Trade Wars, Economic Chaos, and Law: Unpacking Trump's Trade Tactics with Alan Sykes

If you think back to the original negotiation of the U.S. Canada Free Trade Agreement, and then the NAFTA negotiation, those all took years. It’s hard to imagine comprehensive new trade deals being done with 75 countries on a bilateral basis in 90 days. It doesn’t seem plausible.

Pam Karlan: This is Stanford Legal, where we look at the cases, questions, conflicts, and legal stories that affect us all every day. I’m Pam Karlan. Please subscribe or follow this feed on your favorite podcast app. That way you’ll have access to all our new episodes as soon as they’re available. Joining me today is my colleague here at Stanford Law School, Al Sykes.

Al is a professor of law and the Warren Christopher Professor of International Law and Diplomacy here at the law school. He’s also an expert on law and economics, and in particular, an expert on the law and economics of international trade. He just published a book with exactly that title, The Law and Economics of International Trade Agreements.

So, he’s precisely the right person for us to be talking with about what’s happening with tariffs. On April 2, President Trump announced a series of high tariffs against, I think virtually every country in the world except maybe Russia. These tariffs started to upend world trade, and they caused huge upheavals in the financial and diplomatic sectors, with a number of our allies actually questioning whether the United States can be trusted at all anymore.

The stock market went down, there was this roller coaster, and then on April 9, the president rolled back a lot of these tariffs, although not the tariffs against China. So, in today’s episode, we’re going to explore just what’s going on here. And I think, Al, the place to start is with something that I don’t think many of us have thought about for many years because it really wasn’t a huge issue, which is tariffs themselves. So, what exactly is a tariff?

Alan Sykes: A tariff is a tax on imported goods. Occasionally it could be on a service, but almost all tariffs are on goods, and it’s collected by the customs service at the border, or more or less at the border, when goods come into the country. Each import shipment has a so-called importer of record who takes responsibility for notifying the custom service of what’s coming in and what its value is and so forth, and they bear the legal liability for the tariff.

Pam Karlan: And so the tariff then becomes one of the pieces, one of the costs of doing business, with particular things that you want to sell in the United States that have components from outside the United States?

Alan Sykes: Yeah, exactly. It’s like a sales tax only it’s only applied to things coming into the country as opposed to everything.

Pam Karlan: And you said that the importer of record is the person who pays the tariff in the first instance, but if a tariff is part of the cost of actually bringing the good to market in the United States, does that mean at the end of the day, the end user is going end up paying some part of that tariff?

Alan Sykes: Yes. So a lot of empirical work has been done on the question of who ultimately bears the cost of a tariff. The studies done of the tariffs during the first Trump administration suggested that the overwhelming majority of the tariff was borne by U.S. purchasers, sometimes the end consumer, sometimes middlemen. So maybe Costco wouldn’t pass along the full tariff to the retail consumer but would absorb part of it. But one way or another, something like 90-plus percent was found to be borne by us buyers at some point in the distribution chain, and that meant that, a small percentage was borne by foreigners, by the fact that their product has become more expensive and demand has fallen, they reduced their prices to absorb the tariff a little bit. But historically, at least in the recent years, most of it has passed through to American buyers.

Pam Karlan: And a lot of this you were alluding to  …  a lot of this is … there’s some products that are brought into the United States and they’re just sold straight to the end consumer: a shirt that’s made in Vietnam comes into the country; it goes to some retailer who sells it to the consumer. But a lot of stuff that we think of as “made in the United States” has components in it that it that came from another country. And tariffs go onto those as well,

Alan Sykes: Generally speaking, yes. You can exempt them and that was done to some extent during the first Trump administration to exempt certain input products. But the current tariffs that have been announced, and then temporarily paused for 90 days, the president said he wasn’t going do those sorts of exemptions.

And so you would have the tariffs apply to these intermediate goods that become finished products in the United States, and that would include, for example, steel and aluminum, which are now subject to 25 percent tariffs. And would include basically any input product in the supply chain coming into the United States that wasn’t for some reason exempted from the tariff.

Pam Karlan: So, before this latest round of tariffs, what kind of tariffs were put on goods coming into the United States?

Alan Sykes: Since the GATT was formed, the General Agreement on Tariffs and Trade in 1947, tariffs came down from …  it’s hard to say what an average tariff rate is, for reasons that I won’t get into the weeds on, but to the extent that one could say something about “average tariffs,” they were in the 40 percent range at the end of World War II, and they were negotiated down through the history of the GATT, and eventually that became the WTO, to where the average U.S. tariff was maybe three or four percent, something like that. It was a huge reduction, and the similar reductions were seen in the so-called average tariffs of most of the major developed nation trading partners: the EU, Japan, Korea and so forth. Developing countries reduced their tariffs less, but still their tariffs went down quite a bit as well.

Pam Karlan: So, we moved from the world of very high barriers. For those of us who remember our American history class and the like, there was this period where we had huge tariffs in the United State, in the late 19th century and the like, to a world in which really tariffs were pretty minimal for an awful lot of the goods that travel across national boundaries.

Alan Sykes: Yeah, there were, of course, some pockets of high tariffs left for really politically sensitive items. But again, the average tariff rates were quite low and lots of goods became duty free. There’s lots of … before the recent Trump developments, many goods were coming into the United States duty free and coming into other countries duty free. The average tariffs that are low or an average between, sort of a lot of zero tariff or very small tariff goods, and then a few more politically sensitive items that retained higher tariffs.

Pam Karlan: Yeah. And so, what’s the theory that Donald Trump has for why imposing these massive tariffs is a good thing?

Alan Sykes: There’ are two hypotheses and he has said things that are consistent with both. One is he really wants to grow manufacturing in the United States and that he wants capital investment and new jobs in the manufacturing sector. And to that end, he wants to keep out foreign competition and have U.S. companies grow. The competing hypothesis is that it’s all about negotiating–that he wants to use the access to the U.S. market as a lever to achieve various things, including reducing trade barriers to our exports, including cooperating with us on other matters. We’ve all heard about the concerns about fentanyl and drug trafficking with Canada and Mexico, and maybe he has other things in mind that he wants concessions on. And so, really his end game or his ultimate goal is unclear.

Pam Karlan: And at the same time, I think he keeps claiming, and Howard Lutnick, who’s now the Commerce Secretary, keeps claiming that the tariffs are going to raise huge amounts of money for the government. But it would seem to me that it’s impossible to both say you’re going bring the manufacturing into the United States and you’re going to raise huge amounts of money by taxing the goods that are coming into the United States because we don’t manufacture them here. It would seem to be, at most, one of those things if even that could be true.

Alan Sykes: If you think about tariff revenue as a function of the size of the tariff, it starts out at zero with a zero tariff, and then as the tariff gets really prohibitive, it also goes back to zero because nothing’s coming in and therefore nobody’s paying the tax. But if you have a substantial, but not prohibitive tariff, and you keep it in place for a long time, you can raise significant amounts of revenue. It won’t be enormous in terms of the U.S. federal budget, but it would be certainly tens of billions of dollars. So, it can be a revenue source, but that would require that the tariffs remain in place for a long period of time, and that they’d be at a level that’s calculated in a sort of a Goldilocks way: not to choke off trade, but high enough to be substantial enough to generate revenue.

Pam Karlan: And then presumably that’s because the goods continue to be imported into the United States rather than produced here. Because if they’re produced here, you’re not going to end up with any revenue from the tariff on those particular goods. Unless the raw materials are still coming into the United States.

Alan Sykes: So you can imagine that … take automobiles. You could imagine that if we had high tariffs on automobiles or medium tariffs on automobiles, there would still be significant numbers of imported cars, just a lot less than we have now. And that might stimulate auto production in the United States. So there might be a … U.S. producers might gain market share in that scenario. And if those tariffs remain in place long term, that might be a non-trivial revenue source.

Pam Karlan: If you were a car manufacturer, you’d have to be pretty confident that the tariffs are going to stay in place for a while to want to make the capital investments in building an automobile plant here. That is, if the tariff gets announced on April 2nd and then it’s changed on April 9th, and then on April 19th it’s changed again, that level of uncertainty might make it really hard for people to make capital investments because you don’t know whether the tariff’s going to be here five years from now when the plant opens.

Alan Sykes: Yeah, exactly. So, I’m very skeptical that the current administration will be able to stimulate significant investment because that’s, as you say, it’s only makes sense, particularly if you need a lot of upfront capital investment, which can take years. Not to mention finding and training a workforce. You wouldn’t do it unless you thought the tariffs would remain in place potentially for decades. And why would anyone think that? No one would, in my mind, no one would think that these tariffs would necessarily outlast the Trump administration if even they stay in place that long.

Pam Karlan: One of the things I’ve been reading about is that the president seems to think that if we run a trade deficit with any particular country in the world, it must be because that country is doing something wrong, is taking Americans for suckers. Is that really how trade works? That it’s just a series of bilateral relationships and we need to run either even or a trade surplus with every trading partner?

Alan Sykes: Yeah that … I’m afraid the president, in my view, doesn’t understand the meaning of bilateral trade deficits and their economic significance. First of all, if you took him seriously, that would imply that we were being unfair to any country that we have a surplus with, which we … I don’t think we are. But more generally when I teach this to students, I start out by saying there’s no reason at all to expect bilateral trade to be balanced.

I run a huge trade surplus with Stanford University that buys my services and I hardly buy anything from them, and I then have a…

Pam Karlan: You need to go to bookstore more often.

Alan Sykes: You’re right. And I have a big trade deficit with Safeway and, all sorts of places that don’t buy a thing from me. The same is true for countries. You buy … certain countries specialize in producing the things that you don’t make at home and you really want, and other countries really want the stuff that you do make at home. And there’s no reason at all to expect bilateral trade to be…

Pam Karlan: I mean, it seems to me this is especially true if you think about some of the poorer countries that are providing us with a raw material of some kind. They … one of the things when you look at the list of places that he slept these huge tarps on, one of them was Madagascar and I know because I bought several Madagascar vanilla, but it’s hard to see why if they’re sending us a lot of vanilla, but we’re not sending them a lot of high tech goods in return, there’s something unfair.

Alan Sykes: Absolutely. To think that the bilateral trade deficit is a product of unfair trading is just not sound. I don’t mean to say that trade practices or trade policies won’t have any effect on bilateral trade deficits, but there are many other factors that go into it, including just the preferences of the consumers in each country.

And also, without getting too much into the weeds, if you’re going to be a net borrower country, which the United States is, we have a low savings rate and a lot of investment in excess of our savings, you have to run an offsetting trade deficit to finance the net inflow of capital. So it would be …. unless we were to somehow become much less attractive for foreign investors, or if we were to somehow increase our national savings rate dramatically, we have to have an aggregate trade deficit  …. Going to have to be a bunch of individual countries with which we have a trade deficit.

Pam Karlan: Yeah. And it’s just puzzling. His view seems to be if you’re running a trade deficit, if the United States has a trade deficit with the other country, it must be because that country is keeping American goods out as opposed to there just isn’t the demand for those goods in that country.

Alan Sykes: It’s a combination of consumer preferences in that country. It’s a combination of macro economic phenomena, the fact that we have to be a net borrower from abroad. And I, again, there could be some sense in which the trade practices of the foreign country are also affecting the bilateral deficit, but there’s so many other components that you can’t infer simply from the fact of a bilateral deficit that anything unfair is going on.

Pam Karlan: So I guess the next question I wanted to ask you about is how is it that the president can just order these tariffs and then turn around the next day and say, just kidding, and then change the number again? How does he have this power to do this?

Alan Sykes: There’s some who’ve been talking about trying to mount legal challenges to that, but the problem is that the Congress, through various statutes, through the years, has delegated a tremendous amount of authority to the president.

The National secu … the Trade Expansion Act of 1962 has a provision in it that allows the president to take trade measures for national security purposes. That’s been the predicate for the steel and aluminum tariffs. The Trade Act of 1974 includes a provision that allows the president to take trade measures in response to unfair practices, discriminatory practices abroad that harm U.S. commerce. That’s been the predicate for most of the China tariffs. And then there’s the International Emergency Economic Powers Act, which is basis for the reciprocal tariffs that were announced last week, which is, it’s a very confusingly worded statute, but most people seem to think that the wording allows the president to take measures to regulate imports and exports in the event of a national emergency, which the president alone can decide exists. And so that’s where we are, and whether there’s a basis for any legal challenge, I think most Washington trade lawyers doubt it.

Pam Karlan: Yeah. I thought the interesting thing was that the first lawsuit I saw that was filed against the tariffs was filed by the new Civil Liberties Alliance, which is a conservative group, not a liberal group, that’s funded in part by the Kochs. And they’re arguing, to go to what you were just saying: They’re arguing that the decision to impose the tariffs on all of the imports from China went beyond the delegated power that the president had, that it was … they were essentially raising a Non-Delegation Doctrine kind of challenge.

Alan Sykes: Yeah. So and this is really more your area of expertise than mine, Pam, but the old Non-Delegation Doctrine, Major Questions Doctrine, might be somehow invoked here to say that Congress has not delegated this enough with enough specificity to allow the president to do this.

And then I’ve heard some people wondering whether a court could overrule the president’s finding of a national emergency, whether that would be justiciable. I doubt that a district judge would overrule the president’s finding of a national emergency, but that’s  … There are various angles within the statutory framework as opposed to constitutional angles that people have floated. But again, I think most trade lawyers I’ve talked to don’t think it’s likely that a successful domestic legal challenge can be brought.

Pam Karlan: Yeah. So what about international organizations? Is the WTO going to intervene in some way in all of this?

Alan Sykes: No. The truth is the U.S. has effectively withdrawn from the WTO. We stopped obeying the rules in the first Trump administration. We continued, by the way, violating rules in the Biden administration. Some of the Biden subsidy programs and the Inflation Reduction Act were pretty flagrantly illegal under WTO law. And now Mr. Trump has gone in the direction of just essentially ignoring WTO commitments including not just the tariff ceilings that were negotiated in the WTO, but the most favored nation principle, which requires us to charge the same tariff to every WTO member, of course, is wildly violated when we’ve got China at 145% and other countries at 10%. So it’s … the WTO really can’t do anything.

The dispute settlement system is paralyzed because the U.S. has blocked the appointment of judges to the appellate body. And even if it wasn’t, I think that the Trump administration would just ignore adverse rulings if they came down the pike.

Pam Karlan: So, there’s not any real effective domestic response, and there doesn’t seem to be an effective international response. So, is the ultimate discipline here going to come from the market in some way? It looks like there’s a little bit of that’s already happened, which is once the stock market went into its kind of weird tumble and various very rich friends of Donald Trump started moaning, he’s pulled a lot of the stuff, but is that the only real discipline on what he’s doing?

Alan Sykes: I would say politics is the discipline, and that’s part of politics, so as people’s 401ks get evaporated and…

Pam Karlan: Yeah. They’re now  …probably better to call them like 014ks, right?

Alan Sykes: Yeah. Something like, right, exactly. So there’s going to be political pushback when the market goes down. Business will be pushing back. He’s lost the support of people who supported him in this last election cycle. Some fairly prominent billionaire types have been very critical of the tariffs. I even tuned into Fox Business for a while the other day just to see what they were saying, and even some of the Fox Business commentators were hostile to the tariff situation.  So, it’s going to be politics. If the economy goes into recession, there’s going to be, I think, a pretty big political price to pay and hopefully the prospect of a big political price will restrain what happens.

Pam Karlan: I think you’re right that it’s a combination of if the market gets bad enough, the politics of allowing the president to stick the tariffs on and take the tariffs off, there’ll be some disciplining there, but in the meantime, what are the effects that these are going to have in the kind of short to midterm, do you think?

Alan Sykes: We’ll start to see prices creeping up … First of all, the really huge tariffs have been paused for 90 days, so we don’t quite know what, so those won’t have immediate short-term effects. The prohibitive tariff on China, I think, will have some effects. So I’ve heard that Amazon is … there’s certain things that are not available through Amazon or that they’re cutting back on because of the China tariffs, so there’ll be certain things that we sourced a lot from China that will become more expensive or disappear from the marketplace. And then we have this 10 percent baseline tariff on everything from everybody, that’s not paused as I understand it, and that that will have some effect on prices.

But it’s important to remember that the tariffs apply to what you might call the wholesale price of stuff coming into the country, the price at the border. And so if, even if it’s a 10 percent tariff at that level, it might only be 5 percent or 4 percent by the time it reaches the consumer at Walmart. So, it may not be a huge impact from that 10 percent tariff in the near term.

Pam Karlan: And what’s going to happen to American exporters? Particularly if you think about the agricultural sector in the United States. I know that we lost a huge market share in soybeans during the last imposition of tariffs. We used to be the world’s major exporter, and I think now we’ve fallen to the second biggest because it is just harder for us to export. I assume other countries ultimately are going to have to respond to this in some way.

Alan Sykes: Oh yeah. Of course, China has retaliated with a prohibitive tariff, basically against the U.S. already. And I think that other major trading partners, if they don’t do deals in the next 90 days to avoid the giant reciprocal tariffs that were announced, I’m sure there will be retaliation, that the EU already has a retaliation plan in place. Canada’s already got plans for retaliation. It will hit U.S. exporters.

Pam Karlan: Yeah, I think there was a story, this is before this last round, but it was about I think it was Canada was taking bourbon off the shelves in government liquor stores. And that was causing tremendous heartburn in Kentucky, which is the major exporter, of bourbon?

Alan Sykes: Yeah. They removed the American product from the shelves and put up “Buy Canadian” signs in their state liquor authority stores. Yeah, so U.S. exports will be hit, which is another reason—circling back to your earlier question about, are we gonna get an increase in jobs? You’ve got a net against anything that might happen in import competing industries, the impact on our exporters and the loss of jobs that we could see there.

Pam Karlan: Yeah. And when I try to think about doing a deal … You had said earlier on that there were a couple of different theories of what Donald Trump might be doing here, and one of those theories was he’s threatening this stuff so he can do a deal in the way that when he was in business for himself, he would threaten to not pay for something that his companies had bought, and then  try to renegotiate the price of things. To what extent does America have to have credibility in order to do those deals? And to what extent do you think the kind of slapping the things on pulling them off and the like undermines the ability to do a deal in the first place?

Alan Sykes: Yeah, those are great issues. Since Mr. Trump has basically reneged in one way or another on all of our prior trade deals, why would countries trust a future deal with with our current administration? I think that’s a real problem with the credibility of the United States has been significantly damaged here.

We also don’t really know what what the president wants in these trade deals. We hear about unfair practices and high reciprocal tariffs, but the truth is the tariffs abroad in most of our major trading partners are not all that high and what else beyond that would the president ask for and could they plausibly give it? Who knows?

Pam Karlan: Yeah. I do try to figure out, what he want. Does he think we’ll end up with a bunch of new deals in the next 90 days? Because maybe you could explain like this 90-day pause, and what’s the theory behind that is we’ll negotiate some new deal in those 90 days.

Alan Sykes: Yeah, if you listen to the administration, we’ve got 75 countries calling us wanting to negotiate. It sounds like one a day for the next…

Pam Karlan: Yeah. I was going to ask: when you negotiate one of these deals, like how long does negotiating a good a, a kind of sensible deal take?

Alan Sykes: So it, these are bilateral deals, which helps because the WTO and GATT was multilateral, and you had to have a whole bunch of countries coming to the table all at once. But if you think back to the original negotiation of the U.S. Canada Free Trade Agreement and then the NAFTA negotiation, those all took years. It’s hard to imagine comprehensive new trade deals being done with 75 countries on a bilateral basis in 90 days. It doesn’t seem plausible.

Pam Karlan: Yeah. Especially since … I can’t exactly figure out, the stories I read about it … how they were coming up with these numbers, it seemed to be, the way they came up with the number is they took the amount of the difference and they divided it by the this and the added it to that. It was like it looked like something that that was thought up by a clever fourth grader.

Alan Sykes: Yeah. So, the reciprocal tariffs were calculated, as you said, by taking the bilateral trade deficit and dividing it by the quantity of imports initially, and that gave the percentage that President Trump called the reciprocal tariff and then he said he was going to be kind and only impose half that. But that was called the reciprocal tariff, but it has no…

Pam Karlan: but one half of nonsense is half nonsensical, right?

Alan Sykes: Yeah. It has absolutely nothing to do with the actual tariffs being charged on our exports or any … the magnitude of any non-tariff barrier. It actually … you can get that from a simple formula that assumes that exchange rates in general equilibrium effects don’t exist and that exports are not retaliated against. And then ask the question: how much do you have to increase the tariff to get rid of the bilateral trade deficit?

And if you ask that question, under those assumptions, and assume the right numbers for the elasticity of demand for imports and the pass through rate of the tariff, then you get that quotient that we described a moment ago. But that’s

Pam Karlan: I don’t know why this reminds me so much of the famous joke about the economist on the desert island, and they say … and he can’t figure out how to open the coconut to get the milk out, and somebody says, “Well, let’s just assume a can opener.”

Alan Sykes: Yeah.

Pam Karlan: It’s got that feel about it. And then when we think about the negotiations, one of the, one of the other things the president has been doing recently, and I think we’ll probably have a different show on this, is shaking down a bunch of major law firms by threatening them with denial to government buildings, denial of security clearances, interference with their government contracting clients, and and now he’s announced that those firms, which agreed to do $40 million, a $100 million dollars of uncompensated legal work for the president’s favorite causes, he’s gonna get those law firms to negotiate the deals. Have you been reading about this?

Alan Sykes: That I hadn’t heard about.

Pam Karlan: Yeah. So he says, maybe you can get these great law firms to do these negotiations, but I take it we really want like government officials doing these, not firms that have their own kind of international trade practices.

Alan Sykes: You need somebody who knows about international trade law and economics first and foremost, which is, presumably the USTR office and maybe some folks at Commerce. A typical law firm might have somebody who knows a little bit about it, but not necessarily. Yeah, I don’t see how you can just turn it over to a law firm and expect anything sensible to come out of it.

Pam Karlan: Yeah, it’s like the idea that you can just ask your legal questions to Westlaw and it’s gonna tell you the answers to complicate complicated.

Alan Sykes: Yeah. Maybe ChapGPT could do the trade deals.

Pam Karlan: Yeah. Just looking at this, it looks like such a mess, Al. It just looks like such a mess. It. How do we get out of this?

Alan Sykes: Well, I was in Geneva about a little less than a month ago. Before the reciprocal tariff stuff came on board, but there was already a tremendous amount of anxiety, and the thinking over there was that the rest of the world tries to hold the WTO together and just lives with the fact that the U.S. is going to effectively withdraw from it for the next few years. And then the hope is that a future U.S. administration will come back to the multilateral trading system at some point in the future. So that’s the hope for getting out of this situation. And the question is, will so much damage had been done before that happens that it won’t be easy to do.

One of the things that, that is certainly going on now is that there are a lot of China hawks in Washington, including some big China hawks in the administration. And you notice that China did not have its tariffs paused. We’re now in a situation where we have almost prohibitive tariffs in both directions, and there’s a lot of folks in Washington who talk about China decoupling. And just getting rid of China as a economic partner, and that drift feels like it’s happening, which is different from holding the WTO together since China is one of the most important members.

Pam Karlan: Wow. This is just … just watching this is, it feels like a slow motion … watching a slow motion car wreck occur.

Alan Sykes: Yeah. And I think although there was euphoria yesterday in the markets when the pause was announced, I think people now are thinking about it and they’re saying wait a minute, what if we got a 90 day pause, but we gotta get to bilateral agreements with 75 countries and China’s being cut out of the economy altogether. It’s worrisome. It’s really worrisome.

Pam Karlan: Yeah. I, I don’t know. This just exhausts me, Al, this just exhausts me, but I am so grateful to you for explaining this because I understand it much better now than I did when we started.

So, I want to thank our guest today, Al Sykes, who is a professor of law and the Warren Christopher Professor of the Practice of Law and Diplomacy here at Stanford Law School. This is Stanford Legal. If you’re enjoying the show, please tell a friend and leave us a rating or review on your favorite podcast app. Your feedback improves the show and helps new listeners to discover us. I’m Pam Karlan. See you next time.