After US-Japan Trade Deal, What’s Next in Trump’s Trade War

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1:55Bloomberg Audio Studios. Podcasts, radio, news. I just signed the largest trade deal in history. I think maybe the largest deal in history with Japan. With about a week until President Trump's August 1st deadline for trading partners, Japan and the United States have announced a new agreement. There's a photo circulating on Twitter from Dan Scavino, You actually see a sharpie X out of some what looks like preliminary deals for even more concessions with Japan. My colleague Anne-Marie Horder interviewed Treasury Secretary Scott Besant on Bloomberg Television this morning. I want to ask you about this 15 percent tariff rate.

2:34Is that the new floor now for trading partners when you're going into these negotiations? Well, I think it's very important to know that, you know, 15 percent for Japan for reciprocal tariffs for autos, that is a different kind of deal. But because the Japanese proposed a very innovative solution. Notes and marker, last minute maneuvering, different kinds of deals. These are the hallmarks of trade negotiations in the Trump era, along with policy pronouncements on social media and in letters. Suffice to say, this is not the way trade talks traditionally unfold. That's something I heard directly from two former officials, both of whom oversaw U.S.

3:16trade policy. Bob Zellick. I was the U.S. trade representative from 2001 to early 2005. I also worked on trade issues in the Bush 41 administration, particularly NAFTA and the Uruguay Round, which has created the WTO. And Mike Froman. I was U.S. trade representative between 2013 and 2017, and I too worked on trade issues before that as deputy national security advisor for international economic policy in Obama's first term. Froman and Zelik spent years crisscrossing the globe in pursuit of trade deals. As U.S. trade representatives, they argued with trading partners over semantics, words and phrases in agreements, some of which were thousands of pages long.

3:59I wanted to bring these former USTRs together to ask them what they make of President Trump's trade war and what they think will happen next. Zelik says it continues to be tough to identify the president's motivations. What's your goal if you're going to evaluate this in six months or 12 months? Trump sometimes says, well, it's to raise revenue. Well, then you're not going to have to block all trade. Sometimes he says it's to protect specific industries. Sometimes he says it's to lower barriers. Sometimes he says it has nothing to do with trade. It's because he doesn't like the Brazilian leader's politics.

4:32He's worried about sort of fentanyl and sort of other issues. So it's a moving target. Froman represented the U.S. in negotiations over the TPP, the Trans-Pacific Partnership. That was a trade agreement with a dozen Pacific Rim countries that make up 40 percent of the world's economy. The U.S. never ratified it, in part because of political pushback from President Obama's own party, something President Trump and his trade team haven't had to deal with. I think we're involved in a grand experiment. And sometimes I think to myself, gee, as a U.S. trade representative, I would have loved to have been able to threaten and impose tariffs as a way of increasing my leverage at the negotiating table.

5:15And we'll see. It does create potential tensions with allies and partners. What's unclear is how far he can push it. I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, we bring together two former U.S. trade representatives, one who worked for a Republican president and one who worked for a Democrat, to discuss President Trump's efforts to reshape the global economy.

5:46The first thing I wanted to know was if anything President Trump has done when it comes to trade policy was unexpected if this trade war has played out the way Mike Froman and Bob Zellick thought it would. Here's what Zellick told me. Well, it's not a total surprise because Trump has had a strong protectionist streak since the 1980s, first focus on Japan. In his first term, Bob Lighthizer, his trade representative, had a protectionist streak, but Bob also knew how to conclude deals. And so he redid the NAFTA as the USMCA. He worked out some deals with Korea. Jamison Greer, who's the new USTR, had been Bob's chief of staff.

6:26He's a very competent sort of trade official. But he works in an environment now where I think President Trump has a greater sense of self-confidence. The people around him are loyalists. And so it's much more haphazard. So I call it chaotic protectionism. It's not just protectionism, it's the chaos. And that's important because it's not only the economic effects of rising costs and inflation, but it's the uncertainty that it's created. And it's the danger with the types of relationships you have with your allies. So at the same time, you want to get Japan to be spending more on defense. Why would you be sort of getting in a big fight with them or the South Koreans?

7:01He likes the uncertainty. Businesses don't like the uncertainty, but for him, it's part of his negotiating model. Like Zelik, Mike Froman has been studying the president's negotiating model. And Froman sees a through line. I think the president's actually been quite clear. He has at least three objectives when it comes to tariffs. One is just leverage, leverage for its own sake, whether it's migration, fentanyl, or the judicial system in Brazil. Or most recently, the idea that we're going to impose tariffs as secondary sanctions on countries that do business with Russia if we don't have a peace agreement with it.

7:36And by the way, on leverage, I think so far it's been quite successful. All these countries have come to the table. The Europeans who used to say, we'll never negotiate with the U.S. under the threat of tariffs, got on a plane, came to Washington, are begging to have meetings with members of the administration. Two, revenue. Revenue so far also successful. $100 billion in the first six months slated to go to$300 billion. If you end up cutting off all trade by raising tariffs to 50 % or higher, you're not going to collect tariff revenue. But in the meantime, it is raising significant revenue and beyond what anybody expected.

8:11And third, and this I think I had thought was his most important priority, is the reindustrialization of the United States economy and increasing manufacturing in the U.S. I think that's a much harder one. We are seeing individual anecdotal announcements of companies willing to expand their existing production or maybe a new factory or two. But whether or not putting up a tariff wall and tariff wall alone, as opposed to a broader industrial policy, changes the nature of the U.S. economy very much is an open question. And I think politically the interesting thing is that under globalization, when Bob was USTR, when I was USTR, the challenge was the benefits of globalization were widely spread, but largely invisible.

8:55Nobody walked out of a Walmart and said, thank God for the WTO. Yes. But the costs of globalization were very visible, a factory closing in your town, acutely felt by the workers of that town. And that town didn't always get the follow-on investment. And so you saw a downward spiral more generally. Here, we see the opposite. The costs of the Trump approach, I think, are going to be seen and felt by everybody and be largely visible. And if he's successful in increasing manufacturing in the U.S., we're not going to know that for four, six or eight years. and it's going to affect a relatively small number of workers and a relatively small number of industries.

9:32That's a hard thing to manage politically. Mike's trying to be even-handed. He's the president of Council on Foreign Relations. Guilty as charged. The revenue is, the tariff revenue as a percentage of U.S. revenue was about$80 billion. It was 2%. The numbers we're talking about maybe will get us up to 4 % or 5%. These are not significant numbers. And by the way, if the economy slows, What will you do to the revenues you would otherwise get from income? So I think this is a faulty, overstated argument about what can be accomplished in this session. In terms of your second point was leverage. Leverage.

10:07So, again, you have to ask, leverage for what? Okay, so what market have we really opened yet? What have we changed? But that's not his goal. What about fentanyl? What about migration? Well, frankly, I think the way you deal with migration is to take a different policy towards the border, which he will do. And I don't think it's driven by his trade policy. Going back then to the sort of industrialization point. Look, the United States economy has transformed itself. This started really kind of in the 70s. And so the Rust Belt story is not sort of a recent story. And it's the story of changing from manufacturing and services.

10:43It's a story of how people adjust in the process. It's the story of facing competition. So I don't drive a GM car from the 1970s. The Japanese competition was a good thing. And by the way, all these competitions from other countries, these are components in supply and logistics. So there's been lots of work done. If you put the tariffs that he's talking about on steel, you're likely to maybe help save 30 or 40 ,000 steel jobs. You're going to cost hundreds of thousands of other jobs or people who use steel. So it's an interconnected economic system. Trump and Biden, frankly, have tried to restore the wonderful nostalgic economy of the 1950s.

11:21I like the 1950s. I was born in the 1950s. It's not the economy I want to have in the future. What he's missing is all the service sector where we have surpluses. If you notice, when he focuses on trade deficits, by the way, that's another one of his objectives. So you have to ask how he's going to achieve that, is that he ignores the service sector. So look, This is partly his own political sense of using America's economic power. The test will be, and he has a similar view about military power. He won't overuse military power, but as you saw with Iran at the right moment, he wants to show we're a powerful country.

11:56But I want to keep pressing on this question of to achieve what? Well, let me, let me, first of all, I don't disagree. I never disagree with Bob. Never. I agree with virtually everything he said, but let me, let me add a corollary. Because I think one thing has very much changed in the last 10 years, which is that we have become painfully aware of the dependencies that we have on China. China as the world's manufacturing floor was so compelling that every company around the world, if they could, moved a good part of their supply chain to China. And it wasn't just cheap labor. It was the infrastructure.

12:34It was the management practices. It became a very powerful driver of manufacturing. Then we found, whether it was because of natural disasters or COVID or an increasing competitive military relationship with China, that we became overly dependent on them. And we see that now China has various leverage over us. So I agree with Bob. We don't want to go back to the 1950s. However, do we want to be dependent on China for the magnet that goes in the nose cone of our missiles? That seems to me something that we should probably build here in the United States and figure out a way of doing it. And there will be some number of products that will say for national security reasons or for broadly critical national competitiveness reasons, we need to have U.S.

13:24capacity. And there may be other products where we could say we may not be able to do this ourselves or may not make economic sense to do it ourselves. But as long as we can rely on a close ally or partner other than China, that that would be sufficient for our national security and national competitiveness. reasons. I think that is what Trump, he may not articulate it that way, but the best reading of what he's trying to do is to say, we can't be dependent on China for certain critical minerals, for certain magnets, for certain manufacturing capacity that we need to either have here, and where he, I think, has a big gap in his articulation is what role he sees for our allies.

14:01And if you really wanted to rely on Canada and Mexico and Europe and our NATO allies, among others, to help be part of our broader national security posture, it'd probably be best not to stick a finger in their eye with tariffs. My conversation with former U.S. Trade Representatives Mike Froman and Bob Zellick continues after the break.

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16:40As we approach August 1st, when President Trump says the extension of that pause he put in place on reciprocal tariffs will end, the White House has announced framework agreements with a handful of U.S. trading partners, including Japan, Indonesia, and Vietnam. But it's a far cry from 90 deals in 90 days. That's what one of Trump's trade advisors said was the goal back in April. As that initial 90-day period ended in early July, President Trump sounded frustrated with the process. It's just too time-consuming. It just makes it more complicated. And we can do things over the years. I asked former U.S.

17:19Trade Representatives Bob Zellick and Mike Froman about what Trump said at that cabinet meeting. that doing these deals is, as he put it, too time-consuming. I'm going to read a quote from a colleague of mine, Jenny Leonard, who covers the White House. She wrote, The Trump administration is effectively conceding that its self-imposed deadline was too optimistic for a full teardown and rebuilding of the architecture of the U.S.-led global trading system. You both spent a tremendous amount of time outside of Washington negotiating these deals. Traditionally, they have taken a very long time to hammer out.

17:51What has the president learned about the difficulty of negotiating trade deals over these last six months? Deal is an elastic term. But for Trump, it's the heart of the matter. It's the art of the deal. One might look at some of his experience with reality TV and even say it's the appearance of the celebrity winner and the story has to keep moving on. Right. And there's a certain entertainment value with it. And so therefore, his team is confronted with the question of how much should we cover in these deals? Should our priority be to open a market or should our priority be to close our market?

18:31Are we focusing on the bilateral trade deficit as a goal or maybe just want them to purchase stuff? They don't have guidance on that. OK, he's ripping up the USMCA, the North American Free Trade Agreement rewrite, which he negotiated. And remember, trade is a sensitive political topic for other countries, too. So if you're going to take a political hit in your country to either accept the US closing its market or open your market on some addition, you need to know that it's going to last longer than a day. So your question, while it seems basic in some ways, is extraordinarily fundamental because it's how does Trump govern?

19:11How does he see himself as an international dealmaker? And by the way, you know, coming back to the China issue, you know, Trump has been quite forthright. He doesn't care about human rights issues. He doesn't really care about Taiwan. You know, if he gets a big deal, what's in the terms of the deal? And so what you're going to see is an ongoing messy process. But at times, they will be punctured by the greatest deal ever. And so I think this adds to the economic problem of uncertainty. So coming back to the economics of this, do tariffs raise prices? Yes. Will they increase costs? Yes. Will the retaliation hurt U.S.

19:52export industries if they retaliate? Yes. If they retaliate. Yeah. But there's lots of ways, as Mike, you know people can stick it to you, okay? Will they develop relations with others? Will the Chinese say, we're not going to buy soybeans from the United States? We'll get them from Brazil, okay? So the farm community traditionally relies heavily on exports, okay? I was in North Dakota not long ago. I was talking to various farmers, and I said, you know, are you worried about the retaliation? They said, well, you know, turns out we lost about$26,$27 billion of deals last time, but he subsidized us the$20 billion.

20:24So if you're happy to be a subsidized worker under the U.S. government, you know, that's fine. But traditionally, the farm community didn't want those types of things. So what I think you're going to see is this process where the uncertainty will eventually weigh on the system. There's also the prospect of more formal retaliation against U.S. tariffs. President Trump has threatened a 30 percent tariff on European exports. On Wednesday, Bloomberg reported the European Union is ready to retaliate if the president follows through on that. The EU would impose its own 30 percent tariffs on some 100 billion euros worth of U.S.

21:01goods. I asked Mike Froman about what EU retaliation would mean for Trump's trade war. You know, look, I think the Europeans have long been preparing to retaliate if the U.S. actually moves forward with serious tariffs. And what the president has said is he'll simply just add the retaliation on top of the other levels. So, you know, that's not something that has happened in the past because previous presidents, when they've imposed tariffs, it's been going through the various processes that Bob laid out and have said, here's the nature of the damage and therefore here's what the tariff should be.

21:31And he has shown a willingness just to ignore that and try and meet or exceed whatever he faces. As a result, countries thus far have not really retaliated. China, very interestingly, discovered where they had leverage, one of the many areas, I think, where they have leverage, and used it judiciously to send a signal that if the U.S. is intent on raising tariffs, they too can take action. That can make it very painful for the U.S. Is this rare earths? It was on rare earths and magnets and things of that sort, using export controls just like we use with them. I want to say one thing just about sort of how Trump manages and how it compares to other presidents.

22:10Bob and I both worked for presidents where probably one of the watchwords was under promise and over deliver. Like never say something that you want to have read back to you that you failed to achieve. President Trump clearly has a very different approach. I'm going to negotiate a peace agreement with Ukraine and Russia in 24 hours. We're going to have 90 trade agreements in 90 days. Whether he ever gets a peace agreement with Russia or Ukraine and whether it comes in 24 months rather than 24 hours, It doesn't seem to have any negative implications other than those of us who sit around and sort of comment on government policy.

22:44But in the broad public, he will have achieved an agreement. I think what he's decided is, I'll just send you a letter and I'll tell you what the result is. That's a novel approach. I don't think Bob and I, as USTRs, ever thought we could just send a country a letter. Copy and paste it. And tell them, here's the deal that you are to agree to unless you come up with a better and final offer. Bob Zellick says the politics of trade will be interesting to watch. Says the Smoot-Hawley Tariff Act, which Congress passed in 1930, cast a long shadow. That affected a couple generations' views that trade protectionism was bad.

23:18But you now have a public that saw the Rust Belt in the 70s. They saw the alleged China shock and adjustment. And from the progressive left, they didn't like globalization, even though it helped a lot of poor people around the world. And so it's a different mindset. What will be interesting will be to see if some of Trump's policies really backfire. So it'll happen in pieces and it'll happen in different areas and people will struggle for inputs of different types. The question will be whether there will be some other political leadership that at some point says, look, we need to transform this.