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A
I'm Scott. I'm Bill and we're the Trade Guys.
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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 Phil Luck and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys. This week we'll be discussing oral arguments for IPA tariffs, EU regulation and exports of high powered chips to the uae. All this and more on the Trade Guys. Hello and welcome to this week's episode of the Trade Guys. I'm Phil Luck here with Bill Reinsch. It's just the two of us this week as Scott is taking a well deserved week off. And today we're going to be talking about trade and regulation across three different policy spaces. First, we'll be unpacking the Supreme Court's review of the IPA tariffs the President put in place and what we've learned from the oral arguments. Next, we'll be heading over to Europe to discuss the corporate sustainability and due diligence regulations, very fancily referred to as CS3D. And then lastly, if we have time, we'll talk a little bit about exports of AI chips to the UAE and what that tells us about US Regulatory landscape and economic security. So first, let's start off with the biggest news of this week, which we all listen to on our phones and whatever other devices, which was the oral arguments for the case of the IPA tariffs or Liberation Day tariffs, as well as the fentanyl tariffs that were put on early in the administration in February. What's at stake here is the President's ability to impose what turns out to be billions of dollars worth of tariffs on basically any partner with really quite a bit of latitude so far. So to unpack this bill, I'm definitely not a lawyer, so tell us, what was your take from this?
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A
Neither am I, but I pretend to be one on occasion. I think the first thing to say about it is that while this is a decision that's going to have a huge impact on the powers of the presidency and the relationship between Congress and the executive branch, it's probably not going to have much of an impact on the actual tariffs because, I mean, if Trump wins, the status quo continues. If he loses, I expect him to reimpose the tariffs pursuant to other statutes. They don't fit as well. And if you want to know what the options are, there's been plenty of studies on that, but we produced an early one a year ago listing all the various options and you can find it on the website. It's by Warren Murayama and myself. He'll be sued if he does that, and he'll probably lose again because the other statutes are more problematic than this one. But the courts have indicated so far that they're willing to let the tariff stay in effect while the litigation proceeds. So my prediction on outcome is Groundhog Day. Basically, we're going to see the same thing repeated over and over again. Lawsuits, he loses, he does it again. Another lawsuit, he loses again, he does it again. Plan B, plan C, plan D. So if you're a company out there expecting a lifeline here, don't. It's not likely to happen. I mean, there'll be differences. He can't reimpose everything very easily under other statutes, but you can bet that he's going to try. As for the oral arguments, you know, we did all listen, but because it's audio only, unless you know their voices really well, it's not always easy to tell who's asking the questions unless they say acknowledge. Well, Justice Kavanaugh, that was a good question, but it's also complicated because we've seen this before in other matters. The justices really enjoy torturing the attorneys with really complicated questions and extreme what if scenarios. Does your position mean that the following outrageous thing could happen and they tend to be equal opportunity torturers? The justices that went after the administration lawyer, Solicitor General John Sauer, also went after the plaintiff's attorneys. And so it's a little bit hard to draw definitive conclusions. I would, however, say a couple things. One, it appeared that the big issues are what we expected, which is the delegation question, how much authority can Congress delegate to the executive and whether they overdelegated in this case. And related, what's been known as the major questions doctrine, which the chief justice raised in the oral arguments, which holds that if Congress is going to delegate authority on a major question, something with big social or political or economic impact, it needs to do it with guidelines and restraints and rules about how that authority should be exercised. And so one question here is what whether that doctrine applies in this case, because the administration claims it does not, that it does not apply in foreign policy cases. And Justice Kavanaugh, I think, had some sympathy for that view, or at least that the president should get more latitude in a foreign policy case, which also then raised the subsidiary issue of is this a foreign policy issue or is it an economic issue? And I think the justices were a little bit up in the air about that. The related major questions doctrine it raises is if it is a major question, and I think the bulk of them would answer that question, yes, it is. Then the question becomes did the Congress provide appropriate guidance to the executive? And there, of course, the administration would say yes and the plaintiffs would say no. And it was not clear, at least to me or the justices will come out on that. It's also there were other issues that came up, some of which surprised me, and I'm not going to go into all of them because there's not really time. But one of them which was expected was whether the IPA language, which is regulate importation, was means tariffs or includes tariffs. Plaintiffs say it does not. The administration says it does. And I think there were mixed discussions about that. And a very they went down a deep rabbit hole over what is a tariff, what's the difference between a tariff and a license. I think some of them very clearly thought a tariff is a tax and Congress has taxing authority, uniquely, the executive does not. And so because it's a tax, the Congress should be doing this. That then raises the question of can Congress basically cede that authority to the executive on a case by case basis? And I think the plaintiffs would argue no. So that came up. The other issue was the revenue issue, which was talked about extensively and this produced I think probably some eye rolling amongst the audience in the room. The revenue issue is important because if it raises money, it's probably a tax because that's what taxes do. And the administration claimed that the revenue raised was incidental. And I think that's what produced the eye rolling. Since Trump has spent the last six months bragging about how much money they're raising. The last thing he said about it was trillions, which like most things Trump says was a gross exaggeration. I think the current count is the tariffs that are actually subject to the case, which is not all of them. It's not the 232 ones. The tariffs that are subject to the case so far have brought in about $90 billion, which is not peanuts. And so that is a tax. The administration says incidental. I don't think anybody's going to buy that. It did allow Justice Barrett to raise the question, which I think is irrelevant, but it was interesting of how are these people going to get their money back if the President loses? And she said, wouldn't that be a big mess? That was her statement. And that particular question I think was not well answered by the attorney for the plaintiffs. In fact, there's a long standing in law and regulation process for doing that. It's a well established system. Freight forwarders, custom brokers know how to do it. They do it all the time. Customers makes mistakes, things happen, people want to get their money back. And it's common. The administration could make it very complicated if it wanted to, if it doesn't want to give the money back. But the process is there. So where I ended up on all this was probably five to four, six to three against the president. Actually, I think the three liberal justices will vote against the President. I think Thomas, Alito and Kavanaugh will probably support the president. They'll kind of have to tie their knots themselves in knots to do it because these are the same guys that ruled against Biden's exercise of similar authority in his administration. And so they're essentially going to have to say that when Biden did it was bad, but when Trump did it, it was good. And I don't know how they square that circle, but they'll find a way. And that leaves Barrett, Roberts and Gorsuch in the middle. My gut feeling is just that at least two of them, maybe all three of them, are going to go against the President on this. So, Phil, what do you think?
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Yeah, well, I mean, I'm definitely not going to put odds on it because I would just be repeating what smarter people than me might have said. But it does. You know, everything I'm hearing and reading seems to be that it looks like potentially they're going to go against the president. I want to just pick up on a few really interesting things you said. One was your point about the administration arguing this is a regulation and not a tax. I think that's fascinating for a few reasons, because one reason they have to do that is because, of course, IEIPA does not explicitly say it gives the president authority to tax or tariff. The other thing that came up in the oral arguments, which I thought was fascinating, was it doesn't just not say taxes or tariffs. It says a lot of other things. So it's specific, but just not about taxes. So it says it can regulate, investigate, direct, compel, nullify, avoid, prevent, prohibit. So if you're going into all that specificity and leaving out something that's this major, I think that was something that the justices sort of keyed in on. Also to your point about sort of the major questions piece of this, you're exactly right. I mean, I think there is going to have to be sort of seemingly gymnastics to sort of say certain things that the Trump administration is doing. You know, it was okay for Trump, but not for Biden, I'm curious, you sort of mentioned the Barrett of it or I'm sorry, I can't remember if it was Barrett or Kavanaugh. The fact that potentially there's more latitude and foreign policy. So famously one area where Biden did use similar authorities and was ruled down on the major questions issue was with student loan forgiveness. Right. And the idea there was this is more economic policy. So potentially that's the escape hatch of this is foreign policy. The other reason why I think it's fascinating that they're trying to argue this is regulation versus taxation has nothing to do with law, but everything to do with economics, which is the reason that this is working to the extent to which it is, economically speaking is because of its effect on the budget deficit. Right. So the basic argument is in aggregate your trade deficit is a function of how much you as an economy are saving versus spending. And if you are borrowing against the world to fund your consumption, you're also going to be importing more than you're exporting. So to the degree to which any economist has sort of modeled this and thought that this would reduce the trade deficit. And it's exactly because it's a tax, not necessarily because it's a relative price change. So it's interesting, you know, again, this didn't come up in oral arguments at all. I don't expect it to be part of the briefs, but to me it's an interesting little quirk here.
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A
No, just what they've demonstrated is what we've known a long time. These guys basically don't know anything about economics. They're all lawyers, they're not economists. And probably, unfortunately, because you're right, I don't think it's going to be decided on economics. It's going to be decided on legal constitutional issues.
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B
Yeah. And I guess I can't throw stones because I don't know the first thing about law. So, you know, I'll stay in my lane, but seems like they won't stay in theirs. The last thing I would say to first point about like, okay, what does this all matter? Regardless of how it comes out, assuming that this is in any way clawed back or this authority is clawed back a little bit, I totally agree that in the long run, in terms of the President's authority to do these types of things, I think that matters a lot. I think it was Gorsett who said if you give the President this authority, it's a one way ratchet. Right. It's just this is not an authority that's going to Come back to Congress. Right. The presidents are just going to keep using this. So in long run, I think it does matter quite a bit. But to your point about this administration, I think they've been thinking that there's some risk of them losing this power for quite some time. They have plans B, C and D. They may not be quite as dexterous as this one, but I think they will find ways to impose pretty significant tariffs.
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Yeah, if the President loses, we'll need to do an episode on what happens next. There are lots of options. I think probably the one he likes is the section 232 national security option, because that also pretty much lets him do what he wants. And there are procedural speed bumps there. You have to conduct an investigation. I mean, they can phony that up, but you have to do it. And there's. There's paperwork involved. And the other problem that he'll discover with it is you have to sort of do it product by product, you know, or sector by sector. Steel is a threat, I guess. Last month, kitchen cabinets and bathroom vanities were a threat. I mean, we can laugh about this, but winning in a lawsuit means you have to convince a judge that he knows more than the President does about what a national security threat is. Now, I think some of these things, like the kitchen cabinets, may not pass the laugh test. And that I wouldn't be surprised to have a judge just say, you know, if you go that far, that's just ridiculous. You know, nobody believes that. There is litigation, I think, also pending now on, I guess, what's known as the derivatives, because when Trump imposed tariffs, particularly on steel and aluminum, he imposed them on downstream derivatives of those products, which has produced a list of, I think in the steel case, more than 400 items, including knitting needles and crochet needles, which we've made fun of on previous episodes. Of course, you know, if your plan is to assassinate somebody, stabbing them with a knitting needle actually could do the job if you can sneak it in underneath your coat or in your sleeve, probably. So maybe it really is a threat, but on its face, it sounds silly. And I think there's a lawsuit about that, so we'll see how that turns out. The other statutes all have other strings attached. Some of them have limits on how high the tariff can go and how long it can last. And in fact, I think if the President loses, the reason he will lose in this case may well be that the tariffs that are unbounded. And the only previous case that's applicable, which did come up in passing, although not as much as I thought, because the lower courts really rested on. This was called the Yoshida case, which was done in the wake of Nixon's tariff increases in the early 1970s. And in that case, the President actually won. But then there was this big debate about wording. And one of the issues that has come up is that Nixon's tariffs were time limited and scope Limited to 15%. And as I recall, and not every country. And Trump's tariffs, of course, are not limited in any way by size, scope, or duration. And I think the essence of the major questions issue is that Congress really provided no guidance, no guardrails, no constraints on the President, and that they should have. So we'll see.
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B
Yeah. Regardless of how this comes out, I would certainly encourage Congress to rethink certain statutes of ipa. I think it could use a refresh.
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I think I mentioned this before. I am so old that I actually was in Congress and worked on this peripherally, because it came up like two months after Senator Hines took office, and I was on his staff at the time, and he was on the Banking Committee, and he was one of the people that had to vote on it. And there was very little work done the year it was enacted, because most of the work was done in 1975 and 1976. It just never got across the finish line. So in 77, it came back up virtually finished. But I think it's fair to say at the time, the whole mindset of Congress having been through the Nixon experience and also through Watergate, which had an impact on everybody at the time, the idea was to constrain the President, not to give him unfettered authority. It was try to impose some limits on what he had done, what Nixon had done, and Trump is essentially moving in the opposite direction on that. So if they make any attempt at all to go back and think about what the members of Congress were doing at the time or saying at the time, which they generally don't do, but if they did, I think they discovered the point of the act was to put limits on the President and not to remove them.
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B
Interesting. That's fascinating. I'm going to have to follow up with you on that offline. I can't help but go back to the knitting needles really quickly. I recently found out, because my wife's a knitter, that you can bring knitting needles on the plane and you can get them through tsa, which seems like a risk to me. So I think there should be a rule. If you can bring it on a plane, it doesn't cause A national security risk.
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A
Or maybe it has to have a blunt end. Maybe that would do it. Sort of like foils when you're doing practice fencing.
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B
There you go. All right, well, we'll move off of US regulation for a minute and go across the pond to Europe. Bill, can you help us understand what's been going on the last few weeks and months with what's called the CS3D?
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A
Well, it's reached a point of confusion actually, because the Parliament most recently voted down a recommendation for some amendments by one of its committees. Nothing is simple in the European Union. The letters stand for Corporate Sustainability Due Diligence Directive. And it started out as an effort to eventually require companies initially of medium to large size, and one of the amendments would confine it to large size companies to actually go back and sift through their supply chains and their suppliers looking for child labor, slave labor, human rights violations of various sorts, environmental crimes, you know, a wide variety of non sustainability things that the EU disapproves of. And when companies had to start doing that, which is in the future, it has not only part of it has gone into effect so far, which I'll get to in a minute, the companies not only have to identify and find these problems in their supply chains, but they have a duty to mitigate them and make them go away. And they can be fined, in the original proposal, up to 5% of their global revenue, as I recall, which could be quite a bit of money. I mean, none of that has actually happened yet because the way the directive is phrased, it's not a regulation, it's a directive. It went into effect in July of 2024. Countries have two years to build the provisions into their domestic laws. So this is going to be administered nationally and the countries are supposed to build it into their domestic laws by July 2026 and then compliance periods start. The original proposal was for smaller companies, that is those over a thousand employees and a total turnover of I think 450 million euros had a year to comply. 2027, medium sized companies, 3,000 employees or more, had two years to comply. 2028. And the big guys, those with over 5,000 employees and over one and a half billion euros in annual turnover, had until 2029 to comply. That hasn't stopped the lobbying. And the lobbying, it's been vigorous. That's what's interesting about this, because it's another case of the left and the right ganging up on the center, although in this case for opposite reasons, the right would like it to go away, basically. I think they would argue it's woke capitalism and we shouldn't be doing this. It's going to make European companies non competitive. It's going to make it very difficult for companies to compete if they're constantly have to monitor their supply chains and force their suppliers to do things that are going to make everything more expensive. It also raises the question of what position a buyer is in essentially to force his suppliers to do things they may or may not want to do. The left, of course, thinks this is good and would like it to be stronger. And the vigorous business lobbying by both European businesses and of course American businesses, because foreign companies have to comply with this as well if they meet the 5,000 and the 1 1/2 billion turnover standard in their European operations. So that's going to impact a number of large American companies. They're not very happy either. So there's been a lot of pressure and it's sticking. Both the French President Macron and the German Chancellor Friedrich Meirz have called for either changes or repeal of the directive. And the outcry was sufficient to get the relevant European Parliament committee to propose some amendments. And the amendments basically dumped the lower levels of compliance. So the only level of compliance now is for big companies, more than 5,000 employees. So that would substantially reduce the number of parties that are affected by it. And they also dropped a requirement in the directive that companies have to develop a transition plan for dealing with all these problems. And one of the requirements of which also I believe is they have to comply with the Paris Agreement's climate emissions standards as well. So companies are upset about that. But the compromise that I just referred to was voted down in the Parliament near the end of October 22, I believe. Narrow vote 318 to 309. And what it was was the left and the right ganging up on the center. So it's gone back for retooling. There will be another vote right now scheduled for November 13. There is not yet a new proposal out there. My guess is that the center will come up with another compromise, see if they can scrape together nine more votes, well, ten more votes and get it through that way. And then we'll see what happens. From my perspective, just to make an editorial and then I'll yield to Phil to make his editorial if he wants to, is this is another example of the EU approach to regulation, which is pretty detailed and prescriptive. Imposes a lot of burdens on companies, paperwork burdens, reporting burdens. There's also something called the Corporate Sustainability Reporting Directive. I believe it's called csrd that imposes a lot of reporting requirements in these same areas. So a lot of paperwork. And the net effect, I think in the minds of the companies is this is really a distraction from what we're supposed to do, which is to make products or provide services, hire people, create jobs and economic growth. And this is going to retard all of that. And I think they've got a point. And the European Commission has made much of the fact over the years that they want to be a first mover in regulation. They want to be a landmark of sustainability, controlling emissions, standing up for human rights. And these are all good things. And the debate isn't over whether the things are good or not. I think the debate is over what is the cost of these things, because all of them run counter to efficiency. And if you're competing in a world in which everybody else is basing their business models on efficiency and you're not, you're going to end up being non competitive. I think that's what the issue is about.
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B
Yeah, I couldn't agree more. Now, I was going to get to the Brussels effect in the European model in my editorial as well. So I mean, this is like well understood that Brussels really tries to lead by example in these regulatory ways. And in some ways they've been very, very effective in that. I mean, I think the proliferation of things that are similar to the Digital Markets act is a good example of that, which you've done great work on and we've done work as a program on. So I think to your point, I want to sort of dig on, on two things you said. The first is this is sort of the model, right? And I think there's sort of two goals here, at least the way I see it. One is sort of genuinely good, admirable goals which are getting forced labor and environmental degradation out of supply, things that we can all sign on to and are trying to solve genuine market failures and problems. I think it's important to note though that like, there is a second motivation here, I think generally, which is the Europeans have, at least in my opinion, this is definitely me editorializing, have thought about this as having two benefits. The one is you raise standards. The other is if your industry can sort of meet those standards more effectively than other countries, then you will create protection in some sense for your industry. Right. If Chinese firms can less easily show that there's not labor in their supply chains, you'll have protection in some sense. I think one thing that's really interesting to Me, and I've sort of seen this in the tea leaves of the debate here, is I think there's less of a sense that they think that's working.
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A
Right.
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B
They think that more and more to your point, the drag on the competitiveness of European industry is outweighing the sort of protection that those firms can get because they can meet these higher standards more effectively. And so that protects through regulation. I think the balance is potentially off. And again, you're saying that through the French and the German sort of push back on these things.
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A
I think you're right. The support for them is waning a bit. The other reason why that's so is because that support tends to decline as the point of compliance gets closer. We've seen this with the cbam, the carbon border adjustment measure. Everybody was for it as long as it was this abstract good thing out there. But once companies had to start reporting their emissions and starting next year, companies have actually going to have to pay for their imports to the extent they don't meet the emission standards. Suddenly people have gotten a lot more worried about it because now there's going to be an economic cost and in that case there's going to be a price effect. So, you know, as people begin to confront the reality of what they voted for the first time because it sounded like a good idea, we found support waning. And so I think what's happening in Europe in terms of public opinion is that while there's still substantial numbers of people who think this is a good idea, I think more and more people are realizing, yeah, it's a good idea, but it comes with costs. And maybe we didn't take the costs into account sufficiently when we decided to do this.
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B
Yeah, totally agree. And I mean, again, I applaud them for the effort in the sense that it would be a different place if they had others moving with them. Right. If the United States and others were also trying to hold themselves to a high standard, it would be easier.
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A
Well, that's what they want. Their idea is be first mover and everybody will follow the eu. But you're right, everybody's not following the eu.
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B
Right. So that puts them in a tricky spot. And the last thing, really quickly, I want to say on this. So we at CSIS just yesterday hosted a really interesting event on federal statistics for economic security and just indicating just how important statistics are. The thing that I think is interesting about this, and obviously this regime is not specifically about economic security in any particular way, but it does solve or tries to solve problems that we are confronting in other spaces, which is understanding supply chains. Right here it's about forced labor and carbon, other issues. But you know, in the United States we're more and more realizing that our industry, whether it was Covid or the rare earths issue we're having now, doesn't always have really great knowledge of its supply chains. And the private incentive to diversify or de risk might be smaller than sort of the external security issue. So, you know, again, I don't imagine it being solved in this case. But like we are all going to have to start thinking about what cost do we need to bear potentially in order to sort of make sure our supply chains are somewhat secure. And speaking of supply chains, we'll really quickly, in the last few minutes here talk a little bit about the United States selling some things to the uae. So recently, I think just this past week Microsoft was granted an export license to sell basically thousands of Nvidia chips to the UAE as part of a sort of joint venture with a firm called G42. Bill, as a former undersecretary at BIS, I would love your take on this granting of export control licenses.
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A
Well, I have mixed feelings because I think it may be the right policy, but the UAE is not the place to begin, I guess is the bottom line. We've talked about this numerous times on the podcast before. The dilemma of the export controller is always to walk the fine line between under controlling and over controlling. If you under control, the bad guys get stuff you don't want them to have. But if you over control, you kneecap your own industry, you prevent them from raising the money that they need to develop next generation products. The administration when it comes to AI seems to have seized on the danger of over control. And I think they are right about that. If you listen to David Sachs, the White House AI guy, his approach is the way for the US to maintain AI leadership globally is to flood the zone, get everybody to buy our products, make the American AI tech, stack the global standard, and basically outrun and outmaneuver the Chinese. I think he's probably right about that. But the reality of export control enforcement is if you're trying to do that at the same time you're trying to keep the high end out of the hands of the Chinese to make it more difficult for them to run as fast as you are, you really have to do a lot of due diligence to make sure that you're selling your tech stacks to people that are going to keep them and not let them go to places that you don't want to have them. And if I were going to do that, follow that policy, I think the UAE is not the first country I'd start with. There's a long record of leakage from the UAE to both China and to Russia actually on a host of technologies. We haven't shipped the chips yet, so nothing's happened. But based on past precedent, the UAE has not demonstrated, I think, either the policy commitment or the enforcement infrastructure to make sure that stuff that is sent there, even if it's for data centers that are going to operate there, it's actually going to stay there and that not some of those chips are going to leak outwards to places that we don't want to have them. So, I guess good policy. But I would not have started with the uae. I would have started with NATO allies and close friends where we have confidence in the integrity of their enforcement programs.
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B
Yeah, I totally agree. I mean, I think when I was in the last administration, I was definitely a voice trying to push for run faster and make sure your firms have the revenue to do the R and D that keeps us moving forward. And so I think that this administration has certainly moved in that direction. The exact point that you want to be at, it's always a value judgment. To your point, though, it sends a bit of mixed signals. I think that the UAE is the first one here. I visited Dubai and Abu Dhabi as a diplomat. I was there for exactly this issue, basically asking them to do more controlling of US Products that were transiting through free trade zones there in Dubai. So, you know, again, I think for these chips, hopefully they've put enough in place that it's a deal where with basically one other firm, hopefully that's the case. But again, the system, in the most benign description of the term, the UAE is a transit hub. Right? They're an enormous transit hub for trade. That's essentially a big part of their business model. And they have not mirrored a lot of the export controls the United States has tried to get other partners to do, especially with the case of Russia. So, again, it's a fine policy in the macro sense. I think diplomatically and maybe geostrategically, there are reasons to think that we maybe could have gone with a NATO partner or something like that.
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A
Of course, the other interesting thing about this, and then we really should close, is that it's creating some stir in the United States because for the China hawks, the decouplers, this is a bad thing for the reasons I said, because they're much more focused on the possibility that actually any chips, not just these, which are the high end, but any chips might be sold to China. So I think there's some rumbling inside the administration because Trump appointed a number of decades couplers, but they're certainly grumbling in Congress about this and it'll be interesting to see how this plays out.
- [30:35]
B
Yeah, absolutely. All right. Well, with that, let's wrap it up. That's this episode of the Trade Guys. Thanks for listening. Join us next week where we'll continue to explore trade policy and all this economic security issues. Thanks a lot. You've been listening to the Trade Guys, a CSIS podcast. For more audio content, visit csis.orgpodcasts thanks for tuning in.