The Business of Diplomacy: Understanding the Current Trade Wars

0:00I think, you know, oftentimes in life and in business, you're put in a position where you're kind of damned if you do and damned if you don't. and you're kind of choosing between a lot of bad options. I actually think they've run the calculus and what they're betting on. And I'm with you, by the way. Like there's some stuff that I bought that I just, it's going to be more expensive and I don't love that. But this is the calculation that I think that we're doing. And it should be said, by the way, this is not a politics show. We're not overly political people. I mean, I think we generally have our leanings, but both of us are kind of like, just you're all crackheads.

0:37Just tell us the situation we're operating under and we'll figure it out. I don't trust any of you knuckleheads.

0:46Hey, everybody. Welcome to another episode of Business Lunch with your hosts, Ryan Dice and myself, Roland Frazier. We are today kind of following up on something we talked a little bit about before, but in a different context. We talked about the fact that the United States, as of just a couple of days ago, as we record this has put into place tariffs and there are more to come, um, that are being framed as negative and a trade war. And I, I, uh, you know, my dog, uh, uh, in the hunt is that I've got things overseas that I buy regularly. I've got things that are being repaired overseas that are going to come back that I'm going to be paying tariffs on now that I wouldn't have paid on before.

1:30I And so I think like Ryan and I were talking back and forth as we often do and saying this is probably less about tariffs and more about negotiation and leverage. And so we wanted to do a little show on that and talk about that a little bit. So Ryan, I'll kind of put it to you. What do you think? Like, do you think that the tariffs are being put in place as a new way to generate revenue? Or let's say, or to exclusively generate revenue and that the idea is we're just going to put these in place and they're going to stay there? Or is there some other thing at work? Like, in the negotiation context, I would say, what do you think the end goal, the desired outcome of this whole thing is?

2:19Yeah, I mean, I think, you know, oftentimes in life and in business, you're put in a position where you're kind of damned if you do and damned if you don't. and you're kind of choosing between a lot of bad options. I actually think they've run the calculus and what they're betting on. And I'm with you, by the way. Like there's some stuff that I bought that I just, it's going to be more expensive and I don't love that. But this is the calculation that I think that we're doing. And it should be said, by the way, this is not a politics show. We're not overly political people. I mean, I think we generally have our leanings, but both of us are kind of like, just you're all crackheads.

2:58Just tell us the situation we're operating under and we'll, we'll figure it out. I don't trust any of you. Right. You know, so, so I just kind of just setting us like, we don't have an agenda, you know, on, on this, you know, we're not backing any, any parties or candidates or anything. But there are some learnings, I think, right? Oh, heck yeah. And so that's, I want to think about this from a business perspective because what they've done, and I think anytime you can do this in a negotiation, I, I, I sort of think that in the medium to long term that America wins no matter what. So I think they've figured out that if the tariffs go into place, that it is going to generate some additional revenue.

3:35Now it's going to generate some additional revenue at the expense of the consumer. But I think what they're betting is that whatever the additional expenses incurred by the consumer, that that's likely going to be hedged against inflation coming down. So the consumers have already been paying more and have been used to paying more. And so if as a part of this, frankly, sales go down a little bit, you get the economy shrink a little bit, then you have deflation. Then what we have is prices going down at the same time that the cost of these things, because the additional taxes go up, I think they're betting that it's going to wind up evening out.

4:15But yeah, they're telling a whole story about all this new revenue that it's going to generate. I don't think that they believe that it's going to generate a ton of revenue because I think that they believe that these businesses, that I think they believe two things. I think they believe that number one, countries are going to match the tariffs. They're going to either come bring their tariffs down or they're going to go, which some already have. And also that a lot of these businesses are simply going to move their operations to the States, which is going to be good for consumers. There's another piece of this, though, that nobody's really talking about.

4:50And that's that the US government has to refinance like three, five, like trillions of dollars in debt that it has to refinance. And it has to refinance it at essentially the Fed rate, right? That's kind of what it's refinancing. And not exactly that. I'm speaking kind of broadly. But as the economy's dipping, as it's bringing interest rates down, which means that when we have to go back and refinance all that debt, we're refinancing it at a lower rate. So if all they do, I think they win three ways. They win either because it generates some additional revenue. They win because countries bring their tariffs down because of a negotiating strategy and or companies who are producing overseas produce here, which is good for the American worker.

5:45And then thirdly, they win because this is bringing interest rates down, which means they get to refinance their debt, which is happening in a few months. So likely what they're going to be able to do is kind of tank the stock market for a bit, which just don't sell and you're going to be fine. Like if you have stocks, just don't sell. You're fine. It was like, oh, it wiped out like 3 trillion or $8 trillion. I forget what the number was. It's like, if it got wiped out that quickly, was it ever really there? Come on, right? Just don't sell. You're going to be fine. They're going to do it for a little bit.

6:15They refinance the debt. Then they can turn all of this stuff off. Everything's going to go right back up. And it'll be, so I think they basically have run that calculation and realized that we kind of can't lose. And I think they're probably right. And everybody's freaking out because everybody thinks short-term. And I think in business and life, if you can think longer term, you're probably going to win. So that's my take. um what do you i mean from a negotiating you're you're a far better negotiator than i are what do you what are you seeing well the first thing i like is and i i like i think these are things that we can all use and the first thing is that how do you bring um difficult entrenched position people to the negotiating table to start with.

7:02And I think that this threat, which he then followed through, because he announced it to get, I believe, to get the other people to the table. He looked at basically a situation and said, there are several countries that charge significantly higher tariffs than the United States. Most of those countries have a significant trade deficit because they sell much more to the United States. The United States sells there, yet they place tariffs on the United States goods that are coming there. And that just doesn't fundamentally seem fair. And the position of the countries, like let's say China, are basically, you can't make it for as cheap as we can.

7:49So we don't really have any reason to change our tariffs. We're selling in there and you can't afford, your economy can't afford the hit of radical price increases of you reciprocating the tariffs that we've got. And it takes significant resolve to say, you know what, if you can't sell your stuff here anymore, then that's going to be bad for your economy too. So it's not the one way street that you thought it was. And so I'm going to throw up a giant threat to your economy and the trading partner that we are. Now, that means that you need to have leverage. So if you have no ability to get leverage in the transaction, then that would be difficult.

8:38But let's say that you are buying a new car or anything at the store, you're shopping. Let's say that you are a business person and you have suppliers who sell to you who maybe don't give you favorable terms. You know, they don't give you credit or they don't give you good credit or they or they've told you about their price increase. I guess just got a notice of a wine locker rental that's going up 20 percent. You know, and I'm like, no, that's not acceptable to me. So you have to have some leverage in that there is an existing relationship to take advantage of what we're talking about here. But you do in so many situations of your life.

9:20So that's the first thing is identify that you do have some sort of commercial transaction history or desired interaction that's going to take place because that's where you get your leverage. Now you get your leverage by saying something outrageous here, which is kind of Trump style. The outrageous thing is I'm going to put in tariffs that have not been put in place in, I think it's 54 years or something like that. You know, what, you know, well, you're going to have to get that through Congress. Oh no, I'm not. I unilaterally can make this decision. You know, maybe you can, maybe you can't. Um, but I'm going to do it.

9:59And, um, it's going to happen until somebody says it can't. So pain for you. What do you think about that? Now they're going to be replying a little bit pain for you too. And then you're at the negotiating table. You've taken somebody that said, we will not negotiate on tariffs, or we will not negotiate on price. We won't lower our price. We won't give you credit terms. We, you're going to have to pay what we say, uh, cause you want this thing that we have. And you say, yeah, but what if I don't? Right. And now you've got them to the table so you can actually have a conversation. So I, that to me is the first big takeaway is throw up the thing that they're afraid of that will be bad for them to get them to the table in the first place.

10:42I think that's the, the very first thing that we do. I think, I think this is important though. And tell me if you disagree. I think you have to be able to back it up though. You have to say, I'm willing to say this, but I'm also willing to do it. I think a lot of people try to bluff their way through negotiating and this is not poker. Yeah. Right. I mean, I know when we've done business sales and business transactions and it's, what are we willing to do? Like, are we willing to walk? And if we're willing to walk, then we'll say we're willing to walk. And if we're not, then we're not going to say that we are.

11:15And I think all too often people get themselves in trouble in negotiation and they lose credibility because what they're saying, the big grenade that they're prepared to drop at everybody's feet, they're not actually, either they don't have the grenade or they're not prepared to drop it. And I do think that's important. You've got to have some courage. Yeah. And I remember our covenant not to compete in the deal that we did where I told the guy, you probably shouldn't do this deal if that's something that you're worried about. Right. We did not want to walk away, but we're willing to. Right. Multiple times.

11:53There's the power that you have in being able to say we're going to walk away from the table is huge. And here's the thing. It's not permanent. You can return to the table. You just have to be willing to walk away for a minute. So what you're saying is absolutely true. He had to be willing to throw up the tariffs and clearly he had to follow through with that. But now I think it's something like 37 countries are petitioning the White House for trade negotiations. That did not exist a few days ago. Right. So you, you, but, but now the white house can return to the table and in returning to the table, you can start to do the second thing, which is how do I frame my concessions as mutual benefits?

12:43Right. So how do I, how do I come back and say, you know, well, I'm willing to come back to the table if we can talk about, you know, what we might do about this and anything that we do about this will benefit both of us. Because before it was a one-way street, it was take it or leave it. You know, you need us, we don't need you. Now you've got them to the table and then the next thing is to create a frame. The frame around the discussion has to be, hey, this isn't a trade war. This is fair trade, right? We're not here to start a trade war. I don't want to start a trade war. It's just that it wasn't fair.

13:23All I'm trying to get is fair. It's very hard for people to negotiate against fair. It's why I love proposing deals that are like 50-50, you know? And so that I believe is the second thing is that when you're having that conversation, once you've got that person to the table, that government, that whoever to the table, you've got to frame the negotiation as a collaboration, which is one of our big negotiating themes. you've got to stay within the zone of fairness, which is, you know, there is a range of, of outcomes that will be fair to both parties. And we're going to play within that range. We may try to be closer to what's, you know, most fair to us.

14:09And you might be, you know, there, and that's where the true art of negotiation comes into play. But we are now collaborating any concession that either of us makes has to be a mutual benefit. It doesn't have to be quid pro quo though. It doesn't have to be an equal give. It's just, you know, we, it could be, we're giving up our 37 % tariff and you give up your 12 % tariff and let's just have zero because that's fair. That's a hard place to come back from, right? I mean, it's hard to fight against, no, we want it to be unfair. Well, that doesn't sound right. I feel bad about that. I think I'm going to walk away from the table again.

14:45No, no, no, no, no. You know that I think that's really a very interesting thing is like now you got them there, you've got to frame it. And I'd love to hear your thoughts on that before we go to the next. Well, I think the thing that's required to get to step two is you have to deescalate the emotional aspect of this. And this is the thing that's, that again, is funny to me to watch from the outside because everybody's freaking out. And again, I get it to a certain extent. Same kind of thing. I don't want prices to go up. I'm looking at my stock portfolio. And on paper, a tremendous amount of my net worth has been cut in the last little bit.

15:29I don't like that. Now, it's paper, unless I sell, which I've already said don't. But what everybody does, and you're seeing it playing right now in real life, and the media is playing into it so much. But in business negotiation, this happens too, especially for people who are new at this. They let their emotions get the better of them. And they take it personally. And the phrase, it's cliche, it sounds trite, but it's so true. It's just business is so incredibly important to keep in mind at this time. And so somebody in negotiation comes and they say something. Let's say you're on the receiving end of this, right?

16:02So there's a deal and somebody comes in and they make a claim that you feel like is completely outrageous. if you get offended and you get blustery and you're like, well, that's it, we're done. You might feel a sense of righteous vindication that just makes you feel really good, but you just close the door on any potential deal. And so I say to people all the time, would you rather be right or would you rather be rich? You can always, always, always go nuclear, which is why it shouldn't be your first option. And right now, what you had is everybody saying, you know, you've got Trump coming out and saying, this is what we're doing tariffs.

16:40And the media is acting like he's already just blown up all of these relationships. I know. Well, what we know is you've got very mature grownups, diplomats on both sides who have dealt with far higher stakes negotiations than anything that you and I have been on. And they don't get emotional about these things. And they're like, this is what we think. It's like, okay, well, and they're just going to have a conversation. And as long as you can have the conversation, that's what gives you the ability to do step two, which is to come back to the table. And I think so many people, they get offended and they get upset and they burn the bridge and there is no returning to the table because you've created circumstances such that the only way you can return to the table is to do so in a way where your status is so diminished that nobody in their right mind would do it.

17:29So just keep it as non-emotional as possible. It really is just business. It's just business. Yeah. The third thing I think, and it's interesting to watch also, is a great tactic, and it is to demonstrate a willingness to escalate. And so it starts with, we need to talk about tariffs. Then it goes to, well, nobody's coming to talk to the table or they're saying that they're not going to do anything. So the next step, the next escalation is we're going to implement the tariffs, which has happened here now. And then the response is an escalation, which is a measured response of, well, if you have raised tariffs, even though our tariffs are already higher than yours, our escalation is retaliatory tariffs.

18:23We're going to match or meet those. And then Trump comes back with to China just today, um, an extra 50%. If you don't match the tariffs and stop this business, the total combined tariff as proposed currently today would be 104 % on any good that comes from China. He's like, not afraid to be like, you know what? Double. Yeah. And, and then it's, it's saber rattling, it's brinksmanship, whatever you want to call it. Um, but it is a willingness to escalate, to show that you are serious and escalation could be that we walk away from the negotiating table. That is an escalation. It's difficult though, because if you walk away from the table, whenever you come back, you know, if it's too quickly is actually a concession and it's a, you know, I was, I was bluffing.

19:21So I don't believe that he's bluffing. I believe that he absolutely would put another 50 % on and let it simmer. And I think if you look at how fragile several of the economies are, particularly autocratic economies like China, right? That while they've got their army to beat their people into submission, this is how revolutions happen. And so you got to be careful, you know, about thinking, and this is going to be my fifth thing, which is managing, you know, managing the environment around you, which might be domestic versus international, or it might be, you know, your other suppliers versus you, you know, your employees, your customers, your internal team.

20:06Yeah, exactly. Exactly. But, but this willingness to escalate is absolutely critical. That's why we say you've got to always be willing to walk away from the table. You can threaten to walk away from the table if certain things aren't done. You know, that can be a bargaining chip, but whatever you're dealing with, you should definitely think, you know, so let's say that, that my wine rental locker, you know, says we're raising rates 20 % because you signed up for promotional rate. And that was, you know, a few years ago and that's run out and we forgot to raise your rent. So it's going up. You're losing that plus the normal increase that we would do.

20:41And I say, you know what? There are other options. I was thinking about shrinking my collection anyway. If you're going to raise the rate like that, I'm either going to leave or significantly reduce the amount of space I've got. Now they could say, well, we were actually giving you a break. And so if you're going to want to stay here and you're going to reduce the space, smaller spaces cost more. So your rents would actually double. So you really ought to take the deal that you've got because you'll get twice as much space for half the price. And now I'm left with, well, I do have all this wine.

21:15Do I want to sell it? Do I not want to sell it? I can't drink it. We'll die. It is a lot of wine. It's a big wine collection. So that's the escalation. So I think that's the next step. And then - Real quick before we move on to the next one though, because there's kind of that other meta step in between where, because we talked about how to make the transition from step one to step two work, you have to remove emotion. I think to make that escalation step work, you have to do your research and run the numbers. And this is so important because people negotiate from an emotional state and not from a logical state.

21:52They don't run the numbers to say, okay, if we escalate to this level and it happens and they call our bluff because it's not a freaking bluff, then what? And you've got to be able to run that scenario and make sure that scenario is acceptable to you. So going back to your far, well, I know extreme and heartbreaking, but not quite to the level of, you know, kind of trade war type stuff, but going back to your, it's basically the same thing, your wine locker situation. If you're going to say, look, guys, you know, if you're going to do this, then I'm out. You should probably think through, number one, are there competing places?

22:30Like maybe get them on the phone and say, Hey, you know, Bob's wine locker down the street is saying they're going to raise them this to this. You know, if you guys can match it, I'll have my wine sent over to you tomorrow and maybe sign a 12 month contract. You know, like if you've got that in your back, you don't want to move, but if you know you have now, if they're like, you're out of your freaking mind, I can't believe they do it for that. We lose money. Okay. So if nothing else, I've validated the position, right? Which is helpful. Yeah. Yeah. Or, and then maybe you go, okay, well then am I willing to just store it in my own house?

23:02Like what are, if I, if, if before you say it, if I'm going to escalate to this point and they call me on it, can I then say, okay, can I do again, the second equivalent of walking away? Because you do not want to be like, oh, shucks guys, nevermind. never, ever, ever put yourself in that situation if you're not willing to pull the trigger. And that's where everybody keeps saying in the media, like, oh, he's not going to do this. Oh, he's just bluffing. Oh, this is just negotiating. That's not the way this works. Like real professional negotiators don't just throw stuff out there that they can't deliver on.

23:34They just don't because they know they'll lose credibility forever. Right. Yeah. And so one of the things that we like to do is sensitivity analysis or multi-scenario, multiple scenario modeling, where we say, if this, then this is what results. If that, then this is what results. And then we get to look at all those and say, which of these are acceptable that we're actually willing to do and which aren't. And we throw out the ones that we aren't because as you said, we would lose credibility. But we now have a menu of options that we can come back with, which is where I go. It's a good segue.

24:11So you go from this escalation stage into a conditional pullback from the hardline position based on concessions, which is basically to say that you are flexible. And I think that this - Essentially a ceasefire. Yeah, this administration's done a good job of that. They escalate by saying it's going to be 50 % if you don't come to the table, but they left themselves an out because they didn't say come to the table with zero reciprocal tariffs. They just said, you got to come back to the table with something. So they're causing these guys to negotiate against themselves, which I think is smart. And they're also saying, yeah, well, I mean, we're talking to the UK and if the UK can come up with something, we're kind of thinking this 10 % is going to be a base.

25:08This new 10 % tax tariff on the UK stuff is going to be a base. and the UK is like, yeah, well then, you know, we're probably going to always hold on to ours. And then you can back off from your hardline position of that's going to be the base. That's just how it is to, well, what, I mean, we're willing to talk, of course, what are you willing to do that might allow us to not have to make that the base? That's a really good way to go at that. That's, and it's a nuanced way too, I think to, to, to think about big move to get you to the negotiating table, mutual concession, you know, mutual benefit kind of collaborative zone of fairness concessions are good for everybody, um, to escalation to yeah, but obviously we're reasonable people, you know, right.

26:02We're, if you push us to the wall, we will escalate, you know, but we're fair. So let's talk about that. I think that's, you know, it's a brilliant way to negotiate. It's also truly just shredding the emotions of the other side. I mean, you know, it's like, you know, we don't have to do anything. You guys depend on us for all your stuff. You know, like, oh yeah, screw you. What? You know, wait, wait, wait, wait, you know, well, but I mean, we'll talk, you know, okay, we'll, we'll talk, but we're not coming off of that. Okay, then we're going to triple down on what we did. What? No, ah, you know, they can't do that.

26:36You know, but of course we're reasonable if you are, you know, it's just this, this roller coaster ride, uh, which, which really causes turmoil everywhere because, and that gets to the, to the fifth, to me, big takeaway, which is managing the, the, uh, let's call it inter-party, um, emotions or, or, um, you know, perspectives or reactions. Um, the administration I think has done a great job because they're like, number one, Hey America, here's a chart. You see all these super high things and these low things, all these guys are ripping you off. We hate being ripped off, ripping off, you know, screw those guys.