this likely to play out?

A (16:58)

Well, the president has always liked section 232 he revived it in his first term. So there's very fond of it and he'll continue to use it. What you had Liberation Day was three kinds of tariffs. There was sort of the universal, roughly 15% which I think Bill makes the correct point that at least in the near term the Section 122 tariffs will likely supplant that. Then there's this whole series of reciprocal tariffs placed in advance of negotiations. Now a lot of negotiations have taken place, but that doesn't mean all the perceived unfairness has been squeezed out of the trading system. The third level of action and Liberation Day was China. China is clearly a Section 301 case and there's a lot of that which was also the investigation was done in the first term. Those are the three levels that AIPA was an important part of since Liberation Day. And that will need to be supplanted by something. My guess is for the most part they have some industries and products that they are likely to consider national security implications and begin the investigations of the section 232. I think where they need to move Fast, they'll use 301. And mostly because section 301, you go back and read the language, it's quite ambiguous as to what qualifies it. It is an unreasonable or unjustifiable policy or measure of a foreign government that burdens U.S. commerce. That's pretty generic and I think with the very sparse limits definitionally on what constitutes an unfair practice that could be actionable under 301 and the relatively light or weak process, there's just very few procedural hurdles in the way of the administration using it. It's what drove our trading partners nuts in the early days of 301 and why they they tried mightily to get it expunged from the statute book and failed in all cases. But for what that's worth. So I, I think that on a daily basis they'll think a lot more about 301 actions than the National Security 232. But that's just on a practical level, that would be the thing that's the least likely to, to not run into obstacles and try to replicate some of the speed that the President liked with ieba.

C (19:16)

Bill, what do you think?

B (19:17)

I'm inclined to end up the same place Scott ended up. I was originally kind of a. I wouldn't say fan, but thought 232 would be the route of choice because of what Scott said. Trump just likes it and I think you're legally on fairly firm ground. It would be hard to find a judge who would say the President's judgment about what's a national security threat is wrong. And I'm going to second guess the President. I mean, they could, but I don't see that happening. And there are relatively few guardrails on the use of the authority. But it turns out the constraining element in this case is you kind of have to go product by product. And that means a lot of cases and a lot of investigations. I used to have to do these investigations when I was running what's now called bis. And, you know, the first part is easy. Determining whether or not there's a security threat is not that difficult. The hard part is figuring out what to do about it, because what you usually find is that agencies don't agree on what to do about it. And what you often find is that there may be no good solution. And I think we're seeing that now in some of the current 232s. You know, Trump has only one tool, one tariff. So he always thinks tariffs are the answer. But if you look at the Commercial Aircraft 232, which is now overdue, I think the deadline for that one was in January, and they haven't issued anything yet, as far as I know. I think the reason is because if they do tariffs, particularly on parts, the big victim will be Boeing. You know, the victim won't be the foreigners. And so the obvious Trump preferred solution is not a solution that's going to make manufacturing better in the United States. Yeah, and that's not unique. So it gets complicated. If you're going to do it that way, 301 is simpler, and you can go country by country. And you've got a template because of this National Trade Estimates report that has to come out every year, which conveniently is coming out in March or April. So soon, that goes by every country and lists all the things they're doing that we don't like. And Scott's right. You know, they're not all eliminated, so there's fodder there. I think the downside is that that provision is subject to the Administrative Procedures act, which means there's a lot of process and there's a requirement for public comment, hearings, things like that. And this administration is notorious for process fouls. You know, they don't follow the rules, and the result is they get slapped down by the court, not on the merits of the decision, but on the the fact that they didn't do it the right way. So this gives them another opportunity to not follow the rules. So we'll, we'll see what happens.

A (21:52)

That was definitely the case with, I mean, also almost all the immigration decisions that they made in the first term. In Trump 45, the problem was always the APA was it was a process foul that, that kept them from prevailing in the courts. So Bill's right about that. Now, I think they also found a very creative use for section 301. It was the first time 301 had been used on basically a domestic service, which was intellectual property in China. I don't think they got very far with it, but they did make it stick. In terms of one of the issues with China was their IP protection, which had nothing really to do with trade, a lot to do with investment, a lot to do with IP theft. But they managed to apply, and that was due, I think, to the creativity of Bob Lighthizer and the team at usdr. So, I mean, for me, the good news of this court decision is that we'll get the pros like Ambassador Greer's team back in action.

C (22:45)

Yeah.

A (22:45)

And we'll render some of this so people can understand it and they know what we have an agreement about or what we don't and what the agreement means, and it has some chance of surviving into the future. So we'll see.

C (22:57)

Before we move on. We touched upon this a little bit during our emergency episode. But Bill, if you could give just a quick update. And Scott, jump in here as well, of course, on how foreign countries are reacting following the Supreme Court decision. There's been some movement over the past week. So let us know what's been going on and what does it portend for future action?

B (23:16)

Well, it's not one size fits all. And basically countries are getting out their calculators because it depends on which country you are and it also depends on what the president does. If you are one of the, I don't know, six or seven countries that ended up with 10%, and if the tariff sticks at 10%, you're not really worse off or not much worse off. And I'll get to the stacking issue in a minute. If you were one, for example, India or a Southeast Asian country that was at 18, 19 or 20%, and even if we go to 15%, you're actually better off. So they have to think about whether they want to complain, whether that will get them in the right place or not. The other thing they have to think about is whether complaints will get them anywhere. And there, I think, you know, Trump has already threatened people said if you play games, you know they're going to get higher tariffs. It's not quite clear what that means, but the threat is kind of clear that don't play games. I think it's breaking down into separate groups, countries that have already signed an agreement. The administration is saying we regard those agreements as intact and we intend to honor those provisions, and we expect the partners to do the same. To me, that means if you agreed to 18%, as I think Indonesia did the day before the court's decision, in a classic case of bad timing, you know, you're stuck with 18. Now, what is not quite definitive is the Australians will come in and say, we, well, we agreed to 10, you know, and the UK will say we agreed to 10, so we should be kept to 10. So countries that have not signed, I think, are going to slow roll this. And you saw the Indians have already postponed their travel here because that one was announced. But it said that wouldn't be signed until March. So it's not finished. So you're going to see some slow rolling. Trump has already accused the Koreans of slow rolling even before the Supreme Court decision. So you're probably going to see more of that because I'm sure some countries are thinking, you know, we did this under coercion and because of the tariffs that are now invalid, so maybe we should rethink our commitments. Sure. And the final issue that is to me is the big unknown is the stacking question. Are these tariffs to be stacked on top of existing tariffs? And on that, the administration said yes, except for the 232 tariffs. So steel stays at 50, car stays at 25, and there's nothing beyond that. But the question then remains with respect to the other tariffs, stacked on top of what? I talked to a colleague who follows this stuff closely, and he thought it means stacked on top of the traditional old most favored nation tariffs, which for the United States are 2 or 3% on average. Some of them are much higher than that. So that would make it not 10, it would make it 13 or so. That's still okay for these countries. Although the countries that agreed to 10, the UK being a good example, they agreed that 10 was the cap and that the MFN rate would be folded into that. So, you know, if it's going to be stacked on top, that is worse. This is what the EU is complaining about, that in some cases stacking on top of the MFN rates takes the EU tariff over the 15% that they agreed to. But the other question that nobody seems to be wanting to talk about right now is what if the 10 or 15%, 122 tariff is stacked on top of the tariff the country's agreed to? So Indonesia wouldn't be 18, it would be 28 or 33. I don't think that's what the administration intended and that would be disastrous. But they haven't answered that question yet, so we'll see.

A (26:54)

Yes. And the administration, while they want to be tough, they don't have any interest in letting all these things fall apart because of the lack of clarity. So my guess is this is an issue that will get forthright attention. And Bill's right. Our MFN tariffs are, I think the average applied tariff is somewhere around 3%. The average tariff collections are a little below that because of our big free trade agreements with Canada and Mexico. Zero tariff on everything from two of our largest partners. So that brings the average collected tariff down to about 2%. But that 2% becomes important in competitive differences. And in the practical matter of what you meant when you said this and which has all got to be rendered to some kind of agreement. But it's going to be busy over there.

B (27:40)

The lawyers are going to have a field day with this.

A (27:42)

No question.

B (27:43)

Between contesting 122, they'll probably contest. Somebody will contest a 232 decision arguing that it's not really a national security threat. The 301 has all the process foul trap doors to worry about. There will be litigation about people getting their money back. So this is going to go on for quite a while.

C (28:01)

They're going to earn their retainers this year, no doubt. All right. Well, I want to close out here today with just a look at what else is kind of happening in the world. We'll have a lot more on the, on the Supreme Court decision fallout over the coming episodes here. But there are other things happening in the world and I want to specifically focus, if we can, on what's happening between the EU and China lately and whether the EU is pursuing more engagement with China as a counterbalance to its relationship with the US this is relevant because German Chancellor Merz was in Beijing this week. So Bill, what was he doing there and what were the takeaways?

B (28:34)

Well, the takeaways was small cheese. Basically. They they buying more airplanes. This seems to be the standard thing the Chinese do, you know, they'll buy more Boeings and now they're buying more Airbus 120, I think was the number. Small agreements on sports. Know this sounds like the table tennis thing of in the Nixon administration. Small agreement on poultry More cooperation and various elements, not big agreements. What's interesting about it, I think, is the rhetoric and, you know, the limitations on how much either side can accomplish. Europe is now experiencing really the same overcapacity issue that we've experienced already.

A (29:14)

Right.

B (29:15)

I used to offend my European colleagues by, when I give speeches about this, by saying they were five years behind us in understanding China, and now I say they're only two years behind us in understanding China. But they're going through the same thing. I mean, for them, it's EVs, but it's a boatload of other stuff, too, machinery, steel. And they have the same problem. And the Chinese are no more willing to deal with overcapacity to Europe than they have been willing to deal with it with us. And in some ways, it's worse for Europe because. Because one of the effects of Trump's tariffs on China has been to reduce our trade with China and reduce our imports with China, and typically of squeezing the balloon, they've increased greatly. With respect to Europe, you know, the Chinese have found other markets, and the EU is a big one. So Europe is in a much more awkward position than they used to be. Macron was there several weeks ago. Merz was there this week. I think Starmer was there before Macron. They're not in the eu. All of them, I think, are not coming away with major Chinese concessions on overcapacity or any of the fundamental economic policies that are plaguing Europe right now. They're coming away with the same thing. We come away with more airplanes, more chickens, or fewer chickens, as the case may be.

A (30:34)

And keep the noise down about those unfair subsidies, which, of course, we've been complaining about for five years, and they've started to complain about.

C (30:40)

Scott, are they. Are they heading over there expecting real concessions, or is this just a diplomatic.

B (30:45)

I don't think Mer expected concessions. His. He has taken a somewhat tougher line than his predecessor Schultz did. I mean, Germany has a peculiar problem of. Of the big German companies, primarily the auto companies, but not only the auto companies are significantly invested in China. They made a big bet 10, 15, 20 years ago to go over there in a major way, and that's proving now maybe not to have been the best decision. Their sales in China are declining. Their exports to China of these goods are declining. Chinese exports back to those countries are increasing, but the investment is there. And the German companies in particular have not wanted to lose that. So they've held their government back from taking a strong line. And it's a balancing act. It was a balancing act for Schultz, it's a balancing act for Macron. It's a balancing act for Merits to decide how much can I do here and what can I really do that's going to help my companies when what the companies really need to do is I think, figure out how to cut their losses and move on.

A (31:54)

These things get unsatisfactory very quickly, particularly if you, you have sophisticated advanced state owned competition. I mean, tell you hair raising stories about the battery business and how fast it went south. And so companies do tend to cut their losses at that point. The auto sector is particularly subject to this because more cars are sold in China than anywhere else.

B (32:17)

Yeah.

A (32:17)

And they have some key advantages. But there's a lot of provincial and other state owned enterprises there that make for interesting competitors.

C (32:26)

Guys, we're going to leave it there for today. There will certainly be a lot of developments over the next week that we will cover on the next episode. But thank you all for listening. We'll see you next week.

B (32:36)

Thank you.

A (32:37)

Thanks.

C (32:43)

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