Despite Market Dip, This Economist Believes Trump Tariffs Are the Way Forward

WALTER ISAACSON: Thank you, Christiane. And Oren Cass, welcome back to the show.

OREN CASS: It’s great to see you again.

ISAACSON: You have a op-ed that you wrote this week that says, “stop freaking out. Trump’s tariffs can still work.” Okay. Give me the playbook. How should they work?

CASS: Well, I think the important piece to, to start with is just that I, I think the direction here would be a very positive one. I think it’s actually very encouraging to see people focusing on imbalances in the trading system. The need to really change, change the way some of this works, and, you know, frankly, accepting that there are going to be some costs associated with doing that. It’s, it is refreshing to have leadership that is, is willing to speak about the costs and say, here’s why it’s worth it.
That being said, I think you have a responsibility to, to minimize those costs. And, and I think we could get there if, for one thing, if we phase a lot of these tariffs in, I think there are situations where you might wanna do something right away, but a lot of these tariffs would work a lot better if you said, look, here’s what we’re gonna do in six months if we don’t get a deal. And, and have some time to, to try and do that negotiation and get the deal and, and give people time to prepare and adapt.
And so I think a lot more phasing in on the front end. And then I think just a lot more clarity and certainty on the backend. People need to know what parts of this are going to be permanent. People need to know, is the plan to make a deal with China? Or is the plan to exclude China? And, and the goal with all of this is to get more investment in the United States. And, and if you want the investment, you have to give the clear picture of, of what the situation is going to be.

ISAACSON: There seem to be two types of tariffs he’s talking about. A 10% across the board, which I know you’ve kind of advocated in the past where it’s not sort of pick and choose, pick and choose, and then these very specific tariffs on different countries based on their trade deficit. Explain to me why you, why you would do both.

CASS: Well they have very different purposes. And, you know, the, the 10% global tariff is, is the one that certainly my organization, American Compass has done a lot of work on, and I think is is the really important permanent piece that we just, we put into our economic system that says, you know, we are, we are putting a finger on the scale for producing things in this country. We think making things matters. And if all things equal, we would, we would rather have you making things here. Especially if you’re planning to sell them here. And so that I think is a, as a stable, permanent element is, is really good. 

The, the reciprocal tariffs, these ones that are sort of country by country are at much higher levels in a lot of cases, I think are best understood as, as negotiating tariffs. I, I don’t think the idea is that actually it, it benefits the US economy in the long run to have a high tariff with a, a trading partner like a, like a Japan or like the EU or certainly Canada and Mexico. But the idea is that we do want them to change their own behavior in various ways. You know, they, they do have a lot of policies in, in some cases that they are using to promote trade imbalances, to export more into our country and, and to buy less from us in return. And if we say, that’s fine, we, we love free trade anyway, then, then they keep doing it. If we say that’s not really an option anymore I think there’s a, there’s room for a lot of progress. 

ISAACSON: You talk about this country by country approach with trade imbalances, which is when a country exports more to us than we export to them. But tell me why are trade imbalances inherently bad?

CASS: So I think it’s important to say a, a trade imbalance with a single country isn’t inherently bad. You, you could have all sorts of reasons you, you buy more from some countries and sell to others, right? You could imagine you buy a lot of raw materials from one place and sell finished products to another. The concern is when you have an, a very large imbalance or a trade deficit overall. And so if you, if you look at the United States, you know, we have roughly a, a trillion dollar a year trade deficit at this point, which means we have a trillion dollars worth of demand for stuff that we are not serving. We are importing instead. And it should not be a surprise that, that the fact that we let that grow the way that it did meant we were taking a lot of jobs, a lot of good business that used to be done in the United States producing things and just moving it abroad. And –

ISAACSON: But aren’t a lot of those trade imbalances offset by the fact that we have digital services and all types of services that are not counted in those trade imbalances?

CASS: It’s a good question. The, it, there is both goods and services trade, and it’s true that the United States has a surplus in services trade. The problem is that services trade is much, much smaller. So, you know, goods trade is, is at least four times the size of services trade. Or at least certainly our, our deficit in goods is at least four times the size of our surplus in services. And so that trillion dollar number is actually after taking both goods and services into account. If, if you were to look at just the goods deficit, it, it’s well over a trillion dollars. And so, you know, there has been one perspective over time that has been, well, a trade deficit is a good thing. That means people are, are making things and giving them to us, and we don’t, we don’t even have to make anything and send it back, right? What, you know, what a great deal. 

But in effect, what we’ve been doing is, you know, opening up credit cards on, on the country, on the national credit line and buying more and more stuff that, that we are not trading stuff back for. We are taking on debt to do it. And so we both hollow out our own economy. We, we lose those jobs, we lose those capabilities to make stuff, and we lose the future prosperity because we are sending back ownership of our companies. We are sending back IOUs that say, we’ll pay you back for this someday. And so I just think it’s really important to go back to that, you know, econ 101 lesson, when the economists teach why we are so confident, free trade is a good thing. The model always assumes you’re trading things that you make for things that others make. And that’s real trade. And, and that’s I think what we need to get to that, that balanced trade that really does benefit everybody, but not this wildly imbalanced trade where, where some people or some countries really sort of choose to embrace a lot of the industry that is most economically valuable.

ISAACSON: Are we better off being a nation that produces services than being a nation that produces manufactured goods?

CASS: Well, I think we’re better off being a country that produces both. I think the sort of the, the everything in moderation model really applies just to the fact that we need to have a diversified economy. We, we have a lot of different kinds of people living in a lot of different kinds of places with a lot of different aspirations. And economics doesn’t take any of that into account. The economic models that say, just specialize in whatever you can do best and, and celebrate if the stuff that someone else can do more cheaply goes overseas. That model would say, you know what? We should really do let’s send all of the manufacturing overseas and let’s just specialize in finance and tech and media in our big cities on the coasts. You could probably get GDP up pretty high that way, but I think most people would recognize that that is not actually a healthy economy.

And, and what we’ve been doing is pushing further and further in that direction with this free trade system. And, and what I think we, we are essentially saying now and, and what the Trump administration is trying to do is saying, that was the wrong trade off. We, we need to start pushing back the other direction. You know, as, as an economist would say, at the margin, if you were asking, given where we are right now, would we trade off some of those you know, jobs in high tech services for more good manufacturing jobs in the middle of the country? I think that’s the direction that would be much, much better for us. But it takes a different set of policies to get there.

ISAACSON: Well, Trump has put on these tariffs that are country specific based on the trade imbalance they have with us and said they should all try to negotiate with us to do things to get that down. Is there some messiness or problem or even some crony capitalism that could be involved if you start having 70 or 80 of these negotiations?

CASS: There’s definitely some messiness. No question about that. You know, I think one thing that the administration was deliberating on before, before liberation day and, and that they seem to be focusing on somewhat now is, there are obviously higher priority and, and lower priority trading relationships here. Again, to some extent that speaks to the phasing. If, if there are a lot of countries that we’re not even going to get around to talking to for a long time, I’m not sure it makes a lot of sense to, to stick them with the full tariff in the meantime. But it’s very clear that they are, you know, focusing first and foremost on Japan, on Korea, on India on the EU, on the UK. And it’s certainly possible to do a a few agreements at the same time. It is the case that any negotiation, you know, then raises that risk of, okay, who are you benefiting? Who are you harming?
I would just note that of course, the entire model of free trade agreements that everybody has always been so enthusiastic about in promoting as exactly the right way to promote trade is a negotiation too, right? Go, you know, go, go check out one of those free trade agreements. It’s 5,000 pages long and it’s, it’s overwhelmingly written by corporate lobbyists. And so, you know, negotiations are going to be an inevitable element of trade. What’s different here is that I think the United States is saying we actually have different demands than we used to. For a very long time the demand was just open your market, open your market, open your market. We just want open markets. And what I think the US is saying now is, you know, especially as China rises, as we move into what, what folks would call a more multipolar world where it’s not, you know, the US doesn’t, isn’t just in charge of everything. (12:49): You know, I think the US absolutely wants to have a strong economic and security alliance but it has some demands for that. It wants to have balanced trade within that alliance. It it wants those allies to really do their part on the security side and it wants everybody to agree to keep China out. And I think those are pretty reasonable demands. You know, that, that we’re, we’re not exploiting people with demands like that, by the way. Those are things that the US will hold itself to as well, but it’s definitely a very different shape for a negotiation than, than the one folks have become accustomed to.

ISAACSON: So you think that as part of these trade negotiations, we should be telling all the countries around the world or most of them don’t trade with China?

CASS: Yes, in fact, we’re already doing that. You know, Secretary Bessent has, has, even in the context of the early conversations with, with Mexico and Canada, emphasized that that one thing we’re really looking for is that they agree to adopt the same policies toward China that we have. And now you’re even seeing as, as they look ahead to further sequencing some of these negotiations, the the idea is they want to reach settlements with as many other countries as possible, that that set of countries can then face China jointly.

ISAACSON: But wait, even the European Union is now deciding to have trade negotiations with China.

CASS: I think that, you know, the European Union is an, is an interesting case, and I think the eu even in, in dealing with some of the conflicts over electric vehicles and so forth, has shown much less conviction that it actually needs to confront China and, and much more potential openness to working with China. And that is a really interesting question that that, that the EU is going to have to decide for itself. I think that there’s a fundamental question of civilizational will whether the EU wants to remain in, in, in the sphere of of western democracies and market economies or if it wants to be in a partnership with China, I, I certainly know what I would choose and, and what I would advise them to choose, but to some extent they, they are going to have to make that decision for themselves.

ISAACSON: Well, one of the things I don’t quite understand about your push against China on all of this is that during his first term, president Trump really tried to make a deal with China, Xi Jinping, and he’s still talking about wanting to meet with Xi Jinping and make a deal. So at the very least, wouldn’t that confuse our allies, or wouldn’t that be bad policy?

CASS: Well, on the confusion point, I agree, absolutely. I think, you know, one of the ways that, that the administration really needs to improve what it’s doing here. You know, I’ve talked a lot about the idea of phasing in some of the tariffs, just the basic communication on, on what is the actual plan, what is the goal, I think is, is incredibly important. Both for markets and, and businesses trying to invest and for countries trying to negotiate with us. So I, I agree there entirely.
I do think though there has been a, a clear progression in our efforts to engage with China. You know, it was not that long ago, 25 years ago, that we were fully embracing them and believing that we were going to you know, help them liberalize and democratize. And, and everyone was, was incredibly enthusiastic. And I would say it took probably 10 or 15 years for, for folks to notice that that was really not working.  And so it was – you know, I remember even in 2012 I had the opportunity to work for, for then Governor Mitt Romney when he was running for president. And, and at that time, he was one of the first to sort of say, actually this arrangement with China is not working. You know, we need to take a different stance. And then obviously Trump did that very aggressively in 2016. That was really the point at which we stood up and started saying, the, the model that we thought was gonna work is not working. We need to, we need to work on this. And it was entirely reasonable at that point to think, well, let’s negotiate. Let’s sit down with them, tell them we’re not gonna tolerate this. Let’s figure out a way to make it work. 

And the Trump administration tried that and, and they came to a deal that that didn’t end up you know, being, being worth all that much. And, and China has just continued to to dig in to, to further worsen imbalances. We’re now going through what a lot of folks are calling China Shock 2.0 because they, again, have enormous excess capacity that they’re dumping into other markets around the world. It’s a huge problem for Europe. It’s a huge problem for other developing countries. And so I think we’re at the point where we have to accept, you know, there is not a negotiation here that is going to, to end happily. We, we are headed toward a, a different kind of world for the foreseeable future.

ISAACSON: There’s a saying in China of “eat bitterness,” which I think roughly means tolerate pain. Do you fear that China can tolerate more pain than the American consumer and the American voter will if we get into this contest?

CASS: I think there’s a, there’s a lot of asymmetry here that, that works to the, the US advantage. Partly because we do have such a large trade deficit today, partly because trade actually just isn’t such a big part of our economy because we have such a large domestic market. We are relatively more insulated from the effects of these policies than most of our trading partners are. 

There’s no question that the, you know, certainly now this week with the, with the Trump administration going up to as much as, you know, more than a hundred percent tariff on China. While that is painful and, and I think, you know, fatally disruptive potentially for particular businesses in the United States the, the threat to China from that is, is much, much larger. And so, you know, to the extent that it becomes a, a battle of wills or, or a, a tit for tat trade war, I think the United States is in a very strong position.

What, what I really worry about more is that if we take such a strong position that we, we have adopted positions that don’t look sustainable, then we’re not actually being more credible, we’re being less credible. I, I think the best thing that can be said for the, the Trump administration’s approach of we’re just coming in on day one and sticking all this stuff in is, well, no one, no one’s gonna doubt that they mean it. They, they’ve already done it. But if, if you do it so aggressively that people are gonna look at it and say, you know, we’re really not sure you can keep that up very long, then you’ve actually weakened your own credibility and, and given them a, a reason to, to drag things out. And so I, I think there’s a balance to be struck there and that to, to really be in the right position for negotiation, to minimize the cost, to maximize the potential benefit, what we need to be saying is, look, here’s what we want. Here are going to be the consequences if we don’t move toward it at a rapid pace. But, but let’s see what we can get done. And, and let’s see how much we can accomplish before we start into the disruption and, and the cost that that, that ideally we wouldn’t have if we don’t need it.

ISAACSON: Oren Cass, thank you so much for joining us again.

CASS: My pleasure. It was great to see you.