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- [00:01]
A
I'm Scott.
- [00:02]
B
I'm Bill and we're the Trade Guys.
- [00:07]
C
You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys. Today we break down the new US UK Pharmaceuticals agreement, unpack President Trump's proposed tariff dividend, and debate whether bullying or persuasion make for a better trade strategy. All that and more on today's Trade Guys.
- [00:46]
All right, Trade Guys, we're in the final stretch of 2025. We have a lot to cover on today's episode, but we're going to start with some news from over the past few days. On December 1st, the White House announced a deal that spares British drug exports from possible tariffs in exchange for increased spending by the UK on certain medicines. Bill, this one's a little complex, so try to help us understand the background here and help us unpack the contours of the deal as best you can.
- [01:12]
B
Well, it's taken me four or five days to understand it and I'm still not sure that I do, but I'll take a stab at it. Then Scott will tell us all what it means. On the US side, it's sort of clear we're giving them zero tariffs, although it's important to note that this agreement appears to apply to new branded drugs. Generics already have favorable treatment. It applies to new branded drugs. So it's not a universal thing. We're giving them zero treatment. We're telling them that they're going to be exempt from 232 tariffs. And we also agreed that we would not make them subject to any future Section 301 investigations. I don't know if those are planned, but that's not an insignificant statement. Basically, it's a commitment to a fairly free ride for this category of pharmaceuticals. What the UK agreed to do was to basically adjust its rebate scheme. What the National Health Service currently does, basically, is it requires a clawback. It requires the drug companies to pay back some of their revenue back to NHS based on a very complicated formula that I don't think I'll ever understand. That amount is currently adding the various pieces together about 23.5% clawback. What the agreement does is to cap that amount at 15%. So what that means is that the U.S. companies will have to give back less to the National Health Service, which means two things. One, it means that the British national health service will get less money back, which creates an issue for them, although they have said they support it, but at the same time said that it may cause a money issue for them and it means that our guys are going to be making higher profits. Now, this is not insignificant. This is also not a unique process. The difference between the UK and everybody else is the amount of the clawback. In other European countries, it's much lower. Ireland is 9%, Germany is 7% and in the UK as I said, it was 23 and a half. So it's been an outlier and there's been a lot of people saying for a long time that this is too high. The Trump theory I think seems to be that this is one way to get lower US Drug prices, which is his policy objective. I think it's probably the policy objective of everybody in the United States. How do we get prices down here?
- [03:41]
C
What are the chances of that?
- [03:43]
B
Well, that's, yes, that's my rant. I think the theory of this is that prices here are high because their prices elsewhere are kept artificially low by foreign regulatory bodies, including the UK and that if we can force other countries to pay more, that will allow the American drug companies to charge less here. That is in theory a seamless argument, but it forces you to then assume that American drug companies are not simply going to pocket the money, they're actually going to give it back to American consumers in lower prices. And there I'm highly skeptical, although that seems to be the motivation behind this. Scott?
- [04:23]
A
Well, first of all, thanks Bill, for getting into the weeds on this because it is a very weedy proposal. Like most issues when it comes to medicine, the the level of transparency is very low. It's almost impossible to figure out. And that goes from you as a medical consumer. When you get a hospital bill, trying to figure out what you got charged for why is a major challenge. But likewise, these things get layers of complexity to them. So I think you've done a service to our listeners. So thanks for that. This is a problem. It's an old and thorny issue that's about as old as modern medicine itself. If you think Back to the 1960s, the early days of medical insurance, the US and Europe took opposite approaches. Europe moved to a single payer system very quickly and has kept that in in it has various variations on the theme, but it's by and large Europe as a whole is a single payer health system, whereas the United States kept health relatively private and mostly through employer based group insurance. So that was the model at the time. But if you go back to the original Medicare Part A or Blue Cross Blue Shield, which was the classic group insurer, they all mainly just covered hospital costs because the 1960s, other than, you know, maybe antibiotics, there weren't a lot of drugs that were involved in patient care. It was just the early days of pharmaceuticals. And pharmaceuticals had a huge couple of decades in terms of improving patient outcomes and really miracle cures for them. If you go back to the 1960s, there was nothing you could do for cancer. There were these things that were just untreatable diseases which suddenly were achieving great success in treatment because of the inventions of the pharmaceutical industry. But because of that early decision on structure, private group insurance through employers versus single payer, the way we paid for pharmaceuticals became equally different. And you wound up at a place where American consumers have, for decades, literally decades, picked up most of the tab for innovative pharmaceuticals. Not, not all of it, but, but certainly most of it. It's been a complaint for a long time by both companies and consumers who are aware of it now. Why is this deal of interest? Bill, I think you're right about President Trump's interests in doing it, but what I wondered is why he made the deal with the UK and frankly, there's a little bit of Swiss policy in here too. The Swiss trade agreement. I think what the President has done is figured out. When you have headquarter companies, they have the incentive to bargain and do something in, in good faith that will ultimately increase cooperation, reduce the price of drugs. So if you look at where pharmaceutical companies headquartered, well, basically the United States, the UK and Switzerland. And as those key countries have very strong patent rights and have, you know, sort of a well developed technology sector, that all makes sense. But I think that deal was especially interesting to both the UK and US Insurance interests and US Pharmaceutical companies. So just because it's a narrow group of players who all have a commercial interest in the pharmaceutical industry as a whole, I think it has a better chance of sticking than something that an agreement made with, say, all of Europe, including all industrial countries.
- [07:29]
C
Well, the administration, I believe, signaled that this is, you know, kind of the start of a number of these deals that they want to strike. Does that mean that there are actually limited countries with which to strike deals, or are there kind of a crop of nations they could reach agreements with here?
- [07:43]
A
Well, I think once you get beyond the UK you're really looking at Japan and Switzerland as the two with real industrial capacity and headquarters, sort of R and D capacity devoted to pharmaceuticals. It may be a little broader than that. I may have accidentally defended some other nation state, but by and large that's where drug manufacturers operate and that's where there's the greatest interest in sort of resolving the kind this kind of issue. Like I said, hats off that they're taking on the issue because it's a 40 year old problem and it's not easy to solve, mostly because you can't really figure out who's paying what.
- [08:16]
B
The other element of it, which is, I think, not news to our listeners, is that this is one of those industries where the cost of the actual production of the product is relatively low. The very high cost is the development of the product and the research that goes into it, which can take a long time. In this particular case, since we're dealing with public health, requires a lot of test trials to make sure you're not going to end up killing people or injuring them in some ways. So these things take time. They are approvals are heavily regulated in these countries and one of the constant complaints of the US Pharmaceutical industry has been that they need to recover all those costs. And how do they recover all those costs? And I think one of the ongoing problems has been that they, because of regulatory authorities elsewhere, they recover the bulk of those costs in the United States, which is why prices here are higher than elsewhere. I think one big data point we read is that they're triple what they are in a lot of other countries. So solving that problem directly, namely ordering the companies to cut their prices would cripple their revenue streams and have a big impact on the development of future pharmaceuticals and dealing with other health problems that we have going forward. So I think what Trump is trying to do is a creative approach and it's trying to rebalance the inequity between what other countries pay and what the United States pays. The question that is still lingering in the back of my mind is so we do all this stuff, how are the American companies going to react now that their revenue stream is going to increase? Will they pass that on to the consumer at lower prices or will they just pocket it in increased profits and stock price gains?
- [09:52]
C
We will stay tuned on that, but I want to turn next to President Trump's proposed tariff dividend guys. There's been a lot of chatter about this over the past few weeks, of course, and specifically the idea of sending $2,000 checks to and middle income Americans. And President Trump has also said over the past couple of days that tariff revenue could replace or reduce federal income taxes. Scott, walk us through all of this. What exactly has the President put on the table? And how realistic is it that people will see checks in the mail anytime soon?
- [10:23]
A
Well, this is classic President Trump being the consummate outsider because he's just throwing out ideas. There's a method behind the madness. The method is he's aware that one of the more dangerous things to do in Washington is to leave several hundred billion dollars unclaimed. Whoever is sitting around unclaimed in Washington is a little like leaving your wallet on the metro. You may recover it, but you probably won't. So that's what we're looking at here. And my view of when I heard the announcement was, hey, that's a wonderful marketing idea, but you are the wrong branch of government to be doing this. And so, for me, this is one where I want to wake up the Congress and get them to go back to work, because we're talking about a sizable chunk of money. I actually went to the Treasury Department's website and found out where our revenue does come from. It turns out 88% is from income taxes. Individual personal income taxes, 53% of revenue. The payroll tax, which is Social Security and Medicare, is 31%, and corporate income tax is 4% of the total. So that's 88. The next largest item, 7%, is tariffs and customs duties. So imagine how much time Congress devotes to corporate income tax. Are they devoting anywhere close that to that amount of time and effort to tariffs? Well, they're not. And yet it's a bigger source of revenue for the government. By the way, everything else after that falls off. Excise taxes are 1 1/2 percent. The estate tax is 1%, so it goes down pretty quickly. Now, are tariffs going to replace the income tax? Not likely, as income taxes are still the bulk of the receipts by the federal government.
- [12:05]
C
Math doesn't add up.
- [12:07]
A
Well, that part of the math doesn't. But what we have not yet done is figured out what the tariffs are doing economically. What is the rationale for allocating them to certain kinds of spending or tax reductions and not other kinds of. And that's some real work that needs to be done. We thought the conventional opinion was the final consumer will always pay all the tariffs and that they will have an inflationary effect on things. Well, it turns out that's not so obvious. There was some recent work published by the Harvard Business School. They have a daily retail price tracker, and it indicates, at least in the early days of tariffs, only about 20% of tariff charges are passed through to the end consumer. That's A lower number than I thought. And they, they acknowledge that this is rising over time. But 20% is. I never heard that number discussed that. Somehow along whether at the origin or the originating country or the retailer supply chain itself, 80% of the tariffs are being absorbed and only 20% passed on to consumers. That's a strikingly low number. So we've got, we've got things to learn.
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B
Hold on a minute, though. Axios has a tiny little chart about that, which is really interesting, but because I didn't know this either, that 20% number was true in April, in October, according to them, the consumer is paying. Now, it's a bar graph, so it doesn't have exact numbers. It looks like consumer is paying about 56, 57% of the tariff and the U.S. importer is paying, oh, 24% and the foreign exporter is paying the remainder. So over six months, April to October, the amount that the US Consumer is paying has approximately tripled.
- [13:50]
A
Yes, the Harvard retail study definitely syncs up with that of saying that their 20% number was through September 15th. But they do acknowledge that it's rising over time. So there's an equilibrium that hasn't been achieved yet. Okay. Also in terms of the inflationary effects of. The San Francisco Federal Reserve Board issued a report that looked at 150 years of tariff shocks and found that they do tend to slow the economy, but they're generally negative on inflation. They generally, they reduce inflation over time. So what I'm suggesting by mentioning those two, they're not really outliers. They just, they're contrary to the conventional opinion. I, I mentioned them because we've got things to learn and we ought to be learning them in places like the Joint Tax Committee or some other body on Capitol Hill where you get with the group that is going to make decisions about what to do with this tariff revenue. And they're using the best evidence of where it might offset a downturn or something unaligned in the economy. So I think there's an opportunity for them to get to work just on fact finding. But more importantly, look, there are two other reconciliation vehicles available to them. So if you take one of those now, you need 51 votes. So it's not a huge hurdle. And you have a two titles. You have a trade and tax title where you deal with the tariff issues. You take existing agreements and codify them. You make decisions about what, where the President's authority begins and ends. And you put that into the trade title. And then you have a health title which deals with the individual market and the Affordable Care act. We have a risk pool that's inherently unstable. You either need to subsidize people or insurers or you need to create coinsurance or something. There are two projects the title Congress faces. They've got a perfect vehicle to do it without a lot of obstruction and they ought to just do it. But nobody seems to be working on that, so.
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C
Well, Bill, what do you make of all this and is the Hill likely to be synced up with the administration?
- [15:42]
B
Well, from a process point of view, what Scott's talking about might happen, but it's going to take a little while to do a reconciliation. Bill. You need a budget agreement, and that's sort of the first step. And I don't.
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A
There isn't one now.
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B
You're right, there isn't one now. So they have to go through that, which is not easy. There does seem to be a general agreement that this is something that would require legislation that the president simply can't hand out money. So in that sense, it's not going to move as quickly as it might. And Secretary Besant has said that they're not going to make a decision about this until after the Supreme Court decision on tariffs because that decision might affect the volume of money coming in, and.
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C
That could be in June.
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B
Well, and I think it's going to be this month. I'm an optimist about timing. Yeah, well, it's been on a fast track from the beginning. But I mean, Alex, you're right. From the beginning, the math doesn't add up. There are different estimates of how much this would cost, which depend on who's covered. You know, apparently they're going to cap it at taxpayers making less than 100,000. But sort of unstated. Is that per taxpayer, per filing entity. So couples filing jointly or what about children? You know, so if you're a family with six kids and two parents, is that eight $2,000 checks? Is that one $2,000 check or is that two $2,000 checks? All of that remains to be decided. The Yale Budget Lab, which I have a lot of confidence in, thinks that the cost could reach around $450 billion. Whereas you've got a different group, the Tax foundation, making a revenue estimate, depending again on what happens to the tariffs of somewhere between, well, this year 158 billion and next year 208 billion. So even if you add those both years together, you're coming up short in terms of what it might add up to for a policy perspective. Rant coming on Here, stand by. I gotta tell you, I love the Washington Post this morning had a cartoon about this that was just great. It had a taxpayer with a wallet in his back pocket with dollars floating out of his wallet up into a very complicated circuitous system of tubes that ended up with at the end of the tube, out came a $2,000 check in his other hand. Giving new meaning to the term circular economy. You know, we. We tend to think of circular economy as something to do with recycling. What we are doing here is we're recycling the money. We are taking it out of the taxpayer's hands via what is essentially a tax. And now Trump wants to give it back to him in the form of a check. You know, you could save a lot of trouble here. Just let him keep the money in the first place and not have the tariffs. But that doesn't seem to be in the cards. But it is not sound policy.
- [18:26]
A
No.
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B
From the standpoint of a deficit hawk, and I'm a proud deficit hawk, and one of the things I have never forgotten about the Clinton administration is he's the last guy to actually run a budget surplus, and he deserves more credit than he's gotten for that. He actually reduced the national debt at the time several years running. What Trump has done is added 3 trillion to it, thanks to last summer's bill. And there's no way that the tariff revenue is ever going to pay for all of that. But what he's proposing to do with this check is even worse. He says, let's not use it for some responsible purpose. Let's just give it back to the people that I've taken it from in the first place. Makes no sense. I'm frustrated.
- [19:05]
C
Well, Bill, I want you to stay in rant mode here because I want to end today's episode with a debate. It's been a busy year, and one of the biggest questions that I've heard asked in town is what works better in trade negotiating strategy, bullying or persuasion? So, Scott, I'm going to start with you. I know you have a lot of thoughts here. Historically, which approach has been more effective? And has President Trump shifted that paradigm in this first year of his second term?
- [19:33]
A
Well, it's always refreshing to talk with the Washington audience about manners because the city of Washington and our government in general is. Is known for its, you know, for.
- [19:44]
C
Its very refined group.
- [19:46]
A
Yeah, but look, I've been in a lot of negotiations in my life, and I've never found the notion of persuasion and pressure to be either or. I think a good negotiation often requires both in different measures. Persuasion is very important because your counterparty, you can help them reach a conclusion that is different than the one they came into the room with if you persuade them effectively. On the other hand, it takes pressure to close a deal. For me, there's a confusion in that question. The fact that it's being posed, that happens a lot in capitals, Washington not excluded, which is the confusion between results and process. A lot of trade people are very good at what they do, but they worry a lot about the process and about whether we're doing all the things we need to do to manage the system itself and not be concerned at all about the results. So I think you do need both. I think that we've been light on pressure in recent terms and in some ways President Trump is the counterweight to that because as a negotiator he's, he's heavily dependent on pressure. I did note the Financial Times crying some crocodile tears with the poor European Union and how badly they were treated by that bully President Trump. My advice is, you know, elect better negotiators, elect better officials. But for me it seems absurd because I dealt with European negotiators over the years. I remember about 20 years of going to the, the Deputy U.S. trade Representative's office in Geneva, the full deputy job, our ambassador to the WTO and is a bipartisan consensus that the European operation in Geneva wasn't, was an explicitly anti US operation, that their, their job was to convince us it was still 1949 and we were still the victors of the war. They were still poor and starving and, and we should just allow them to handle all their internal differences and give us the result and we should just take it. So been very frustrating over the years to deal with Europe. I was particularly enthralled with President Trump's treatment of them in July because I think that's been a long time coming. It reminded me of a little bit of a scene in Goodfellows, but it was effective and it did take people aback and the US Got better terms of trade out of it. That's ultimately is the measure. Did you achieve improved terms of trade? And if you did, then you probably used both persuasion and pressure. But however you did, it works for me.
- [22:14]
C
Bill?
- [22:16]
B
Well, I endorse Scott's rant about the eu, but I won't repeat that. I looked at it a little bit differently. I think if you look at it historically, both approaches work. The conventional let's have a negotiation that produces a win, win outcome. We'll concede some Things you concede some things that worked in the sense that it produced, I don't know what, 18 free trade agreements over a relatively long period of time. And going back to Scott's point, you can make a results analysis of whether those agreements were good or not. But from the standpoint of the presidents that engaged in the negotiations, they achieved their goals. You know, they brought the agreements across the finish line and put them into place. And in the cases of some of those administrations, I think the articulated objective, Obama being the best example, was to demonstrate in the case of Asian agreements, the US Presence in and commitment to the region and to develop better relationships with those countries. It was not just how much rice we were going to sell the Japanese. It was a geopolitical goal. And I would say that historically the nice tactics worked. They also produced subsequently the criticism of what these agreements led to is job loss, globalization and things that we've talked about in the past. And there's some truth to that, too. You can also make a good case that the bullying tactics of Trump also have worked in the short run he's produced. I mean, to me, these agreements are unfinished and unenforceable. And we're in a state of perpetual negotiation because he'll keep going back for more and we keep having to refine the things that were punted from the original talks. But there are tangible concessions there that are good for the United States. So he achieved results his way. His predecessors achieved different results their way. In both cases, the results they achieved were the results that they wanted. So what you need to do is look at the long term, not just the short term, long term, as I said, some of the agreements that were negotiated earlier have not held up so well in the light of the impact on the economy. In the case of Trump, it's going to be interesting because there is no long term with Trump. So it's too soon to say what's going to happen to these agreements. The issue will be these are not agreements that have improved bilateral relationships. I would argue they've left a number of countries that are embittered by the way they were treated. And so the question is, what are they going to do? And the interesting thing about that is there's a test of that coming up very soon that's going to be novel because it's a multilateral test and Trump doesn't like multilateral organizations, but he stuck with one in this case, and that is next March, the WTO sponsored moratorium on taxing the Internet expires again. It expires every two years. This is enormously important for. For American tech companies. The administration has taken the position that it should be renewed. In fact, it should be renewed permanently so we don't have to go through this every two years. And it's clear that when the. The next WTO ministerial comes around, which is the end of March in Cameroon, where this has to be dealt with, the United States presumably will be there arguing for a permanent extension. So who's tried to block this every time for the last 15 years? India and South Africa.
- [25:40]
A
Those bullies?
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B
Yeah. Which are the two countries that we are squeezing hardest right now on trade policy. Who just got kicked out of the G20 or got disinvited the next year's G20? South Africa. Who just had 50% tariffs put on them because they're buying Russian oil. India. So we get to Cameroon next March, what are those two guys going to do? And Trump is, in this particular case, stuck with a multilateral arrangement. So it'll be interesting to see how bullying pays off. Then maybe he can pull it off. I hope so. I mean, on the merits, I think the US position is right, but it's not clear to me that you can go around humiliating, you know, all the people you have to deal with in the future that you're going to ask them to do you favors.
- [26:23]
A
Well, that's true, but at the same time, I think America first is not equivalent to bullying. I remember in Trump's first term, there was beginnings of negotiations of a UK US Free Trade Agreement, and the British Embassy set up a number of courtesy meetings with business community members. One of them was with a member of the House of Commons, and he was asking about our opinion on things. And one of the comments he made that has stuck with me over these years is he says, I have no problem with President Trump putting America first. I'm going to put Britain first in our negotiations, and I would only expect him to put America first. So I worry less about the manners. We've got a guy from Queens, but he's our agent. He's the guy who's making the deals for us. And I think that putting too much on his style versus his intent, which is, let's put our country first, are different things and may have different results.
- [27:15]
B
Ah, you're being too kind. This is a question in a sense of process. All of our presidents, I think, have put America first. I think the previous ones have approached trade negotiations as, let's look for win, win outcomes. Let's look for outcomes where we get what we want. But that doesn't mean the other guys can't get something too well.
- [27:36]
A
Yes, and you're right, Bill, because the beauty of trade is it is win, win at its essence. Free exchange between individuals doesn't happen unless both parties are better off.
- [27:47]
B
Yeah, but Trump's a zero sum guy, you know, he doesn't win unless somebody else loses. And that's the issue here. His negotiation style is I get everything, you get nothing, I win. And the question, the long term question is does that come back and bite him or doesn't it? You know, there has been much less retaliation so far, certainly than I expected. China and Canada are the only ones that really have done anything. So maybe he'll continue to get away with it. We'll see. But there will be a test point next March that'll be very interesting to watch.
- [28:18]
C
We'll be watching it. We'll revisit it then. Trey guys, good to see you. We'll be back next week and we'll see everybody else then.
- [28:24]
A
Thanks.
- [28:25]
B
Thank you.
- [28:30]
C
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