Keep Calm, the Tariffs Are On

And more from this week…

Where else would we start, besides Oren’s thoughts on the Supreme Court tariff ruling:

I am surprised by how broadly and bluntly the Supreme Court blocked the use of IEEPA tariffs, when it could more easily have issued some guidelines cabining the authority and then sent them back to lower courts to work out. The decision that IEEPA allows no tariffs under any circumstances, by contrast, creates the rather bizarre situation—as President Trump noted in his press conference—where he could restrict trade, license trade, embargo trade, mandate quotas on trade, but never collect any tax or fee on it. That’s a somewhat ironic position for the Chief Justice to adopt, after he saved President Obama’s signature health care policy by rather creatively construing a tax where only a mandate existed.

But as trade experts across the political spectrum have been noting since the start of the case, and as President Trump emphasized this afternoon, the decision does not have much substantive effect on the administration’s trade agenda. One could even interpret the opinion from Chief Justice Roberts, who knew all this too, as emulating the style of John Marshall in Marbury vs. Madison: taking the opportunity to lay down principles that will constrain executive authority for all time (in this case, via the Major Questions Doctrine) at a moment when the executive would not be all that bothered.

And indeed, Trump seemed unperturbed and in downright good humor in his reaction. To understand why, and what’s likely to happen now, let’s return to the framework we’ve been using since Liberation Day, which breaks the tariffs into three categories: the Global Tariff, the Reciprocal Tariffs, and China.

1. The Global Tariff. The baseline 10% tariff is an important policy for rebalancing global trade and also raises substantial revenue, but was always difficult to fit within IEEPA’s parameters. Ideally, it would be legislated; indeed legislation has already been introduced. In the interim, the president announced he will use Section 122 of the Trade Act of 1974, which allows him to address the trade deficit by imposing a baseline tariff of up to 15% on all countries. So little will change in the short run, though that authority will expire after 150 days unless Congress votes to extend it, finally setting up an unavoidable moment of action at that end of Pennsylvania Avenue.

2. Reciprocal Tariffs. These are the targeted, country-by-country tariffs that the president has used for negotiating leverage to reach bilateral agreements with a wide range of allies. The minimal process required by IEEPA before regulating trade (which, per the Supreme Court, cannot include imposing tariffs) made it an especially potent tool for negotiations, but the president can impose comparable—or higher—tariffs through Section 301 of the 1974 Act and Section 232 of the Trade Expansion Act of 1962. Those require a more thorough process, but imposition is an entirely credible threat, and countries that have already entered negotiations or reached deals will likely recognize that they would be unwise to back out now.

The ongoing renegotiation of the USMCA with Mexico and Canada is an especially important subset of the many negotiations. Successfully concluding an agreement with those countries (whether among all three, or as two bilateral deals) that provides a framework for ensuring fair and balanced trade on our continent will provide a crucial cornerstone for trade among the U.S.’s broader set of allies. Here, again, renegotiation is underway and the president retains ample leverage through these other trade laws, and other facets of the North American relationship, to reach satisfactory terms.

3. China. On one hand, China is the easiest situation. The president imposed wide-ranging tariffs on China under well-established authorities in his first term, President Biden mostly maintained them, and now they have been expanded further. IEEPA tariffs were adding to the total, but no one really questions that Trump can use other authorities to go as high as he might want with tariffs on China, given its status both as an obvious adversary and national security threat, and as an obvious bad actor in the trading system.

On the other hand, China is where the president’s strategy has been most unclear. Since his meeting with President Xi in October, Trump has mostly tried to dial back pressure and avoid confrontation, and with the next summit now slated for the week of March 30, no one is quite sure whether he is looking to strengthen his leverage or signal a commitment to détente. If he uses the loss of IEEPA tariffs as an excuse to let the rate on China drift lower, that would be a concerning sign for the summit and it would undermine the ongoing effort to push supply chains out of China, which depends on keeping tariffs there meaningfully higher than they are on other countries.

Here is the most obvious opportunity for Congress to act, by revoking China’s permanent normal trade relations (PNTR) status. Revoking PNTR is a bipartisan recommendation of both the U.S.-China Economic and Security Review Commission and the House Select Committee on the Chinese Communist Party. Secretary of State Marco Rubio, while in the Senate, cosponsored legislation that would accomplish the task, and it has a bipartisan companion in the House. Congress could reassert its role in trade policy and settle the question of the U.S.-China relationship’s future direction, along exactly the lines where there is broadest consensus.

The ruling’s most obvious complication for the president’s agenda may come on the issue of transshipment. The U.S. can put up its own barriers to Chinese goods, but if it wants to maintain free trade with Mexico, or even Malaysia, and those countries put up no such barriers, the goods will soon make their way into the American market anyway. The president had used the IEEPA tariffs as leverage to extract commitments on blocking transshipment, and the threat of re-instituting such tariffs offered an especially potent enforcement mechanism if the commitments were not fulfilled. This is another issue on which both parties in Congress and even the most strident free traders can agree, and could provide the basis for new legislation as well.

Whatever the Court thought it was doing, Trump is correct that in many respects it “made the president’s ability to regulate trade and impose tariffs more powerful and more crystal clear, rather than less.” He had made a strategic choice to move quickly with the authority that was most flexible, even if not the one on firmest legal ground. The year since has given his team time to make enormous progress on negotiations and to initiate processes that will provide a more stable foundation for continued efforts.

Peter Harrell has been one of the sharpest commentators on the case throughout (and bested me on our respective predictions for it!). He concluded his own rundown with an assessment that I share of the tools now coming to the fore: “The greater discipline those authorities will require will make for a more orderly, disciplined, rational, and stronger tariff policy going forward.” A better framework for the global trading system, and better incentives for domestic investment, were always going to require firmer foundations than IEEPA. It is good to move toward them.

Just after Liberation Day, I wrote about the need for the administration to “move from its embattled beachhead into a sustainable forward position.” It seems likely that, in time for Liberation Day’s first anniversary, we will be celebrating such a position established.--Oren

MORE ON TARIFFS

It was good to see U.S. Trade Representative Jamieson Greer on the mic for a few minutes at the president’s press conference. Who is Ambassador Greer? The New York Times just published a great profile:

As the United States trade representative, Mr. Greer, 45, has been a powerful but behind-the-scenes force in transforming the global economy. His calm demeanor is often overshadowed in a cabinet filled with outspoken, brash billionaires. Yet few have done more in Mr. Trump’s second term to put into practice the president’s vision of altering the system governing how trillions of dollars of goods move around the world.

And what is it we’re all fighting about, again? IMF Calls on China to Halve Industrial Subsidies (Financial Times):

The IMF has called for China to slash state support for industry as international concerns mount about overcapacity in the world’s second-largest economy. The fund estimated that China spends about 4 per cent of its GDP subsidising companies in critical sectors, and said it should reduce that by 2 percentage points in the medium term. China’s industrial policies “are giving rise to international spillovers and pressures” and have combined with weak domestic demand to make China “more reliant on manufacturing exports as a source of growth”, the fund said.”

Here’s betting that asking really nicely doesn’t work.

On one hand, it’s worth noticing how quickly things have changed. “The 2024 staff report didn’t mention external imbalances at all—so there has been an important evolution in the IMF’s thinking in the last couple of years,” notes Brad Setser from the Council on Foreign Relations. On the other hand, as the Carnegie Endowment’s Michael Pettis explains:

China spends a lot more than 4% of GDP subsidizing critical manufacturing sectors, not just through direct central-government subsidies, but also through local-government subsidies and mainly through indirect subsidies. …

Rather than target a tiny part of the distortions that create large, persistent trade imbalances, the IMF should be targeting the imbalances themselves. Rather than tell Beijing which measures it must manage, it should let Beijing decide what measures it will use to rebalance domestic demand.

Asking Beijing to reduce specific subsidies is pretty meaningless and suggests more of lawyer’s approach to understanding trade than an economist’s approach.

Thus, the wisdom in the Trump administration’s strategy of imposing tariffs (rather than asking nicely), and of making its core demand from trading partners that they achieve balance, not that they correct this or that distortion, which may achieve little.

A less wise approach? Whatever it is the EU continues to do. Reports early in the week from the Financial Times indicated that “Brussels is planning to force electric-vehicle manufacturers benefiting from state support to ensure that at least 70 per cent of the components in their cars are made in the EU, as it seeks to protect the bloc’s industries from intense Chinese competition.” Good idea. But the EU commissioners voted it down, punting a decision to March. Bad idea.

These are exactly the issues USMCA will be renegotiated over. China’s BYD and Geely are seeking now to buy a Mexican car factory (per Reuters). Will they be allowed to do so? Would their product be “local content”? Hopefully not.

GOOD WEEKEND READS, EUROPEAN DIPLOMACY EDITION

Starting with the interesting and substantive, it’s worth taking a look at both Secretary of State Marco Rubio’s speech at the Munich Security Conference and Under Secretary of Defense for Policy Elbridge Colby’s speech at the NATO Defense Ministerial.

In Munich: Reiterating the key themes from Vice President JD Vance’s speech in Munich last year, Rubio criticized the Europeans harshly—on the destabilization of mass migration, their failure to maintain a robust defense, and the dangerous complacency of the post-Cold War consensus. Where Vance questions “what exactly it is that you’re defending yourselves for,” Rubio asked “what exactly are we defending?”

The same European diplomats wildly offended by Vance gave Rubio a standing ovation, confirming as always the shallow and performative nature of European diplomacy. Which style better served America? Probably both. Sometimes you need your friends to understand how upset you are, sometimes you need them to understand you still want to be friends.

In Brussels: We will give Colby a pass on the “1.0, 2.0, 3.0” cliche because this is an extraordinarily sharp way of framing the past and future of the Atlantic alliance:

Throughout the Cold War, “NATO 1.0” as we might describe it, was defined by a hard-nosed, realistic, clear-eyed approach to deterrence and defense. Allies from the beginning were expected to pull their weight, as evidenced as early as Article III of the Washington Treaty and the Lisbon Commitments of 1951…

This model was tremendously successful. It made sure that the USSR never saw military aggression against the Western Alliance as a viable strategy. It thus saw us through the Cold War with peace in Europe - an incredible achievement for which we must all be grateful.

When the Soviet Union collapsed, however, NATO transformed into something else - perhaps what one might call “NATO 2.0”. This version of the Alliance was typified by a shift of effort and focus away from Europe’s defense toward “out of area” operations and substantial disarmament on the continent, as well as a change in frame from the hard-nosed, flexible realism of the Cold War “NATO 1.0” to much more of a liberal internationalist mindset of the “rules-based international order.”

It is clear, however, that this approach of “NATO 2.0” is no longer fit for purpose - certainly not for the United States and, we would submit, not for our allies either. The times are changing, and we must adapt - in terms of how we think about the world and the Alliance’s role in it and how we posture to meet it in practical terms.

What is needed is a “NATO 3.0” - something much closer to “NATO 1.0” than the approach of the last thirty-five years…

Read the whole thing.

GOOD WEEKEND READS, BAD WSJ READS EDITION

These missives by the Wall Street Journal’s editorial board are good reads in an America’s Funniest Home Videos sort of way.

First up, The UAW’s Southern Strategy, where the editorial board laments Volkswagen’s neutral stance in the UAW’s efforts to organize its Chattanooga plant, leading to a successful union election. “VW had also agreed not to oppose the union, perhaps to curry favor with its Biden overlords doling out electric-vehicle subsidies,” lamented the Journal, which is funny, because VW had adopted neutrality in 2014, as the Journal complained about back then.

Why would VW want a union? Because, per the Journal’s 2014 article, “Volkswagen believes that setting up a works council in Chattanooga would promote labor comity and flexibility. The UAW has promised to delegate to the council ‘many of the functions and responsibilities ordinarily performed by unions as bargaining representatives.’” The remarkable thing about the Chattanooga plant was that, in 2014, despite no opposition from VW, workers voted the union down anyway. That it has now won their support speaks to the broader national fight the Journal’s editors are badly losing.

Speaking of losing battles, be sure to also read GOP Doesn’t Know Smith From Adam, by editor Jason Riley. “Thanks to [Adam] Smith,” he writes, “today we judge the performance of an economic system based on how efficiently it allocates resources to satisfy consumers.” That this is a self-evidently inadequate way to evaluate an economic system seems lost on Riley, as does the role that industrial policy played in American economic progress for most of our history. “Industrial policy,” according to Riley, is “the antithesis of free-market economics,” which isn’t true and, if it were, might say more about the latter than the former.

GOOD WEEKEND READS, FAMILY EDITION

They Lied To Us About Having It All, And It’s Costing Us Our Children (Evie Magazine)

“Last week the internet lost its mind over Brad Wilcox’s piece in Compact. The sociologist laid out the data with the cold precision of a coroner: women who reach thirty without starting a family have roughly a fifty-two percent chance of ever having children. Not great odds. Not the odds we were sold. The outrage was immediate. ‘How dare he?’ ‘Misogyny!’ ‘Stop telling women when to have babies!’ But here’s the thing no one wants to say out loud: the people sounding the alarm aren’t the villains. The villains are the ones who spent decades lying to us.”

When Politics Comes to the Parenting Group Chat (Washington Post)

“‘I think that’s a part of why the aggression is so surprising to me and the, for lack of a better word, the rudeness and kind of how everything evolved.’ McCune, the Peanuts president, told me. ‘Like, we’re neighbors. I’m still gonna see you guys.’ But one parent’s aggression or rudeness is another’s righteousness. ‘Folks in Free Range tried everything, like, to engage in good faith,’ Stackl told me in September, listing the petition, numerous emails and formal requests for meetings.”

THE AI SLOP WILL CONTINUE UNTIL SUPPORT GROWS

Data centers remain deeply unpopular, with a new issue arising: “Land Grab for Data Centers Is One More Obstacle to Much-Needed Housing” (Wall Street Journal). But it also seems to be the case that people don’t like data centers because, well, they just don’t like AI. As Oren wrote about in “If Nobody Trusts You, They’re Not the Problem,” every dumb move by OpenAI to launch an infinite-scrolling social media app premised on deepfakes makes Americans think about AI more like the last generation of life-degrading apps, and they’re more than smart enough to recognize data centers as the tip of the spear for deployment.

“Donald Trump’s AI push fuels revolt in Maga heartlands,” reports the Financial Times, leading with Lisa Garrett, “who lives beside the site of a rapidly greenlit $6.6bn, 400-acre data centre development in the satellite city of Independence, just east of Kansas City.”

A worker for a local ministry, Garrett’s unease extends beyond the project’s demand on local water and electricity supplies to the broader social impact of the industry it is being built to support. “I have grandchildren . . . It does concern me that they’re being drawn into a world that isn’t real,” she said.

If the AI overlords want support for what they’re building, they may want to think about building something that people support. Because this isn’t getting it done:

HR Teams Are Drowning in Slop Grievances: Employees can now effortlessly create complaints using AI, leaving firms with the time-consuming job of responding (Financial Times).

And neither is this:

Ring Ends Deal to Link Neighborhood Cameras After Super Bowl Ad Backlash: A commercial about a lost dog being reunited with his family ignited concerns (New York Times).

And just wait until we get to this:

The Financialisation of AI is Just Beginning: Get ready for a new wave of securities, hedges and collateral (The Economist).

Eventually, the combination of trusted benchmarks and liquid derivatives markets could support bonds collateralised by baskets of GPUs, much like those backed by bundles of individual loans. Few investors possess detailed knowledge of Californian consumers or Ohio’s office market. Many nevertheless snap up bonds collateralised by credit-card debt and commercial mortgages.

There are some financial market innovations that not even The Economist can sell with a straight face.

SPEAKING OF FINANCIALIZATION…

Three Wall Street Journal headlines for you:

• Gen Z, Locked Out of Home Buying, Puts Its Money in the Market

• The Ivies Are Having Second Thoughts About Investing in Private Equity

• Private-Credit Warning Signs Flash After Blue Owl Unloads $1.4 Billion in Assets

But, good news too: Substack is partnering with Polymarket! Place your bet, er, thoughtfully hedge your risk now on whether Oren or Daniel will be writing the top item next week. We recommend buying Daniel, currently trading at $0.54.

AT LEAST WE CAN STILL BUILD

Encouraging movement on a number of fronts in reindustrialization. The administration released its Maritime Action Plan. Good rundown of the elements here from gCaptain. The U.S. is proceeding with plans for a critical minerals price floor, which it is pitching to allies (Bloomberg). And the U.S. and Japan announced the first $36 billion in capital investment from Japan planned as part of the recent trade agreement (Financial Times).

But our favorite story was Boeing defense headquarters to return to St. Louis after leaving the area in 2017 (NPR):

In a statement, Boeing Defense, Space and Security CEO Steve Parker said the move is part of an effort for the company’s leaders to work “side-by-side” with teammates in the area. “The headquarters move, coupled with our senior leaders being based at and spending their time at major engineering, production and manufacturing centers across the U.S., reflects our continued focus on disciplined performance across our business,” he said in a statement.

Having management close to major engineering and manufacturing centers helps to promote disciplined performance? The good news for Boeing is that, as a defense contractor, its manufacturing had never moved overseas and relocating its headquarters was thus viable. But where else besides the defense sector might that apply?

Enjoy the weekend, and your three days without the global tariff!