How to Win a Trade War | Chad Bown

0:00Demetri Kofinas:What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Chad Bowne, a trade economist at the Peterson Institute for International Economics, a former chief economist at the US State Department, the host of the popular Trade Talks podcast, and the co-author of the recently published book, How to Win a Trade War. Chad and I spent the first hour of our conversation today laying the intellectual groundwork for understanding the modern trading system, or what remains of it, roughly 10 years into America's trade war with China and much of the rest of the world.

0:47Demetri Kofinas:An important question that arises from this episode is whether some trade wars are more about trade while others are more about war and how knowing which kind of trade war you are in should influence the nature of your country's policies and the support of its citizens. We examine the unique role played by the dollar and capital recycling in concentrating the gains from trade among the owners of capital and stress test the theory of weaponized interdependence as seen through the ongoing case studies of Russia's war against Ukraine and America's latest war with Iran. The second hour turns from assessing the motivations behind the current trade war and what's at stake to a discussion about the players themselves, their incentives, and what it means to wage a trade war in the first place, the weapons at each nation's disposal, the defensive measures to be taken, the strategies to be deployed, and the various time horizons and end games to be considered when fighting war.

1:40Demetri Kofinas:We close the episode with an assessment of American industrial policy, including the CHIPS Act and the Semiconductor Export Control Regime, Beijing's willingness to weaponize its dominance in rare earths and permanent magnets, and three scenarios for how this new and likely durable era of economic conflict could ultimately unfold. If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q &A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you can also do that on our subscriber page.

2:30Demetri Kofinas:And if you still have questions, feel free to send an email to info at hiddenforces.io. and I or someone from our team will get right back to you. And with that, please enjoy this highly useful and imaginative conversation with my guest, Chad Bowne.

2:51Demetri Kofinas:Chad Bowne, welcome to Hidden Forces. Thanks for having me. It's great having you on, Chad. You and your co-author, Sumeya, have been on a bit of a tear lately in terms of doing media for your book, How to Win a Trade War, including a recent appearance on The Daily Show with Jon Stewart. Before we get into the book or your background, what was the origin of your collaboration and how long have you two known one another? Yeah. Simee and I have known each other about 10 years. She was, at the time, this was 2016, she was the main trade correspondent at The Economist newspaper working out of London.

3:28I was here at the Peterson Institute doing work on trade policy at the time. President Trump comes along, wins the 2016 election, and all of a sudden trade becomes part of the headlines every day in ways that had never been seen before in media history. So she was covering it every day from London. I was covering it every day from Washington, DC, and we decided to start a podcast together. And we did a podcast together called Trade Talks, really nerdy niche podcast only about international trade. But for our little world, it kind of blew up and became quite popular in the first Trump administration.

4:02And we did that together for about five years. And then she went off and trade became a lot more boring when President Biden came along, not in the news every day. She went off to cover other things. I started working on other things as well. But when President Trump came along again in 2025, we decided to rekindle our partnership and work on a book together that we had talked about doing back in the first Trump administration, but never got around to doing. Yeah.

4:27Demetri Kofinas:I'm glad that you concede that it's a boring topic because I think that's how most people feel about it. And yet it is one of the most important aspects of the modern economy that investors and businesses need to understand. And you guys have done a great job making it feel both accessible and interesting by taking a rather unorthodox approach to how you cover it in the book, which is written as a kind of battlefield manual for fighting a trade war. I should mention that we're recording this on the same week that Trump announced 50 % tariffs on certain Canadian goods, including electrical equipment and machinery, which are apparently some of the steepest tariffs his administration has ever levied against any country, in addition to his plans that he supposedly has to impose new tariffs on up to 60 other countries.

5:14Demetri Kofinas:So, while I conceded that I think many people find the topic boring, I also think that it is endlessly confusing for almost anyone to try and follow. It's hard to know really what to make of all these announcements. There've been so many of them. Where do we file them in our heads? What is the duration between the announcement of a tariff and its implementation, assuming it even gets implemented in the first place? Again, it's all very confusing for someone like me. And I think this is probably a feeling that many in the audience will also have. What is your assumption about people's preexisting knowledge of trade economics, before they even begin reading your work?

5:55Demetri Kofinas:And more to the point, who is the audience for this book? The audience is you and your listeners. So you hit the nail exactly on the head, right? So this stuff usually is so boring that the general public doesn't need to pay attention to the details, right? The challenge is President Trump has made it really, really, really, really exciting. But at the same time, he's made it incredibly confusing and it's really difficult to track all the details. So, you know, what we tried to do in this book, and I think it's worth talking about, you know, what the conceit of the book is. So imagine, Dimitri, you're an aspiring trade warrior.

6:30That's kind of our audience. You don't really know anything about it, but it sounds like it's awesome. President Trump, you know, has got some tweet or truth social post or a soundbite every day talking about tariffs. It makes it sound like something you want to do. So you come to us, Simeon and I, and we're your reluctant guides in terms of how to fight a trade war. We're going to explain it to you. We're nerdy, right? And so what that means is we have gone out and we've done all of the research so that you don't have to. We've read every economic paper that talks about what works and what doesn't work.

7:00We've tracked all of President Trump's details of his announcement so you don't have to. We've gone out and spoken to all of the companies that operate and work in international trade to learn from them. We've gone out and interviewed all the policymakers that work not only in the United States, but in countries around the world and have to deal with all of this stuff. And what we're going to do in this book is to bring you on this journey, right? We're reluctant guides. We don't think that trade wars are the most awesome thing in the world, but we're going to be truthful. We're going to tell you about the evidence and really present you with what you need to know to help you understand what's actually happening out there in the news every day.

7:41Demetri Kofinas:So are trade wars more about trade or are they more about war? There are a little about both. I mean, we haven't had war between the major powers, right, in a very long time, right, since, you know, the Second World War of the 1940s. And there is this longstanding question, argument that trade can help perhaps facilitate peace, right? That you get more trade between countries and perhaps they're less likely to go to war with one another. One of the architects of the post-war trading system, the rules-based trading system that we've been living under since the end of World War II in the 1940s was FDR's Secretary of State, Cordell Hall.

8:28And he was very much of this view that if you could get countries to reduce their tariffs, trade more with each other, that the big, terrible wars of the early 20th century, the First World War, Second World War, would be unlikely to repeat themselves, right? So in a sense, and we walk through the evidence of that in the book, right? There's a great theories. How much do we know? What's the historical evidence of, you know, you take any two countries out there in the world. If they trade more together, are they less likely to go to war? And the answer is nuanced and it's complicated. So that is a big part of it, right?

9:00Does trade lead to war or not? But really, in the absence of that war, right? And so again, we do have wars going on at the moment, especially Iran, right? And we can talk about the trade aspects of that as well. But in the absence of major conflict, it really is about trade, right? And it's a trade war in the ways that governments are interfering with international trade, the way that they're weaponizing international trade in ways that they haven't done in the recent past. And that's really sort of what the crux of the trade war issues that we're worried about today.

9:30Demetri Kofinas:I did a bad job setting that question up because while you do make a distinction in the book between economic and geostrategic arguments for fighting a trade war, the distinction I was trying to make or the question I was trying to ask is whether a trade war is just an intense economic dispute or whether it is war by other means and how we can tell the difference. Because trade wars today feel less like disputes over the terms of trade and more like open hostilities. And this seems to be especially true when it comes to their use against smaller nations or dependent allies of the US. Before we delve into the current paradigm, which is one characterized by the breakdown of global trade, it would be helpful, at least for me, to hear you make the case for an open international trading system, conceding, of course, all the shortcomings of the neoliberal consensus.

10:26Demetri Kofinas:What were the advantages of that system? And what's at stake if we devolve further into protectionism, where major economies become increasingly walled off from each other, and where in many instances, success is determined not by the expansion in the size of the overall pie, but by how much you can shrink the size of other people's pieces. Yeah. So I'm a trade economist and I believe in the benefits of international trade, right? And so one of the things that we do in the book is we walk through that evidence. In what ways does trade make us better off, right? What are the key channels? It's things like it allows your companies to achieve scale, right?

11:10If they get access not only to your domestic consumers, But if you get access to foreign consumers as well, they can produce more and more. And so if you have big fixed cost industries, if you're talking about semiconductors or automobile wheels, you can spread those costs over more and more consumers, get lower prices. That's great. One of the reasons for trade. And comparative advantage. Countries are relatively better at doing different things. In the United States, we're really good at high-end stuff, things that involve a lot of R &D, a lot of really smart people, because historically we've had a great educational system.

11:43We have been the innovators, but our workers are then relatively expensive. And if you're talking about doing things that really anybody can do, right? So if it's sewing garments or putting together footwear, having Americans do that would be really, really costly compared to having that done by people elsewhere in the world where, you know, their standard of living is relatively lower just because of differences in the supplies and education levels and things like that of people. So my bias, quote unquote, going into all of this is trade is generally good and there's large benefits from engaging in more international trade if countries are getting along in the world.

12:25That being said, of course, and economists have known this for 100 years, there's also distributional consequences of opening up to trade. There are going to be some people that are going to be hurt from increased trade. And we saw that especially play out in the 2000s when China entered the world trading system. It was so large and its impact was so big that there were a number of sets of workers in the United States, for example, that were making goods that competed directly with what China was suddenly shipping to the world and could do much more cheaply than what we could do here, that they were hurt by it.

13:02They couldn't find new jobs. their communities might have been devastated by it as well because you get a bunch of people and the only thing that gets done in that one plant in a relatively small city is now gone. Well, that affects housing values in that city and that affects tax receipts in that city and that affects the distribution of public services in that city. So at the same time that trade is absolutely unequivocally good overall for the economy and for the world, it can also have harmful effects at the individual and community level that, at least in the United States, we've been very, very bad at dealing with, right?

13:40We should have better adjustment policies to help workers find new jobs, to help them transition into new industries, to have new industries pop up when old industries disappear, to help workers get through tough times, things like wage insurance. In any case, there's lots of domestic public policy issues that you could implement to complement trade openness. And that, unfortunately, when you look back to what's been known as now like the rise of anti-globalization or those sort of forces of the last 10, 15 years or so, I pin it less on trade than on the failure of the American domestic political system to realize that there were going to be some costs associated with trade and distributional issues and not enacting the complementary policies that you need to have to actually facilitate that and to make it happen.

14:30So anyway, those are sort of my biases heading into that. And in the book, what we do is we walk through the evidence. This is what we know. This is what we know about how big the gains from trade are. This is what we know about how costly these distributional effects are. And then also how those things have implemented the political process, the rise of Donald Trump, and all of that kind of stuff as well. Yeah.

14:51Demetri Kofinas:So I'm reading off the the contents of the book here, there's a couple of chapters on what are called the stakes, which is what we're talking about now. Another three on the players, then some on the rules, the defense and the attack. And the defense and the attack relate to the trade war component of this. So my recollection of this was in fact that we were aware, generally speaking, the political class was aware that there were going to be negative distributional consequences to free trade. And I remember Clinton in the 90s talking about reskilling programs for workers who were displaced by NAFTA, et cetera.

15:23Demetri Kofinas:What's the reason that we didn't follow through? Was it just because that was the unique circumstance of that time, or it's just that political incentives just would never lead to the kind of policy steps required to actually remedy the distributional consequences of free trade in the first place? And therefore, the distributional shortcomings of more international trade ultimately undercut the benefits, at least in a democracy like the United States, where voters have a say? Yeah. It's a great question, right? And it goes to the heart of what makes America different, right? Because there are lots of countries in the world, you look at Europe and the Nordic countries, especially in Europe, that are much more open to international trade than the United States.

16:13And the reason for them is it's simple. They're so small that they have to import to get goods and services. And if they want to produce anything competitively in the world, they've got to get to scale. They've got to get it through exports. Their domestic economies, their domestic markets are just too small. But in recognizing that, they have set up much bigger, you can call it a welfare state if you want, but it's basically a redistributive mechanism to make sure that when trade shocks happen and new technologies come along and new sources of imports come along that displace your workers, that they spend money on doing exactly what you said, retraining them, putting it to work in new industries.

16:49And that's not been traditionally the American approach, right? We like small government writ large, right? We have political cycles where what Clinton did in the 1990s was one thing, but then the Bush administration comes along and has a different view. President Obama comes along. Anyway, so we have much less consistent policy in the United States, and we have just been historically much less willing to deal with these distributional issues. I should say, it's not just trade. We're facing a lot of distributional consequences that are going to come about through shocks for other reasons as well.

17:22During the same period that we're talking about of trade liberalization and opening up to the world, you also had incredible advances in technology. You had the internet come along that made it a lot easier to communicate. You had a lot of forces of automation. And so how much of this dislocation and job loss is actually due to trade versus robots and automation and firms just finding alternative ways of making stuff that require less people that has nothing to do with trade is also hard to disentangle. But the latter is stuff that has the same exact impact on workers and jobs, right? And it's just something in the United States historically, and even currently, I think we're doing a very, very bad job at and addressing what people and workers need.

18:05But in any case, right, we're kind of different from many of the other countries in the world that have managed to address some of these concerns better than we have.

18:12Demetri Kofinas:Yeah, I'm glad you brought up those confounding variables because they also have important implications for what the solution is, you know, in terms of like, oh, is it simply just, we just have to raise trade barriers? Is that going to fix the problem? Well, not necessarily, because a lot of this stuff has also been increasingly automated. So even if it comes back to the United States, the gains would accrue, all things being equal, to the capital owners. And so there's another question that comes up for me, and that has to do with really what percentage of the benefits of free trade for a large country like the United States with the world's reserve currency are actually the result of a labor arbitrage, at least in the early phases, certainly more true in the early phases, and also the recycling of capital from surplus countries into the United States and into US capital markets, which have led to asset price appreciation, which further advantage the owners of capital at the expense of labor.

19:04Demetri Kofinas:Because the economic benefits I've seen, having spent much of the last 30 years of my life living in and around New York City or Washington, DC, seem disproportionate to the overall benefit that has supposedly accrued to the nation as a whole, and certainly far in excess of anything experienced by broad swaths of citizens living in the great middle of the country. Yeah. And so there is research that it kind of speaks to that issue as well, right? That it's also the cities and the communities that you're living in and how they're able to take advantage of globalization that may be quite separate from your position as an individual that matters.

19:45I guess, so I don't have an exact number to be able to give you, to be able to break it out in terms of shares. But the way I think about it is trade and openness can definitely affect those shares and those numbers. But the main way to deal with them, if that's something that you're concerned about, and I think it is something that we should be concerned about, these distributional issues, is not by cutting off trade, right? It's by figuring out how do we get a domestic policy that maybe takes away some of the benefits from the folks living on the coast, people like you and me, that have seen incredible rises in our standard of living that go well and above and beyond what we could say, oh, it's our brilliance of how hard we work or our education or how, you know, we're just lucky in some sense, and redistribute that to the other areas that haven't been as fortunate for reasons that are outside of all of our control.

20:37Those are domestic policies, right? That's basically what kind of a tax system that do you want to live under and what kind of, you know, Government benefits do you want to provide to your populations? So I would say if you're interested in those issues and tackling those kinds of issues, those are the policies that you should be using and not trade policy. Because to your earlier point, could we reverse what happened if we suddenly imposed tariffs today? No, right? Yeah, we might get back more manufacturing, but it's going to come in the form of robots doing the work instead of people. It's going to show up in new places.

21:08it's not going to necessarily go back to where the jobs were lost 20 years ago. So you have to be forward-looking when you're talking about ways to tackle some of these underlying concerns and not have too much of an emphasis, I think, on what you lost and the nostalgia of the past, even though admittedly you do want to learn those lessons so you don't repeat them.

21:27Demetri Kofinas:So I'd like to go back to the conversation about national security and theories for what we might think of as weaponized interdependence or arguments that would have been proposed by someone like Norman Engel back in the pre-World War I period for why it's less likely for countries to go to war if they trade more with each other. So one is that argument, and I'm curious to know really to what degree the data supports it. To what degree, in other words, data supports the weaponized interdependence argument. And then also there's another argument to be made, and And COVID, I think, is the most recent example for why it's important, and the data shows us it's important, which is that countries are vulnerable when they depend too much on international trade, or rather, actually, a better way to put it is when they depend too much on international trade for specific things that are of critical national security importance, whether those be masks or missiles or whatever.

22:21Demetri Kofinas:So, how do we disentangle this? One, what does the data tell us about actually how real this theory is of weaponized interdependence? And then two, how do we balance to the extent that it is, how do we balance those sort of larger macro objectives of peace, international security with a more immediate concrete vulnerabilities that arise from international trade and dependency? To the first question, what the evidence tells us is that more trade overall, so more interdependence, tends to promote peace and the less likelihood of war between two countries. So if I trade more with you and you trade more with me, we're less likely to have a military conflict because it's going to be economically costly for us to do so.

23:06But unfortunately, there's also evidence that if you and I trading more together comes at the expense of me trading less with Sally, then it's actually more likely that I might go to war with Sally or Sally might go to war with me because now, because you and I are trading so much, I don't need Sally, right? So more trade overall isn't necessarily the panacea if it's really concentrated and there isn't sort of enough trade between everybody. The countries that are left out or the bilateral relationships that are left out can actually have more probability of conflict. That being said, this evidence is based on the history that we have lived through.

23:51We don't get to do randomized control trials with a lot of public policy. We have to learn about the history that we live through. We don't get to live in some sort of counterfactual. We don't get to observe the counterfactual universe of what actually didn't happen. So we don't want to push. This is what the evidence is, but we kind of don't want to push it too far. To the second question about, you know, the way I think about it is what has changed recently that's made us kind of question this? And I agree the pandemic was part of it, right? So we saw product shortages in the pandemic. You mentioned personal protective equipment, you know, then we can think about shortages of vaccines, semiconductors even, low-end semiconductors.

24:38You couldn't get access to a toaster or a washing machine, refrigerator or a car for a while because we were so short on semiconductors. Governments were saying, wait, where are we getting these things from? Is this worrisome? This is making us vulnerable in one way or another. So at that point, what governments did is they did what are called mapping exercises. They went out and asked all of their economists to go do studies and figure out where are we sourcing these things from and are we vulnerable in ways that we hadn't previously anticipated. Now, this is not to say that international trade is the problem.

25:11What the problem is, is the concentration of production, because you also don't want to be too reliant on yourself for some of these essential goods also, right? So you can remember in the United States where we live, and I think this was post-pandemic, but we ran short on infant formula, right? There was a shortage in the, in the story there, it turned out to have nothing to do with international trade. It was basically American parents, American consumers were sourcing entirely, you know, a particular type of infant formula from one plant in Michigan. And when it had a, you know, a issue with its production process, there was just no other sources of supply.